The Indian Government has made investment in infrastructure a priority, with the power sector at the top of the list. But will challenges in accessing long-term funding and fuel availability hold back growth? Guru Malladi responds.
India's economy has been growing rapidly, and to maintain this momentum, the Government has strengthened focus on developing infrastructure. It has increased infrastructure spend as a percentage of India's GDP from 5.15% during the 2002–07 Tenth Five Year Plan to 7.55% during the 2007–12 Eleventh Five Year Plan, and an expected 9% during the 2012–17 Twelfth Five Year Plan.
It has consistently made power a high priority. It is also the best performing sector: in February 2011 cost overruns were a major concern for urban infrastructure (102% over budget) and oil and gas (45% over), but not power, with overruns of just 4%.
Four key issues
Robust economic growth and industrial activity have significantly increased the country's power demands, leading to as much as a 12% peak power deficit. The areas Indian power that companies see as key to the sector's growth and ability to cope with this demand include:
- Increase in generation capacity. From 2007-10, India added 32,000 MW of generation capacity. The Twelfth Five Year Plan aims for an addition of around 75,000 MW. Investment in the sector is estimated to be INR12,576 billion (US$250 billion), of which generation development alone will attract about INR 3,750 billion (US$75 billion).
Construction intensity is approximately 38% at present and is expected to result in construction opportunity worth INR4,780 billion (US$95 billion).
- Availability of fuel. Shortages of coal (and gas) will cause trouble for power plants. Coal India Ltd., India's dominant domestic coal source, seems to have quality, quantity and pricing issues.
The Prime Minister recently took an important step by appointing his Principal Secretary, Pulok Chatterjee, to work out a time-bound action plan to resolve these shortages, cheap imported coal, power tariff hikes, and the second generation of power reforms. Secretaries from the Ministries of Power, Petroleum, Coal, Environment and Finance are part of the panel.
- Funding. The absence of a dedicated fund offering long-term financing is an issue. Private players in the sector have lobbied the Government to improve funding, as Indian banks typically lend over a ten year time frame and have sector limits. More flexible terms are also needed, for example, in the timing of fuel guarantees, commissioning and financial closure.
- Transmission and distribution losses. The Central Government has introduced a number of programs and incentives in the last two to three years to deal with this issue.
However, very high losses in the distribution sector which are making state-owned distribution utilities financially unviable still need to be addressed. The Planning Commission has appointed a high level panel headed by VK Shunglu, which provided recommendations in December 2011.
Opportunities from ultra-mega power projects
Private sector investment is likely to increase significantly in the power sector with the announcement of 14 ultra-mega power projects generating over 4000 MW. Four (Sasan, Mundra, Krishna Patnam and Tilaiya) have already been awarded to private players, with the rest expected to be commissioned during the 2012-17 Twelfth Year Plan.
The Government's approval for 100% FDI investment in infrastructure projects through the automatic route has encouraged international players to set up in India.
These global giants provide the latest technology and quality to domestic contractors through strategic alliances, joint ventures and partnerships. Key risks for foreign players interested in UMPPs are:
- Restriction of supply from outside India. This means bidders must manufacture in India or partner with companies manufacturing in India.
- The likely new or increased import duty that could be levied.
Major power companies in India
- JSW Energy
Driven by, and dependent on, infrastructure growth, the Indian EPC market has many opportunities to offer — an estimated spend of INR12,576 billion (US$250 billion) over the Twelfth Five Year Plan — with 50% of opportunities expected to be funded by the private sector. Players will differentiate themselves by the soundness with which they secure and manage these opportunities.
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