Power Finance Corporation

LETTER TO SHAREHOLDERS
 
 Ladies & Gentlemen,
 
 It is indeed my pleasure to extend a warm welcome to all stakeholders
 on the occasion of 22nd Annual General Meeting of your Company.
 Financial Year 2007-08 has been yet another milestone year for PFC
 family as your Company not only scaled new heights in business
 operations but was also accorded prestigious recognitions at national
 and international fora. It is a matter of great honour that your
 Company was conferred with the coveted ‘Golden Peacock Award for
 Excellence in Corporate Governance’ at international level. Besides the
 certification of ‘ISO 9001:2000’ for ‘Financial Operations’ Division
 underscores the best practices followed by your ‘Navratna’ Company. The
 year also witnessed the transfer of 4,000 MW Krishnapatnam Ultra Mega
 Power Project (UMPP) to the successful bidder and the launch of PFC’s
 wholly-owned Consultancy subsidiary for providing cutting-edge
 consultancy solutions.
 
 Sectoral Outlook
 
 In the recent past, Indian economy has decisively moved to a higher
 growth trajectory marked by GDP growth of above 8% during the last 5
 years. During the XI Plan Period (2007-2012) a growth target of 9% has
 been set by National Development Council, which requires commensurate
 infrastructure in power, roads, ports etc. PFC as the dominant player
 in the power sector, has a key role to play not only in the power
 sector but also in the associated infrastructure sector.
 
 We are all aware that the demand for power has consistently outstripped
 the supply. In order to bridge this demand - supply gap, Govt. of
 India’s National Electricity Policy (NEP) stipulates ‘Power For All by
 2012’ and aims to achieve a per capita consumption of 1,000 Kwh by the
 end of XIth Plan, by adding a capacity of over 1,00,000 MW. This
 requires massive investment of over Rs.10,00,000 crore during this Plan
 period including establishment of requisite transmission and
 distribution system.
 
 The initiatives of the Govt. of India for adding the requisite
 capacity, have already started yielding the desired results. A
 testimony to this is the commissioning of over 9,250 MW capacity during
 the 1st year of the XIth Plan period, compared to about 21,000 MW
 commissioned during all the 5 years of Xth plan. In addition, over
 66,000 MW is already under construction and will be supplemented by
 about 28,000 MW from renewable energy sources and captive power plants.
 The above capacity addition programme excludes capacity addition of
 12,000 MW through UMPPs which has already been awarded and necessary
 work is under progress for their commissioning in a phased manner in
 the initial years of XII Plan.
 
 To provide thrust to investment in power sector, Govt. of India has
 announced setting up of a ‘National Fund for Transmission and
 Distribution Reform’ in the Budget for FY 2008-09. The proposed fund is
 expected to facilitate higher inflow of investment for strengthening
 and augmenting the T&D network commensurate with the capacity addition
 programme and also targets T&D loss reduction by providing grants on
 achievement of loss reduction, thus benefiting the ultimate consumer in
 terms of reliable and quality power.
 
 Believe that the above plans of the GoI for generation capacity
 addition and facilitation of investments in the T&D system would
 provide buoyant conditions for growth, especially for a Financial
 Institution like PFC. However, there are concerns on the financial
 markets front, which is manifested in the form of high inflation and
 rising interest rates. The measures to curb inflation by RBI had an
 upward pressure on interest rates, tightening of liquidity conditions,
 resulting in narrowing down of spreads, which may affect the various
 players in the financial sector. The modification of ECB guidelines by
 RBI in August, 2007 restricting ECB borrowing for rupee expenditure
 also restrict the resource mobilization from International Markets.
 Nevertheless, your company does not foresee any constraints in raising
 the requisite resources from domestic markets given its highest credit
 rating and strength of its balance sheet.
 
 PERFORMANCE HIGHLIGHTS
 
 With a glorious history of over two-decades, underscored by tangible
 accomplishments in Indian power sector, PFC has firmly entrenched
 itself as a leading Financial Institution through its knowledge, skills
 and expertise by providing innovative solutions to power utilities.
 PFC’s catalytic role in growth of the sector has catapulted it to the
 centre stage. This has paved the way for its active involvement in a
 host of Government-sponsored initiatives which include:
 
 - Ultra Mega Power Projects for economies of scale and deployment of
 Super Critical Technology
 
 - Accelerated Power Development & Reform Programme (APDRP) for
 reduction of AT&C losses
 
 - Merchant Power Plants to achieve the targeted capacity addition
 
 - Assisting State Power Utilities in preparation of CDM projects for
 R&M of old Thermal and Hydro generation plants to enhance their life at
 rated capacity ,
 
 - Delivery through Decentralised Management (DDM) to showcase model of
 excellence in distribution primarily in rural areas,
 
 - Distribution, Reform, Upgrades & Management (DRUM) for commercially
 viable distribution system for reliable and quality power etc.
 
 Your Company had sanctioned Rs.1,86,419 crore and disbursed Rs.92,065
 crore, by the end of FY’2007-08. It had supported a capacity addition
 of over 70,000 MW and about 33,000 MW capacity has already been
 commissioned which is about 23% of the total installed capacity in the
 country.
 
 The Corporation witnessed yet another year of sterling performance and
 established new benchmarks in various areas of its operation.  The
 loans sanctioned for various projects reached a figure of Rs. 69,498
 crores, an increase of 123% over last year which shall pave the way for
 higher disbursements in the years to come. The disbursement made during
 the year reached a level of Rs. 16,211 crore, an increase of 15% over
 previous year. The Total Income rose to Rs. 5,040 crore compared with
 Rs. 3,928 crore during the previous year representing an increase of
 28%. The Net Profit is up by 22% at Rs. 1,207 crore from Rs. 986 of
 previous year. The Recovery Rate stood at 99.11% in respect of
 principal amount due and the net NPAs as % of loan assets decreased to
 a record low of 0.01% in 2007-08.
 
 Your Company has been supporting reforms for overall improvement in the
 performance of State Power Utilities. The Utilities are categorized
 based on the reform status, operational and financial performance
 parameters which enable PFC to determine its credit exposure and
 differential loan pricing mechanism. Quarterly Performance Research
 Report and the Annual Report on Performance of State Power Utilities
 published by PFC is acknowledged as authoritative source of information
 by various stakeholders in the Power Sector and also by State Power
 Utilities who take corrective measures on the key issues flagged in the
 report to improve their performance.
 
 The fact that PFC is a dominant player is amply substantiated by its
 market share of over 20% in Indian Power Sector in terms of investment
 in the X Five Year Plan. The Corporation is poised to take full
 advantage of the emerging opportunities in the power sector.
 
 To expand the business arena, PFC had signed MoUs with various
 Companies like IREDA, WBGEDCL, KREDL and MEDA for promoting investments
 in Renewable Energy Sources like Wind, Solar, Biomass, energy
 efficiency & conservation projects which include consortium financing
 of such projects. PFC has also signed an MoU with Export Import Bank of
 United States which facilitates US$ 800 million as a special delegated
 line of credit to support purchase of goods and services for power
 projects including Renewable Energy Technologies from USA during the
 next 2 years. In addition, MoUs were signed with RITES Ltd. for
 synergizing resources and expertise to import coal from African
 countries and elsewhere to meet the demand-supply gap of coal for
 thermal generation plants in India and with TNEB for financing
 co-generation projects in sugar mills. These steps will certainly
 strengthen PFC in securing its growth prospects in the long- term.
 
 The year gone by has raised the bar of performance and business
 prospects of your Company by way of stupendous financial performance
 and long-term understanding with various Institutions mentioned above.
 
 RATINGS & ACCOLADES
 
 Your Company was rated in the highest category of ‘Excellent’ for its
 performance viz-a-viz the MoU with Government of India during FY
 2006-07. I take pride in sharing with you that during the FY 2007-08
 also your Company had surpassed all the ‘Excellent’ MoU targets for
 various performance parameters and is poised to be accorded ‘Excellent’
 rating for the same.
 
 Further, PFC has been accorded international credit rating at par with
 ‘Sovereign’ by leading overseas credit rating agencies such as Standard
 & Poor’s (S&P), Moody’s and FITCH. On the domestic front, PFC got the
 ‘Highest Safety’ ratings from reputed agencies like CRISIL and ICRA for
 its specific resource mobilisation programmes. It is a matter of great
 pride to state that PFC has been ranked 2nd as per total income in the
 FIs/ NBFCs/ Financial Services Sector in Dun & Bradstreet’s ‘India’s
 Top 500 Companies, 2007’. In addition to “Project Appraisal System”,
 “Finance Division” of PFC is also now ‘ISO 9001:2000’ certified.
 
 Consistently high ratings by the Government of India as well as leading
 Indian and international rating agencies bear testimony to PFC’s
 stature as a an Institution with strong fundamental and financial
 strength.
 
 As you may be aware, PFC was conferred with ‘Navratna’ status in June
 2007 based on its impeccable performance and remarkable contribution to
 Indian power sector. One more feather to the cap was added when PFC was
 conferred with the prestigious ‘Golden Peacock Award for Excellence in
 Corporate Governance’ (National Award category) in September 2007 in UK
 for adopting best practices and its contribution to the cause of
 Corporate Governance.
 
 ULTRA MEGA POWER PROJECTS (UMPPs)
 
 Unveiling of the UMPP initiative by the Government of India has placed
 new responsibility and opened up growth opportunity for PFC.  India’s
 power sector has crossed the inflection point in terms of huge
 generation capacities of 4,000 MW each through UMPPs entailing super
 critical technology and requiring an investment of about Rs. 16,000
 crore for a single project. Through ICB process, PFC had already
 awarded 3 such projects to the successful bidders. Efforts are underway
 to transfer another UMPP at Tilaiya to the successful developer during
 the current financial year. The development of balance 5 UMPPs in the
 series shall be contingent upon availability of various critical inputs
 like land, water etc which are in the domain of the State Governments
 and also on the pace of permissions and clearances from various State
 Government and Central Government agencies.
 
 As regards the critical input of fuel is concerned, the Government has
 taken proactive steps in encouraging the use of captive coal blocks for
 power generation so that uncertainties in fuel supply and
 transportation are mitigated. Govt. of India has allotted coal blocks
 to several companies, either individually or in joint ventures. The
 Merchant power and Captive power segments have been identified also for
 captive coal block allotments.
 
 UMPP initiative, Renewable Power and Captive power generation are the
 three key promising sunrise segments which are expected to provide
 substantial business prospects for PFC, as private investors are
 willing to set-up power plants due to advantages offered by the captive
 coal mines.
 
 RECENT POLICY INITIATIVES
 
 In order to keep pace with the emerging market requirements, your
 Company has taken several new initiatives during the year under review.
 Some of the key policies introduced during the year relate to financing
 of initial project development expenditure including land acquisition,
 financing of grid-connected solar PV power generation projects, funding
 of energy saving projects. In addition to this, policy and guidelines
 pertaining to lease finance scheme for wind power projects, extent of
 funding for T&D projects, and payments terms for short-term loans, were
 revised during the year.
 
 THRUST TO RENEWEABLE ENERGY SOURCES INITIATIVES
 
 The fuel mix in India’s power generation is undergoing a change, with
 greater prominence being attached to renewable sources of energy than
 ever before. Although the country’s dependence on coal-based generation
 is still significant, a shift is clearly taking place.  This is a
 direct offshoot of the Government’s initiative to encourage green and
 clean power to overcome price uncertainties and supply constraints
 arising due to overdependence on conventional fuels.
 
 PFC accordingly attaches high priority to Renewable Energy Sources like
 Wind Power, Solar, Biomass, etc. As mentioned earlier, PFC has signed
 MoUs with the State Nodal Agencies of Maharashtra, Karnataka and IREDA
 to promote and finance Renewable Energy projects in the country.
 Further, to increase the business prospects in renewable,
 co-generation, energy saving projects and captive power plants, your
 Company evolved an innovative strategy of soliciting business through
 empanelling Business Development Associates (BDAs).
 
 LAUNCH OF ‘PFC CONSULTING LTD’
 
 The opportunities for growth of Consultancy Services are immense. With
 the implementation of Electricity Act 2003 and Govt. of India’s plan to
 add the envisaged capacities of over 1,00,000 MW each in XI & XII Plan,
 opportunities in the Power Sector have increased manifold. In order to
 target such opportunities and focus on high value assignments, PFC has
 launched a wholly-owned Company ‘PFC Consulting Ltd’.
 
 The Consultancy Services Group (CSG), set-up in 1999 had been offering
 competitive fee-based consultancy services and had earned a reputation
 for itself over a period of time. The Client base included the
 state-owned (SPSUs/ CPSUs) as well as private entities (IPPs) in the
 power sector, State Electricity Regulatory Commissions, State
 Governments etc.
 
 The Subsidiary Company would provide Consultancy Services in power
 sector and related areas. It would also look for new opportunities in
 the sector and would focus on Project related high-value assignments
 and opportunities emanating from implementation of Electricity Act
 2003. Further, it would also carry out any other consultancy works
 related to the business activities of PFC. The subsidiary would also
 create SPVs for UMPPs and undertake any bidding process for State(s),
 State Power Utilities, either on its own or as Joint Venture.
 
 HUMAN RESOURCES
 
 PFC would not have reached the position where it is today without the
 unstinted support of a motivated and highly committed workforce. The
 Company’s performance for the year under review is a testimony of hard
 work, dedication and commitment by the entire PFC family, including my
 colleagues on the Board, which I place on record.
 
 THE ROAD AHEAD
 
 Considering the size of investments required in the power sector, PFC
 intends to diversify its borrower portfolio to cover various fuel
 suppliers for power generation like coal, lignite, oil & gas companies
 etc. and expand the services being offered to its customers.  Besides
 equity participation in viable and attractive power projects, PFC is
 also investing in equity of other CPSEs in their Initial Public
 Offerings (IPOs).
 
 ACKNOWLEDGEMENT
 
 I take this opportunity to express my sincere and grateful thanks to
 the Hon’ble Union Minister of Power, Hon’ble Minister of State for
 Power, Secretary (Power), Additional Secretary (P), my colleagues on
 the Board, officials of the Ministry of Power, Ministry of Finance,
 
 Planning Commission, Central Electricity Authority, Comptroller &
 Auditor General, Statutory Auditors, RBI and other Departments of the
 Government of India for their support and guidance in ensuring smooth
 operations of the Company. I am also thankful to our Indian & Foreign
 lenders, Commercial Banks, Financial Institutions, Registrars, our
 Consultants and other agencies for their continuous support.  extend my
 sincere thanks to the Print & Electronic Media for their untiring
 support.
 
 My special thanks and warm appreciation are also due to our valued
 borrowers and clients for reposing faith in the Company and also for
 their valued suggestions, which have definitely gone a long way in the
 betterment of our performance. I hope the coming years would lead to
 further blossoming of this partnership. I take this opportunity to
 thank all employees of the Company for their cooperation and good
 performance, which helped the Company scale new heights of success. In
 future we expect to cross many more milestones and I firmly believe
 that a bright future awaits the Company and the Power Sector, which
 would enable us to take the entire nation to new heights of economic
 growth.
 
 Conclude my speech, with a special note of thanks to all the investors
 who reposed faith in PFC by becoming partners in its endeavour to steer
 the Indian power sector to higher levels of growth.
 
 Thanking you,
 
 Yours sincerely,
 
                                                          (Dr. V.K.Garg)
                                            Chairman & Managing Director