Interview: Mr. Rangarajan Kumaramangalam

60 MINUTES
"There's No Commercial Approach In Power"

India's Power Minister Rangarajan Kumaramangalam oversees a ministry with a tepid track record: In the 10 years since power sector reforms first began, the country has added only 4,541 mega-watt of fresh private capacity. And the commercial environment in the sector is far from conducive. The 48-year-old Kumaramangalam admits to policy goof-ups and a lack of coordination among the government's various arms. Kumaramangalam explains to BT's Ranju Sarkar how he plans to put the wobbly power sector back on track. Excerpts from an hour-long, high-voltage interview.

Q. Why are transnationals quitting power projects in India? Cogentrix and EDF have walked out, while others like PowerGen, Marathon, and National Power could follow suit.

A. Not all transnationals are quitting. Some are fed up, and justifiably so. They have waited for eight- to-nine years and have seen nothing moving. The bureaucracy and the policy have come in the way. The State Electricity Boards (SEBs) are in a poor condition.

In 1991-92, when we opened the power sector, we committed a mistake. We knew that the SEBs were in a bad shape, and that's why we gave counter-guarantees. But we had not finalised things like power purchase agreements (PPAs), fuel supply, and transport agreements. These are legal matters that needed to be sorted out with financial institutions, and other ministries such as finance, coal, and railways. This co-ordination and the way they went about it, frankly, took too long.

Now, the whole problem is that the Power Ministry may have a policy and push it. But the sort of co-operation that is required from the various arms of the government-especially the bureaucratic arms-is missing. The shift from a command economy to a market economy involves dealing with a lot of details. The nitty-gritty. Especially, since there does not seem to be a commercial approach. There has been no experience of treating power as a commercial commodity.

How will you address these issues?

Fortunately, they have been addressed by the passage of time. Now, most of of the problems are over. We have model PPAs, fuel-supply agreements, and transport agreements. But those who have been waiting for eight years are fed up.

Given that, what are you going to do to provide adequate security cover, ensure timely closure, and viable returns on investments?

In a market economy, you can't ensure anything. It's wrong to assume that we will ensure a guaranteed return. I am not one of those who believe in it. I believe in reasonable competition. And it is that which will settle the tariff. That is why, in our major projects like Pipavav, we are looking for competitive bidding for tariff.

The exits (of some multinationals) are a small price we have to pay on the learning curve. But if Cogentrix has walked out, the Tatas are walking in. If EDF exits from Bhadravati, somebody else is going to come in. It's not that the projects are going to stop. India is not a loser.

In most states, an escrow facility is not available (SEB revenues go into an account over which power suppliers have a right in case of a payment default), and, therefore, banks and financial institutions (FIs) are unwilling to underwrite the revenue-risk. What kind of an alternative mechanism are the FIs trying to evolve?

The FIs have changed their stand. I have told them: ''Let's not fool ourselves; the escrow is a bit of hawa-bazi (baloney). Let's be realistic. Let's look at the net revenue they have.'' And looking at the SEBs' net revenue, let the financial institutions assess how much of an additional capacity they can put up.

How are we doing it? We are putting in milestones. Say, if the SEB recovers 40 per cent of its billings, the state will be allowed a certain amount of additional power capacity. If it achieves 60 per cent, then the permissible capacity goes up. If the tariff goes up, the revenue should improve too. If an SEB goes in for privatisation, then its prospects brighten further. But privatisation also has a recovery element. Merely privatising distribution does not take care of the billing problems. This is why we call them the milestones. What the financial institutions are doing is that they have taken up four states (Andhra Pradesh, Karnataka, Madhya Pradesh, and Tamil Nadu) and will be assessing their situation in the next three to six months.

How is the approach different from an escrow?

Unlike the escrow, which is a separate account through which money flows, here they go by the standard practice that pari-passu, the IPP (Independent Power Producer) will have the first charge on the revenue account for all debt.

But will this address the revenue risk of the IPPs?

No. This will look after two factors. One, fuel charge-that is, operating, operational, and maintenance expenses-and two, the fixed charges. Now, whether it will cover the cost of power, I don't know.

Will the rising prices make naphtha-based projects unviable? For instance, naphtha prices have risen from Rs 6,700 to Rs 13,500 per tonne in the last three years.

To start with, naphtha-based projects were a wrong conception. I have been saying this from the day I became the minister. Power is a 30-year game and not bi-monthly or bi-annual affair. Naphtha or, for that matter, any petroleum fuel, cannot ever be a long-term fuel source because it is expensive. Even if you look at efficiencies, gas is far more efficient fuel for power. Technically and commercially, it was wrong for any IPP to say that it would depend on liquid fuels.

But with transnationals quitting, not more than one or two LNG projects are going to come up...

You will see very soon two or three LNG projects being finalised.

Coal India is not ready to share the fuel risk that affects players like NTPC. Can the ministry help?

Traditionally, NTPC has had no problems with coal. Nor has any power plant. Till now, no power plant has been shut down because of coal-shortage. Coal India has not said that it will not take the risk. It will take the risk. But like everybody else, it is asking for a little more. There's a risk-premium involved.

You have proposed a number of hydel projects to improve the hydro-thermal mix. You need Rs 1,80,000 crore to fund the nearly-30,000 mw of projects under NHPC. Where will it come from?

We are looking at hydel projects more as 15 per cent equity and 85 per cent debt projects. Equity is costlier than debt. Besides, the government guarantees all NHPC debt. So financial closures are very quick. It's always budgetarily supported. Almost all the money that we receive as budgetary support goes for hydel projects.

How do you view the power sector reforms in states like Andhra Pradesh, Uttar Pradesh, and Orissa?

In Uttar Pradesh, they have done a very good job. Honestly, I never expected them to do so much. There was a liability of around Rs 18,000 crore. The state government took the entire liability and managed it with a World Bank loan. So, when they restructured, they had four companies: one for transmission, one for generation, and two for distribution. And they have handed over everything to them without any liabilities.

In Orissa, they did not improve the liability situation of the transmission company. Same is the case in Andhra Pradesh. All the liability lies in the name of the transmission and distribution companies. Therefore, those companies are floundering today. Until debt-free companies are created, and the state is willing to step in and clean up the balance-sheet, reform has no meaning.

Why is it that even after a decade of reforms, the power sector is in such a mess?

I am not blaming anybody. I think there was a lack of maturity at that time. There were lots of mistakes, but you can't blame anybody. But at that particular time, if I had been there, I would have been desperate to add more power to the grid. And I would have said: ''Now that naphtha is cheap, let's use it. When the time comes, we will re-organise LNG.'' When the person took the decision, he took it with substantial application of mind. But it turned out to be a mistake; you can see that in hindsight.

How do you see power-sector reforms progressing now?

The reforms are moving very fast. Rajasthan has enlivened the new Electricity Act, Madhya Pradesh, Maharashtra, and Karnataka are in advanced stages (of doing so), and the State Electricity Regulatory Commissions are in place. So, I would say, two years from now, you would have a very vibrant power sector.

So, you do think there is hope yet for the power sector?

The only way to attract investment is to ensure timely financial closure of projects. The rest is all talk. The policy is in place, and the reforms are in full-throttle. The prime minister has said that he would consider giving guarantees to transmission projects and to power purchase systems. This means the government will give direct, and not sovereign guarantees to the Power Trading Corporation to purchase power. That should help some projects.

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