Vinayak Chatterjee: Ultra-mega lessons from power plants

INFRATALK

The biggest lesson is in creating bankable projects with the government getting major clearances, leaving private firms to deliver on what they do best.

Now that the dust is settling on the Sasan and Mundra Ultra Mega Power Projects (UMPP) bids and how Lanco and Tatas found it viable to bid at Rs 1.196 per unit (pit head) and Rs 2.264 per unit (imported coal) respectively, some broad lessons are gradually emerging:

1) Technocrat-bureaucrat in charge: It pays to have a committed "technocrat-bureaucrat" at the helm. RV Shahi has earned accolades for himself and joins the Hall-of-Fame of "visionary technocrat civil servants" of the likes of V Krishnamoorthy, Mantosh Sondhi, D V Kapur, to name a few. Such persons bring a passion and zeal to their lifetime "vertical".

2) Creating bankable projects: This is the way to "cook" a large member of "bankable" projects in Indian infrastructure with all the required elements broadly in place prior to bidding. For UMPP, the government has given captive mines. Power Finance Corporation is the dedicated lead agency to secure all clearances such as those related to land, water, environment and forests. Revenue security mechanisms are in place. So we have come a long way from the time the private sector was told to arrange everything that may be required to execute a project.

3) Single-parameter competitive bidding: The Indian government is fast learning the game of "open competitive bidding" with a single bid criterion. This is a great leap forward. UMPP was preceded by bids for the Anapara "C" generation project in Uttar Pradesh, Delhi and Mumbai airports (with some serious hiccups on subjective technical scores), NHDP stretches and some port bids. No crony capitalism here please. No more cost-plus tariff. No Enron-type sweetheart deals or cosy "G-to-G" contracts without any public scrutiny or accountability. India should move a few notches up in the Transparency International's index.

4) Indians are building a new India: Cheers! The UMPPs are the largest thermal Independent Power Producers at a single location, and Indians are implementing them. Other than Lanco's partner Globeleq, leading foreign players like the Hong Kong based CLP Group and AES Corp opted out. There is also a larger Asian resurgence with Lanco choosing to order equipment from China's Dong Feng Electric ignoring overtures from the more well-known occidental purveyors of power equipment. South Korea's Doosan is also believed to be in dialogue with Tatas.

5) A new generation of infrastructure entrepreneurs: India has thrown up a vibrant and energetic new generation of entrepreneurs that is outpacing the traditional business houses and PSUs. So we have the Mittals in telecom, GMR/GVK in roads and airports and now Lanco in power. Losers in UMPP include traditional heavyweights like Reliance, L&T, NTPC, Sterlite, Jindal, Essar and Jaiprakash.

6) Full "value chain" capture: We have learnt the economics of "full value chain capture". Lanco could structure its bid building in savings from mining to super-critical technologies to construction to carbon credits. It is an important lesson in an environment where other mega bids are being structured in areas such as steel, SEZs, ports and rail freight corridors. Inter-sectoral linkages and synergies in infrastructure projects have also clearly come out "" policy, finance, mining, transportation, construction, logistics and ports have all been woven into a winning tapestry. This is the key. Many countries like France, Japan and Israel have a single ministry of infrastructure to deal with cross-sectoral issues. India has close to 20 ministries traditionally getting into each other's hair.

7) It pays to think big: With capital no longer a relevant constraint, scale ensures sovereign support, sectoral impact, huge savings in equipment cost, lower operating costs as well as policy and statutory interventions which go into derisking a project.

8) Not taking customers for granted any more: There is a rude awakening among domestic and industrial consumers on how highly years of abuse of the system have made them pay. With power capable of being produced at a rate as low as Rs 1.196 per unit, the cost of the inefficiency built into existing tariffs has been brought into the open. It is indeed ironic that at the time the UMPP champagne is flowing, the Union Cabinet has cleared the Electricity (Amendment) Bill 2005. This Bill, adding new provisions to the Electricity Act 2003, renders theft of electricity a cognisable offence and enables the state to come down with a heavy hand on life-sapping thefts, leakages and wastages estimated at Rs 30,000 crore a year.

9) Take similar initiatives in other sectors: If UMPP has shown the way in the power sector (where most would earlier have agreed that very little could be done), then surely the Central and state governments should now be emboldened to structure similar mega projects in the equally difficult areas of urban water supply, irrigation and public transportation. And we have our Indian entrepreneurs to react with aplomb. Also, there is viability gap funding.

10) Recalibration of energy input cost: The aggressive "price discovery" thrown up by the UMPPs has led to a flutter in the dovecote. Energy input specialists are already talking of reduction in the price of gas, re-negotiation of long-term agreements on coal-supply, review of competitiveness of liquid fuels, re-investigation of transportation and logistics costs and a reassessment of the attractiveness of non-conventional power sources.

11) Proof-of-Concept: It is important to showcase "Proof-of-Concept" by carefully nurturing the first few demonstration projects. This gives the investing community the necessary confidence to bid enthusiastically for an expected rush of similar projects. This was admirably done in the case of Sasan and Mundra. There are seven more UMPPs in the pipeline. Remember, the first few wins under the Annuity Scheme for NHDP followed a similar hand-holding track. This allowed the private sector to wet its feet before a burst of confidence set in, as shown in the aggressive "negative grants" in some of the more recent road bids.

12) Centre driving big-ticket infrastructure projects: Discussions and debate on power sector reforms and initiatives have always been mired in centre-versus-state controversies. Inefficiencies and inadequacies from generation to distribution would be tossed around using the "federal structure" arguments. The essential point is that there is merit in a centralised entity (in this case the ministry of power and Power Finance Corporation) showing the way in such mega initiatives. If states were left to drive their own process of procurement of power (as has been done in the past), the kind of cost-economics thrown-up in UMPPs would not have easily emerged. Now, most states are looking at this model and re-thinking their own procurement models.

Overall, the times signal a clear victory for public-private partnerships and the sovereign as "visionary entrepreneur".

The author is the Chairman of Feedback Ventures as well as of CII's National Council on Infrastructure. The views are personal.