According to reports, the benchmark to qualify for the tax incentives granted to mega power projects has been lowered to 1000 MW from 1500 MW. This is applicable to thermal power projects. The other major benefit extended to mega power projects is that the period of tax exemption has been doubled from five years to ten years. The period of availing the benefit has been logically extended to 15 years from 10 years.

Reportedly, Bhel will benefit due to the 15 per cent price preference for supplies to mega power projects and also because of the benefits of deemed exports. Unless, the Office Memorandum issued by Ministry of Power dated 31.5.99 has been amended before it was issued as notification, Bhel is actually at a disadvantage. According to the above OM, the price preference of 15% is available to domestic manufacturers for public sector Mega projects. This is in line with the price preference allowed in bids financed by World Bank and is applicable to the supply of spares as well.

The OMdid not allow price preference to the whole package (as was available earlier) but only to the locally manufactured equipment within the package. In certain projects, BHEL has to import equipment for completeness of the package specified in the bid. This is done because either the equipment is not manufactured in the country or to meet the shorter delivery requirement specified in the bid. Such equipment was not entitled to price preference as per the above OM even though it meets with the value addition norm prescribed by the World Bank. The impact on the competitiveness of Bhel is anybody's guess.

The above preference is also applicable to supply of spares. Bhel's competitors will be at an advantage because they will be able to import equipment/spares duty free and will also be able to quote better prices as the price preference will no longer be available to Bhel. Of the seven projects which are granted the status of Mega Power Projects, at least four-NTPC's Anta II(Rajasthan-650 MW), Auriya II(UP-650MW), Kawas II and Jhanor-Gandhar(Gujarat-650 MW each) are gas based. The other three being, Maithon Power Project(BSES-DVC 1000 MW, coal), Cuddalore project and 1000 MW Narmada project. The interesting thing is that phase I of all the four NTPC projects are already operational and together with phase II qualify as mega power projects. Logically it should mean that any existing project if exceeds or equals 1000 MW or whatever the criteria at the time of expansion should have a scope to qualify as MPP.

In all probability, the mega power projects will have once through(drumless or super critical) boilers. BHEL has finalised a technical collaboration agreement for once-through Boilers with Babcock Borsig Power GmbH, Germany - the new company formed after the acquisition of L&C Steinmueller GmbH, Germany by Deutsche Babcock AG, Germany. There is no pre-condition regarding purchase of boilers from the technical collaborator. It is a technology transfer agreement. BHEL will be paying a technical know-how fee androyalty on sales to the collaborator during the term of the Agreement. The GoI should extend its policy to its logical end and impose price preference criteria for equipment for which royalty payment has to be made.

NELP

Realising the need for increasing investments in the oil exploration sector, the government introduced the much publicizied new exploration and licencing policy (NELP). Though there is very little to comment on the policy, which is a major improvement from that followed earlier, news reports suggest that the policy has not met with the expected response.

Apart from the fiscal incentives such as an income tax holiday for seven years from the start of commercial operations, zero customs duty on imports and the fiscal stability provision, the policy offered other incentives which made the package very attractive. These include the possibility of a seismic option in first phase, no minimum expenditure commitment, no mandatory state participation, option to amortise explorationexpenditures over a period of 10 years from first commercial production, nominal royalty rates @ 12.5% for onland crudes and 10% for natural gas and offshore crude. For deep-waters 5% for first seven years of commercial production and most importanatly freedom to sell oil and gas in the domestic market, among others. Inspite of these incentives bids for exploration have been poor.

The government had put on offer 26 Offshore Blocks, 12 Deep-waters Blocks (beyond 400 m bathymetry) and 10 onland blocks. The areas encompass both western and eastern offshore areas and onland areas in eastern, northern and western parts of the country.

In order to woo investments in the sector, the government held roadshows at New Delhi, London, Houston, Calgary and Singapore. However, the response had not been up to expectation, because of which the deadline for receiving bids had to be extended by three months. Further, some of the multinationals had asked for more time on the pretext that they need time to study the data.Among the reasons cited for the poor response is the low international crude oil prices. Though prices have increased in the near past, it has been mainly a result of control on supplies. In other words, capacity exists to meet immediate demand. Thus companies are not willing to put in money at this stage in high risk exploration business. Further, Brazil has recently opened up the oil sector. Oil and gas reserves in Brazil is expected to be much higher than those in India. Response to the roadshows in Brazil has been much better, with analysts claiming it to be the event of the decade in the oil sector.

Considering these factors it is hardly a surprise that bids for India have been very low. It is not that there have been no bids for the block put on offer, there has been some response. The government's decision not to extend the deadline any more, though will mean lower bids, but the point that has to be put across to international companies is that the government can not be made to wait for eternity,while these companies decide on their investment plans considering whether they are able to bag orders in other lucrative areas.

Steel

Ordinarily a small price hike in a commodity should be treated as a non-event. But for steel in India it is different. A 5 per cent hike would make Tisco double its profit, a 10 per cent hike would make SAIL come out of the red, while a 15-20 per cent higher price would result in Essar becoming profitable, and a 25 per cent rise would mean that all the steel projects in India would become viable and the NPAs of the FIs would reduce by more than 30 per cent. Obviously steel prices have an impact on the economy and the entire banking system of the country.

Today Tisco officials have announced a price rise of Rs 200 for long steel products and Rs 500 for flat steel products. Such a price hike is less than 2 per cent for long products and slightly more than 3 per cent for flat products. The price hike announced would be only for new contracts to be entered by thecompany. Company officials say that the annual contracts would continue to be serviced at earlier rates. The important thing here is that Ispat and SAIL have so far not announced even a small price rise. Essar Officials declined to comment on the pricing policy. Obviously all of them would be keenly watching Tisco's move before contemplating a similar hike.

Critics may say that if other steel majors do not increase the price of steel, there are more chances of prices falling rather than rising. But that is not true. Like any other market, what is important in steel is the perception of the prices.

After dismantling of the JPC, it is only in recent times that the steel industry has faced competition in the form of imports. With domestic prices following the landed cost of imports, the rise in international prices would mean that the only element of competition from the Indian market would fade. This can fuel price hikes. This is because the market in India is very thin. Direct sales still form a majorchunk of total steel sales (more than 40 per cent) as compared to its peers in other countries, where indirect sales are close to 90 per cent. In such a scenario, if all the steel companies raise price, the user industry has to accept it whatever be the jump, primarily because the element of competition is missing. One may cite that the user industry should also recover. But last year was the worst year for the user industry and with signs of recovery one may see both volume and price levels rising.

The problem could be the re-emergence of the re-rolling mills, that have backward integrated themselves by setting up their own steel melt shops. There have been proposals mooted to fund this small scale sector by UN-aid. If this sector comes back, the dealer network would gain its prominence and then there could be a major fight for market share. Till that time the only variable that would affect the prices would be international prices. With those rising, there is every chance for a full recovery in the steelsector.

With contributions from Urmik Chhaya, Shishir Asthana & Manish Saxena