New Delhi: India’s power sector may see a rise in foreign inflows as government reforms bear fruit and domestic players look overseas to bolster borrowing in a sector key to sustaining the Asian giant’s rapid economic growth.
Government officials and analysts agree the bulk of the money to build India’s coal, wind and hydroelectric plants will be local, but the power sector’s share of total foreign inflows is likely to rise from the relative disappointments of recent years.
The power sector’s share has risen to 7.6% of total foreign direct investment this year from around 5% last year and 2-3% earlier, said infrastructure specialist Kameswara Rao at PricewaterhouseCoopers. The sector’s share of total private equity grew to 13% last year.
Hong Kong’s CLP is a rare example of a power major that has attracted foreign banks for its Jhajjar power plant in the northern Indian state of Haryana to fund part of an existing $900 million loan, according to Project Finance International.
It is the first time this has happened since a failed Enron project in the 1990s, said PFI, a Thomson Reuters publication.
“The Indian power market is evolving rapidly from a ‘nascent/opening’ market phase to a ‘developing´ phase,” Rajiv Mishra, managing director, CLP Power India Pvt Ltd, told Reuters.
“The Electricity Act 2003—that was followed by open access regulations, national electricity policy and national tariff and integrated energy policy—has brought about a fundamental shift in the sector that’s opening up several new business opportunities,” Mishra added.
India plans to spend $1.5 trillion over a decade to overhaul its creaky infrastructure and bring the power supply, pot-holed roads and crowded railway network up to speed with the aspirations of one of the world’s fastest growing economies.
The government has courted both foreign and domestic investors with schemes such as infrastructure bonds, relaxed borrowing rules and proposed debt funds to help tackle double-digit power shortages during peak hours.
India has an advantage over some emerging peers such as Indonesia, which also needs an infrastructure splurge to speed economic growth, because its bigger domestic infrastructure players make it less reliant on foreign money.
Project finance has seen a boom in India in the past two years and loan volume soared 250% in 2009 to reach $32 billion.
But a domestic debt market rapidly reaching sectoral exposure caps for the power sector, coupled with the interest rate reset risk in rupee borrowings, is driving a few Indian power projects to look abroad for debt funds, said Abhay Rangnekar, Standard Chartered’s head of Project and Export Finance, South Asia.
These include international commercial banks and Chinese banks where the supplies are from Chinese vendors, he said.
“What my read of the situation is that there is a cautious optimism,” he said in regard to more foreign lending to projects.
“The comfort has grown, but you’re not going to see floodgates opening immediately as far as international banks are concerned.”
Higher FDI Expected
Though bureaucratic hassles such as land acquisition remain, analysts credit the 2003 reforms to India’s energy sector, breaking down unwieldy state providers into smaller market-driven ones, as a big step to unlocking its investment potential.
“We typically take a very incremental approach to regulation and policy that has in 2003 culminated in a fairly significant shift,” said Kameswara Rao at PricewaterhouseCoopers.
“We see the exact opposite of the situation 10 years back, when the economic attractiveness of the sector was fairly low. Now it’s fairly high.”
CLP’s 1,320 MW coal-based plant is scheduled for operation by 2012. Another is Reliance Power’s 4000 MW Sasan project in central India, which is also looking overseas to fund part of the plant. The government’s target is to add 100,000 MW capacity in the five years to 2017, though it missed earlier ones.
But while the two projects could signal the rise of more foreign lending to the Indian energy sector, foreign power companies themselves are establishing a presence from coal to renewables and to atomic energy after landmark nuclear deals.
So successful have Chinese power equipment manufacturers such as Dongfang Electric and Shanghai Electric been, with their low prices and breakneck construction speed, that domestic firms and parts of the Indian government have demanded a sizeable import tax on foreign gear.
Perhaps tellingly, one of the biggest names to accompany US President Barack Obama on his November visit to India was the chairman of the power major AES Corp . Its chairman announced an ambitious $15 billion plan to expand capacity to 10,000 megawatt (MW) in India and may look for local partners.
Memories of a troubled Enron project, Dabhol, in the 1990s are beginning to fade for foreign players, analysts say.
“What we expect is the FDI component to significantly increase from here, because local lending will reach saturation,” Rao at PricewaterhouseCoopers said.