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India

India

Reforms will restore confidence

The future for foreign investment in India's energy sector looks bright despite political upheavals, turmoil in the Asian Tiger economies and the need for ongoing reforms. This was the optimistic picture painted by investors and analysts at a conference in London last month, "Transforming Indian Energy."

Many speakers pointed out that India has emerged from the financial crisis in South East Asia with its credibility intact. George Foulkes, UK Under Secretary for International Development, claimed that India now has an advantage. Confidence in the market has not been broken and India can now learn from the experience of her neighbours, he said. The main lesson is that markets need to be transparent and well regulated, he told participants at the February 4 conference, organised by the UK's Royal Institute of International Affairs and India's Tata Energy Research Institute.

Sir Robert Wade-Gery from Barclays Capital agreed. India can gain from the turmoil by harnessing capital flows that earlier went to other countries in the region, he said. But to seize the opportunity, India must quickly address several investors issues. The foremost issue for the power sector is the poor financial health of the power purchasers -- the State Electricity Boards (SEBs). Electricity is the fastest growing sector of the Indian economy at 7-8% annualised; and there is no doubt of the need for foreign investment. By 2002, 40,000 MW of incremental generation capacity is to be added -- half of which will be in the private sector. But investors' main problem is to guarantee payment to secure project financing.

"Many SEBs are on the verge of bankruptcy and are therefore unable to give long term financial guarantees for power purchases," said John Bray from the Control Risks Group, putting the problem in a nutshell. The SEBs' difficulties stem largely from the hugely subsidised price of electricity to farmers -- a result of regional government interference -- combined with high levels of electricity theft. Wade-Gery prescribed the remedy: the SEBs need to be commercialised to make them more market oriented, corporatised to make them answerable to shareholders and empowered to adopt a variety of options for generation, transmission and distribution.

The right direction

Salman Haidar, Indian High Commissioner to the UK, admitted that corporatisation is low in the electricity sector compared with other energy sectors. Yet moves in the right direction are being made. Many SEBs have set up public corporations or joint ventures with the private sector to generate electricity. And several state governments have accepted corporatisation as a prime objective. This has been carried furthest in Orissa state, where the SEB has been corporatised into successor entities and an independent regulatory commission is already functioning. Other states -- Haryana, Andhra Pradesh and Karnataka -- are considering following Orissa's lead.

Haidar agreed with the need for a rational pricing policy. A "fast track" scheme in Rajasthan had demonstrated that most farmers recognise the added value of reliable power and are willing to pay up to ten times the normal connection charge and double the energy charge for a priority connection.

Other factors identified as hindering growth in the sector were delays in obtaining the large number of clearances needed to set up a power plant, and the extended negotiations needed to secure key project agreements, like power purchase agreements.

Renewables too

Haidar maintained that India is firmly committed to sustainable energy development. Public investments in new renewables in the form of financial incentives, R&D and technological support have developed India's wind power industry into the third largest in the world. Despite the resource crunch faced by the government, budgetary outlays for clean and renewable energy have been increased at an annual rate of 27% since 1990 compared to the 7% per year increase in total public outlay.

Political uncertainty does impact on investment, the conference heard. Enron's Dabhol power station -- -which consecutive governments had agreed, cancelled and then supported -- was held up time and again as a case in point. "The controversy has inflicted lasting damage on India's reputation among foreign investors," claimed Bray.

It was widely acknowledged that in spite of successive changes of government, most of the economic reforms instituted in 1991 have continued, even though the speed of reforms is too slow for some. Bray predicted little change from the new government that emerges from the February elections, especially if the United Front and Congress are returned to power. Fears over the prospects for the energy sector from a government led by the Bharatiya Janata Party are misplaced, he said. Although the BJP has questioned the role of foreign companies selling consumer products, the party has been consistent in its support for foreign investment in infrastructure, he explained.

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