Govt should get out of power distribution

Written by MG Arun | Viraj Nair | Updated: Oct 17 2012, 08:55am hrs
Tata Power, Indias largest integrated power company with 6,900 MW of generation capacity at present, has an ambitious plan to achieve 26,000 MW by the end of this decade. The company has commissioned the first unit (800 MW) at its 4,000 MW ultra mega power project (UMPP) at Mundra in Gujarat in March. However, its investments in Indonesian coal mines, which were to secure its fuel and hedge it against high input costs, have been hit by an unforeseen hike in coal prices effected last year by the Indonesian government. Moreover, earlier this month, rating agency Moodys downgraded Tata Power, citing its weakening credit quality. Anil Sardana, managing director, Tata Power, explains that the breaches mentioned by Moodys were theoretical, because the money has not got out of the system. In an exclusive interview with FEs Viraj Nair and MG Arun, Sardana also lays out his plans to scout for mines in new geographies in the US, Columbia and Africa.

Your investments in coal mines in Indonesia, for a while, seemed to benefit you as coal prices moved up, but now, you are stuck with losses at your Mundra UMPP. How will the company cope with this unanticipated turn of events

Let me give you a step-back perspective. When we won the Mundra bid, we securitised ourselves with the investment in Indonesia. However, the change in Indonesia was a shockerthat somebody could actually not only renege on the contract but also go back in time and apply the rules to even contracts signed earlier, giving a retrospective impact, a bit like what happened with Indian tax law la Vodafone. Our contract was signed in 2007 and, in 2011, the rules were changed to apply to even old contracts.

Its not just an Indonesian phenomenon. This has a larger context in the way price changes are being made. It is similar to what OPEC is doing in the oil industry. Around the time Indonesia introduced a controlled price regime, Australia introduced a 30% carbon tax. South Africa also similarly introduced arms-length price norms. Combined, these countries provide 95% of thermal coal exports to this part of the world. It is not coincidental that prices increased at around the same time. This seems to be a well-organised, well-thought-through process.

With the decision on a tariff hike pending, what are the options now open before you

In Indonesia, 89% of the amount we earn goes into taxation and government coffers. For the 10 million tonnes weve got for Mundra, were just making a normal 10-12% rate of returns on investment. However, the purpose for which we had invested was to securitise coal on a long-term basis. Thats why were now looking to go to the US, Colombia and Africa. Were looking at those countries that expectedly wont join this club and those who seem to be honouring contracts and not retrospectively applying rules. The US market is a little more open. Were trying to get in there. They have coal and it is competitive, but the problem is that they dont have port capacities because they never thought they would export coal. They dont have a large railway network. So, transporting the coal will be a big challenge. Meanwhile, the Central Electricity Regulatory Commission (CERC) has to go through the process on our petition on tariff renegotiation. It could be a long, drawn-out process.

How will the uncertainties in coal impact Tata Powers long-term energy generation plans

We plan to have a capacity of 26,000 MW in generation, 4,000 MW in distribution and 50 MTPA of energy resources by 2020. Of this, 6,000 MW will come out of greener, cleaner, non-greenhouse gas sources. We will have an uptake of 50 MTPA of coal by then, which well divide between various countries for sourcing. We obviously dont want to be in just one country.

How damaging will Moodys act of downgrading the companys corporate family rating be

Tata Power has invested in Coastal Gujarat Power Ltd (CGPL) and has given a comfort letter to lenders saying if there is any problem in servicing the loan, we will service them. Moodys says were breaching the covenants because we had R4,000 crore of equity, of which R1,800 crore provision was kept for impairment because of coal price hikes and exchange variations. So, the ratio of debt-to-equity, which was good enough with R4,000 crore versus R14,000 crore, has become adverse with R2,200 crore to R14,000 crore debt. Therefore, the debt-to-equity covenant on record shows a breach. Now, there is a process to approach the lenders to say that this breach is only theoretical, because the money has not got out of the system, so give us waivers. Before we get the waivers, Moodys said we had breached the covenant in the books. Until we get the waivers, Moodys is right, theyre just doing their job; it is nothing malicious. Our lenders like K-EXIM-backed Korean banks, ADB, IFC and SBI have told us they completely understand our perspective and there is nothing to worry about.

How challenging will it be to reach your 2020 target, given the current uncertainties

As things stand now, we have a generation capacity of 6,900 MW, which is already commissioned. We will reach 10,300 MW in a year and a half. Another 3,000 MW will come by virtue of some of the captive mines that we are co-developing. So, we will reach 13,450 MW. That leaves 12,500 MW beyond what is already in hand. Between now and then, there are projects we are developing in a joint venture in Africa, targeting South East Asia, SAARC, Turkey and the Middle East, which give us comfort that we will reach the target. From a current capacity of 206,000 MW, India has to reach 350,000 MW by 2020. This is a daunting task, and the country needs more and more investments to do that. We are one of the large players in this sector, and we feel responsible enough to check whether we should invest in international assets or wait for things here to become more predictable. The view is that we need to create parallel teams and give them the opportunity on each and every front. So, we have divided ourselves into five groups, with five leads in five different regions. Whoever gets the clearances the fastest, gets the investment.

The government recently approved the restructuring of R1.9 lakh crore debt of state electricity boards (SEBs). Would this bring about any significant change in the sector

I have a discordant view on this. Its bad money chasing bad money. Such large aggregate technical & commercial (AT&C) and fiscal losses can be corrected through efficiency improvement. There is nothing in the plan that will do that. Today, SEBs have no money to pay salaries, to buy spares, or fuel. The R190, 000 crore losses of SEBs have just been taken out of the system by a bond and restructuring, so that banks can provide further lending and the balance sheet becomes more viable.

The money should have been given as positive support from the central government, provided ownership is transferred to the private sector. With this, the government should get out of the picture, and if anyone suffers, it would be the private firms. So, let private companies make the distribution viable and the government should demand performance in return for the money. The distribution business is a customer interface model, in which the government has no place. This sector should be made completely competitive.

Delhis electricity regulator raised tariffs by 26% for households in July. The move is expected to help discoms recoup some of their losses...

The concept of a state regulator system is politically influenced. It should be abolished. The regulator should be lifted at the regional level, in the way our grids are managed. The regional regulator should, every year, announce an equated tariff for all states in the region for different categories like commercial, industrial and residential customers and then allow the respective state governments to transparently say what is the amount they want to implement in their states and announce a budgetif it is less than what a regional regulator has prescribed, subsidise the difference. It is very sad how bad politics can make the system sick.

What are the major dampening factors in India that make you look abroad

We have a responsibility towards shareholders. Energy resource assets are not spread across the world, but concentrated in a few countries. In regions like China, Korea, Japan and Europe, the governments negotiate for the resources and then give them to private companies to develop. Here, there is a lack of trust between the government and the private parties. Everyone is running helter skelter to compete for limited energy resource assets and individual players can never get what governments can. The government has to play a role. Were a great, stable country, but our growth story is completely gone. And weve done this to ourselves. There is no one else to blame.