Ministry estimates a shortfall of Rs. 4.2 trillion in funding additional generation capacity in the 11th Plan period
New Delhi: India’s power sector plans may come unstuck in the absence of adequate funding, according to top government officials, analysts and project developers.
The sector, which is struggling with funding shortfalls, will need an additional $400 billion (around Rs. 18 trillion) investment in the 12th Five-year Plan period starting April 2012. The government is worried about the funding scarcity facing the power sector, which threatens to worsen an energy deficit that is seen as a key bottleneck in efforts to sustain and boost economic growth.
The 11th Plan had set a target of adding 78,577MW of power generation capacity, requiring, at current estimates, some Rs. 10.60 trillion of investment. The power ministry estimates a Rs. 4.2 trillion funding shortfall.
Even the Economic Survey 2010-11 had stated that sourcing the trillions of rupees needed to fund the country’s ambitious infrastructure agenda is a challenge and the government needs to tackle this with innovative ideas and policy interventions.
India’s power minister Sushilkumar Shinde admitted to funding concerns during the consultative committee meeting of the power ministry in June and said the estimated fund from all available sources is only Rs. 6.4 trillion.
The concerns have been articulated by rating agency Fitch Ratings Inc. which said in a report that funding for new projects is “likely to continue to slow”.
“In recent months, private investment in infrastructure from debt and equity sources has slowed. Consequently, power sector investment may now fall short of targets... Bond market financing—even for operating projects—has been negligible... Fitch expects that a combination of sector specific risks, a rising interest rate regime, banks starting to close in on exposure limits, and the slowing down of equity funding will negatively affect the availability of funds to the power sector in the short to medium term,” the report said.
“Banks are now realizing the stretch on the fuel availability and the tariff concerns. Earlier, the banks were relying on letter of assurance (LoA) issued by the coal ministry. With Coal India Ltd not being able to serve the LoAs, the banks now are forced to look beyond the letters,” said Sanjeev Agrawal, managing director of Amplus Infrastructure, a power project developer.
The government plans to add 100,000MW during the 12th Plan to the current capacity of 174,000MW. The bulk of the 11th Plan targeted addition is coal-based, but the country is facing an increasing shortage of the fuel.
Shortage of fuel has widened to 40 million tonnes (mt) in 2010-11 from 4 mt in 2004-05. The power sector is the country’s biggest consumer of coal, absorbing 78% of local production.
Indian banks are also exposed to increased risk of defaults on loans to companies linked to the power sector. As mounting losses at state electricity boards (SEBs) and delays in the execution of new power plants have made recovery difficult.
SEBs across India are saddled with losses running into crores of rupees on account of power theft during transmission and distribution, billing inefficiencies, and, more importantly, because they have to buy expensive power to tide over short-term deficits. Some SEBs have also failed to revise tariffs for many years, adding to their losses.
“Fuel supply constraints, falling merchant power prices, environmental activism, land acquisition problems and the weakening credit quality of state electricity boards are all becoming increasing concerns,” the Fitch report said. “Elsewhere, rising interest rates could impact the viability of some projects and may even force the postponement of investment decisions.”
However, the government is trying to facilitate funding to the power sector. As part of this exercise, the government wants to make it easier to lend to the power sector by relaxing exposure norms for banks and state-run lenders such as Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd (REC).
The power ministry has asked the cabinet committee on infrastructure to increase the exposure limit of banks, PFC and REC to single borrowers to 30% of their capital reserves from 25%. The central bank imposes limits on how much Indian institutions can lend to each sector or business group, restricting their funding ability.
“We are trying to facilitate funding to the power sector,” said power secretary P. Uma Shankar.The government also plans on subsidizing the interest on loans taken by SEBs to cut distribution losses under the national electricity fund.
The beleaguered utilities are expected to avail Rs. 25,000 crore worth of loans in the first two years. The boards will get a 3-5% discount on interest rates depending on performance, which will be paid by the federal government to the lenders.The other measures to facilitate funding include a mandatory rating system for 65 state-owned distribution firms to streamline lending to them.
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