A loss of faith in a 'temple of modern India'

A rash of poor managerial decisions is threatening the existence of the once successful Damodar Valley Corporation. Without a drastic turnaround plan, the future doesn't hold much hope

It isn't every day that the chairman of a public sector undertaking asks the government if the time has come for the company to down its shutters. It can happen only when the venture has become unviable and there is no hope to revive it. And if the company was once a "temple of modern India", the question becomes all the more intriguing. But that's precisely what happened last month when Arup Roy Choudhury, the chairman of Damodar Valley Corporation (DVC), asked the Union power ministry whether it was time to wind up the Kolkata-headquartered power generator and distributor, dam operator and miner. "A total paradigm shift is required," Choudhury said, "if DVC has to survive."

Choudhury, the chairman of state-owned power generator NTPC, had taken the additional charge as DVC chairman in November. Naturally, his letter has caused a lot of anxiety amongst DVC's 11,000 employees. A senior officer, who does not want to be quoted, says cutting off the head to cure a headache is no solution. The company, like most public sector undertakings, runs townships, schools, hospitals, clubhouses et al. "How can it all be dismantled?" he says. Others too do not agree with Choudhury. One of them is RN Sen, former DVC chairman and Choudhury's predecessor. For the moment, Sen wants to hold back his reaction. "Let's see. I do not want to say anything publicly. When I think I need to do that, I will call a press conference."

But what is the basis for Choudhury's dire diagnosis? Actually, some of the company's projects are stuck, and its arrears run into thousands of crores, resulting in negative cash flows of Rs 110 crore a month. Choudhury, in his letter, has blamed the earlier DVC management for ill-planned expansions (without securing land, water and environment clearances, coal linkages and power-purchase agreements with distribution companies). There are three equal shareholders of DVC: the Centre, Jharkhand and West Bengal. Choudhury has suggested that some of these shareholders may have lost interest in the company. "When DVC was formed, probably the Centre-state and state-to-state dynamics were totally different. Today, the main stakeholders for whose benefit DVC was created do not feel that the company is working for their benefit."

TAMING THE FLOODS

DVC was the outcome of a series of efforts  made over many years to control the wild and erratic Damodar. The river has a  catchment area of  25,000 square kilometres running through Jharkhand and West Bengal. While the river flooded on numerous occasions, it was the flood of 1943 that was the most destructive in a long time. In order to tame the river, a plan was mooted to build a multi-purpose  project to achieve flood control, irrigation, power generation and navigation in the Damodar valley. By April 1947, the government of India, and state governments of West Bengal and Bihar reached an agreement on the implementation of the mega project. In March 1948, Damodar Valley Corporation Act was passed by Parliament for the purpose of forming DVC and it came into existence on July 7, 1948 as the first multi-purpose river valley project of independent India.

TOUGH CALL DVC Chairman Arup Roy Choudhury has written a letter to the government asking its opinion on shutting  the plant

Borrowing to spend
Choudhury does have a point when he says stakeholders do not feel that DVC is working to promote their interest. The company's equity capital is just a little over Rs 200 crore. DVC officials say there has been no infusion of capital from the shareholders since 1969. "It is running on self-financing mode," DVC Director (finance) TK Gupta says. As a result, the company has had to fund its capital expenditure through debt. Thus, the company has debt of Rs 22,000 crore on its books. Company insiders say that the average cost of this loan is about 10.5 per cent per annum. This works out to an annual interest outgo of Rs 2,310 crore, or a monthly outgo of a tad below Rs 200 crore. The annual cost of servicing the debt for the commissioned projects alone is about Rs 1,200 crore.

What has hurt the cash flows most is the power arrears of Rs 6,880 crore from Jharkhand. But a former senior functionary of the company says the problem will soon be resolved. "An agreement has already been finalised and is awaiting final clearance from the Union power ministry for settlement of about Rs 4,000 crore of arrears from Jharkhand. Once this is cleared, it will be a big boost for DVC," he claims. Company officers admit that they expect "substantial payment" from Jharkhand within the next couple of months.

Another big headache for Choudhury is that DVC does not have power-purchase agreements for as much as 1,200 MW. The company runs six thermal and three hydel power plants in Jharkhand and West Bengal with a combined capacity of 5,857 MW. The absence of power-purchase agreements means the company cannot evacuate a fifth of the electricity produced at these plants. DVC insiders say this happened because the company's agreement with Delhi, negotiated before the 2010 Commonwealth Games, didn't materialise. DVC has now initiated talks with some southern states (now that they have been linked to the national grid) and even the railways to sell this power. Gupta reckons that if these agreements are concluded, the company will get additional revenue of Rs 1,500 crore a year.

But, if Choudhury's letter is to be believed, it won't be easy for DVC to sell the power: the high tariff would make it lose out in merit order dispatch, under which the cheapest power gets scheduled first. Gupta says DVC tariffs are competitive and will slide further once its captive coal mines go into production and the "other problems are resolved".

Delayed plants
However, there are more issues to worry about. DVC's Raghunathpur thermal power plant in Purulia (West Bengal) faces serious hurdles put up by residents. DVC has not been able to commence generation from the first phase of the 1,200 MW (600 MW X 2) project due to lack of water and ash pond. That's because it could not progress with the 10-km water pipeline for the plant due to opposition from local residents. In fact, DVC a few months back had threatened to shift the Rs 10,000-crore second phase of the plant out of Purulia. However, the company later clarified it has no intention to do so. It is now negotiating with the state government to break the impasse; work finally restarted for the second phase earlier this week.

In spite of the problems, Gupta says DVC has shown "great resilience". He says that the company posted an operating profit of Rs 896 crore in 2012-13, but adds that the situation could improve if "some core challenges raised by the current chairman (Choudhury) are addressed".

Even then, DVC's problems are huge. The "paradigm shift" that Choudhury said was necessary for DVC's survival was suggested by experts earlier as well. A couple of years ago, the Union power ministry had appointed the Administrative Staff College of India, or ASCI, to examine ways to restructure DVC. ASCI had stressed the need to make the corporation more broad-based and professional. Accordingly, DVC Act was amended for the reconstitution of the company's board to include three independent experts: one each from the fields of irrigation, water supply and power. The process to select these experts is underway.

DVC had also said that it will hive off its generation business into a new company that may hit the capital market by 2018. The full board, once set up, is expected to take this up. Also, a new chief is expected to take over from Choudhury in the next few months. To a large extent, DVC's future will depend on the new chief's vision for the company. In the interim, while salvage plans are being looked at, a drastic turnaround of the company's fortunes is unlikely -at least until the general election are over.