)
Ever since news broke last month that the National Democratic Alliance government wants to merge the country's four public sector hydro-power producers, there has been much speculation about its objective. According to one account, the idea was floated by National Hydroelectric Power Corporation (NHPC), the largest producer of hydro-power, to usurp its smaller competitors: Satluj Jal Vidyut Nigam (SJVN), THDC India and North Eastern Electric Power Corporation (NEEPCO). Another account says the idea originated within the government, and NHPC merely worked on it. Union Power Minister Piyush Goyal recently said it is an idea being worked upon to test its feasibility. Later, it was reported that the proposal is likely to be shelved altogether.
So, what really happened? The fact remains that the hydro-power sector is crying out for reform. Consider these numbers: its share in India's power capacity has declined from 50 per cent in 1963 to 17 per cent in 2013; its share of power generation has slumped from 52 per cent to 12 per cent during this period; it grew by a dismal 5 per cent in the entire 11th Five-year Plan (2007-12) as compared to 43 per cent jump in thermal capacity during the period; 81 per cent of the total cost overruns of Rs 16,000 crore in power assets (1,000 Mw and above) under implementation are hydro projects; and power generated by NHPC declined from 18,600 million units in 2010-11 to 18,300 million units in 2013-14.
Successive governments have announced various measures to push new hydro-power projects as it is not just clean and available in plenty, but also the cheapest source of power generation to date. However, an analysis of key parameters of the sector's performance throws up a grim if familiar tale of time and cost-overruns due to delays in project implementation. The state appears to have failed over decades to adequately address the twin issues of local unrest surrounding projects and technological challenges arising from difficult and uncertain geology. This does not augur well for a nation that takes pride in its so-called "diversified" energy basket and has committed to cutting its carbon emissions in multiple climate change negotiations globally.
The genesis
The story of the proposed merger began on July 2 during deliberations based on a presentation before Goyal, where it was argued it may be in the interest of the smaller public-sector hydro-power producers to align with NHPC to take advantage of the "synergy and core competence" available with them. It was decided the finance directors of the companies would examine the issue and submit a report in 15 days. NHPC Director Finance ABL Srivastava was nominated as the nodal officer. A week later, on 9 July, 11 executives of the four companies met in NHPC's Delhi office to explore the "possibility of integration of THDC India, SJVN and NEEPCO with NHPC". The purpose of the meeting was to debate whether to go ahead with the proposal or not; if yes, what should be the business model (merger or subsidiary), modalities of going ahead, timeline and formation of a steering group. Srivastava gave a presentation on "consolidation", listing the advantages including improvement of balance sheet strength, reduction in the cost of capital, increased negotiation power with vendors, better succession and manpower planning, economy of scale in work procurement and creation of a single point of contact for clearances. He also listed concerns including conflict of interest among entities, impact on ratings, legal constraints in continuity of power-purchase agreements and legislative sanction. The rest of that meeting was consumed by innumerable objections raised by the smaller companies (see Objections Galore).
With the idea of a merger facing resistance from the smaller companies, the panel of executives appointed SBI Caps to develop a concept paper on the "possibility of consolidation of central hydro-power producers". Contrary to the perception of the companies involved, the agency in its report held that a consolidation or merger in some form in a given timeline is a necessity and is in national interest. One, the merger would create financial consolidation. It will have significant balance sheet strength and a net worth of Rs 47,000 crore. Access to financial markets would improve. Two, the existing talent shortage and succession issues - flowing from the employees' average age profile of around 50 years - in individual companies would be addressed. Three, the Centre's investment in THDC India and NEEPCO is currently illiquid because these are not listed on the stock exchange. By merging them with NHPC, the government will be able to capture a part of the value through subsequent disinvestment. Four, most of the companies have aggressive expansion plans but limited internal resources. Consolidation would help to fund growth through internal resources.
Power behemoth
The merged entity was visualised with an operating capacity of over 10,000 Mw, with another 5,600 Mw under implementation and 28,200 Mw under development. It was to have a net worth of Rs 47,000 crore and consolidated after-tax profit of Rs 2,900 crore. The merger was to result in a mega hydro-power entity with market capitalisation of Rs 51,000 crore, with 81 per cent stake owned by the centre. SBI Caps also highlighted a few concerns. One, NEEPCO's expertise in the Northeast region may get diluted. Two, in case the Uttar Pradesh government wants to be compensated for the land given free of cost to THDC India, the outgo may be of the order of Rs 4,000 crore. Three, debt disbursement to SJVN from the World Bank may be impacted during the merger, which could impact project implementation. And four, NHPC's credit ratings could take a hit due to the merger affecting the cost of debt.
With these, a final report on the merger was submitted to the power ministry. The current status of the proposal is not clear. Experts say the government may do well by merging the entities but the process has to be carefully thought through in order to ensure a smooth transition. "The merger is a good idea but the government must be very careful in handling the issues of transition including those related to employees and culture," says Amrit Pandurangi, senior director, Deloitte Touche Tohmatsu India.
