There are enough and more reasons to celebrate the growth of India’s power and adding to the conviction is Vinayak Chatterjee, founder and managing trustee, The Infravision Foundation. In an exclusive interview with Moneycontrol after the interim budget, he said he’s more optimistic about the sector than ever before.
He underlined the government’s changed stance on coal thermal capacity, noting that there was a time India followed the trend of rejecting new coal thermal projects. However, he said the government has now accepted that the country needs more coal power, while acknowledging the need for pollution and climate change safeguards.
He was particularly optimistic about renewable energy, and emphasised the potential in the transmission sector, while also pointing to the challenges of evacuating power from remote sites.
Of private sector capex in greenfield projects, Chatterjee discussed past attempts to revitalise public-private partnerships or PPPs, like those proposed in 2014 or the Kelkar committee's recommendations in 2015, but rued the lack of progress. During the interaction, he acknowledged the need for new infrastructure rules but highlighted the absence of clear signals to the private sector. Edited excerpts:
Which segments of infrastructure do you think are poised for growth? Where would you put your money if the proposed additional Rs 2 lakh crore comes in the next budget? Second, how far is private capex really, 12 months, 18 months?
My points are only related to private capex in greenfield infrastructure.
Domestic and foreign investors, do they have the confidence right now after what happened from 2012 or 2010 to 2013-14, what with the burst of NPAs (non-performing assets), the non-level playing field, the criticism about PPPs? The question really is, are we seeing any signs that suddenly the confidence has come back in full robustness? Obviously not. Because PPP formats are still waiting to be substantially improved.
I am aware of the fact that NHAI (National Highways Authority of India) and the ministry of road transport and highways (MoRTH) are working on a new BOT (build, operate, transfer) format, which is supposed to be more investor-friendly. I'm waiting to see the outcome. The railways is on a blank in attracting private capital.
There is some private capital, a fair amount in renewable energy, and some in electricity T&D (transmission and distribution)-related areas. But otherwise, (the private sector) today is not yet ready to invest in greenfield infrastructure. The maximum that's happening is that money is changing hands in existing projects, which is called monetisation, but monetisation doesn't lead to increased GDP or a new stock of projects. Monetisation means somebody else is buying somebody else's project. The main thing is private capital in infrastructure greenfield projects, and there are still not enough clear signals to the private sector from the government that a significant reset is being done to the PPP format. Therefore, I am not particularly hopeful in the medium term unless something dramatic happen.
If you look back even 7, 10 or 5 years, road capex was here and railway capex was here. Over time, the railways is getting a higher and higher relative share of capex, and that is very much in order because the national logistics policy of this country and our plans to bring competitiveness in our logistics area means the railways has to carry a far higher share of freight from 20 percent today to 48 percent as planned for India to achieve both competitiveness in its logistic as well as to transfer more goods not by road but by rail for climate change reasons, for green reasons.
I would expect a significant reset of the capex from the road sector in favor of the rail sector. I would also feel that when the government is formulating its new thrust, the new government, it would also pay a lot of attention to rural infrastructure, by which I really mean river linking, irrigation, storage and mandi towns.
Finally, India has seen two and a half decades of intense focus from the mid-1990s to now in core infrastructure, transportation, energy, all of that. The time has come to start creating frameworks to attract and put in a substantial chunk of money into the social infrastructure sector—health and education.
The nation has now progressed to having the confidence to now attack those two segments with as much energy and vigour as it did core infra from the mid-90s onwards. But let me stop there.
Awarding activity has been rather slow. NHAI has seen a dip. How do you see this panning out in the election year? What kind of growth are you anticipating given the allocation in the interim budget?
Look, the problem of reduced orders emanating out of NHAI and MoRTH has little to do with the budget. The point here is that the finance ministry had a view that NHAI had reached prudential limits on the amount of debt it was carrying on its book and it guided NHAI and MORTH to say, no more raising debt.
Effectively, India's vast road network was built in the last few years by taking on debt. So the fact that debt has been constrained is the reason that order books are falling. Now, there are two ways to attack this. Either you say that I am going to increase the budget allocation substantially because India still has a massive road programme ahead of it to complete.
For example, there has already been an announcement of the next, futuristic stage of the roads programme, which is 35,000 kilometers of greenfield controlled expressways, right? That's a very big programme announced and waiting to be executed. Or you say that I am going to change the BOT/PPP format so beautifully that it is going to be wonderfully attractive to domestic and foreign investors to once again jump in and put in balance sheet money into BOT.
Either one or both of these can happen. If both happen, we are in clover. That government increases the budget substantially to address the new challenges in the road sector. greenfield controlled access expressways. Or it makes the PPP format so attractive that private capital kind of falls over each other to start putting money into building roads again.
The latter is still work in progress and we are yet to see what kind of a new, friendly BOT format finally emerges. So let's put that on hold. Assuming it takes one year or one and a half years to settle down, assuming it's very positive, we still have this year to contend with.
Road construction is one of the sectors that has the highest multiplier effects, far more than transmission, far more than anything else. So it would be prudent for the next government, as I said, in the full budget to actually address this problem of no more debt for NHAI by saying, Guys, while NHAI is putting its house in order and NHAI is making best efforts in monetisation and BOT, etc., let us support the roads programme with a far higher allocation for the sector, and I would bet that that is going to happen.
Private sector capex in greenfield projects is not really happening because of the limitations of the BOT-PPP framework that we have. What has stopped this from being finalised?
Unfortunately, that budget paragraph did not get implemented and all of you forgot, nobody even raised it. Around mid-2015, the government again was seriously concerned about the lack of energy in the PPP format and set up a very, very high-powered and very able committee under (economist Vijay) Kelkar. The Kelkar committee (the panel formed to evaluate the PPP model) came up in November 2015 with a brilliant report. If you read it today, you will get a laundry list of all that is supposed to be done to put PPP back on its feet. This is November 2015. But we haven't seen a formal acceptance of that report. We haven't seen debate and discussion on that report, and we are unaware of the government's take on the recommendations of the report. In the meantime, PPP has not revived.
The railways in a sense has faltered on attracting private capital on every initiative, whether it is dedicated freight corridors, station privatisation or running private trains. There has not been great PPP in any other major sector. So I do not have an answer to the question saying, as you rightly raised, when everybody knows that there is money waiting outside and in India to put money into India's infrastructure sector, why aren't we putting our heads together in having a new set of infrastructure rules of the game and get all this money in.
Do you see spending in the power segment accelerating from here on? That's been one of the fastest growing overall.
‘Power’ is an umbrella word that encapsulates three links in the chain; generation, transmission and distribution. Actually, I am far more optimistic about the power sector than I've been ever before. So far as generation is concerned, I think Indian entrepreneurs with backing of foreign funds and partners are putting in a lot of effort and money into renewable power, both in terms of power stations as well as in terms of manufacturing modules and accessories. The government has finally woken up also to take a softer stand on coal thermal. There was a stage a few years back when India joined the fashionable bandwagon to say no more new coal thermal capacity and everybody said, no, no, no, no, that's not right for us. And finally, the government has come around to the view that in the next few years, India is going to add 15,000 to 20,000 megawatts of fresh capacity in coal thermal, of course, with all the pollution and climate change safeguards. So I am confident that the generation sector is going to hold, although there is a medium-term concern because if renewables capacity does not come up as planned, you are going to see a certain phase in the medium term when merchant power rates are going to rise, because there will be an imbalance between demand and supply. We can discuss that separately, but I don't see generation right now as a major constraint.
Transmission… India has one of the finest transmission systems in the world. The only challenge now is that most of the renewable (power generation) is coming up in remote areas and the necessary transmission lines have to be created with the same speed to be able to evacuate that power; that seems to be the biggest challenge in renewables now. And finally, on distribution, I think huge measures have been taken that has brought in a sense of fiscal discipline in discoms (power distribution companies)... The policy framework allows a second licensee (to provide last-mile delivery of power within a grid) and you're going to see a lot of action there. The government has put a lot of money into smart metering. Announcements have also been made about time-of-day pricing, etc. So, to cut a long story short, the power sector is looking good.
I would certainly put my money into the well-run EPC (engineering, procurement and construction) companies, because as India unrolls its infrastructure, we will need the good EPC companies to roll out, build that infrastructure. So I would look at the stocks of the well-run EPC companies across the country, that would be on my list. I would look at people who supply goods and services to the electrical industry, cables, switchgear insulators, transmission towers, solar modules—everything that goes into the power generation, transmission and distribution sector is going to see an uptick. So I would make a list of those companies and carefully scrutinise where I would put my money. These are the two areas that I would put my money in, and people who make construction equipment, for example, excavators, bulldozers, earthmovers, pavers, people who make construction equipment—those companies are also ones that I would look at. And, obviously, what is called intermediates like steel and cement, which are necessary ingredients to the infrastructure story and are popularly called infrastructure intermediates.
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