The Hindu Business Line : Power equity

By offering to take some equity in a project that will use its new energy-efficient technology in electricity generation, Bharat Heavy Electricals is only following conventional management wisdom. Even without any technology risks to the project, capital goods equipment suppliers do come in as equity partners, at least to the extent of the value of equipment supplies. They may later offload their stake to the promoter at a mutually agreed price but that does not detract fr om the logic of their initial entry. Such stake acquisitions are particularly evident in large, capital-intensive projects.

Dabhol Power Company, in which Enron roped in General Electric and Bechtel as equity partners in the energy venture, is one instance. The case for mitigating, at least partially, the equity risk is all the stronger in projects that involve the use of as yet untested technology or when, even with proven technology, the vendor’s experience may as yet be unproven. The promoters would be loath to regard themselves as guinea pigs for the vendors’ experimental ventures. There have been instances in India where new technology has affected project viability, eventually forcing the company to drastically restructure its operations. Power utility companies may be thus entirely justified in not wanting to bear any equity risk involving projects where the technology provider has not established its credentials in the market-place. The BHEL decision to sweeten its equipment supply contracts with equity participation must be seen in this context.

BHEL’s predicament is particularly acute. Domestic power producers have not been convinced of the efficacy of the indigenous super-critical boiler technology BHEL showcased and were knocking its bids out on grounds of technical capability. The company’s attempts at bringing in overseas partners with proven technology have also been unsuccessful as its bids, given the cost of equipment supplied by the technology collaborator, were more expensive and its elimination, thus, was on commercial considerations. The Government must accept part of the blame for the situation BHEL is in today. It has neither privatised the enterprise nor at least brought in a strategic investor who would then have taken the responsibility for the company’s future direction and relieved the Government of its burden. If the Government’s policy or commitments to the Left did not permit it to sell stake in profit-making public enterprises such as BHEL, that is understandable, even if one may not agree with the wisdom of such a decision. But its apparent abdication of strategic oversight in steering the company at a time when power projects, on grounds of both cost and environmental considerations, are increasingly moving towards more modern technologies, is clearly indefensible.

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