With many Indian private power projects turning unviable owing to steep hike in global coal prices, Lanco group chairman L Madhusudhan Rao wants the government to tighten bidding norms for infrastructure projects in general and power projects in particular. Excerpts from interview with ET:
The government seems to have focussed largely on addressing the concerns of the power sector in its Budget this time?
We are happy with the response of the government to the issues of the power sector. We need at least 70% of the weightage to ensure that the domestic coal is produced, more than what is required, to keep tariffs low. Another aspect is the health of the power distribution system, which could be achieved through some of the proposed distribution system reforms recommended by the Shunglu Committee.
How about the aggressive and unhealthy low tariff bids by the developers affecting their projects?
The most important thing that needs to be addressed by the government in the power sector is tightening the bidding documents pertaining to price quotations by the developers. The government should ensure a balanced RfP (request for proposal) in place which should not allow the entrepreneurs to take unreasonable risks.
At the end of the day, it is going to adversely impact the specific projects in the form of delayed implementation, non-implementation, making them unsustainable and unviable. There are certain areas where the government should make it very clear in the bid documents that those unreasonable risks are not passed on to the developers to compete.
Are heavy forex losses hurting your financials of late?
The exact picture is not being reflected in the financial results pertaining to forex resources and losses in view of the existing accounting standards. These losses are notional. The company has the benefit of enjoying forex loans at less than 4% interest rate. Had I used rupee loan, it would have cost at least 13.5%.
So there is a saving on interest burden which is not reflecting in the balance sheet. The total forex exposure of the group at present is around $700 million. What is being seen is only the fluctuation in the dollar price movement. Another factor that is not reflecting in our balance sheet is the profits earned on EPC revenues from internal projects.
How are you coping up with the gas supply shortages from Reliance Industries for your power projects?
It has an impact on Kondapally, especially for units II, III and IV. The association of power producers has been representing the issue to the government to bring LNG and make a pooled price to distribute among the allottees. We are being given to understand that any additional natural gas production is unlikely at least for two years.
In the interim period, we are asking GAIL through the ministry of petroleum to find a mechanism of getting LNG and pooling it with domestic gas and proportionately supply to all the non-urea customers.
You were among those who wanted to grow as a major merchant power developer? How do you look at it now?
Merchant power is highly competitive these days owing to high cost of production unlike 2007 where merchant power gave high returns. Today, we want to get into long-term power purchase contracts and we are participating in such bids. We want to have decent long-term returns. Lanco's view in the current scenario is that merchant power is risky. We prefer long-term power purchase agreements (PPAs).
What is the status of your plans to raise private equity funds into some of your business verticals, power to begin with?
The due diligence process is currently going on. A good number of private equity firms, some 10-12, have expressed interest. I cannot name them since we have signed non-disclosure agreements with them. Lanco's power portfolio is attracting good attention of PE investors since we have the largest and most diversified basket where a good number of power projects have domestic coal linkages.
We will be the largest beneficiary of the government's action to increase domestic coal and making sure that PPA projects have 80% coal. We have 5,800 MW of projects, both under operation and construction, which are based on 100% domestic coal linkages of some 30 million tonne of coal. We should be sealing the PE deals of some $750 million in the next 2-3 months.
What kind of operational power capacities will you have over next 2-3 years?
We will have some 9,300 MW of capacity by FY2015 with 5,800 MW will be completely on domestic coal with 1,200 MW on imported coal, 1,600 MW gas and the balance on hydro.
Which of your business verticals are going to drive your growth going forward?
In the medium to long term, 7-8 years from now, power and EPC (engineering, procurement and construction) verticals will drive the growth, contributing at least some 65% of business. Natural resources, solar and urban infrastructure together could account for some 35% of our total business.
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