BW OPINION
28 Jan 2012
Ultra Mega Problems
A secretaries’ committee is an inadequate instrument to resolve UMPPs’ problems, which require bargaining with the states at the political level

Power development has been bedevilled by the fact that the power market is served by state governments which are in the business of buying popularity by selling electricity cheap. So their electricity boards chronically make losses, and are not in a position to finance capacity expansion or raise capital. The National Democratic Alliance government devised a moderately intelligent solution to it: private enterprise would be asked to build power stations of 2,500 megawatts or more and sell power to the central government, which would sell it at cost to states that are prepared to pay for it. In this way, it tried to relieve private investors of the worry of realising dues from bankrupt electricity boards. A number of large business houses were attracted to the idea. All over the world, electricity is a capital-intensive industry facing a very stable market. It is just the kind of industry for investment by aged people who need a steady income. Many an industrialist thought he would develop the power market with the savings of pensioners; ultra mega power projects seemed to be custom-made for them.

Six years later, the hopes of neither industrialists nor pensioners have been realised. Reliance is in the process of building three UMPPs at Sasan, Tilaiya and and Krishnapatnam, and Tata Power one at Mundra; the rest of the projects continue to be in the planning stage. The Ministry of Environment and Forests (MoEF) threw a spanner in the works; the date of submission of the request for proposals of the Chhattisgarh power station was postponed nine times because the MoEF declared the coal mines allocated to it no-go areas. Jairam Ramesh may have rescued the environment in so many locations; but his obstructionism also shook investors’ confidence in the very concept of UMPPs. Now his power to obstruct has been truncated. But he is a resourceful minister; whether he has been tamed still remains to be seen.

The industrialists seem to be caught between the devil and the deep sea. They may conclude that it is just too hazardous to base enormously expensive projects on domestic coal, and instead go for coastal plants dependent upon imported coal. But they would find that coal overseas is subject to equally high risks. For one thing, large deposits of coal are available in few locations in the world. As far as power generation in India is concerned, the most favourably located coal deposits are those of Australia, Indonesia and South Africa. Not all countries permit Indian companies to buy mines freely. If the mine cannot be owned, its coal will be available only at world market prices, convertible at current exchange rates. Such prices are uncertain; they do not provide a good basis for production of electricity, whose price in India is bound to be subject to negotiation with state buyers.

There is international competition for coal available abroad. The biggest competitor will be China. It has enormous reserves of coal. But at the rate its economy is growing, its demand is spilling abroad even for resources that it has at home. With its strong economy and central direction, China can outbid anyone in the world market. Indian power producers would be extremely uncomfortable knowing that they would have to compete with China.

So, the Association of Power Producers of India sought a meeting with the Prime Minister. He was friendly and sympathetic as usual; he appointed a committee of the relevant secretaries, and asked it to report to him within three months. While his good intentions are manifest, his swift action is of doubtful value. The secretaries may be of some use in regard to the exploitation of coal within the country. But they will be pretty useless when it comes to dealing with the problems the power producers face in the world coal market.

What seems to have been forgotten, however, is that in the scheme of things originally conceived, private entrepreneurs were not required to get environmental clearance at all. Instead, all the government clearances were to be obtained by the Power Finance Corporation and given on plate to the special purpose vehicle to be set up for each UMPP. This principle of single-window clearance was central to the UMPP concept; the Prime Minister’s idea of making half a dozen secretaries sit together and bargain is a retrograde step. It may be said that this is inevitably how our democracy works, and that two steps back have to be taken before a step forward can be taken. But it worked differently under the previous regime; it can work under this government too if it uses the tremendous leverage fiscal transfers to states give to the centre.