Bankers, beware! India stares at a power debacle 20 times bigger than Enron

Enron Corp. is long gone, but the scandal it left behind in India has beguiled the country’s lenders for almost two decades.

However, if the bankers who financed the US energy company’s unviable power plant in Maharashtra state aren’t ruing that 2,000-megawatt debacle any more, it’s only because they’re now staring at a mess 20 times bigger.

India’s total electricity-generation ability is 344,000 megawatts, a 72 per cent increase over six years. The country, notorious for its outages, still doesn’t have a power surplus. But coal-fired plants in the private sector that ran at 84 percent capacity utilization at the start of the decade are struggling to stay alive with load factors of 55 per cent. As much as 40,000 megawatts of capacity — equal to 20 Enron plants — has become stressed assets for the banking system.

Lenders, on the hook for $26 billion, are yet to classify these exposures as nonperforming, let alone provide for losses out of (their increasingly nonexistent) profits. However, now that the central bank is forcing them to clean up their act, they’re trying to think of creative solutions. According to BloombergQuint, the banks will convert debt that’s unsustainable into equity and sell those shares to a jointly owned asset management company. The AMC will hawk its controlling stakes in power producers after a turnaround.

A better idea may to be to fix the underlying profitability of the power business. 

Forget long-term power purchase agreements. State utilities are shy to sign such contracts anyway and prone to ditch them at the first hint of cheaper electricity in the wholesale market. Let most of the demand and supply move to exchanges with open access for all bulk buyers and sellers, says Hemant Kanoria, chairman of India Power Corp., a 99-year-old company involved in both electricity generation and distribution.

The share of power trading in the country’s overall demand-supply equation has been stagnant for years at about 10 percent. This needs to change. 

The other big issue, as Kanoria rightly notes, is coal. India has no shortage of the fuel, but its dominant miner, which met 95 percent of its 600 million ton production target last year, needs to crack the whip on underperforming subsidiaries.

Power plants’ coal inventories are falling, and linking domestic availability to whether a producer has a long-term electricity purchase agreement with a state utility isn’t helping. Rather than continue with a less-than-satisfactory auction system, let Coal India Ltd. fix a price at which it would assure supply to whoever is willing to pay and take away the feedstock.

Finally, financing costs, which have ballooned to half of the total expense of putting up a power plant, need a tweak. Restructuring unserviceable loans into other instruments — such as preference shares — would give producers some breathing room, Kanoria says. 

It’s silly of lenders to expect that debt with annual interest rates of 16-percent-plus won’t eventually turn bad. Dragging borrowers to the bankruptcy tribunal won’t solve anything. Most assets would sell for scrap value; jobs would be lost. Sweeping the problem under the carpet of an asset management company may preserve employment, but the immediate financial hit to banks could upset their already weak capital position. Besides, if existing owners are booted out, who will run the plants?

It was relatively easy to leave Enron’s Indian unit in the care of a couple of state-run companies, as the government did in 2005. That can’t be a template for a problem 20 times larger.