New Delhi: In a move that could potentially curb investments in India’s power sector and hurt state-owned power generation company NTPC Ltd’s ability to fund expansion, the government plans to reduce the assured return on equity (ROE) for some power projects.
The Planning Commission has asked for reducing ROE (the after-tax profit of a company as a proportion of its equity, expressed in percentage) from 14% to 12% on so-called negotiated projects. These are projects that are negotiated between the power generation firm and the relevant government body and where there’s no competitive bidding, unlike the Centre’s ultra mega power projects, where the firm quoting the lowest cost per unit of power generated is awarded the project.
“Post-taxes, a 14% rate of assured return is too high,” says Planning Commission member Kirit Parikh. “The very idea of assured returns is a bad strategy... If the project is awarded through competitive bidding then it is fine. For example, state electricity boards (SEBs) are already financially stress-ed and pay NTPC an assured tariff as they do not have any other option. This rate should be comparative and in tune with the market conditions.”
All NTPC power generation projects work on an assured-return system. SEBs, which buy power from generation firms and supply them to end users, bear the burden of assured return on negotiated projects. With returns assu-red, firms pass on any incre-ase in raw material, financing, or other costs to customers.
“Why should such an incentive be given to firms such as NTPC, which are sitting on cash reserves of around Rs12,000 crore?” asked a senior government official, who did not wish to be identified but confirmed that the government was considering the plan panel’s proposal.
The government’s willingness to accept such a proposal at a time when the country needs significant investments in the power sector could also be on account of the reasonable interest shown in its ultra mega power projects. Of the 10 planned projects, two have already been awarded. Reliance Power Ltd emerged as the winning bidder for the Krishnapattnam project, but it is yet to be formally awarded.
Developers say that if the government accepts the proposal, investments in the sector will suffer. The view is echoed by a senior official in the Union power ministry, who did not wish to be identified. “In my view it is not an appropriate thing..., that too at a time when the sector requires massive investments and the investors are ready to bring in money to the sector. Let us first put in place a firm order book position for the 11th Plan (2007-12) and then do this kind of tinkering.”
India plans to add power generation capacity of 78,577MW in the next five years at an investment of Rs10.31 trillion. As per the power ministry, the government faces a Rs4.51 trillion funding shortage in this effort, which it hopes to make up by attracting investors to participate in the power sector.
“The biggest hit will be taken by NTPC, having all its current projects under fixed ROE regime. By reducing ROE, NTPC’s cash flows would be constrained and would negatively impact its future plans,” said Abhishek Puri, an analyst with ASK Securities Ltd. NTPC is India’s largest power generation firm with a total installed capacity of 27,904MW, which it plans to increase to 50,000MW by 2012 and more than 75,000MW by 2017.
A senior NTPC executive, who did not wish to be identified, said firms would invest in the sector only if it was profitable for them. If the proposed cut happens, he added, “it will be more beneficial to park our money with the banks than invest it in the power sector.”
NTPC returned a net profit of Rs6,726.40 crore in 2006-07 on sales of Rs30,638.70 crore. NTPC has planned a capital expenditure of Rs1.6 trillion in the five years to 2012 and is raising $1.5 billion (nearly Rs600 crore) from banks and multilateral institutions.
“To put things in perspective, the government reduced ROE for power project developers from 16% to 14% in 2004, as the interest rates were lower. Currently, the interest rates are peaking and tying up for finances for a power project entailing 70-80% debt at competitive rates is difficult. It would certainly act as a dampener for private investments in the power sector,” added ASK’s Puri.