Not all doom and gloom

It is not all gloom and doom as far as the infrastructure sector is concerned, if you go by what Rajiv B. Lall, Executive Chairman, IDFC Ltd, has to say . “I am not saying it is all hunky-dory, but it is certainly not true that there is nothing happening,” he said during a recent interview .

Excerpts from the interview:

There is a lot of talk about infrastructure while at the ground level nothing seems to be happening. What is your view on this?

I think it will take a while for everything that has been done to translate at the ground level. The power sector issues are complex.

They range from fuel supply to the problems of generating companies, especially private generating companies, that in the absence of the appropriate amount of fuels, or the promised amount of fuels, what are the alternatives, what are the cost implications of those alternatives.

That translates into a problem at the distribution end — who will bear the burden of that increased cost. Will it be shared with the consumer or will it be shared with other people along the supply chain? On all those, there has been progress.

The central electricity regulator has opined on some important matters, including the fuel pass-through. In its opinion, there is a case for re-opening power purchase agreements to a limited extent, to accommodate the extraordinary circumstances that have afflicted the generating companies, including the lack of availability of coal from Coal India as well as unprecedented price rise of Indonesian coal, based on sudden changes in government policy in that country.

That opinion of the CERC is being debated in a committee that brings together stakeholders to build consensus. Once consensus is arrived at, it will become a legal precedent which can be applied to a number of cases.

Coal India has clarified that it will commit to delivering 65 per cent of the originally promised coal, assuming a 90 per cent PLF for 78 GW of capacity. This means that up to 35 per cent of the coal will need to be imported.

There has been some progress on articulating a new policy for gas pricing. The $8.40 international price, again not everybody is happy with it. The important thing is that it should restore some clarity about gas pricing on the basis of which potential suppliers can start developing or re-starting their business for supply of gas.

There is some gas that is going to be available from ONGC fields. Some re-allocation away from fertiliser in favour of power plants seems to be on the cards.

The Government is working towards finalising clearer policy as to what subsidies will be entailed as a result of this higher gas pricing policy and who will be entitled to those subsidies and who will pay those subsidies.

It is possible that more gas will be available over the next 24 to 36 months, partly through ONGC and partly through KG basin; that a greater share of that gas will be made available to power projects; and, to the extent that there are increased fuel cost implications, there is likely to be a subsidy for the fertiliser industry, although not for the power industry.

That needs greater clarity. At a higher price, say, $8.40, it translates into an electricity generation price of over Rs 5 per unit. That is on the high side.

The concern is that even as the gas becomes available at this higher price, not many distribution companies will be willing to buy it.

Still, work has to be done and that is a longer term effort, which will require open access, which was enshrined in the 2003 Electricity Act but never became a reality on the ground. State electricity distribution companies have been reluctant because they fear that they will lose most paying customers.

It seems to me that because they do not have the cash, they are not buying enough electricity and a lot of people who need electricity are being starved of electricity. This bottleneckneeds to be addressed.

Who should push that?

It is eventually the State government’s decision. How does the Centre motivate States to allow open access?

A little incentive given in the form of capital funds in exchange for certain policy decisions on the part of the State government. Right now that has worked to get the financial restructuring off the ground. It is not immediately possible, for political reasons, to use more carrot and stick to now make open access happen. Slow progress, but progress nevertheless.

When will the consensus emerge?

Very difficult to put a timeframe. I am hopeful the next six-eight months will yield results. I would like to believe that this progress is independent of the electoral cycle. It may not be independent of the State-level electoral cycle.

At the State level, the political dynamic is what is the trade-off between reducing my losses by raising the cost of electricity and not delivering any electricity at all. Or, just increasing my losses. The third is not an option for anybody. They have to choose between the first two options.

Even States that have gone in for debt restructuring need to raise tariffs annually…

Yes, this has to happen annually. The one thing is that it is happening at different speeds in different parts of the country. State electricity distribution companies or even State electricity regulators have not fully understood or accepted that no matter what happens, the cost of procuring electricity is only going to go up.

If there is a shortage of coal and if there has to be a pass-through, it is inevitable. Likewise with gas. (The distribution companies) still haven’t acknowledged that electricity generation costs are only going up.

Coal is going to become more expensive. Environmental regulations are going to become more stringent. It is going to become harder to extract domestic coal. Shortages of domestic coal will remain chronic.

Even if the international price of coal remains depressed, it will still be higher than what we have here. Roads again, we don’t hear much…

There has been some progress. More than 2,000 km of roads have been completed this year, although the number of new projects bid out is down sharply compared to last year. There has been a steady growth in EPC contracts.

There is progress on dispute resolution between the NHAI and EPC contractors and concessionaires.

They say that Rs 60,000 crore worth of contracts have been caught up in disputes; about 15-25 per cent of those have now been resolved in a period of six months through just process improvements within NHAI. With a little bit of luck maybe another 50-60 per cent of these disputes can be resolved.

That will unlock a lot of money that is tied up. There will be a re-injection of liquidity in the roads sectors, which will improve the cash flow situation of a lot of concessionaires, make them more able to bid for the next round of concessions.

One other development is some simplification of the environmental regulations, which will make it easier to finish a road project, reduce construction risk.

A lot of domestic companies are grappling with bloated balance sheets. Where do you see the money coming from?

This injection of liquidity through EPC contracts, through dispute resolution, should improve the cash flow situation of a number of better developers and give them greater confidence about bidding for new projects.

You don’t see progress on the ground yet, but a number of things have happened to improve the situation.

How quickly it translates into actual new investments is not clear, but there is progress. I am not saying it is all hunky-dory, but it is certainly not true that there is nothing happening.

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