In recent months, the Appellate Tribunal for Electricity and the Central Electricity Regulatory Commission (CERC) have begun to undo the damage done to the electricity sector over the years by the central and state governments. Similar steps are yet to begin in other infrastructure sectors. All infrastructure is in the nature of public goods. The attempt must be to make it available, accessible and affordable to everyone. The infrastructure sectors have developed largely with government funds, and the framework is - and likely to remain in the foreseeable future - one of dominant government ownership, control and management. As a result, they are subject to political (populist) influences. Frequent elections and ideological hang-ups prevent holistic decisions.
With escalating demand, governments do not have the resources to invest as needed. Public-private-partnership contracts have come into vogue. These contracts and their execution often witness a clash between politics and economics, resulting in delays, lock-up of funds, and possibly infructuous investments. Delays on any account hinder economic growth and people's well-being. Since, at most, 20 per cent of investments are as equity, with the balance 80 per cent being debt, the danger of default with such large sums as are involved in infrastructure investments (estimates suggest over Rs 700,000 crore being exposure of banks to distressed infrastructure projects/assets) could seriously hurt the economy.
To ensure fairness and transparency, the contract is bid and awarded competitively. Since lenders want confidence that the output will be sold at a price that enables their loans to be repaid, the debt funds require forecasts for the life of the project. For this purpose, the tariff bids are for the life of the project - between 25 and 30 years. The contract provides for an escalation in the bid if one or more specified elements of cost change over the period. The contract period involved is, however, long and not all contingencies are foreseen. But when they occur, they make the whole project unviable. The bidder wants a renegotiation and the buyer is against it, while the lender wants the project made viable. These disagreements result in projects getting considerably delayed, even stranded - a growing occurrence in India as it has been In Latin America.
Indeed, the central and state governments have been responsible for the present dismal state, aggravated by the indecision and prevarication of the central government in handling related areas. Coal, oil and gas, imported and domestic, have been bottlenecks, leading to stranded capacities and vast investments in power becoming unproductive. Lack of clear policies and speedy clearances - of land acquisition, environment and forests - and many administrative hurdles, have resulted in delays and a locking up of funds. Large fluctuations in the exchange value of the rupee, higher interest rates and unforeseen rises in fuel prices have led to higher fixed and variable costs of power projects. With tariffs being fixed within a levellised framework for 25 years, the negative impact on project balance sheets has been devastating. There is clearly no time value of money in the decision-making by the governments (central and state) and their utilities.
These uncertainties and their consequent effects on costs have led to some of the largest power projects in the world (of 4,000 Mw and above) either not being completed or causing huge losses to promoters. Imported coal and the unilateral increase in prices promulgated by the Indonesian government, the sudden rise in domestic coal prices by Coal India (CIL), delays in land acquisition and various clearances by government departments, rises in interest rates, the sharp decline in the foreign exchange value of the rupee resulting in substantial increases in the rupee costs of external borrowing and of imported equipment, have played havoc with the plans of Tata in Mundra, Reliance Power in Krishnapatnam, Adani in Mundra, GMR, and others.
The recent CERC order on a petition by Adani has agreed that many of these unforeseen events and costs have made the project unviable. It, therefore, has appointed a committee to review the project and the impact of these events on costs, and recommend a solution. CERC had the option to declare that these higher costs could not be foreseen and were a non-natural economic force majeure that must be compensated. That would have been within the purview of the contract and the Electricity Act, 2003. CERC has instead taken powers under its tariff determination powers. This could lead to long litigation, further deals and cost escalation.
The objective must be to prevent stranded capacities, infructuous investments and increase the supply of power. A suggestion that the project developer, who has invested in Indonesian coal mines, must share the extra profits from higher coal prices to lower the additional cost of coal to the Indian project appears unjust. After all, they are different companies. Government delays in giving various clearances must be charged to the government. CIL must enter into firm contracts on prices or build escalation clauses. Variations in rupee values in foreign exchange, like interest rates, are a business risk that the promoter must bear. It might have been prudent for bidders to provide for escalations in the contract.
What is clear is that the present contracts for power are difficult to implement. A levellised tariff for 25 or 30 years, for a project in which Rs 20,000 crore or more is to be or has been invested, cannot ever forecast the changes that might take place and affect future costs. If banks require guaranteed off-takes, the agreement with buyers must be for the period of the loan, usually 15 years, and not more. If it has to be for longer, there must be well-thought-out terms for renegotiation. The idea of tariff-based competitive bidding is attractive, but not when bidders are aggressive in bidding. They create the problems now being experienced. The contractor must, therefore, have a floor price below which a bid will not be considered. This will at least ensure that some bids we have seen, especially for roads and metros (for example, the Secunderabad Metro), do not get considered even though tariffs are low.
In conclusion, we must note that the present problems have come about because we are trying to fit private parties into government frameworks. These give government the control over tariffs, the major material costs, and allows it to influence costs by delayed permissions. Instead, the role of the government must be reduced. Items like (domestic and imported) coal, gas, and so on must have their prices determined on the exchange, and not by government agencies. If the end product (power, tolls on roads, metro fares, etc), have to be made affordable to socially weak groups, that must be done independently by the government. It must not be included in project revenues.
The government is like Hamlet - still trying to decide what to do. The regulators are taking over to rescue projects. But their powers and jurisdictions are confined to the sector. They are also sometimes staffed by ideologically influenced members. Instead, they should try to get more power capacity delivering power. Until they come to decisions, we will lose many more years and crores of rupees invested in building capacities that are not producing.
The writer is former D-G, NCAER, and the first Chairman of CERC
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