Neyveli Disinvestment

NLC Disinvestment – Way Forward – A Model


A performing Prime Minister and person responsible for spearheading India’s resurgence in the new millennium, is ready to move away from active governance; a Dravidian party which has just come back to Power and has a very grand agenda for decimating its only opponent including smooth transfer of power to the next in command is ready to put at stake its entire plan on this issue – NLC disinvestment. Such is the power of this issue that it requires a thorough analysis of the issues involved, a possible solution and its impact on the entire reform process.

To start from the origin, the NLC web page takes you back to as early as 1828 when the first traces of “Low Calorific value of Coal” deposits was found. It took years of investigation and policy making for the birth of a commercial enterprise to exploit these “traces” which by now had been identified as “2000 Million Tonnes” of Lignite reserves. So in 1956 Neyveli Lignite Corporation was born with Mr.T.M.S.Mani as the chief executive of the project. It stands today with an installed generating capacity of 2490 MW supporting the southern grid with its steady and sustained performance of XX % PLF.

Lignite is a soft brown mined fuel found in distinct areas through out the globe. Its characteristics in terms of composition and calorific value is between “Coal” and “Peat”- a state of the rotten vegetable mass buried over many years. The calorific value of Lignite is 2450 Kcal/ Kg as against 6500 Kcal /Kg for high calorific Coal. But the moisture content in Lignite is very high -53% which is one of the major issues in burning it. It however ahs the advantage of being “Free Burning” with low ash content. Once the high moisture content is addressed (through Air Drying) lignite is suited for direct burning. With the identified reserves in our country of lignite and the growing appetite for energy in our country “Lignite” as one of the primary sources of Power Plant fuel is undisputed.

With the union government’s plan to proud power for every one by year 2012, every source of power which is owned by us and not dependant on imported fuels needs to be exploited. It is therefore necessary to leverage the fast technical expertise available with NLC in the areas of Open cast mining, handling of Lignite, dealing with sub terrain water tables, consistent Power generation over the years with this high moisture fuel and last but not the least managing & minimizing the environmental impact of the entire cycle of mining to Power generation. One must also not underestimate the cash surpluses that are generated (which can no doubt be maximized by further improved performance and financial reengineering), which can be utilized to build new capacities.

The government is therefore correct in wanting to do something about it; but has not quite approached the subject. As Sri. N.Ravi in his recent article “Half Done” pointed out, the political class is correct in implementing the reforms but are not convinced that it will bring the votes which they badly need. On the contrary they are mislead with the scare that these reforms are driving their voters away from them. The reforms therefore “need to be packaged”.

How does one go about “packaging” the disinvestment plan? The main issues the political class are confronted with today are

· Family silver is sold cheap
· Not sure about future as ownership change may alter the basic character of the institution and hence
· Employees stand to loose their jobs; if not jobs at least they may loose the benefits which other wise they enjoy.
To address both these issues, we can look at how another great professional orgainsation addressed the similar dilemma and has come out successful. – L&T. Because of its performance and lack of ownership clout L&T was always a target for corporate raiders till the present management decided to pool their own strengths and that of the the majority shareholder Financial Institutions to make an enterprise which all of us are proud of. The management reviewed the asset base of the organisation and created value by demerger of divisions, which was pooled in to the shareholder’s wealth. Employees benefits were ensured for posterity through the L&T employee welfare trust.

To replicate the same model for NLC(or any such PSU), the following steps can be an option:
· Create 4 subsidiary companies de merging the main assets as under
o Mines
o Power Stations under two distinct groups – TS II and IA and TS I
o Package the large land available under a different company and create a dedicated industrial estate
o Future projects.
· Sell of the majority stake in two of the existing entities and plough back the proceeds as equity capital for the future projects. In the process you have a lean organization with a low equity base but large cash to spearhead investments in the booming power sector. In addition to the already identified future expansion plans the much talked about Jayamkondam Project, Srimushnam Project and similar such projects can be started immediately.
· Allow the personnel to choose and incentivise their cntinunace by providing schemes through the welfare trust.

Based on the current PEs enjoyed by similar companies and the real estate values, NLC will be able to generate much more than the required equity component for all their future projects. This unlocks the hidden value and provides the benefits to the rightful owner the “Employee” and the Government. It is also acceptable to the political class as they will launching new projects in the Public sector which will generate much more employment and overall growth which is their main concerns. Reformist economist Sri. Manmohan Singh is also happy as he is able to provide funds for development with out burdening the Revenue budget.