FDI in power sector swells even as domestic fund flows trickle

At a time when domestic investors are applying the brakes on power sector funding, foreign direct investment (FDI) inflows into the sector could actually be headed for a new record this fiscal.

In a signal of bullish sentiment among global investors, FDI inflows into the power sector — at a robust $1.3 billion during the first six months of the current fiscal — were just marginally short of what came in during the entire 12 months of each of the previous two financial years.

The FDI inflows, apart from investments routed through Mauritius, include fund flows from France, Singapore, the UK , the UAE and the US. Recent FIPB (Foreign Investment Promotion Board) approvals include proposals by Hinduja Energy for induction of foreign equity into a domestic firm and fund raising plans for coal washery operator ACB Ltd and Chennai-based Gita Power and Infrastructure. FDI up to 100 per cent is permitted under the automatic route for projects involved in electricity generation (except atomic energy), transmission, distribution and power trading.

The news on robust foreign inflows comes in at a time when domestic investor interest in the power sector is petering out and is clearly visible in the form of the tepid response by domestic banks and financial institutions to the funding of new private generation projects. The main concern is about adequate coal supplies for new projects, amidst signs that developers of projects close to commissioning could default on their loan repayments due to fuel shortages.

Subdued merchant power rates and reluctance among cash-strapped State Electricity Boards to buy power from the spot market are adding to investors' woes. The worsening financial position of the SEBs — their losses are pegged at Rs 55,000 crore — has already begun to affect existing power generators. While NTPC's bottomline was dented last fiscal due to lower offtake by SEBs, private developers also face the same risk.

An official with state-owned lender Power Finance Corporation admitted that fuel risk had made them cautious while evaluating projects. Edelweiss, in a recent wrap-up on the power sector, too attributed “serious business risks” for power developers, cascading down to their lenders, due to coal shortfall. These fuel risks, it said, were bigger than the risk arising out of lower or less remunerative merchant sales.

The overall funding requirement in the Eleventh Plan (2007-12) was estimated at Rs 10,31,600 crore (about $230 billion at an exchange rate of Rs 45) by the Working Group on Power at the beginning of the current Plan period.