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Cover Story | January 2014

Power finance- Layers Within Layers

Just when you thought clearances were the real culprit, it turned out to be just another layer in the complex power industry´s blues now looking like an onion-peel of discovery and tears. The new nemesis, it seems, is lack of finance. Just as the Prime Minister-appointed committees were busy fast-tracking clearing more than 100 power projects, the industry struggles to explore options to finance, which has recently eluded the sector. There is hope yet, as cash-rich non-power players enter the market, says Pradeep Pandey.

A high-decibel, high-publicity campaign has rightfully emerged in power sector corridors in recent months, where a slew of reform initiatives has been promised by the government. These include fast track clearances of power projects, removing environment hurdles, assuring coal linkages, and also setting deadlines for necessary clearances to upcoming projects. With all these developments, the government has made its stances clear and has thrown the ball in the court of independent power producers (IPPs). With that, the problem, as the IPPs had been claiming, should have been solved. Yet, and in the face of increasingly positive reports about the sector emerging from observers, that is hardly the case.

It now seems that power producers have still much to say as their new nemesis raising finance continues to haunt them. Various factors, both domestic and global a yet-to-fully-recover economy, weak rupee and upcoming elections have put most of them in an indecision mode. Discreetly, though, a few of them are seeking partial pressure on their credit portfolio.

Meanwhile, the erstwhile government´s mysterious silence seems to now pervade the power sector, as nobody seems to want to make any serious statement in this regard, saying it is not the right time to talk. The efforts made by Power Today for getting their future strategy also turned out to be futile. However, a few talked but not on their individual plans. People from the government institutions and authority also proffered to remain unnamed while sharing their view. Meanwhile, media brains are busy surfing speculations, producing half baked news and analysts' feeds and adding to the confused chatter.

Exceeding expectations
The government has approved 287 stalled projects worth Rs 5.5 lakh crore and 250 such projects worth Rs 10 lakh crore are expected to be cleared shortly. Among these projects, power sector has a mammoth share of more than 60 per cent of the total projects.

The government has been trying to ease the regulatory burden and simplify procedures to boost infrastructure projects, says Cabinet Secretary Ajit Kumar Seth. The government set up the Cabinet Committee on Investment (CCI) in January with a view to fast-track project clearances. The CCI has had 11 meetings since its inception. "We are in difficulty but we have to find the solutions for getting out of it," said Seth, adding that the government is taking steps to enhance growth in most sectors, including power.

Seth says ´a lot´ has been done in the power sector. The government has approved the guidelines for pricing and pass-through of higher cost of imported coal and the issue of signing fuel supply agreements (FSAs) has also been resolved and 157 FSAs have been signed this year.

In another development, the Cabinet Committee on Economic Affairs (CCEA) has cleared the supply of coal to nine out of 24 power projects where development of mines has been delayed because of a policy of the environment ministry. These power plants are together building a capacity of 11,000 megawatts (MW), worth some Rs 60,000 crore of investment.

´It has been proposed to provide additional coal supplies to these nine units for a period of three years (till the end of September 2016) or for the period that they were affected by the said policy or till such time the production actually starts from the blocks, whichever is earlier,´ the government said in a recent statement. The committee had earlier approved coal supplies to thermal power plants that will have a total capacity of 78,000 MW in the period between January 2009 and April 2015.

Silver lining?
All these developments could be considered as silver lining but the vision is still not clear as industry analysts and financial institutions have mixed view. ´As we look into the last decade (2003-2013), it appears that history is repeating itself in the power sector. The financial stress in the sector is very high, this time it affects both the public sector discoms and the private sector gencos,´ Arvind Mahajan, Partner and Head Infrastructure, Government & Energy Sector at KPMG.

Talking on the similar note,
Rajiv Mishra, MD CLP India and Chairman of Association of Power Producers, says ´What making this even tougher are the interest rates that have been all time high and high volatility in exchange rates.´ In addition to this foreign lenders will likely continue to stay away from opportunities in the Indian power sector. ´And, domestic players will find it difficult to attract foreign currency lending for their projects,´ Mishra added. However, there are some other people who are optimistic about the situation. The recent development on a French company GDF Suez SA buying majority stake in Meenakshi Energy's power project and global as well domestic firms, with healthy balance sheets, have shown interest in buying viable projects. ´We are always open to buy power projects if we feel its viable and have necessary clearances in place,´ NTPC Chairman Arup Roy Chaudhary said during his recent visit to Mumbai.

JPMorgan Asset Management has already invested $150 million in the Bhaskar Group´s Diliigent Power in May 2013, Nagarjuna Construction has been reported to be in talks with Sembcorp to sell a stake in a power plant, and Meenakshi Energy and Infrastructure Holdings has agreed to sell a 74 per cent stake in a 1,000 MW coal-fired power project to GDF Suez.

The debt-laden Jaypee Group is close to selling two of its three operating hydroelectric projects to a consortium led by Abu Dhabi National Energy Co PJSC, known as TAQA, Mint reported recently. It has also reported that Piramal Group is exploring opportunity to buy power assets.

With this the hope is that such kind of developments could provide opportunities to those players who are planning offload their loan burden and clear their distressed assets in order to rectify their credit portfolio. Meanwhile, financial institutions and lenders are also busy with pulling down their NPA barometer.

Global Outlook
The global credit rating agency Moody's Investors Service says that the overall outlook is stable for the power sector in Asia (excluding-Japan) in 2014, mainly because of supportive regulatory policies, which result in stable market structures and low probabilities of adverse adjustments to tariff structures or returns.

In its latest report, Moody´s says that the governments´ strong willingness to provide support will continue to boost state-owned power utilities´ credit quality. However, it has rated negative for Indian power sector due to structural challenges in fuel supply, generation, T&D and power sales.

´Despite high level of capital expenditure, most power utilities´ leverage is unlikely to increase significantly over the next 12-18 months, owing to increasing cash flow from capacity additions and stable-to-declining fuel costs,´ said Mic Kang, a Moody's Vice President.

The Indian power sector remains an outlier. Moody's outlook for the Indian market is negative in 2014, due to the structural challenges in the entire value chain. The outlook for India's power sector was also negative in 2013.

On leverage, Moody's expects debt levels in the power industry across Asia (ex-Japan) to be stable over the next 12-18 months, supported by increasing cash flows from capacity additions and stable-to-declining fuel costs, and despite high levels of capital expenditure.

Moody's report says the stable outlook for the power sectors in Hong Kong and Singapore is driven by supportive regulatory policies and a low likelihood of adverse adjustments to tariff structures or returns. In addition, offtake and fuel supply risks are low.

On the power sectors in China, Indonesia, Korea, Malaysia and Thailand, Moody's report says while the stable outlook for these markets are also owing to supportive regulatory policies, such policies are less predictable than in Hong Kong and Singapore.

According to the report, ad hoc tariff increases or subsidies against the backdrop of stable to declining fuel costs offset the absence of automatic cost pass-through tariff systems in China, Indonesia, Korea, Malaysia and Thailand. Moreover, execution risks related to the construction and commissioning of new power facilities in these five markets appear generally manageable.

Industry-Speak
"We also need to meet the reforms agenda set before us"
Mukesh Kumar Goel, Chairman and Managing Director, PFC, explains to Shashidhar Nanjundaiah how the Corporation is gearing up to the competition from private players.

Even as a public sector unit, PFC has the mandate of taking on viable projects, ensuring bottom lines. Take us through the process of vetting a project before extending support to it.

It is an age of cut-throat competition and PFC is not insulated from it. Since our inception, we have been able to maintain a year-on-year growth rate of over 20 per cent. We are a lean and professional organisation, with about 423 employees, all based in Delhi. About 70 per cent comprise of executives and professionals either having expertise of power sector or finance sector. These people ensure that a systematic method of appraising the projects is followed. Our appraisal system is considered as an industry standard and is widely acclaimed.

What is your biggest challenge?
The biggest challenge before us is to ensure the reduction of distribution losses by state power utilities. Non-revision of tariffs at regular intervals has been a recurring problem in some cases such as Tamil Nadu. Lower production of coal by CIL has prompted the producers to turn to imported coal. Unfortunately, this has led to a rapid increase in fuel costs. A few administrative issues have also emerged. As an arm of the Government of India, we also need to meet the reforms agenda set before us.

Reforms agenda from the central government has not been always followed by states. Has this problem come in the way of your growth?
Not really. In fact, we facilitate reforms: apart from monitoring, we also bring out two annual publications one on the operational and financial performance of the utility, and the other provides the status of reforms on a quarterly basis. Both are well received by our stakeholders.

We see that the benefits, including grants, etc., are available to the states when they implement the various reforms schemes of the Centre. For example, the financial restructuring agreement (FRA) is one such scheme, and we have worked with the state of Rajasthan on implementing it. Certain targets and milestones are set, and the money is released only when the targets are achieved.

Does the health of discoms have an effect on your lending?
No. Only 0.5 per cent of the value of our loan book comprises our non-performing assets (NPAs). As far as state power companies are concerned, we have recovered all our dues. There is no NPA among state power companies.

How does your monitoring team function?
We have two teams one monitors the generation projects we fund, and the other is the reforms committee.

Specialised financial institutions like yours can probably afford appraisal committees, whereas other banks must depend on general appraisals since they don´t normally have sector-specific expertise. Can PFC use its power sector appraisal skills to help banks?
Where we are the lead financial institution, we share our project appraisal manual with the finance consortium members and vice versa. We have developed an integrated, transparent and objective model of appraisal which includes project and borrowing entity´s ratings.

What is the rate of rejection of loans by PFC?
I wouldn´t call it rejection. Rather than rejecting a project outright, we prefer to work with the client, offer suggestions and ask them to come back to us with a revised proposal which is acceptable to all parties.

Even as the power finance sector has been lamenting poor performance, Power Finance Corporation´s (PFC) NPA level is one of the lowest in the industry only about 0.5 per cent, out of a total loan book value of Rs 171,000 crore. The company, which has been consistently acclaimed for its efficient asset management, has even upgraded one of its assets into a standard asset last year.

The following statistics show the crisis the sector faces today

  • Distribution sector financial losses stand at INR 67,000 Crores3 (FY12)
  • Bank exposure to the discoms in the form of short term loans (which largely represents deficit financing) stands at INR 1.9 lakh Crores4
  • The debt-equity ratio of private gencos has risen to 2.64 in FY13 from 0.91 in FY095
  • Commissioned but stranded power capacity stands at more than 33 GW6 (due to lack of coal and gas) which will result in non-performing assets with investments of over INR 1 lakh Crores
  • Cost of power deficit in the form of additional cost of diesel back-up generation is INR 43,800 crores annually.

Something has gone wrong. The key questions before us today are:

  • What are the immediate short term measures to revive the sector and get the investment cycle going?
  • What are the long term measures to ensure sustainability in the sector so that we don´t see history repeating itself in this manner again?

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