Devangshu Datta: Power failure

BEATING THE STREET

The Indian power industry is a chaotic mess. The centre:state split in capacity terms is about 30:60 (10 per cent of capacity is controlled by the private sector). The central utilities are actually quite efficient.

But they sell to state utilities and those are in bad shape. Most are cash-strapped and many are bankrupt. Many states have spun off distribution and transmission in the hopes of improving the situation but that hasn't paid off yet. Every state also has its own regulatory commission to set tariffs, etc.

Efficiencies are low. Plant load factors are pathetic "" below 30 per cent in some SEBs; transmission and distribution losses are high, averaging around 40 per cent across the country.

Political interference is endemic. Offering free power to farmers is a popular election gambit, for example. Tariffs bear no relation to the rules of supply-demand. Labour is unionised and cannot be pruned or disciplined.

Hence, India has expensive, unreliable power. Most industries must develop supply backups, adding to overheads. There's a large gap of around 11 per cent between power supply and demand. If power cleaned up its act, investments would come in to plug that gap.

With mountains of receivables across the value chain, the gangrene infects the entire economy. Several states have been pushed close to ruin due to their respective SEB balance-sheets.

The consolidated fiscal deficit of the central government plus all states is around 10.5 per cent of GDP. If the situation improved, the Fisc could decline by 3 per cent to 4 per cent.

Thus, there's huge incentive to reform. The Electricity Act of 2003 was one of several steps in this direction. This Act breaks up state monopolies and allows power trading.

It could free consumers from the tyranny of being forced to buy from inefficient monopolies and also free captive generators from the obligation to sell excess power to bankrupt entities.

In conjunction with the Accelerated Power Development Reform Programme (APDRP), which offers incentives to states to implement reforms, and pricing schemes like availability-based tariffs (ABT), the Act promises to eventually improve matters. Unfortunately deadlines have been missed and politics will mean slow implementation.

That's a pity. Apart from considerations of the greater common good, slow reform hobbles the few decent companies. Central utilities such as NTPC, PTC and PGCIL would have far better prospects if their customers were in better shape.

A complex securitisation of dues from SEBs has led to improved cash-flows. But the current formula of month-by-month securitisation may be unsustainable in the long run without a genuine improvement in outlook.

One must assess the NTPC IPO in this context. The central PSU has high PLF and a strong balance-sheet. It has good margins (over 20 per cent at net level). It generates maybe 25 per cent of India's power. The securitisation could help NTPC realise most of its dues.

Growth was flat last fiscal but prospects should be good due to the demand-supply gap. There are ambitious expansion plans on the anvil. But political interference will continue and slowdown reforms. That is the dark side of the picture.