Worst over for thermal power space post reforms: Feedback

Ekta: One of the key things highlighted in the Bharat Heavy Electricals Ltd (BHEL) numbers was the lack of execution and according to them 24 percent of their order book is ‘non-moving’. Do you think that execution is going to become even worse than what it is?

A: Not really. For the sector that you are talking about, BHEL is largely in the coal thermal sector. The worst is behind us in that particular sector with a whole lot of concerted action on coal, focus on Coal India, imports, the policy decisions on fuel passed through unblocking a whole lot of stuck projects to the Cabinet Committee of Investments (CCI). That sector has seen the maximum political, administrative and bureaucratic action in the last 18 months. So, this is one sector that one can say is looking up where stuck projects are slowly getting unstuck, where coal shortage sees to be a problem, where distribution companies (DISCOMs) reform is happening, transmission links are happening between northern linking southern India and so, a whole lot of positive messages from there.

Anuj: How have you read the situation in Delhi in terms of the whole recent power fiasco and that is being replicated in Maharashtra as well, some noises in some other states as well, how do you read into that? Is that going to put some pressure on the investment climate in particular?

A: Not really. There are two separate issues. When you refer to issues in Maharashtra, Haryana and Delhi, it is one set of issues targeting tariff subsidies.

The other issue is the current mismatch of wavelengths between the political establishment in Delhi and the private sector DISCOMs. The two are completely different buckets. As far as Delhi DISCOMs are concerned, as the state, it is also a partnership.

The private DISCOMs are your agents to distribute power to millions of homes and consumers. So there is a partnership spirit here and the fact is that these regulators across India have created this enormous monster called regulatory assets. All it means is that the regulator agrees that you should be earning more tariff as a power supplier based on cost structure but because they feel that it maybe too harsh to immediately pass on increased tariffs to consumers, they create a basket called regulatory assets, which effectively tells you that hopefully we will give you this cash tomorrow.

That seems to be reasonably unfair when you have close to Rs 20,000 crore worth of regulatory assets stuck in Delhi and the commensurate number in Bombay is a little short of Rs 12,000 crore. As you know, yesterday the Maharashtra Electricity Regulatory Commission (MERC) mandated a 90 paisa increase in the power tariffs to Mumbai consumers to start addressing the problem of Rs 12,000 crore of regulatory asset for Mumbai DISCOMs.

The equivalent figure in Delhi is Rs 20,000 crore. This is the amount of cash that is due to the DISCOMs, which the regulator has agreed but not allowing them to collect. If you have Rs 20,000 crore of liquidity stuck, anyone, however efficiently he or she runs his DISCOMs will have problems paying the power suppliers and other suppliers that is the macro problem.

My general advise to the system and particularly the political establishment is that the regulator and the appellate authority is to evolve the mechanism where this amount of liquidity can be made available to the DISCOMs so that they can discharge in turn their liabilities to NTPC and others from whom they have bought power. That issue needs to be handled separately. Merely fighting about it is not going to solve the problem.

The other issue is about targeted subsidies. I have repeatedly gone on record on different channels including the print media to say that when societies like ours are transiting from decades of tardily provided or even non-provided urban utilities like electricity and water and we are jumping to privately produced market priced power. There is a vulnerable section of society, which requires transition management. It is this vulnerable society that consumes four buckets of water a day or consumes electricity upto 400 units that certainly deserves our empathy, deserves our sympathy and there is fiscal space and models that can provide them targeted subsidies.

Ekta: You did mention that maybe the coal and thermal sectors now bottoming out but what we gathered from the BHEL results and the management talk was that they haven’t seen any progress on orders from Surana Power, Indiabulls, Abhijeet Group indicating that maybe even private capex is at the worst levels that we have seen in many years. In that sense, do you expect it to have bottomed out pre-election at least and where does it stand at this point in time?

A: The BHEL figures are a reflection of history. You are talking about the past. Looking forward there are various reasons why these projects were stuck. These projects have been stuck for coal linkage and all the brouhaha we saw on coal related allocations. Many of these projects were stopped because of water, forest and environment issues and many of these projects are also stalled because of very poor conditions in capital raising, in the capex market, whether equity or debt because many of these companies were overleveraged or have had standard assets.

All these forces have to get together once again in a positive format to enable these entrepreneurs, the names that you have taken to get back to paying BHEL and others for supplies already met and cash flow to commence deliveries for future supplies. That is just around the corner and we will see an improvement in the capex cycle so far as power equipment is concerned.

Anuj: You had tweeted yesterday that CCEA has cleared four container terminals at Kolakata, Kandla, Jawaharlal Nehru Port Trust (JNPT) and Ennore and why do such expansions need approval from Cabinet Committee? What do you think is the alternate play for that?

A: Putting a new container terminal is like a normal capital expansion that any factory or large factory would do in the normal course of business. Why this needs to go to the cabinet of this country? Aren’t there more pressing issues that require our cabinet ministers to address themselves? Why are ports and the port trusts and the authorities given the power to undertake what one would call a routine capex operation, keeping steps and keeping pace with growing demand in the market?

We have a huge bunch of useless issues occupying the bandwidth of cabinet and sometimes when you see cabinet agenda with 67 and 70 items on the agenda, you have to ask yourself the question why doesn’t somebody clean up this whole system of what goes to the cabinet and what should be left to the domain of the people running the business?

Ekta: How would you gage the success of the CCEA?

A: The CCEA has to fill a very desirable gap that existed, which is this complete nuts and bolts focus on what is holding up projects. That was earlier fuzzy. Nobody quite knew what was holding up project. So the fact that they have a website that people can log in and you can document these are the permissions held up and then it prioritizes, it calls a different groups of ministries and administrative departments and state governments to solve this. I think that is a major battle won for this country. That kind of intervention was required.

The larger issue to have the projects that are cleared by the CCI, have they started their project operations is a question that is still unanswered. How many of the 300 projects or Rs 19,000 crore have commenced drawing down their loans and issuing orders for capital goods or commenced construction is still a black box. The finance ministry under the department of economic affairs has set up a cell to monitor post clearance movement and I am looking forward to getting some data from them soon enough.

Ekta: The bidding for the Navi Mumbai airport has begun and we have got some global bids coming in as well, how much of an incremental or how much of an upside would you see in the bidding process for the Navi Mumbai airport and for it to get on stream?

A: I don’t have an answer to that question. I don’t have in depth knowledge of the economics of the Navi Mumbai airport to tell you what the auctioned amounts will be.