News reports indicate that L&T is negotiating a deal with the Chowgules to buy out Narmada Cement. The basic attraction for L&T is the grinding mill at Magdalla. If acquired, L&T will be able to capture the south Gujarat market and its freight costs will reduce sharply. Gujarat Ambuja has a packaging unit at Surat. Another reason could be that Narmada has recently undergone a modernisation-cum-expansion programme. Effective November 1997, the clinkerisation capacity at Jafrabad has been hiked to 1.2 million tonnes (1 million tonne). At Magdalla (near Surat), the grinding mill was renovated in 1997-98, and can now operate at full capacity. The capacity at Ratnagiri was hiked from 0.33 million tonne to 0.4 million tonne, and the plant will also produce slag cement.

Narmada Cement has been a consistent exporter of clinker, and despite using only imported coal (duty-free because of the company's exports), the cost per tonne of power and fuel is very high. The reason is that the companyrelied almost entirely on the grid for power (average cost/unit:Rs 4.27). To lower the cost of power, the company has switched over to DG sets. The export of clinker is because the company was not able to sell cement (the cement unit operated at less than 70 per cent in 1997-98).

Narmada Cement will have difficulty surviving in the Gujarat market, and the promoters have the option to operate a loss-making unit or sell it off. The freight cost is a major advantage for L&T. Besides the debt (Rs 76.15 crore as on March-98), the major hurdle in getting even the expansion (cost/tonne Rs 2,700) through will be the pending conversion of 17,50,000 FCDs of Rs 100 each (equity:Rs 50.78 crore). The conversion will result in unserviceable equity. For the first half of 1998-99, the operating loss was Rs 5.98 crore, and net loss, Rs 14.3 crore. The only hope for shareholders (in the medium term) is to wait for a takeover.

Mega power plans

The government had constituted a Standing Independent Group (SIG) inNovember 1997 to be the apex body to oversee the implementation of mega private power projects. Inter-state and inter-regional mega power projects are proposed to be set up both in the public and private sectors. Principles of competitive bidding would be adhered to as far as possible while obtaining tariff offers.

The government feels the country will be adding 15,000-20,000mw of capacity through this policy at the most competitive tariffs payable by SEBs and consequently by consumers. It is setting up the Power Trading Company (PTC) to enable companies setting up mega power projects to negotiate with one buyer only, and will eliminate risks regarding payments. A pre-condition will be that the beneficiary states should have constituted their regulatory commissions with full powers to fix tariffs as envisaged in the Central Act. They will also have to privatise distribution in the cities having a population of more than one million.

Here lies the first problem of setting up mega power projects. Atpresent, there are only five licensees operating in the country, who cover cities like Mumbai, Calcutta, Surat and Ahmedabad. The Orissa government is going ahead with privatisation of both transmission and distribution. As these cities are more or less self-sufficient in power, it is unlikely that companies setting up mega power projects would be interested in supplying power to these areas. Thus, unless state governments speed up the process of privatisation of distribution, there is little scope for the projects seeing the light of the day.

No state has yet set up regulatory commissions (which seeks fixation of tariffs of the various sectors), and unless this is done, the feasibility of mega power projects will be under threat. This is more of a political decision, as some states which offer free power to farmers will now have to charge them. It is thus unlikely that states will be willing to set up regulatory commissions unless they are forced to do it. A case in point is Tamil Nadu.

The revisedpolicy guideline states: "Similar comforts (regulatory commission and privatisation of distribution) would be given to public sector projects; however, they will have to deal directly with the SEBs and not through the PTC.' This means that NTPC will have to sell its generation to an SEB in spite of being a promoter of PTC. Why should NTPC then promote PTC? The revised policy also allows import of capital equipment, which would be free of customs duty for such mega projects. It also says that to ensure that domestic bidders are not adversely affected, price preference of 15 per cent would be given for the projects under the public sector, while deemed export benefits as per the Exim policy would be given to domestic bidders for projects both under the public and private sectors.

This will give a major boost to the domestic capital goods industry players. Domestic players have been complaining that they are not operating on a level-playing field, as they have to pay domestic taxes, while international biddersare exempt from any duties. Under such conditions, international players like ABB and Siemens used to bid for projects through their parent company, and give sub-contracts to the domestic subsidiaries.

However, with the benefits given to domestic companies, the scenario is likely to change, and it is the Indian subsidiaries who will now be bidding for the projects, as not only are they getting a level-playing field by getting deemed export benefits, but are also being given price preference up to 15 per cent.

(With contributions from Shishir Asthana)