Nirmal Gangwal, the founder and managing director of Brescon Corporate Advisors, a financial advisory firm, talks about the financial problems in India’s electricity sector.
What are the main issues that the sector is facing?
The power sector in general has been facing several issues like policy paralysis, political, economic, environmental, legal. The government has to realise there has been a considerable increase in the cost of equipment, fuel (both coal and gas) in the last three to five years. Hence, existing power tariffs do not make much economic sense for the power generation companies. If due to political or other considerations, the government wants to provide power at lower cost to certain strata of the society, the same has to be subsidised by the government and not at the cost of the power generation companies or lenders.
What impact have delays had on projects’ costs?
In general most of the power projects of independent power producers are delayed by three years more than originally envisaged. Projects were funded at a debt to equity of 75:25 and at an average interest rate of 12 per cent. For many of these projects, about 90 per cent debt disbursement has already happened. Hence, time and cost overruns have led to about 25 per cent increase in the cost of projects purely due to the additional interest during construction.
What needs to be done to improve the situation?
Most of these delays are due to issues linked to inefficiencies of the previous government, so the burden should be borne by the government of India. Also, payments from state electricity boards to independent power producers have to be expedited. Currently, there are disputes within independent power producers and distribution companies over power purchase agreement rates. These disputes are not getting resolved due to a dearth of judges at the Central Electricity Regulation Commission. The same needs to be looked into and resolved.
