We need NTPC to bail out pvt power cos. So don't say govt should not be in business
Turning around all loss-making public sector units is a free-market economist's erotic dream. Pages are written every day in Indian newspapers arguing for shutting down or selling government-owned companies that have been in the red for a few years.
In line with this reformist agenda, the Narendra Modi government recently decided to sell a stake in Air India – whether partial or full is yet to be decided – to a private player. The government has no business of being in business – goes the standard logic.
However, it is a fact well known that whenever the private sector fails to live up to its reputation of being efficient and cost effective, a government sector company that is expected to take over. Something similar is going to happen in India's power sector, now.
According to Business Standard, public sector banks have shortlisted nine coal-based power projects “and are evaluating them for equity purchase”. Since banks cannot run power plants, so NTPC Lts, the public-sector utility, will be asked to run them.
Promoters of these power assets have been unable to repay their debts, therefore, the banks have to take them over as a last resort. The newspaper mentioned the names of three major projects out of nine that are ready for a take-over:
– Jindal India Thermal Power's Derang Project in Odisha
– RattanIndia Power Plant in Nashik
– Lanco Infratech's Babandh in Odisha
While there is no harm in taking over assets of a loan-defaulting company, but the decision only emphasises that you can never have a 'no government in business' argument in any economy.
At the same time for banks, before taking over these assets, it is important to consider a few critical aspects of the economics of these plants.
First, most coal-based power plants in India turned loss-making due to unavailability of cheap coal or, simply, the lack of demand. For example - the JITPL's Derang Project. The operations of the plant became unviable due to the paucity of coal and absence of firm coal linkages. The project was completed at an approximate cost of Rs 7,537 crore which includes Rs 5,900 crore worth of debt.
Lanco Infratech's Babandh Power in Odisha and Indiabulls' RattanIndia Amravati Thermal Power Project are on the block for sale since 2014.
Many companies including JSW Energy, Reliance Power and Adani power have been in the fray to buy these power plants. But negotiations never worked out because the buyers did not see these plants turning profitable in the near future or because the cost of debt on these assets was too high.
Now that the debtors are willing to convert their debt into equity, one challenge gets resolved automatically. But, making these plants commercially viable, even for India's largest power generator NTPC, would be an uphill task.
“Many of the private sector power plants are running on less than 50% Plant Load Factory (PLF) because either they do not have steady coal linkage or Power Purchasing Agreements or both. In this scenario, if NTPC agrees to help banks run the operations of these loss-making power plants, it would be a challenge for them to make them commercially viable, especially because NTPC itself did not show any interest in buying stressed power plants when the promoters of these plants were looking for buyers,” said Salil Garg, director at India Ratings & Research.
Moreover, thermal power in India is facing an increasing challenge from the declining prices of solar power. The price of solar power in India fell to Rs 2.44 per unit in May this year. Enthused by lower solar prices, states governments have started demanding a renegotiation of power purchasing contracts with the power generation companies.
All this makes the future of these power plants very bleak.
While public sector banks have no choice but to take over these assets at the moment, they must rely on a government sector company to turn their fortunes and help them avoid big haircuts.
Does 'business isn't government's business' sound so attractive now?