About 46,000 MW of power projects are facing viability issues due to lack of long-term buyers for electricity, inadequate fuel supply, and aggressive bidding to win projects and coal blocks, CRISIL, the leading rating agency, has said.

Of this, 36,000 MW are coal-based projects within which tariff under recovery has impacted 20,000 MW of capacities, while the rest are reeling because of inadequate feedstock and poor electricity offtake by discoms. And 10,000 MW of gas-based projects have become unviable because of dwindling fuel supplies from the Krishna-Godavari basin.

“Total loans to these stressed generation projects are currently about Rs.2.1 lakh crore. A sixth of it, or about Rs.35,000 crore, is for projects which have the cushion of a strong parent. Additionally, projects with loans of Rs.1 lakh crore could become viable if their payment profiles can be structured appropriately. This leaves the remaining Rs.75,000 crore of loans at risk,” said Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings.

Another Rs.1.9 lakh crore of debt is owed by weak discoms for which moratorium on principal repayment based on a financial restructuring package (FRP) announced in 2012 ends in the current and next fiscal. Till date, government support has prevented these discoms from turning weak. Assurance of continuing financial support is necessary else this debt, too, can be at risk.

After the FRP, states and discoms did not follow through fully with measures to improve financial discipline and commercial orientation. The FRP, thus, provided only a liquidity respite. Discoms will continue to face liquidity pressure till there are appropriate tariff hikes and a significant reduction in aggregate technical and commercial (AT&C) losses from the current level of 25.4 per cent.

CRISIL believes significant efforts to augment domestic coal production and improvement in the ability of discoms to sign long-term PPAs are critical going forward.

While the government has taken some positive steps to improve fuel availability through coal block auctions and gas subsidy, these provide only limited relief and the plant load factor of capacities commissioned after fiscal 2009 will remain sub optimal at 45 per cent.

And if discoms remain financially fragile and stay away from signing power purchase agreements, capacities at risk will increase.

Sudip Sural, Senior Director, CRISIL Ratings, said: “Annual tariff hikes of 10 per cent over the next three years and a reduction of at least 200 basis points in AT&C losses are necessary for discoms to break even in the medium term. As for sector health, improving agricultural metering and feeder separation, timely tariff filings and financial reporting, focus on power purchase cost optimisation through accurate demand estimation, and signing more PPAs are necessary.”

It is pertinent to note that provisions on timely tariff filing and pass through of fuel and power purchase costs are a part of the amendments proposed in the Central Electricity Act, but success here depends entirely on implementation by state governments. And paving the path for privatisation through distribution franchisees and evolving the open access mechanism would induce efficiencies.

Remove entry barriers in defence procurement

In the spirit of ‘Make in India’ programme, the government should set an indigenisation target within a timeframe to encourage domestic companies to take part in manufacturing of defence equipment and facilities, Assocham has said. It is only then the homegrown companies would be able to participate in the multi-billion dollar defence procurement sector.

In a detailed representation submitted to the Ministry of Defence, the chamber said, “Stringent conditions which block the entry of domestic firms into the defence procurement of the government should be diluted. This should be done in order to make it easier and more attractive for Indian vendors who are investing in high-risk areas.”

It said the existing arrangement of contracts to be awarded to defence public sector undertakings on a nomination basis proved to be a disincentive for the private players, “thereby leading to lack of level playing field for the private players.” Assocham recommended that the provision for nominations should be deleted/restricted to clearance by the Cabinet Committee on Security.

“With billions of dollars worth of defence contracts going to foreign firms, the Indian firms are denied access to the same, mostly on the ground of lack of track record and experience. It is a chicken and egg situation,” the chamber noted.

“Unless, the homegrown firms are allowed entry, how would they get experience and track record? The entire mind set and system of procurement should be changed in a manner to support domestic industry and entrepreneurship. Several Indian companies like Mahindra and Mahindra, Tata Group, Ashok Leyland and several others have built capabilities which are world class. However, more players need to join the defence purchases,” Assocham Secretary General D.S. Rawat said.

The trade body also said eligible private sector players were currently not allowed to participate in a majority of programmes where they had both the technical and financial competence to deliver the project because of nomination of such programmes to defence PSUs. “Nomination in such cases is detrimental to the objective of creating a vibrant private sector defence industry, which is one of the prime recommendations of the Kelkar Committee,” it stated.

In case a private sector system integrator meets the financial and technical capability specified in an Request for Information or Request for Procurement along with a minimum threshold specified for indigenisation for the project, then for such a firm not having a track record should not be criteria not to allow for the firm’s participation in the RfI/RfP process, the chamber added.

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