NTPC split may affect efficiency: AT Kearney

While the Centre is examining a proposal to split the state-owned National Thermal Power Corporation (NTPC) into four regional subsidiaries, the move could affect cash management across the new entities and reduce flexibility in management of diverse business, an A T Kearney study has said.

NTPC Chairman C P Jain had cited the contents of the A T Kearney report in a letter to the power ministry arguing against splitting the power utility into four regional entities.

The NK Singh-led task force on power sector, which submitted its report to the government earlier this month, had suggested breaking up NTPC into four regional subsidiaries to prevent monopoly in the power generation sector.

The A T Kearney report, which was commissioned by NTPC following a disinvestment commission recommendation that the utility be split, said the power major's current size enabled it to borrow at low costs, present a good balance sheet and tremendous leverage with customers and other industry players.

According to the report, subsidiarisation will have substantial impact on the complexity and the cost of fund management across subsidiaries, specifically due to the tax liability on dividend paid to the holding company and difficulties in effective cash management across subsidiaries.

The move could lead to a possible value erosion of NTPC because of increased transaction costs and higher receivables risk.

The risk of increase in cost of financing due to smaller balance sheet size and strength of the subsidiaries has also been highlighted.

According to the study, there could also be difficulties in assigning existing debt to the subsidiaries as the perception of quality of assets and lenders covenants may hinder the process and the move from negative lien loan security to positive lien loans will lead to a reduction in the borrowing power of the company.

The report on organisational restructuring, however, suggests that if NTPC is split, it will address the issues of transparency for external parties. According to A T Kearney, complexity of implementation of such a move is low due to similarity with current structure.

AT Kearney had studied four options for subsidiarisation of NTPC, based on the Disinvestment Commission's proposals. These were namely subsidiarisation on the basis of assets and services, on the basis of individual plants, depending on fuel usage and by way of region.

The N K Singh Task Force has suggested breaking up NTPC into four regional subsidiaries, broadly with plants aggregated under regions based on customers being serviced. AES Corproation is organised as regional entities with generation and distribution assets.