PSUs ~ Current Models

PSUs have played a humongous role in building the infrastructure of our country. The model which some of the old timers (people around 50 plus today) are familiar with are the additional role they played in generation of employment, building of local infrastructure such as hospitals and schools. NLC is a standing example. Slowly they became tools in the hands of politicians to scurry favours starting from favouring their constituencies for the next capital investment to influencing employment etc.

Slowly the PSU transformed to behemoths and became a sink which draining the public exchequer.  So we saw action taken to wound down some of them.

We also witnessed in the utilities sector emergence of some central utilities like NTPC, PGCIL, NHPC, NHAI and so on so forth. These PSUs are different in as much as they were incorporated by the centre, but as per the concurrent list their main functions fell in the domain of the states. So here we have central utilities built with the cost of equity paid by the state and still not receive any return on the equity, while paying for the services at market determined rates, linked to international bench mark! Over the years, these central utilities have become behemoths and now a need is felt to encourage Private sector.

So we witnessed a burst of growth in private sector investments especially in two sectors Power Generation and Roads. But that has come down to a trickle owing to various factors. Now efforts are being taken  to entice the corporate back and hope their appetite will emerge.

In the process, some of the initial roles of PSUs and prime responsibilities got hijacked and we saw unparalleled imports, which has built some of the huge global brands in South Korea and China. This made the Indian corporate to attach themselves to some of these corporations for sustenance. Services rendered by Indian corporates, their accountability to the Indian corporate tax structure never figured in the factors, which weighed in the awards of contracts and investments. Chasing foreign borrowed capital, we threw some of our main strengths ~ namely the size and the strength it offers to negotiate a deal which would benefit the large mass of Indian citizens. 'Made in India' was given the go by. Thankfully once again we hear many nosies about the theme 'Made in India'.

What else can be done to correct, and bring back the focus the roles PSUs must play:

• Any capital project constructed in Indian soil shall be done by a Firm registered in India and hence are assessed under the Indian Tax structure. 
• Open siphoning of margins through 'High Sea Sale' contracts and 'Divisible Contracts' should be done away with.(Any way some of the projects are assigned the exalted status and claim exemption). 
• Each major infrastructure project generates employment, in the manufacturing sector, services sector and construction sector. PSUs are aware and actively encourage, under the garb of 'L1' bid, firms to work and optimise the cost of engagement of labour. There must be mechanisms which ensure that 'Direct' employees are employed and even 'Contract' labour are eligible for all the benefits. Open recognition of the cost of engaging 'Direct Labour' shall be factored for evaluation of a bid. They shall ensure that the employees who build the project, including the unskilled work force derive all the benefits starting from wages. These should be budgeted and expenditure monitored and shall become reportable in the statements of PSUs. 
• Cost benefit analysis should include factors like long term benefits to the Economy. Amounts spent in local area development including providing public health services attached to a Power Generation project of a PSU for instance, must be able to access cheap credit from the special schemes of the centre or grants. 

PSUs have become more important for their ability to raise capital and the other more important factors are being ignored. It is time a major structural reengineering is done and their role is substantially modified.

Disinvestment a different Perspective

All the assets which are currently considered as Navaratnas have reached that status due to the protection they enjoyed during the start up stage through various tariff protection measures and in some cases by denial of permission to create additional competing capacities by governments diktat. It is therefore not wrong to say that these assets are created through Regulation efforts and not necessarily through the enterprise efforts of the government. Such being the case, it is but obvious that the ownership will have to be transferred to the public who has basically suffered to create this asset. One cannot wait generations to reap the benefit.

It will be therefore appropriate to offload the Navartna equity to individual citizens who have suffered to build these capacities and have the first moral lien on these assets. So the return of the equity to the public cannot be considered as "Dis Investment". By this process funds are garnered for creating similar assets, which over a period of time can again be returned to citizens thereby creating a value creation. In appropriate naming has vitiated the entire process of returning the assets to the true holders.

Ultra Mega Power Projects - A great Idea for the Indian Power Sector

The caption is misleading as the author is actually in favour of locating Mega Power Projects along coastal basis. His main concern is water and hence he prefers coastal based power plants.

Given the current Power deficit in India we need to have many more of these Mega Power Projects to provide even a single lamp connection to many of our citizens' households. While the Distributed generation modules will survive in a grid backed up by good base load generating capacity, the model will fail miserably in our country where we have severe shortages.

Mega projects bring with it scale of operation and high level of automation and latest technology. If we have to achieve 4000 MW of generating capacity even by 3 to 4 plants as suggested by the author we will add up a minimum of 3 times the labour force required to operate a 4000 MW power plant. And that is sheer waste and even in a populous country like ours we are running short of qualified staff today.

It is therefore in the interest of the nation that power professionals appreciate the need to bridge the gap quickly and work for it.

Economic Renaissance in the Developed World

Economic Renaissance is sustainable and the Developed world is looking up to India to bolster their economy through the improved performance of our economy and increased consumption. Just to illustrate - Today our earnings in foreign exchange is across a much wider spectrum as compared to a decade ago. While there used to be only remittances from sweat labour from across the middle east and supporting funds from non resident residents to the near and dear ones, today Indian born and international entrepreneurs are returning to their mother land with ideas, systems and seed capital. This is setting in a new chain of growth which will take our economy to new levels, leave alone sustain. Their presence and their interactions with the world clearly demonstrate the sustainability of the growth story, for these are definitely not "Fair weather Friends".

True any mismanagement of the macro economy can undo part of the growth story. But the current government has not given any indication of such actions. On the contrary, the government owned Goliath the Indian Railways has returned surplus and is set to surpass its own stellar performance last year. The investment in the aviation sector is returning surplus as well.

The capacity addition being seen in the Capital goods industry, the booming service sector and the additional investment being planned for in the Retail, Infrastructure through Public Private participation, indicate that the Indian corporate and international private fund managers have a diametrically opposite perception from that of IMF. They believe in the Indian growth story and are eager to participate at the first opportunity, rather than wait and be left behind.

Increasing appetitie for Investments in Indian Power Sector

With the "Electrifying Start" achieved in the implementation of Ultra Mega Power Projects, it is clear that the present policy initiatives has met with more than anticipated response. This is a land mark event in the country and will clearly be remembered for times to come.

Two significant changes have been heralded in this start. One; it is now clear that there is an enormous appetite for investments in the Power Generation Segment. Given the mind set of some in the government who still complain of lack of response of the Private sector in participating in the addition of more than 120,000 MW of Power Generation, the current response of Indian Companies with the support of the international equipment manufacturers and investment agencies, should be satisfying.

Power sector is unique with its own typical issues. It cannot be compared to Automobile Industry (as done by a senior government official in a conference recently) for the Dealers in the Power Sector decide what the consumers get and not the Consumers or the Producers.. The freedom the consumer enjoys in choosing the Automobile he wants, whether it is the class or brand, it comes to Power, the same consumers do not have the luxury of choosing between a Maruti or Tata or Honda, even for a given segment. He has to live with the dealer with whom he is connected or generate on his own. In the other industry Dealers have a limited role and the market is governed by consumer demands and the Suppliers capabilities. To add to the trouble, in India the "Power Dealer" (Distribution Licensee / Board) can simply report that he has lost 60% of the goods delivered to him! Can a dealer in Cement or Automobile report a similar loss and still continue to be in Business?

Given this scenario where the Producers cannot choose consumers, it is necessary for the government intervention to guarantee returns on investment or provide policy initiatives where the investor will be able to recover his investments and see guaranteed returns. When such micro management takes place, then the prices are artificial and are not typically governed by Free market dynamics. And the prices tend to be higher when the Public sector takes the major role as being in house, the Prices are not put through hard negotiation. It is therefore to the Credit of the persons at the helm of Ministry of Power (MoP) for introducing a high degree of competition and bringing in an era of Ultra Low Prices.

The Second important change that this Start will bring in is a significant improvement in Public Sector Operations in this sector. With this policy initiative the Generator is given the option of integrating two distinct elements in the value chain namely mining and Power Generation. The price now received is stripped of the high cost on both these counts. NTPC which had teamed up with BHEL for equipments has quoted a price in excess of Rs.2.00 per unit while three Private sector Companies have submitted offer less than Rs.1.40. To understand the magnitude of the impact one needs to work out the additional cash flow which NTPC tariff would have generated in the 25 year life cycle of the plant. Taking an average PLF(Plant Load Factor) of 80% with 8000 hrs of annual operation, the amount is Rs 45000 Crores for 4000MW. Some would argue that "that is the kind of inefficiency which the country is bearing today".

The equipment maker BHEL has to review the cost of his operations as he is no longer operating in a protected environment. NTPC, should sharpen its skills on mining and also negotiate finer rates of finance. I am sure there will be lots of introspection in these companies and there future actions will factor in these market dynamics.

All of this euphoria will quickly disappear if the planned evacuation arrangement (over which the Generating companies do not have any control) do not come up in time. With the MoP planning to do a similar act in the Transmission segment, part of this issue will be addressed. Focused initiatives are needed to strengthen the sub transmission segment as well.

The MoP literally talked down the Prices in this bidding round, when they indicated that their expectation of the Price for Sasan power should be in the region of Rs.1.50 to Rs. 1.60 per unit; a reserve price of sort. Any serious player would not have quoted more than that and the results bear this out. It is of course another thing that the government corporations which derive the maximum support from the MoP do not seem to concur with this view!

With such significant changes the Indian consumer can clearly look forward to an illuminated future.

5 Points Overlooked by FM

The article Five points someone overlooked made for an interesting reading. I believe that the FM gave each of these five proposals a due thought and rejected it. And here is why?

1. Excise Duty on cars: Passenger car segment has seen an overall growth of 23 % on the previous year and that too on a year when they have seen their input costs escalate. Across the sector they have reported healthy earnings and the sector is exiting enough to attract major players with the existing duty structure. So why reduce and loose revenue?
2. Focus on Tourism Infrastructure: The hotel industry was not waiting for a 5 year tax holiday to launch new projects. They are waiting because of the more than 80 clearances which they have to take from governmental organisations starting from Central to state government departments, to corporations to local police. If it is a high rise building you need a clearance from the Aviation department and if you are on an important road the Highways! Clear these hurdles and increase taxes. You will still not be able to discourage investors rushing in. The average room tariff of our hotels is after all comparable with the some of the costliest in the world!
3. Duty Structure on Petroleum Products: The case here is driven by the need to generate enough revenue for a rainy day. Imagine a situation when the Oil price stays stable at US $ 75 per barrel or above. The impact on our economy will be severe; may be the FM thought it prudent to pass on further cuts at that time! The real cut in this sector should come from states who never are convinced about it. May be we have to wait for the GST for an overall taxes reform in this sector.
4. Promoting savings: I do not agree that this has been missed out in the budget though the author may have his reservations as to the extent. tax deductions on Premium paid on Medical Insurance has been increased and the interest costs paid on educational loan taken for one's spouse and Children are tax deductible. Satisfying enough for a middle class person.
   
5. Abolishing DDT for Holding companies: This wish, I tend to compare with the wish for reduction in taxes on tobacco. Holding companies are vehicles which serve to enrich the investors and work around the regulatory, taxes network. To reduce taxes for such Holding companies will translate to encouraging their breed. Let us encourage more transparency and may be increase the taxes for these companies.

Infrastructure Upgradation

The author's comment that the enabling environment is essential for a successful implementation of infrastructure up gradation is appropriate and is the accepted norm. However to imply that nothing has been done in the ground will belittle the achievements we are seeing in terms of competitive offers coming in by way of "Negative Grants" in highway projects and investors appetite for large Public Private partnerships in Airports and Mega Power Projects.

Even to achieve the targeted completion of the projects already commenced, increased mechanisation is needed. This would call for mobilising large, sophisticated construction equipment machinery. In some capital equipment segments our existing capacities are fully booked and we need to look at imports. Developers, as in the case of Power Projects, make commitments to offer competitive prices based on imported equipments with better efficiency and earlier deliveries.

Government has therefore done the next correct thing to announce the roll out of support for these initiatives, by committing to use the forex.

As regards, the reserves, from the way in which we are growing in many sectors, it is just a question of time before we have many more Dollar streams starting from the additional Refining capacities being added to manufacturing capabilities in the auto ancillaries sector to Telecom components equipment.