Funding crises in the power sector

The following piece appeared in livemint.com on 14th March 2008:

India’s renewed attempt to revive power sector reforms, promoted by the Planning Commission, will not fly as state governments are rejecting the proposal that requires them to provide sovereign guarantee to the Rs1 trillion loans that state electricity utilities, in both transmission and distribution, will have to raise from financial institutions to move the needle.
Power shortages due to limited capacity and growing electricity theft have been identified as one of the key infrastructure bottlenecks threatening India’s ability to sustain the 9% per annum growth rate recorded in the last two years.

About 40% of power generated in India continues to be lost due to theft and pilferage. Earlier, the Planning Commission had rejected a model, proposed by the Union power ministry, under which the Centre would provide Rs51,000 crore in loans directly to state electricity utilities to finance investments badly needed for the sector’s reforms. If the utilities do adhere to the specified benchmarks, the loans owed to the Centre will be converted into grants for the respective state governments. Taken together, the divisions in government have put the brakes on India’s power sector reforms, even as 40% of every 10 units of power generated in India continues to be lost due to theft and pilferage. The country has an installed capacity of 141,000MW at present.

As a result, the ruling United Progressive Alliance has not been able to come up with a fresh programme ever since the accelerated power development reforms programme, or APDRP, lapsed a year ago. “We are not in favour of the loans given under APDRP as gross budgetary support from the government, as argued by the power ministry. We want the state utilities to raise finances on their own from financial institutions such as Rural Electrification Corp. Ltd and Power Finance Corp. Ltd, for which the state government’s should give sovereign guarantees,” said a Planning Commission official, who didn’t want to be identified.

APDRP was created for upgrading the distribution system, minimizing transmission and distribution losses, improving metering, and assigning responsibility for realization of user charges. However, it has grossly underperformed as it has not been able to bring down the losses to 15% by the end of 2007 as originally targeted in 2000-01, when the programme commenced. Power sector officials of Tamil Nadu, Andhra Pradesh, Bihar and Karnataka, who didn’t want to be identified, say that since states have other work commitments for which resources have to be raised, giving sovereign guarantees is not the way forward.

“The Planning Commission is absolutely right. APDRP is a questionable investment today even though it is the flagship programme of the government. The ways that the funds have been utilized need to be revisited. Providing grant funds is a counter measure as the power sector is an economic sector rather than a social sector. Grant funding is fine for rural electrification, but not for this,” said Shubhranshu Patnaik, an executive director at audit and consulting firm PricewaterhouseCoopers

Indian bureaucracy has two serious problems. Excessively complicated mind set AND complete lack of coordination. The Planning Commission, the Power Ministry and the Finance Ministry all are & will have their say on the financing issue but no one is going to call in the RBI or consult the private sector. After all the future of the power sector is most critical for industry and ordinary citizens, alike. Should not there be more discussions in the public domain ? Decisions on such issues should be taken transparently and understood by us. I am sure there are enough International Banks, even in this choppy market, who would be happy lend to established power players in India. (Lets not forget that our interest rates are so very attractive). But please recall we have squeezed the foreign debt maket dead. RBI in its guidelines issued in August 2008, when everything every where was booming, virtually strangulated the debt market by restricting raising of funds to a maximum of USD 20 million through the automatic route and mandating RBI permission for any larger debts. It is widely held that no approvals have been granted ever since by the RBI for any borrowings by the private sector.
So that is how we create a problem and go on complicating it.

Hey ..someone is listening!

Economic Times / 21st April 2008

New Delhi: External commercial borrowing (ECB) norms may be relaxed for infrastructure companies. The finance ministry, which is in favour of creating a special window for such companies, is expected to push for a review of the norms with the RBI.
While the overall cap of $22 billion may remain, an additional limit may be set for these companies. The total amount raised through ECBs in April-February 2007-08 was over $26 billion, much more than the overall limit.
The finance ministry has been pushing for some relaxation in ECB norms for core companies ever since the curbs were introduced, especially on the end-use. A comprehensive review of the policy is expected next month, with senior officials of the finance ministry and RBI sitting together to discuss strategy.
The review of the norms comes at a time when domestic companies are facing higher interest rates at home and there is a growing demand for access to cheaper overseas funds. RBI continues to toe a hard line on excess liquidity with inflation ruling at a much higher level of over 7% as against its comfort level of 5%. A final decision on relaxing the norms would be taken by a high-level committee.
Infrastructure firms have been impacted by the restrictions placed on rupee spending of dollars borrowed overseas, since a large part of the expenditure is local in nature. A company cannot raise more than $20 million for permissible end-use. Under the current norms, all firms registered under the Companies Act can tap overseas markets for funds up to $500 million under the automatic route, subject to restrictions based on end use.
Realty firms setting up integrated townships have been barred from raising ECBs. The ceiling on interest to be paid on such borrowings was also lowered, making it difficult for small and medium sized companies to borrow abroad. It is unlikely that any relaxation will be made for this sector.

1st Aug 2008 / LiveMint.com

New Delhi: Anxious that sharply rising interest rates could force companies to postpone much-needed investments, India’s finance ministry is trying to help by working towards loosening rules involving companies’ ability to raise overseas debt through external commercial borrowings, or ECBs.
The government will now try to persuade the central bank, the Reserve Bank of India, or RBI, to agree to loosening ECB rules, primarily for maturity periods of five years and above, a senior finance ministry official told Mint. This will be done when RBI and finance ministry officials meet to discuss capital market issues shortly, he added, asking not to be named.
India’s current domestic interest rate level, coupled with a relatively immature bond market, could short-circuit investment plans of companies, the official added, explaining the finance ministry’s reasons to want to push RBI to agree to ease restrictions.
RBI officials couldn’t be reached for comment.
On 29 July, RBI, as part of its monetary policy review, hiked the cash reserve ratio, or CRR, by 25 basis points (bps) to 9%. The so-called repo rate was also revised upward by 50 bps to 9%. CRR defines the balance commercial banks need to keep with RBI. The repo rate is simply the rate at which it lends money to banks, thus infusing liquidity in the system. One basis point is one-hundredth of a percentage point.
The last time the Indian government loosened some ECB rules to help infrastructure borrowers was on 29 May.
Investment demand has been the most significant driver of India’s recent economic growth, according to the government’s Economic Survey of 2007-08. The annual economic growth in the past three consecutive years has been at least 9% or more.
In 2007, the finance ministry significantly tightened ECB rules twice—in May and August—as large foreign capital inflows made it difficult for RBI to use monetary tools at its disposal to balance the needs of exchange rate management, inflation control and economic growth.
In 2007-08, foreign portfolio investment and ECBs were the largest sources of inflows into India, amounting to $29.26 billion and $22.16 billion, respectively. Consequently, the Indian rupee appreciated relatively quickly against the dollar and money supply increased beyond the RBI’s targets, which added momentum to inflation.
However, the situation has changed since last August, the same finance ministry official pointed out. According to RBI data, foreign portfolio investors have turned net sellers, and the rupee depreciated 6.3% against the dollar since March-end to trade at Rs42.51 in late afternoon deals on Thursday.
“Some opening up (of capital inflows) would help, (and) I don’t think it will pressurize inflation up. One can afford to ease ECB norms a bit,” said D.K. Joshi, principal economist and director at the credit rating agency, Crisil Ltd.
One of the tightening measures announced by the finance ministry last year was a reduction in the spread between the London Interbank Offered Rate, or Libor, and the interest rate on ECBs, which served to squeeze some companies out of the ECB market.
Another measure announced last year was to ask companies to park money outside India and use it to buy machinery for use at home, which slowed an increase in domestic money supply.
According to a senior banker, who didn’t want be identified as he is not authorized to talk to the media, a simple way to increase access to ECBs is to widen the spread over Libor even if the money can’t be brought in. This measure would open the door to a larger number of companies, the banker said. The current spread over Libor for ECBs with a maturity period of more than five years is capped at 3.5%.
In the wake of the subprime crisis in developed countries’ financial markets, the risk attached to debt issued by companies from emerging economies such as India increased, making ECBs more expensive. However, simultaneously the six-month Libor, which is the benchmark for interest rate on ECBs, softened on account of monetary policy measures in the US.
According to Anil Ladha, head of capital markets at ICICI Securities Ltd, a top-notch Indian company, typically one with the highest domestic credit rating, could pay 1.5-2 percentage points lower on ECBs (including hedging cost) as compared with domestic debt of the same duration. The same Indian company could raise money through ECBs for a five-year period at a total cost of about 9%, Ladha said. The cost saving on an ECB for Indian companies at a slight lower level could be more than 2 percentage points compared with domestic borrowing for the same period, he added.

22nd September 2008 / Bloomberg

India Eases Loan Rules for Infrastructure Companies (Update1)

By Kartik Goyal

Sept. 22 (Bloomberg) -- India today eased borrowing rules allowing companies building roads, ports, utilities and other infrastructure projects to borrow more from overseas, a finance ministry release said. Infrastructure companies can borrow as much as $500 million for rupee expenditure, compared with the maximum of $100 million currently. The new rules will come into force when the Reserve Bank of India notifies them, the finance ministry said. The move will help companies including Larsen & Toubro Ltd. and GVK Power and Infrastructure Ltd. access less expensive funds from overseas after the central bank in July raised the benchmark interest rate to a seven-year high to fight the fastest inflation since 1992. Higher inflows may also help stem a decline in the currency, the third-worst performer in Asia this year. ``The government doesn't want infrastructure funding to get hurt as it's critical to the economic growth,'' said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. ``It will help companies access funds at cheaper costs.'' The cap on borrowing costs for overseas loans maturity in more than seven years was raised 100 basis points to 450 basis points plus six-month Libor, or London interbank offer rate. A basis point is 0.01 percentage point. ``In view of the widening credit spreads in the international financial markets, it has been decided to modify the all-in-cost ceilings in respect of'' external commercial borrowings with a minimum average maturity of more than seven years, the finance ministry said. The government estimates that Asia' third-biggest economy needs to invest $500 billion in the five years to build roads, ports and power stations if it has to sustain 9 percent average annual economic growth. Yet, companies are facing difficulties in accessing funds domestically after the central bank raised the benchmark rate thrice since June to seven-year high of 9 percent. The rupee fell almost 2 percent on Sept. 16 as the credit- market turmoil in the U.S. prompted overseas funds to pull out money from Indian stocks. The rupee gained today after the U.S. government proposed buying as much as $700 billion in financial assets to clean up banks' balance sheets. Easing rules on overseas borrowings ``may help shore inflows in to the country and strengthen the rupee,'' Crisil's Joshi said. Foreign investors, who bought a record $17 billion of Indian stocks in 2007, have withdrawn $8.7 billion this year, fueling a 31 percent decline in the benchmark stock index. All other aspects of the policy on external commercial borrowings remain unchanged, the finance ministry said.

Companies engaged in mining, exploration and refining activities can now borrow up to $500 million a year from abroad for spending in India, 10 times more than the $50 million allowed till now. The finance ministry on Tuesday relaxed the external commercial borrowing policy to allow entities in these sectors to borrow more from abroad by defining them as infrastructure companies.
Economic Times / 8 Oct. 08