SEB package foolproof; intervention was necessary: Feedback

Giving his views on the financial restructuring of State Electricity Boards, Vinayak Chatterjee, Chairman of Feedback Infrastructure said that the package is fairly foolproof and this intervention was necessary otherwise nobody was able to see the road forward. The restructuring enables the SEBs to sustain themselves in the short-term to meet their supplies, to meet their bills and to carry on operations.

However, Chatterjee believes that the success of the programme is very contingent on very good behaviour henceforth. “A whole bunch of good behaviour parameters are important if we are going to see the effect of this restructuring positive. If this good behaviour does not happen then three years down the line, we will see Rs 190,000 crore of non-performing asset (NPA) tsunami.” Also Read: Tamil Nadu SEB likely to clear dues by CY12-end: PTC India According to him, the fear of cash bankruptcy will see a slew of reforms across all the states. Many states have already announced massive tariff increases ranging from 15% to as high as 43% and more are likely to follow. Many states are going in for revamping of the distribution networks following PPP models. Below is the verbatim transcript of the interview Q: What are your initial comments on the financial restructuring of State Electricity Boards (SEB)? Do you think the package is fairly foolproof and we are going to see some kind of sustained good behaviour in terms of the SEB passing on costs? A: I think the answer is yes. Many friends are joking that it is not a restructuring but a re-restructuring because in 2002, we had restructuring worth Rs 10,000 crore, and now in 2012, we are having a restructuring of Rs 190,000 crore, which means 19 times increase in the size of the problem. But having said that, this intervention was necessary otherwise nobody was able to see the road forward. But to answer your question head-on, the restructuring enables the SEBs to sustain themselves in the short-term to meet their supplies, to meet their bills and to carry on operations. But the success of the programme is very contingent on very good behaviour henceforth, which means regular first one-shot major tariff increases, regular tariff increases, thereafter, privatization through different formats of the distribution, public private partnership (PPP) formats in distribution, reduction of technical losses, getting electricity pricing less political and more commercial. A whole bunch of good behaviour parameters are important if we are going to see the effect of this restructuring positive. If this good behaviour does not happen then three years down the line, we will see Rs 190,000 crore of non-performing asset (NPA) tsunami. But not to scare your viewers, I think the point is that the only way that people understand business is when you turn the cash flow to cap off. All SEBs have been threatened that if they do not reform as part of the good faith of making this package available to them then the central banking, the public sector undertaking (PSU) banks, the public financial institutions like Power Finance Corporation (PFC) and others will not provide cash support. This fear of cash bankruptcy, if nothing else, will see a whole bunch of reforms across all the states. Many states have already announced massive tariff increases ranging from 15% to as high as 43% and more are likely to follow. Many states are going in for revamping of the distribution networks following PPP models. Q: Which state governments actually have the flexibility to add more additional debt into their fiscal space? Have you been able to gauge which states would come up first? A: To be honest with you, I am not a public finance person. The broad point is that states have very little headroom in terms of their own state’s fiscal structures to actually start issuing new bonds to these Discoms. If you see the reform package, 50 per cent of the loans are reset by the commercial banks and 50 per cent of the loans are, in a sense, taken over in lieu of state governments issuing bonds. Obviously, it is simple to see that by state governments collectively issuing bonds of thousands of crore raises the liability of the state governments. How much headroom each state government has or how much headroom each state government will be allowed in terms of its moving forward on this, is a detailed micro exercise that only an experienced public finance person can do, state by state, balance sheet by balance sheet. I do not have a ready answer for you. _PAGEBREAK_ Q: There were some comments from the finance minister earlier where he said fresh timelines for clearances of infrastructure projects to the tune of almost Rs 1 lakh crore. How easy or difficult do you think it would be for such timelines to be met and what are your thoughts on what the status of these infrastructure projects could look like? A: My update on this is that there are two centers within the governmental system that are taking very active interest in seeing that stuck projects move forward. One is the PMO’s office, and I have anecdotal evidence from many ministries and departments that they are getting phone calls every morning. The other is the finance ministry. There are two very senior officers under Chidambaram, DK Mittal who is the financial services secretary and Arvind Mayaram who is secretary department of economic affairs (DEA). Both of them along with their teams have done granular work in terms of identifying 89 major projects over 1,000 crore; each has been broken down in terms of granular detail as to where they are stuck and some communication from the finance ministry have said that out of this 89, 15 are earmarked for moving ahead in the next 15 days. I do not know which these are. To be honest, I have not seen before this extent of micro focus on removing obstacles. Over and above this, you have very welcome announcement of setting up of the national investment board, a new powerful body which is to be created by the government to be chaired by the Prime Minister. It will change the way the government does business. The rules of business will be changed where instead of permissions coming, trickling in from various different permission givers. There will be a Foreign Investment Promotion Board (FIPB) kind of situation where all interested ministries, departments, permission givers, clearance givers sit around the table. At one-shot, permissions will be given under the auspices of National Investment Board (NIB), and once given, it’s sacrosanct. Things like these are happening at the center. I see great interest in the government in terms of an action agenda for moving ahead. Q: Even if some liquidity comes into the system as and when the SEB piece is put in place, that could well take three-four months, the fuel supply continues to remain very sticky. How are you reading the tea leaves over there? On gas, absolutely no progress is made. We see more and more companies coming onto this channel and bemoaning that their gas plant is ready, but there is no gas available. They are working at 20-30 per cent PLF and big ones at that. So, it is one step away to becoming NPLs and these are really big names. As well even on coal, we are still squabbling over the FSA and that is only at the signing stage. A: Let me take on the gas issue. I completely agree with you. From the industry, our feeling is that gas and the problems associated with a bunch of impending huge NPAs of underperforming or non-performing gas assets are already staring at us in the face. The government has been told this repeatedly by the private sector. They understand they have a problem, but the informal message that we are getting from the government and system is that they need some more time. Right now, in terms of prioritization of problems that we are attacking, we are attacking thermal power plants and coal first. As soon as we are able to put most of the issues to bed, we will attack gas next. To be actually candid with you, there is really no action on gas. The government is just asking for more and more time. Moving onto coal and the associated issues, you can track over the last few months that the nature of the intervention is moving down the chain. The issue that import is imminent is cracked, the fact that PSU units other than Coal India will import coal is cracked, the in-principle agreement that tariffs will have to be reset has been cracked. The Attorney General himself has said that signed PPAs can be reopened. Right now, we are actually squabbling about crude pricing. Once we know that coal has to be imported and coal has to be aggregated, the question is the current fight between state governments, between power producers etc. is how will the pooled price mechanism work. The ones who were enjoying coal at old prices feel that pooled prices will only be detrimental to them, because the price can only go up, whereas for Coal India, if it does not do pooled pricing, it will make a huge loss. We do not expect Coal India to subsidize the difference between domestic and imported coal. The nature of the problem is changing. We are moving ahead to that extent. When you see a new problem overtake an older one, it is, to my mind, a sign of marginal progress. Honestly, I really do not see any alternative. There cannot be an alternative other than pooled pricing and the entire country and the entire power sector, ultimately old plant or new plant, old FSA or new FSA, everybody will have to finally adjust to a coal price, which is a blend of imported and domestic. But for example, the Bengal government and certain other state governments are resisting it. This is a political wrangle which the government must immediately solve, and once we solve this problem, we are well on the road to moving ahead fast on the power reforms front. _PAGEBREAK_ Q: Do you even smell any moves towards revoking the nationalization of coal? Ultimately, Coal India is able to produce only 6% maximum more coal than the previous year, the asking rate is something like 20-25% in terms of fuel requirements. A: There are two things happening on coal denationalization. Coal denationalization is a political topic, which has to be passed by changing the act in parliament. Step one is I know that various people in Delhi, whether it’s the Planning Commission or the coal ministry or finance ministry, are immediately working on PPP package that will allow private companies to mine coal on behalf of Coal India. I still do not know the exact nuances of how they are going to be compensated etc. But I know that significant groundwork is being done to quickly have this passed as some kind of a government order or a policy announcement. Simultaneously, one gets the political message that no political party is against denationalization of coal. You may have fringe elements of the far Left opposing it but no major mainstream political party has a case for standing up and saying that we are against denationalization of coal. But since that’s a legislative stuff and you have seen how Parliament has been affected in terms of functioning, that is likely to come little later. Q: When we started off the year, there was an FY13 full year target of 9,500 kilometres that the NHAI had come out with. Now that the government is making some initiatives at least to fast-track the infrastructure projects, do you think that there will be any sort of target that will be met by the NHAI? Secondly, since the liquidity situation has improved slightly, will it be easier for bidders to raise capital and go ahead and bid for many of these projects? A: We have had some fairly interesting conversations with the leadership at Ministry of Roads as well as NHAI. They are doing a politically smart thing and I must appreciate that. The current reality is that private sector does not seem to have the appetite to bid aggressively for road projects in a Public-Private Partnership(PPP) format. It has both to do with what is one caused the Boa-constrictor syndrome, that large chunks of the private sector have swallowed huge projects in the past and have swallowed huge debt. Like that proverbial snake, it is busy digesting all that it has swallowed and it does not have the appetite to eat more. That is the reality in the power sector, both in terms of operational and financial appetite. Banks are saddled with NPAs and they are being very cautious about supporting further bids by the private sector. The ministry and NHAI have understood this current phase of private sector. It is a phase, a short-term cycle and yet, they have a 9,000 kilometre target given to them by the Prime Minister and the PMO to say in the fiscal year 9,000 kilometres of new roads are your target. They are shifting the focus to Engineering, Procurement and Construction (EPC) contract, which means that it is not on the Build-Operate-Transfer (BOT) format. Private sector does not have to raise capital or to fund these road projects on their own balance sheets. It is a variation of the old PWD contract. You build a road and the government pays you for it. It is a smart move to shift from BOT in the current situation to EPC. Under this format, I understand that by October 15, some 4,000 kilometres of EPC roads are almost ready to be bid out, and come February-March or even earlier, the balance 5,000 kilometres could be bid out on EPC. To that extent, if they really get their teeth into it. Remember, EPC shortens the cycle also, because you do not have to give six months for financial closure, you have to do far less work in terms of bidding it out, so it reduces the bidding cycle also and you are able to turn it around faster. If all the horses pull the carriage well, there is a fair chance that a 9,000 kilometre target could be met this year under EPC. It is politically a smart move also, because in EPC, you don’t have to select roads, which are necessarily high on traffic.