Investing in Losses

~ Joe Athialy

Like India once had a Ministry of Disinvestment, it’s time she has a Ministry of Loss Making. How else can one understand government’s eagerness to buy out all loss making projects, whether in coal, hydro or steel sectors, collectively a few lakhs of crores of rupees worth?

Thermal power projects of about 25,000 MW are on sale, a report says, while there are not many buyers in the market. The government jumps in and offer to buy some of them. Last month after a meeting with leading bankers Power Minister Piyush Goel said that the Centre is designing a new plan where public sector banks will buy off stressed assets or projects which are running on losses, and the state-owned National Thermal Power Corporation (NTPC) will operate it.

What magic could turn these loss-making projects profitable by buying them off from private corporations who, despite subsidies and other incentives given by the centre and state governments, failed to make their projects economically viable? If one looks at the fate of Air India today, one wonders if the government could convert loss making sectors to profit making ones, why did they fail in saving Air India!

This buy off undermines the effort Reserve Bank of India (RBI) is doing to recover nearly 25% of non-performing assets (NPAs), listing down 12 stressed accounts through the Insolvency and Bankruptcy Code and cast a shadow on the tall claims of curbing the menace of NPAs.

The other day, nine thermal power projects (TPP), run by private corporations were shortlisted for bank takeover. Three of the major ones are said to be Jindal’s Derang project in Odisha; RattanIndia Power (erstwhile Indiabulls Power) plant in Nashik, Maharashtra; and Lanco Infratech’s Babandh power project in Odisha, with a combined capacity of 6660 MW.

A study, which looked into TPPs which are 1000 MW and up, and which secured environmental clearance between 2005 and 2015, said that over Rs. 6 lakh crore was lent out by national and international financial institutions, banking and non-banking, for 125 projects, with a capacity of 2.4 lakh MW. Of which, 89%, or Rs. 4 lakh crore was lent by national institutions. The above 3 projects are part of the 125 projects considered for the study, and they borrowed from national banks as well as non-banking institutions like Rural Electrification Corporation and Power Finance Corporation, for a combined cost of Rs. 27,255 crores.

But where did all this start? The coal sector is reeling under heavy financial stress with more and more companies trying to off shed their liabilities. Expansion of coal based power sector a decade back was devoid of any sense or reasoning. How else would one justify approvals of over 700 GW of power projects by 2011, with nearly 85% of them coal based projects, when the Integrated Energy Policy of the Planning Commission was projecting a power requirement of only 230 GW by the year 2032? One could trace back today’s financial stress of the sector to that mindless expansion, into which companies which hitherto was only making/dealing with compact disks, electronic items and running newspapers jumped into to make quick bucks.

Coastal Gujarat Power Ltd (Tata Mundra) and Adani Mundra plants are other two projects, which sought government bailout in the recent past due to mounting losses.

One of the first Ultra Mega Power Projects, Tata Mundra has been the poster-boy of TPP in India. A 4000 MW, $4 bn project, financed by every major financier one can things of – World Bank private sector arm, International Finance Corporation, Asian Development Bank, Korean ExIm Bank, BNP Paribas, India Infrastructure Finance Corporation Ltd, HUDCO, State Banks of India, Bikaner and Jaipur, Hyderabad, Travancore, Indore, Vijaya Bank and Oriental Bank of Commerce.

Claiming to be using supercritical technology, and hence less pollutant, they procured coal from Indonesia, prices of which trebled within a few years making the project more non-viable.

The colossal environmental damages, loss of livelihood and a host of social and environmental issues recognised as serious impacts by accountability mechanisms of IFC and ADB – the Compliance Advisor Ombudsman and Compliance Review Panel – were never counted in the costs, nor tried to compensate or mitigate.

Since the time of its commissioning, the Mundra project has been a drag on the financials of Tata Power.

Adani’s 4260 MW coal based power project in Mundra, a neighbour to the Tata project, has been reeling under growing stress the past many months. Adani Power recently reported a consolidated net loss of ₹4,960 crore in Q4 of FY17 compared to a net profit of ₹1,085 crore in Q4 of FY16. Last month, Adani Power had discontinued 1,250 MW power supply to Gujarat Urja Vikas Nigam Ltd. (GUVNL), a Govt of Gujarat entity, mainly due to the inviability of imported coal to run its power plant at Mundra.

In April, Supreme Court had disallowed any relief to Adani Mundra plant (and Tata’s Mundra plant, both located at Mundra) in a five-year-old contentious issue of compensation due to the unforeseen increase in imported coal prices for their power plant.

Economic and Political Weekly, in a recent investigation, found out how the NDA government amended rules related to Special Economic Zones to favour one company – Adani’s Mundra Power, benefiting the company with Rs. 500 crores by giving it an opportunity to claim refunds on customs duty, which it never paid. It says:

In August 2016, the Special Economic Zones Rules, 2016, were amended by the department of commerce, to insert a provision on claims for refund under the Special Economic Zones Act, 2005. The SEZ Act under which the SEZ Rules are framed did not initially provide any provision for refunds of any kind before this amendment was introduced. According to reliable information received by the authors of this article, the amendment was made to specifically provide Adani Power Limited (APL) an opportunity to claim refunds on customs duty to the tune of 500 crore. The APL has claimed that it has paid customs duty on raw ­materials and consumables—that is, coal imported for the generation of electricity. However, documents leaked to the EPW clearly indicate that the APL had not, in fact, paid the duty on raw materials and consumables amounting to approximately 1,000 crore that had fallen due at the end of March 2015. It appears at face value that by amending the SEZ Rules to insert a provision for companies to claim refunds on customs duty, the department of commerce is ­allowing the APL to claim refunds on the duty that has never been paid by it in the first place!

How will a project plagued with controversies, with possible legal and certainly financial liabilities, be of any good for a public sector undertaking?

NPAs stand at a staggering Rs. 7.6 lakh crore at the end of March, or 9.3% of the gross advances by the banks – a rise of 135% in last two years. Public sector banks account for almost 88% of these loans, which have now exceeded these banks’ combined market value.

It’s a double blow to the public – first their deposits in the banks have been turned to NPAs and then their tax paying money is used to bailout the ones who turned their assets to NPAs.

The bailout of corporations by the government sends a wrong message to the banks and regulators and takes away the confidence in the public that the government is serious about tackling this issue. It’s a simple case of privatisation of profits and nationalisation of losses.

Without putting bold and long-term measures to tackle the issue of NPAs, piece-meal measures of bailing out selective corporations will only lead to the ripping off of the banking system. The long-term measures could include a moratorium on corporate debt restructuring and non-transparent debt write-offs, blacklisting willful defaulters and preventing them from further borrowings, and stringent measures to recover from defaulters.

 

 

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