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Monday, April 23, 2012

China’s PCC inks $2.4-bn deal for IL&FS power unit

Even as Indian security agencies have expressed concern over the growing influence of Chinese firms in India’s infrastructure projects including power, one of the country’s biggest infrastructure companies IL&FS has inked a $2.4-billion contract with Power Construction Corporation of China. The deal includes the construction of the second phase of a coal-fired power complex in Tamil Nadu. It is the first time a Chinese company has undertaken the responsibility for the entire project work and not restricted itself to the supply of equipment for an Indian power plant.

Chinese companies have been supplying equipment to power projects in India but are averse to taking responsibility for the entire project work (that is, engineering, procurement and construction or EPC), especially after India tightened visa norms for Chinese workers in 2008. So while close to to half (45%) of the equipment orders of about 56,000 MW placed by companies for different projects in 11th and 12th Plan periods are overseas and about 48,000 MW of this is from China alone, not many of these projects have Chinese companies as EPC contractors.

“This is a matter of concern. The issue of growing Chinese influence in Indian infra projects has also been flagged by the National Security Council Secretariat and government strategy should be carefully calibrated to nix this trend," said a government official, who asked not to be named.
China has been playing an active role in power project construction overseas, particularly in developing countries, taking advantage of state financing as well as experience and technology acquired through three decades of economic boom. Chinese equipment suppliers are taking a piggyback ride on cheaper funding being extended by Chinese export-import and development banks to penetrate the Indian market.

When contacted, BHEL chairman BP Rao said: "I would not like to comment on this matter," adding that "there was not much movement on the ground".

India plans to add 100,000 MW capacity in the current 12th Plan period. That would mean investment of R12 lakh crore. Domestic banks and financial institutions are not in a position to lend this much due to the Reserve Bank of India’s prudential norms.

However, India is not an isolated case. Chinese banks are also helping indigenous solar equipment makers increase market share in the US and Europe.

Equipment supplied by Chinese vendors are 15-20% cheaper compared with equipment supplied by domestic manufacturers like BHEL and Larsen & Toubro. Besides, Chinese suppliers also score over Indian vendors when it comes to meeting contracted project schedules. That is the reason private developers prefer Chinese equipment. Chinese suppliers also come with export financing. About a quarter of the total orders placed for capacity addition during the current Plan have gone to Chinese suppliers.

Given the growing interest of power project developers in Chinese equipment and the high cost of funds in the domestic market, the Reserve Bank last September accepted the renminbi for external commercial borrowing within an overall ceiling of $1 billion by Indian infrastructure sector companies.
"While the dollar cannot be replaced in international trade, people are trying to diversify their foreign currency risk. From risk management's practice, this is a good move," said DH Joshi, chief economist at credit ratings agency Crisil.

While there are apparent benefits of borrowing in the Chinese currency, there are risks also. "One vulnerability for companies taking loans in the Chinese currency is that it is is widely believed to undervalued. If the Chinese government allows the renminbi to appreciate freely, borrowers will stand to lose heavily," said Anil Bhardwaj, secretary general, Fisme, a trade body.

Significantly, the five-member emerging countries BRICS bloc inked a pact in its recent summit in Delhi to extend credit in the respective local currency in a bid to reduce the transaction costs of intra-BRICS trade. The group has also agreed to explore the possibility of setting up a development bank for mobilising resources for infrastructure and sustainable projects in BRICS and other emerging and developing countries.

The second phase of the project for IL&FS includes the addition of four generators each with a capacity of 660 MW.

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