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The power majors

Print edition : Nov 15, 1997

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Despite the constraints placed on them by policies of liberalisation, the Navaratnas BHEL and NTPC have the potential to be the prime movers in any effort to revive the power sector.

V. SRIDHAR

THE two dominant Indian players in the power sector, the Navaratna public sector companies Bharat Heavy Electricals Limited (BHEL) and National Thermal Power Corporation Limited (NTPC), have borne the brunt of the Government's controversial power policy of 1991. However, the changeover to competitive bidding for power equipment and supply contracts offers the two giants a window of opportunity, despite the Government's failure to provide financial and policy support to them.

BHEL is India's leading power equipment manufacturer, and has established its competitiveness against multinationals in the field. The NTPC generates a fourth of all electricity generated in the country; besides, as the least-cost bulk power generator in India, it sets the floor price for other power producers.

The new power policy was accompanied by a squeeze on public investment in the power sector. The Eighth Plan outlay for the power sector was fixed at 18.33 per cent of total Plan outlay. In comparison, in the Sixth and Seventh Plans, the Plan outlay for power accounted for 20.13 per cent and 19.04 per cent of the total. The actual expenditure during the first three years of the Eighth Plan was 15 per cent lower than the Plan outlay. During the Eighth Plan, additional capacity of 30858 MW was expected to be added. However, only 17667 MW is likely to be added - a shortfall of more than 40 per cent. The vacuum effect caused by the failure of private investment to compensate for the fall in public investment has raised fears of a serious crisis in respect of infrastructure.

Despite the constraints placed on them by policies of liberalisation, BHEL and the NTPC have the potential to be the prime movers in any effort to revive the power sector. The sheer scale and range of their operations ensure them a place in any major expansion of power generation capacity. Fears of a sharp increase in the price of power generated by private power companies have made the Government replace the earlier policy of negotiated power projects, which allowed cost-plus pricing of electricity, with a policy that is based on competitive bidding. While the revised policy offers the two companies a more level playing field, aspects of current policy cause concern.

In the case of BHEL, its indigenous capability is perceived to be threatened by the alliances it has been encouraged to forge with multinationals. There is also concern that NTPC, pushed towards adopting an aggressive market-oriented posture, may raise the floor price of electricity, resulting in an allround increase in basic energy prices. Some executives of the two companies fear that the multinational- and market-friendly drive may provide the basis for future privatisation.

BHEL, the pioneer in the manufacture of power generation equipment in India, is among the top six such manufacturers in the world. It also ranks among the top 12 engineering companies in the energy sector.

In February 1947, the Advisory Planning Board recommended that an indigenous base for electrical machinery be established in India. In 1948, the Sir J.C. Ghosh Committee reiterated that a manufacturing base for electrical equipment be laid in the public sector. The Heavy Electricals (India) Ltd was established in Bhopal in 1956 to manufacture transformers. In 1964, after BHEL was incorporated, other units were established at Hardwar, Hyderabad and Tiruchi with technical assistance from the Soviet Union and Czechoslovakia.

In 1974, the Bhopal unit was merged with BHEL. It became the only company in the world to have integrated facilities to manufacture power project equipment - from boiler to turbine to generator. The company now has 14 manufacturing units across the country and employs 67,000 persons. It manufactures equipment for coal, gas, nuclear and hydel power plants. BHEL-manufactured generating sets, with a capacity of nearly 55000 MW, account for about 65 per cent of the installed capacity in India. Being the only one of its kind in the region, BHEL also accounts for a significant portion of Malaysia's power generation capacity.

Despite being focussed on the power sector, over the years its capability has extended far beyond. Indeed, this is perhaps what has saved it from the effects of the new power policy. Apart from generators, turbines, transformers and other equipment for power plants and power stations, it manufactures locomotives and traction equipment for the Indian Railways, valves for application in oil exploration and other areas, pollution control equipment, boilers for a range of uses in industry, heat-exchangers and pressure vessels and many other products. It also offers turnkey solutions to establish power stations and is a leading participant in the market for cogeneration equipment.

The concept of self-reliance, an active ingredient of government policy after Independence, laid the basis for BHEL's success. Financial and policy support enabled BHEL to expand capacity to meet Indian requirements of a rapid increase in power generation capacity. Being the sole manufacturer of its kind in the country, it enjoyed viable scales of production. Today, BHEL has the capability to produce 6000 MW per annum. A senior BHEL executive told Frontline that in order to utilise its capacity fully, and, taking into account BHEL's delivery cycle, the company requires annual orders of about 12000-15000 MW of power equipment.

During 1996-97, fresh orders worth Rs. 7,188 crores were placed with BHEL and the outstanding orders were worth Rs. 10,600 crores. Even though the orders at hand increased by 27 per cent when compared to the previous year, BHEL's capacity is still underutilised. During 1996-97, the order inflow for equipment for the power sector was Rs. 4,048 crores, including Rs.2,556 crores worth of power plant equipment. The under-utilisation of capacity in this segment remains.

Faced with the new power policy, BHEL utilised its capacity to produce equipment for the industrial sector, that is, for the non-power sector. Its Tiruchi unit in Tamil Nadu, for example, has produced boilers for use in a range of industries - from paper to petrochemicals. BHEL's equipment supplies to the utilities in the power sector accounted for 62.34 per cent of its turnover in 1991-92; BHEL's turnover from the power sector now accounts for 50 per cent of the company's turnover.

Ashok Rao, president of the National Confederation of Officers of Public Sector Undertakings (NCOA) and an executive in BHEL, argues that notwithstanding the diversification achieved by the company, BHEL's "survival as a national enterprise depends on its ability to sustain its commercial operations as a supplier of equipment and services to the power sector."

Prior to 1991, BHEL's unrestrained access to the Indian market enabled it to enter into technical arrangements with multinational companies for whom BHEL was the only route by which to reach the Indian market for power equipment. Thus, although its tie-up with Siemens imposed certain restrictions on BHEL, it still had first access to the Indian market for the supply of power equipment. Siemens could not operate on its own in the Indian market. This "monopoly" status brought significant gains. Between 1977 and 1997, BHEL bagged 86 per cent of all power equipment contracts in India that were financed by multilateral agencies in international competitive tendering. In all these cases, BHEL did not utilise the 15 per cent price advantage that tender specifications gave it as a local supplier.

Under the earlier regime, BHEL sourced technology from foreign companies, upgrading it to meet Indian conditions. In the changed environment, BHEL is directly in competition with these companies. Moreover, BHEL's research and development (R&D) expenditure is small compared to its competitors: BHEL's R&D budget was $14 million in 1994, compared to Siemens' R&D expenditure of $4,844 million the same year. A senior BHEL executive says that the lack of funds has meant that "scarce resources have been channelled to applied research," for instance, to develop technologies suited to utilise the vast Indian resources of poor-quality coal in power plants. BHEL's development of fluidised bed combustion (FBC) technologies has applications in the utilisation of low calorific value fuels for power generation. Its work in this area is comparable to international achievements in the field.

BHEL does not suffer from lack of competitiveness; its problems are financial. Dues from customers, including State Electricity Boards (SEBs), other public sector units, the Railways and others amounted to Rs. 1,800 crores (in mid-October 1997). This amounts to almost one-third of its turnover in 1996-97. The persistence of outstanding dues hampers its ability to raise resources in the form of debt from financial agencies. Moreover, BHEL's inability to extend credit while supplying equipment puts it at a disadvantage vis-a-vis its multinational competitors. Equity participation by equipment suppliers is a norm in Independent Power Projects (IPP), but here BHEL's lack of financial muscle puts it at a disadvantage.

Ashok Rao argues that lack of adequate funding for capital-intensive power generation, transmission and distribution systems has forced Indian power utilities to buy equipment from countries that fund specific projects. Thus, multilaterally funded projects are based on competitive bidding and bilateral credit is tilted towards purchase of equipment from manufacturers from the same company as the source of funding. Ashok Rao says that "commercial credits from Germany stipulate conditions for import from Germany."

From the standpoint of international power equipment manufacturers, the Indian market for power equipment is significant - the size being larger than the entire European market minus the United Kingdom and Germany. Ashok Rao said that the recession in the power equipment market had resulted in a series of mergers that created giant conglomerates. Asea merged with the Swiss company BBC to form ABB; GEC merged with Alcatel Alsthom to from GEC Alsthom. Other power majors such as Siemens, Hitachi and Mitsubishi are diversified companies, with power equipment being just one of their many products.

BHEL's operating profits as a percentage of sales for 1994-95 compares very well with those of multinational power equipment manufacturers: while GE reported a percentage of 16.2, BHEL reported 14.6 per cent. BHEL's performance is particularly creditable because the multinationals have a higher level of consumer goods in their portfolio of products where profit margins are higher, whereas BHEL is mainly a supplier of investment goods that have a longer production cycle and larger capital outlays. Thanks to the legacy of self-reliance, BHEL's lengthy presence has meant highly depreciated assets. This, according to Ashok Rao, has protected BHEL's profit margins.

In his speech at the annual general meeting, BHEL chairman R.K.D. Shah said that the company would upgrade through in-house adaptations, "know-how and know-why" that has been obtained from leading companies. He also said that state-of-the-art technology would be brought in through licensing arrangements with "world leaders". Shah said that BHEL's two recently formed joint ventures with Siemens and General Electric would "source hardware and services from the partners, thus creating additionality of business." The Navaratna status, which allows the introduction of eminent part-time directors into the BHEL board, is expected to facilitate the formation of more such joint ventures.

Regarding problems in arranging project finance, Shah is optimistic that the recent line of credit offered by ICICI (Industrial Credit and Investment Corporation of India) would provide "sales aid finance" for BHEL's supplies to independent and captive power plants. In line with the new thrust on developing tie-ups, BHEL made a successful joint bid for the 630 MW Bakreshwar power project in association with Itochu of Japan. It is planning similar arrangements for an IPP for a 420 MW plant at Raichur.

A recent study by UTI Securities Exchange Ltd found that BHEL, with its mature power equipment technologies, has distinct advantages. The study says that the "well-entrenched position of BHEL serves as a major deterrent to the possibility that all global majors would impose a technology regime on BHEL."

THE NTPC, India's biggest power utility, was established in 1975 to strengthen regional grids. It utilises coal near the pitheads for power generation, the reasoning being that generation at such locations is a cheaper alternative to transporting coal or transmitting power across the country. Most of the funding for its projects have come from the multilateral agencies, primarily the World Bank.

However, immediately after the new power policy was announced in 1991, The NTPC was not allowed to bid for Independent Power Projects (IPPs). Some of the projects allotted to it earlier were handed over to private developers. During the same year, the World Bank, the primary agency in respect of the funding of NTPC power projects, refused funding, alleging that the company was in poor financial health.

The NTPC now has 12 coal-based and seven gas-based power projects. The use of coal, the cheapest and most abundant resource for power generation, has enabled it to sell power at the cheapest rate in the country. The average cost of power generated by it is a rupee a unit; at Korba in Madhya Pradesh it is only 64 paise. The Plant Load Factor (PLF), indicating the extent of capacity utilisation of a power plant, is far higher than the national average. Last year, the average PLF of its power plants was 77 per cent, despite the poor performance of plants in the eastern region where the PLF was 43 per cent. To improve the situation, there are plans to evacuate surplus power from the eastern region to the northern and western regions.

The NTPC's first 200 MW unit for the 2000 MW Singrauli power project in Uttar Pradesh was commissioned in 1982. By 1983-84 it had a capacity of 1000 MW, but the real spurt in growth came between 1987-88 and 1989-90, when 6713 MW of capacity was added. By this time the mega projects at Singrauli (2000 MW), Korba (2100 MW), Ramagundam (2100 MW), and Rihand (1000 MW) were fully completed. Since then, however, capacity has not expanded at the same pace (see chart). It now has an installed generating capacity of 16795 MW - about 19 per cent of the entire power generating capacity in India. However, it produces about 25 per cent of the electricity generated in the country.

The restructuring of the power sector and the 'rationalisation' of tariffs that accompanies it, is now being implemented at the level of SEBs. The NTPC is also likely to follow such a course. This will provide the Corporation avenues for rapid growth in revenue.

SEBs' arrears to the NTPC have mounted. The arrears now stand at Rs. 3,800 crores, and, inclusive of surcharge, the amount is Rs. 6,200 crores. The NTPC, the largest corporate recipient of World Bank funding, has been told by the Bank that fresh assistance will become available only if the dues from the SEBs are cleared.

Some of the SEBs, such as those in Andhra Pradesh and Orissa, are being restructured through the creation of separate companies for generation, transmission and distribution. A more moderate option advocated by critics of such a course is a modest increase in tariffs, which, they argue, will bring down the losses of SEBs. Ashok Rao argues that the SEBs were in "robust health" till the 1980s. He says that the SEBs were made to bear the burden of the "populist policies" of the Government; they were made to provide subsidies on behalf of the state. Critics argue that the same pretext, of outstandings from SEBs, is being extended to the NTPC so that the Corporation can increase tariffs.

The NTPC recently indicated that it would prefer to be freed from the administered price mechanism (APM) that governs its sale price to SEBs. Its demand is similar to that planned for the oil companies after price deregulation. The NTPC has been allowed to set tariffs at levels that guarantee it a 16 per cent rate of return on new power plants. The Navaratna status is likely to help the company proceed with plans to break up the company into separate subsidiaries, each operating as a profit centre. The reasoning is that the loss-making units will be separated from the profit-generating units.

Although the NTPC has been referred to the Disinvestment Commission, the Corporation's chairman, Rajendra Singh, is on record as saying that he would prefer disinvestment after the division. The hope is that the division would fetch better prices for shares upon disinvestment.

The company's projects in Kayamkulam in Kerala, in Yamunanagar in Haryana, in Mangalore (where the controversial Cogentrix project is now located) and another controversial project, the Ib Valley project in Orissa, were all handed over to private developers after the Government announced its new power policy. The projects in Kerala and Haryana are now back with the NTPC because no private promoter wanted to undertake them.

Despite its aborted partnership with Spectrum Technology for the Kakinada project, the NTPC is now keen on forming a joint venture with a company specialising in the lucrative renovation and modernisation (R&M) business in the power sector. Asked whether an alliance with BHEL may have been preferable, Rajendra Singh told Frontline that BHEL had entered into an alliance with Siemens in this segment.

The NTPC plans to add 6270 MW of generating capacity during the Ninth Plan period and a further 8000 MW during the Tenth Plan, aiming for a total capacity of over 30000 MW by the end of the Tenth Plan period. The outlay for projects in the Ninth Plan is estimated to be Rs. 19,000 crores. Of the additional capacity in the Ninth Plan, 3920 MW of capacity are in coal-based projects and the remaining for projects utilising gas and other fuels. About 40 per cent of the funds for the projects are expected to be raised in foreign currency from multilateral agencies and a further 10 per cent in the form of suppliers' credit if equipment is sourced from the multinational power equipment companies.

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