In the midst of public sector banks [PSBs] losing lakhs of crore due to the so called non-performing assets [NPAs] – a sophisticated nomenclature for sheer loot of public money by dubious businessmen/industrialists acting in collusion with pliable politicians and bureaucrats – one comes across reports of the ‘government nudging bankers to take criminal action against independent power producers [IPPs] that have inflated project costs’.
The diktat is a follow-up to the new power minister RK Singh last year hinting at the government’s intent to investigate ‘whether private developers gold-plated project costs’. He had suspicion that IPPs inflated project costs to raise a higher amount of debt to cover their equity component—a practice called ‘gold-plating’. This has far reaching ramifications. Let us elucidate with an example.
If, a project’s actual cost is Rs 100 crore with a debt to equity ratio of 2:1, the equity to be borne by the developer is Rs 33.33 crore and debt Rs 66.67 crore. If, he does not intend to bring his equity contribution, then he inflates project cost to Rs 150 crore. This implies debt of Rs 100 crore and equity as Rs 50 crore. With this, he can cover the total cost [read actual] all of it coming from debt without having to contribute even a rupee toward equity commitment.
A dubious arrangement such as this is in contravention of the basic principles of financing projects whereby a promoter must bring in his own funds/equity [also known as risk capital] to demonstrate his seriousness and commitment. The intrinsic/risky nature of this capital compels him to be extremely careful and diligent as in an event of project failing, his own money will also sink. If, he does not bring his own capital, the principle is seriously compromised.
Having maneuvered not to deploy their own capital, such promoters faced no risk whatsoever and recklessly went about executing projects using funds borrowed from public financial institutions [FIs] – mostly PSBs. In other words, they were simply playing with public money. The consequences could only be catastrophic.
According to the department of financial services, 34 coal-fuelled power projects with total capacity of around 40,000 MW and exposure of Rs 177,000 crore to banks/FIs are under stress. The problems faced by them are manifold. Some plants do not have assured supply of coal while others have not signed PPA [power purchase agreement]. Some neither have fuel supply nor PPA. Then, there is a fourth category wherein, the project has not even been commissioned.
The government may be making its best endeavors to address the problems. For instance, in May, 2017, the Cabinet Committee on Economic Affairs [CCEA] had approved a new policy christened Scheme for Harnessing and Allocating Koyala [Coal] Transparently in India, or SHAKTI. The objective was to allocate coal in a transparent manner to meet fuel requirements. But, how does one salvage plants which are afflicted with foul play?
An artificial boost to investment cost [courtesy, gold plating] has the inevitable effect of increasing tariff to make plant operations viable. This won’t be acceptable to the power distribution companies [PDCs]/state electricity boards [SEBs] and hence they would be unwilling to sign the PPA. Unlike the earlier dispensation when PPAs were done through memorandum of understanding [MoU] and virtually thrust on SEBs/PDCs – as a fait accompli – under present competitive bidding route, this is ruled out.
Indeed, in a scenario of overall surplus availability [with supply from renewable sources also adding to the kitty] several state governments having offers for supply at lower tariff have already declined to sign PPAs with such projects. Some have even threatened to cancel existing agreement on the ground that the tariff is high. Further, developers who do not have PPA and hence, no assured off-take of power, face dim prospects of getting fuel linkages as in that case, the supplier [read: Coal India Limited or any of its subsidiaries] won’t be sure about payment.
Finally, there are projects which never reached the commissioning stage. These are ones where the promoters indulged in reckless use [‘misuse’ is a better phrase] of public money. Such projects cannot be rescued even under most favorable supporting environment [signing PPA at high tariff and assured coal supply] which itself is most unlikely. Thousands of crore of public funds invested in these projects – with total capacity of 10,000 MW – have simply gone down the drain.
The balance 30,000 MW capacity cannot be saved either as it would be impossible to find a SEB/PDC who would be willing to pay higher tariff. This is all the more because under UDAY [Ujwal DISCOM Assurance Yojna], distribution companies have to comply with stern conditions to ensure that the realization from sale of electricity fully covers the cost of purchase and distribution. If, at all a SEB/PDC decides to buy high cost power, it won’t be able to comply with the conditions.
The problem gripping the mentioned power projects and resultant NPAs is the unavoidable outcome of a virtual siege that a cozy relationship between dubious businessmen and corrupt politicians/bureaucrats had laid on state owned banks. Under a devious arrangement/understanding, the former enjoying tacit support of latter managed to get loans from PSBs without conducting due diligence and assessing viability of projects. With loans given in such casual manner, artificial inflation in project cost could easily pass muster.
Now, the government may have ordered criminal action against promoters who cheated banks but how does it help in recovering the bank money. True, it is also working expeditiously to deal with NPAs under IBC [Insolvency and Bankruptcy Code] [2016] but power plants are not finding bidders. Even when, the lenders eventually get one, the haircut [a fancy jargon for loss] will have to be steep.
The damage done due to wrongful actions of banks acting on diktats of corrupt politicians-bureaucrats in the past cannot be undone. However, for the future, the government must take all possible steps to ensure that the past does not repeat.