RBI study says state finances require more focus

As part of fiscal transparency initiatives, Reserve Bank has called for greater attention on structural issues confronting state finances in the country. “There is also need for greater focus on structural issues confronting state finances, particularly for those states that could not undertake rule-based fiscal corrections prior to the crisis years of 2008-09 and 2009-10,” a RBI study released today said.

The state governments, it said, need to ensure that their finances capture both explicit and implicit liabilities associated with certain off-budget activities, including project financing undertaken through special purpose vehicle or public-private partnership mode.

“Although all the states except Goa have amended their fiscal responsibility and budget management (FRBM) Acts or Rules, most of them do not include provisions for additional disclosures for enabling transparent assessment of state finances. According to the regulator, the recommended restructuring of the public expenditure system would enable better management of outlays for effective outcomes. “Successful restructuring of the public expenditure management system would, however, call for appropriate assimilation of the new system across the government machineries at all levels including the Planning Commission, the Central and the state governments," it said. Concerned with financial losses of state power utilities, the regulator also emphasised on the issues on debt liabilities of distribution utilities and the revision of power tariffs.

"The losses of state power utilities... necessitate not only renegotiating debt liabilities of distribution utilities but also undertaking reforms to enable independent functioning of state electricity regulatory commissions and to address issues on periodic tariff revisions," it added.

Handover of Katwa power project gets WB cabinet approval

The handover of the proposed 1,600 MW thermal power project at Katwa in West Bengal's Burdwan district to the National Thermal Power Corporation (NTPC) today received the Cabinet approval.

"Yes, the cabinet has approved formal handover of the proposed power project from the West Bengal Power Development Corporation Ltd (WBPDCL) to NTPC," a highly placed government source told PTI here.

Conceived a decade ago, the project was shelved in the post-Nandigram-Singur land acquisition controversy.

With the approval of the state cabinet, the project is ready to go ahead following handover of the 550 acres acquired during the erstwhile Left Front regime and logistics developed by the WBPDCL to the NTPC, the source said.

The remaining land will be purchased directly by the NTPC. WBPDCL spent about Rs 175 crore on acquisition and development of the land spread over 11 mouzas in two blocks of Katwa-I and Ketugram.

NTPC was enrusted by the erstwhile LF government to set up the project with half the generation to go to the state and to sell the remainder.

ECB norms for power cos eased; RBI to issue guidelines in 7 days

Government has allowed power companies, such as NTPC and Reliance Power, to use 40% of the funds raised through external commercial borrowings (ECBs) route for refinancing rupee debt, raised from Indian financial institutions and banks. The rupee refinancing window would be allowed only if the balance 60% ECB funds is used for financing new power projects.

The RBI will issue guidelines on it in the next seven days after which this window will be opened to the sector, a finance ministry official said. The Budget 2012-13 has proposed to expand the scope of end use sectors and activities that raise money using the ECB route. While aviation sector has been allowed to tap ECB to meet their working capital requirements with a ceiling of $1 billion, power companies have been allowed to use the route to part finance rupee debt of existing power projects.

The facility to raise oversees loans for the rupee debt has been kept under the approval route. The government has not set any sectoral limit for the power sector under the overall ECB limit.

The key purpose of the move is to allow companies to expand their loan portfolio with banks to muster funds required for their expansion and new projects. Several banks and financial institutions have reached the sectoral exposure limit allowed by RBI for the power sector, thereby putting pressure on power sector companies to mobilise funds from the domestic market.

Earlier, companies operating in infrastructure sector were permitted to utilise 25% of the ECB loan to refinance their rupee debt. Government has extended the facility to power companies also with a higher limit on rupee debt financing.

The RBI will soon also issue guidelines in next seven days to allow ECBs for making capital expenditure on the maintenance and operations of toll systems for roads and highways. The infrastructure companies will be able to raise up to $750 million under the automatic route.

The Indian companies raised total of $35.9 billion oversees funds in the last fiscal year. Although, finance ministry has kept the annual overall ECBs ceiling unchanged at $30 billion, the ministry is open to extend the limit if the current limit is exhausted, Thomas Mathew, joint secretary, capital markets, finance ministry said.

Apart from currency fluctuations which can hurt the interest of companies, capital flows through ECB pose macro-economic challenges for the government. The flows through this channel can potentially add to inflation besides increasing country’s external debt.

Since the cost of raising ECBs is much lower than the domestic avenues, it remains one of the most attractive options for companies. The 57% of ECB raised between April 2011 and January 2012 saw its overall cost under Libor +30o bps, while borrowing cost from domestic banks touched the roof due to tight monetary stance taken by the Reserve bank of India.

Extending a lifeline to the ailing aviation sector facing difficulty in raising funds through domestic banks, government has permitted airline industry to raise working capital, subject to a total ceiling of $1 billion in the budget. In order to keep a check on funds raised through this window, government has extended the facility only for 1 year through the approval route.

The guidelines are expected to be announced in some time. Government has also permitted low cost affordable housing projects also to raise ECB through the approval route.

Apart from this, withholding tax on interest payments on ECBs has been significantly reduced from 20% to 5% for the period of 3 years in sectors like power, airlines, roads, affordable housing and fertilizers.

Export of US LNG wins final approval

The first project to export liquefied natural gas from the US in more than 40 years has been given its final approval by the federal energy regulator, clearing the way for construction to start at the site on the coast of Louisiana.

The decision is a potential first step in what could be a profound upheaval in global gas markets, allowing the impact of the US shale gas revolution to be felt in other countries worldwide.

The surge in production made possible by the application of techniques to open up reserves that have traditionally not been commercially viable has sent US natural gas prices plummeting to a ten-year low below $2 per million British thermal units.

That is less than one-seventh the price that LNG cargoes have been selling for in Asia, creating an inviting arbitrage opportunity for anyone able to ship gas from the US.

The $10bn Sabine Pass liquefaction plant planned by Houston-based Cheniere Energy “can be constructed and operated safely and with minimal environmental impacts”, the Federal Energy Regulatory Commission said in a statement on Monday evening.

With the US Department of Energy having already given its approval for Cheniere to export gas from the US to any country not under an embargo, the Ferc decision was the final green light needed by the controversial plan.

The commissioners’ ruling had been expected after Ferc staff made a similar recommendation last year.

However, the project had faced a late flurry of opposition and its sensitive nature may have been reflected in Ferc’s announcement of its decision on Monday evening, ahead of its scheduled date of Thursday.

Charif Souki, co-founder and chief executive of Cheniere, had said he was hopeful that the Ferc commissioners would follow the staff opinion, but he did not want to “jinx” the project by claiming success too soon.

Some energy-consuming businesses have raised concerns that allowing LNG exports could drive up the price of natural gas in the US, eroding the cost advantage that they would otherwise enjoy over international competitors.

Some environmentalists have also objected to awarding a permit for exports, on the grounds that by allowing US gas producers to find new and potentially more lucrative markets for their output, it would encourage greater use of hydraulic fracturing or “fracking”. That process, involving the injection of water, sand and chemicals into the earth at high pressure to crack shale rocks and release the gas, has become increasingly contentious.

Deb Nardone, director of the natural gas reform campaign for the Sierra Club, an environmental group, said in a statement in February: “Liquefied natural gas is not only the dirtiest and most polluting form of gas, but it also requires an increase in fracking, a process we know to be unsafe and dangerous.”

She added: “The industry is pushing forward with these export facilities with their profits in mind, not the families who will bear the burden of increased fracking.”

Several other LNG export projects have also been proposed, but none has yet been awarded general export permits by the energy department or approvals from Ferc.

With all its approvals in place, Cheniere can now start construction on its 200-acre site, which has space to fit four “trains”, the refrigeration units used to cool the gas down to -162°C, at which point it becomes a liquid with 1/600 of the volume of its gaseous state, and can be shipped in tankers.

Sabine Pass was originally built as an LNG import terminal – a sign of how quickly the outlook for natural gas has turned round – and so already has some facilities, such as storage tanks, docks and pipelines, that will be needed for export operations.

Cheniere has already lined up four customers: BG Group of the UK, Gas Natural Fenosa of Spain, Kogas of Korea and Gail of India, to export a total of 16m tonnes of LNG per year, roughly 89 per cent of the plant’s possible maximum capacity if all four trains are built. The company has already committed to proceeding with the first two trains and expects to approve the other two next year.

Cheniere also announced on Monday that it had lined up eight banks to help it raise $4bn in debt to fund the project.

Power industry miffed with CIL, to approach PMO

Miffed at the Coal India (CIL) board's recent decision to set a low penalty level under the fuel supply agreements (FSAs) with power plants, private power producers are planning to again approach the Prime Minister's Office (PMO). What CIL would pay if it fails to supply the entire additional quantity of coal to the power sector is a paltry Rs 77 lakh annually.

After last month's presidential directive to the world's largest coal producer, its board on Monday agreed to sign new FSAs with power companies at an 80 per cent commitment level. However, the board not only set a penalty level of a mere 0.01 per cent (one-hundredth) the value of the shortage below 80 per cent, it also wants the penalty to come into effect only after three years of signing FSAs. "If we keep the average price of coal for the power sector at about Rs 1,100 per tonne, the penalty we are going to pay after three years would be around Rs 1.1 lakh per million tonne. This shows the penalty clause of 0.01 per cent will not have any effect at all to the company's profits,&" a senior CIL executive admitted, on condition of anonymity.

The maximum fine CIL would have to pay if it failed to meet the promised 70 mt of additional coal, according tot the FSAs, would be about Rs 77 lakh. Considering CIL had a turnover of about Rs 50,200 crore in 2010-11, the penalty would hold little meaning.

According to a board member, in the seven-hour meeting yesterday, the main point of contention was the penalty clause. "Independent directors were not even ready to give a penalty clause. Finally, we decided to keep it at the least possible level,&" he said. At present, penalty is paid by the coal supplier at 10 per cent (one-tenth) of the value of shortage below the committed quantity. The domestic industry has termed the board's decision on low penalty level "irresponsible behaviour&" and "a mockery of assured supply&".

Power producers are understandably complaining. "We feel the presidential directive has not been followed in spirit and intent. So, the coal ministry should act suo motu (on its own) to address the concern. And, if it does not, we will take up the matter with the prime minister again,&" Ashok Khurana, director-general of the Association of Power Producers told Business Standard. He, however, added any decision on FSAs would be taken by companies individually.

"Our allocation to the power sector would cross the 400-mt mark this year, compared with the current 383 mt. During the first two years, allocation won't be a problem for us, as there would be no shortfall. So, even if imports take place, these would begin from the third year,&" a senior CIL executive told Business Standard.

Coal ministry rules out Coal India arms' divestment

The coal ministry has ruled out divestment of Coal India subsidiaries. The department of divestment had proposed 10% divestment in profit making CIL subsidiaries.

"In a meeting held last week, the coal ministry has conveyed to the department of divestment that if profit making subsidiaries of CIL are divested, it might not be possible for Coal India to support turn around two of its ailing subsidiaries - Bharat Coking Coal and Eastern Coalfields. It will also not be able to give the government dividends of at least 6,000 crore every year," a senior CIL officials told ET.

"Post divestment it may not be possible to channel funds to support ailing ECL and BCCL and turning around of these two companies will be impossible. Hence, the divestment should be held back till BCCL and ECL turns around. The ministry has conveyed to the department of divestment," he said.

"We are not in favour of this divestment proposal," Alok Perti, secretary at the Coal Ministry had earlier told ET.

These two companies are integral part of CIL which produces premium thermal and coking coal. BCCL is the only company in India that produces coking coal.

"CIL is a marketing company. It does not produce any coal and its income is based on the coal that its subsidiaries produce. Its IPO was done on the basis of the strength of the subsidiaries," he said.

According to the proposal mooted by the department of divestment, 10% in Central Coalfields, Mahanadi Coalfields, South Eastern Coalfields, Northern Coalfields, and Western Coalfields would be divested.

"The divestment proposal includes listing only the profit making companies and leaving the two large subsidiaries that are incurring losses. This will tell on the valuation of CIL," he said.

"The Initial Public Offer met with heavy resistance from the unions. During that period, the management had promised the divestment of CIL will be restricted to 10% only. This promise will be dishonoured if the subsidiaries are divested too," a senior CIL official said.

In 2010-11, the six subsidiaries together posted a profit before tax of over 14,700 crore. MCL ( 4,039 crore), NCL ( 3,956 crore) and SECL ( 3,777 crore) were the major profit churners. CCL and WCL posted a PBT of 1,860 crore and 1,068 crore respectively. CMPDI, being a consultancy wing, has a smaller balance sheet and posted approximately 24-crore profit.

CIL rallies trouble seen ahead

Shares of Coal India rose over three per cent on Tuesday, a day after its board agreed to sign new fuel supply agreements (FSAs) with power producers, with an average penalty of just 0.01 per cent for supply shortfalls.

The penalty clause in the new FSAs is well below the prevailing levies of 10-40 per cent, according to foreign brokerage JPMorgan.

Coal India shares gained 3.18 per cent, or Rs 10.80, to close at Rs 350 on the Bombay Stock Exchange here on Tuesday.

However, the near-term boost is unlikely to be sustained, JPMorgan argued, as the more pressing issue was how Coal India would meet the government’s condition that 80 per cent supply commitment be provided to power providers. The foreign brokerage maintained its “underweight” call on the stock.

Those long-term supplies, which would be provided at lower prices than what could be fetched in private markets, is at the heart of the tussle between Coal India's directors and The Children's Investment Fund, the biggest minority shareholder in CIL.

“Implementation of the new FSAs, which would require about 80 million tonnes of incremental coal offtake for the power sector, will lead to a shortfall of about 10-20 million tonnes, likely to be bridged through imports,” analysts at IDBI Capital said. “Also, signing of these FSAs is likely to see an increased pressure to feed the power sector’s needs at lower realisations and, hence, reduce the pricing flexibility of Coal India,” they added.

Give private contracts in coal mining: Praful Patel

The Union Minister for Heavy Industries and Public Enterprises, Mr Praful Patel, said on Tuesday that to rapidly increase coal production, the private sector needs to be given out mining contracts.

This will help the power sector to reduce production costs. Such benefits can then be passed on to the rest of the industry, helping them be more competitive at the global stage and meet the challenge of Chinese imports.

“Management contracts need to be given out for coal mining. Its one of the areas were we need quick reforms. Many industries have lost competitive advantage globally for this. We need to have much larger scale as growth will not only come from internal demand,” he said, while speaking at the Confederation of Indian Industry's Annual General Meeting.

Apart from the power sector, Mr Patel said that the other area of “huge concern” is infrastructure. Most port, road and airport projects get delayed and are under-built. This poses a challenge and increases costs for manufacturing firms, such as BHEL, which need to move bulky equipment across the country.

“India also needs to move much forward in agriculture. So many irrigation projects are under way, but not even 10 per cent gets completed in time. Huge investments have gone in these sectors,” he added.

Further saying that the cost of capital needs to be reduced, Mr Patel stressed on the need to arrive at a quick political consensus for reforms and increasing the flexibility and autonomy given to public sector companies.

Speaking at the CII event, Mr G.V. Sanjay Reddy, Vice-Chairman, GVK Power and Infrastructure, said that politics is not letting India fulfil its economic potential and confidence needs to be restored back in the country.

“These days all we talk about is problems, corruption, inflation and fiscal deficit. We need to take advantage of our assets to get growth back. The opportunity will not last forever,” he said.

Coal ministries in power tussle over allocation of coal blocks to companies

The coal ministry has asked the power ministry to review allocation of coal bocks to companies, and argued that electricity costs would have been lower if mines had been given to Coal India Ltd (CIL), which extracts fuel at half the declared mining cost of firms such as Reliance Power Ltd.

The ministry has specifically cited the case of coal blocks attached to Reliance Power's 4,000-MW Sasan Ultra Mega Power Project (UMPP), where the company will mine coal at a cost of 919 per tonne compared with CIL's 450 per tonne in an adjoining block.

A Reliance Power spokesman said what matters is the power tariff, not the mining cost. "The cost of coal is not relevant for any of our coal mines as we are not selling coal but supplying power at most competitive tariffs. The historic landmark tariff from Sasan ultra mega power project at 1.19 per unit signifies the efficiency in coal production and power generation brought in by Reliance Power. This tariff would benefit 35 crore Indians in 14 distribution companies in seven states," he said.

The coal and power ministries have written several letters in recent weeks since the leaked draft report of the Comptroller and Auditor General (CAG) created uproar and triggered a debate about large blocks given to companies of leading business houses such as the Anil Ambani group, the Tatas and the Jindals.

The draft report estimated that the blocks given free to various firms contained coal worth 10.7 lakh crore. In one letter, the coal ministry said mining costs of two blocks in the same area can vary substantially.

In a letter dated April 12, coal secretary Alok Perti told his counterpart in the power ministry, P Uma Shankar, that consumers could have benefited had the Moher and Moher Amlohri mines attached to the Sasan UMPP been awarded to CIL.

A senior power ministry official confirmed that Perti had written a letter asking for a review of mining costs of all power companies, including state-run NTPC, for taking necessary actions. "Required steps will be taken," the power ministry official said.

The official said that ironically Perti's views were based on what Reliance Power itself had argued in a presentation following the leaked draft report of the CAG, which estimated that coal blocks given away to private firms contained fuel worth 10.7 lakh crore.The company said in the presentation that it expects the cost of mining to be as high as 1,000 per tonne. The draft report says that Power Finance Corp has considered 431 per tonne as the cost of extraction including royalty per tonne for loan appraisal of Reliance Power's Sasan ultra mega power project.

Perti's letter, also marked to prime minister's principal secretary Pulok Chatterjee, said mining cost from CIL mines is just about 450 per tonne, the coal ministry official said. Northern Coalfield, CIL's subsidiary, operates Amlohri and Nigahi blocks near Sasan blocks.

Although the coal ministry has told the Comptroller and Auditor General that mining cost of no two coal blocks is similar, it believes that there cannot be such wide variation between mining costs of two adjacent blocks, the official said.

In a separate letter to CAG on March 15, coal ministry has said cost of production from blocks depends on many factors and 'varies to a large extent' even if they are located in the same area. The ministry has challenged CAG's calculation of at 10.67 lakh crore undue benefits to companies that have been allotted coal blocks free of cost during 2004-09.

The ministry has said cost of production of CIL mines does not include financing cost of about 100-150 per tonne, which other captive block owners incur. The coal ministry has called for deliberations with CAG before the auditor finalises the report.

Investment in green technologies will benefit India,US: Sushilkumar Shinde

US companies investing in India's green energy market will have good prospects and it will be a "win-win" situation for both the countries, Power Minister Sushilkumar Shinde said.

In his address to a meeting of US private sector organised by US India Business Council yesterday, Shinde said, "There are excellent opportunities in India to examine the feasibility of clean energy technologies, which will be a win-win situation for India and the United States."

The Minister said that energy security is of vital economic and strategic significance for the country.

India has a number of financial, technological and exploratory initiatives with the US in clean and renewable energy and energy conservation, he said.

"We now need to explore economic partnerships between the Indian and US companies in this shift to clean energy," the Minister said.

He, yesterday, also met the US Energy Secretary, Steven Chu, during which the two leaders discussed ways and means to enhance bilateral cooperation in the energy sector, in particular the alternate sources of energy and energy conservation.

Shinde also invited US corporate leaders to invest in India saying the country is moving on the path of massive investment in the energy sector, especially electricity generation and transmission.

No doubt India's power sector presents a massive opportunity to the American companies, Shinde acknowledged the concerns of the investors from the US.

"I am also aware of the concerns of investors with respect to land acquisition, coal sourcing, financial health of discoms, pricing reforms, payment security and contract sanctity," he said.

"Recognising the need for an overall and comprehensive legal architecture and a policy framework conducive to larger and more sustained investment in the power sector, the Government of India took numerous steps to facilitate reforms in the sector," he said.

Shinde said the Indian government has proposed various proposals in the Budget 2012 to stimulate investments.

A crucial Land Acquisition and Rehabilitation and Resettlement Bill is under the consideration of the Parliament, he said.

The current installed capacity of India stands at over 1,90,000 MW of which renewables (wind and solar) contribute over 22,000 MW.

Gujarat to become India's largest solar power producer

Commercially exploiting large tracts of wasteland, Gujarat is set to emerge as India's largest solar power destination. The Chief Minister, Mr Narendra Modi, will dedicate 600 MW of solar power projects to the nation on Thursday.

Currently, India's total solar power production is nearly 900 MW, two-thirds of which will be produced by Gujarat alone.

On Thursday, Mr Modi will launch India's first Solar Power Park with generation capacity of 500 MW in 3,000 acres Charanka village, Randhanpur taluka, in Patan district. Currently, it has an aggregated operational capacity of 214 MW of solar power projects commissioned at a single location. The Patan ceremony will be attended by representatives from Australia, Canada, China, Germany, Italy, Hong Kong, Singapore, the UK and the US.

The Gujarat Solar Park is an innovative concept of the State Government to promote solar installations in which it allocated developed land to the project developers with the entire infrastructure including power evacuation, roads and water for commissioning of the power project put on fast track.

Under its Solar Power Policy, the State Government had signed up memorandums of understanding for generation of 968.5 MW of solar power by December and also took an initiative to launch the Gujarat Solar Park with a vision to build it as the world's largest solar power park. Its foundation stone was laid in December 2010.

The dedication ceremony will be followed by the ‘India Solar Summit 2012: Investment and Technology Expo' to be held in Gandhinagar on April 20 and 21, said Mr. D.J. Pandian, Principal Secretary, Energy and Petrochemicals Department.

China Light and Power arm to raise debt

CLP India, a subsidiary of Hong Kong-based China Light and Power, is planning to raise about Rs 1,000 crore in debt in 2012-13.

The debt would be used to fuel its plans to add wind power capacity across the country. CLP India has about 500 Mw of wind power generating capacity and is also constructing another 267 Mw. “We have been adding 200-300 Mw of wind power every year. If this rate continues, we can reach 2,000 Mw,” said managing director Rajiv Ranjan Mishra.

The company recently won a 102.4-Mw wind power project in Rajasthan. It is one of the few large international power companies operating in India. It also has interests in non-renewable sector and has 655 Mw capacity in gas-based generation. It is building a 1,320Mw coal-based power plant in Jhajjar, Haryana. One of the units of this power plant of 660 Mw has already been commissioned.

The company recently completed 10 years of operations in India, and had entered the country at a time when foreign investors were facing losses like Enron in Dabhol, Maharashtra. “Back then, outstanding payments were endemic. So, we focused on getting them back and by 2005, our outstandings were liquidated,” said Mishra.

At present, the company is in a similar fix as it has outstanding payments from the Tamil Nadu state utility since the past 12 months. However, Mishra says things look better now. “They have had a tariff increase and we hope that the bills are cleared soon,” he said.

Unlike the last time, the company is not shy of making large investments this time. It is even hoping to bid for the ultra-mega power project in Chhattisgarh. The 4,000-Mw power project comes with a coal mine at the pit-head, eliminating fuel risk for the project. It is these kinds of projects that CLP India is looking for. “We would take land acquisition and development risks, but when we make this kind of large investments we should have the ability to pass on fuel supply risks,” said Mishra. The much delayed project could come to bid around the end of the year.

As the sector is going through tough times like high interest rates, Mishra expects the bids to be rational now.

In the past, tariffs for UMPPs have been very low and very competitive.

“We definitely expect rational bids though the competition might be high this time around as well,” said Mishra.