An urgent need for a good bank

Jan 29, 2009

In this issue:
» Create a 'good bank', says Soros
» China blames US for the crisis
» More job cuts on the anvil
» Fuel prices cut further
» ...and more!

They may no longer be partners, but their hearts, or should we say their investing, surely yearns for the same thing. Days after one half of the famous duo predicted that the 'UK is finished', we hear another one making a comment that he has indeed profited from the depreciation in UK's currency. If you haven't guessed it by now, it is Jim Rogers and George Soros we are talking about.

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Speaking on the sidelines of the World Economic Summit, Soros held out a view similar view on UK's currency as his partner's. He further went on to say that he views the current financial crisis worse than the Great Depression and that the financial system is on an artificial life support. He also proffered his opinion on how he would handle the 'bad bank' program that the Obama administration is planning to undertake. Soros felt that in addition to the 'bad bank' the authorities should also try and create a 'good bank', which will be capitalised by the existing shareholders and which will then be able to lend freely, a scenario that is not happening under the current program because the banks don't know which of their loans will go bad.

Soros also estimates that the capital injection that will now be required could be the tune of US$ 1.5 trillion as the TARP money has more or less poisoned the well. If the man's track record is anything to go by, the Obama administration surely has its hands full.

Reliance Power has won the bid for building its third ultra mega power project (UMPP) at Tilaiya in the eastern state of Jharkhand. The company is already in process of executing two other UMPPs in Sasan (Madhya Pradesh) and Krishnapatnam (Andhra Pradesh). Tilaiya UMPP will be a 4,000 MW project and Reliance Power will supply electricity generated here at Rs 1.77 per unit.The companies that lost out to Reliance Power in this bid were NTPC, Jindal Steel & Power, and Sterlite Industries. Bids put up by these were Rs 2.39, Rs 2.69, and Rs 2.97 per unit respectively. The Tilaiya project will be executed at a total cost of Rs 160 to Rs 180 bn to be funded by a debt/equity ratio of 70/30.

It will now be interesting to see how Reliance Power will execute these projects when it already has over 20,000 MW of projects on its platter. Tariff based bidding does not differentiate between companies those who can execute projects on time and those who can't. The lowest bid wins the prize notwithstanding the risks that the winning company faces in actually executing the contract. At the time of Reliance Power winning its second UMPP, the government was mulling over the idea of restricting the number of UMPPs to two per company. However, the proposal has not been acted upon, for reasons not mentioned.

Another question that comes to mind is - Why is a player like NTPC, a PSU as also the largest power generating company, always bidding at a much higher rate as compared to the winning bidders? Remember, NTPC is amongst the least cost generator of power in India. So why is it always bidding at extremely high tariffs when it comes to UMPPs?

What is it that Reliance Power can do that NTPC with all its pedigree can't? Or do we ask, what is it that Reliance Power 'knows' that NTPC with all its government influence doesn't? Or for that matter, how is it that Reliance Power can deal with huge risks that such large projects entail, and NTPC with all its experience in execution can't?

We remain intrigued! Do you have the answer?

The World Economic Forum in Davos has kicked off, and not surprisingly the topic that dominated the proceedings was the global financial crisis and economic slowdown. Interestingly, countries that were formerly part of the Communist bloc (Russia and China) left no stone unturned in laying the blame on capitalists (US and Europe). Both, the Chinese premier Wen Jiabao and the Russian Prime Minister Vladimir Putin were of the opinion that the unsustainable model of prolonged low savings and unabated consumption sowed the seeds of the crisis, which has now spread far and wide affecting developed and developing countries alike.

However, both agreed that by working together towards restoring the battered global economy back to health can be achieved. While the West has obviously been suffering, China and Russia are struggling to grow as well. Waning demand for oil and consequent fall in prices have hurt the Russian economy while China is reeling from the problems of shrinking demand for exports, overcapacity and rising unemployment in urban areas.

In what can be called the first triumph of the Obama-led government, the US House has passed the new President's proposed US$ 819 bn stimulus package, aimed at lifting the economy out of recession through tax cuts and more than a half-trillion dollars in new spending. We wonder whether this repeated attempt at offering life support to the economy that is the largest consumer of the world's resources will help save the rest of the world as well.

The Indian government has cut fuel prices for the second time in the last few months. The price of petrol has been cut by Rs 5 per litre, while the price of diesel has been cut by Rs 2 per litre. The rate for domestic LPG has also been reduced by Rs 25 per cylinder. The reduction in the fuel prices comes on the back of softening international oil prices and the imminent national elections. While these cuts will find popular approval, they will have a negative impact on the beleaguered oil marketing companies (OMCs) which continue to reel under huge under recoveries from the sake of domestic LPG and Kerosene. As far as the OMCs go, we are reminded of what Warren Buffett once said, "In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen."

The International Labour Organisation says 30 m people are yet to lose jobs. As per the organisation's Global Employment Trends report, even in the best case scenario, the global economic downturn could see 30 m more people lose their jobs by the end of the year, taking the unemployment rate to decade high levels. The projected worldwide unemployment level of nearly 230 m people in 2009 will be nearly 21% higher than at the end of 2008. This would hike the global unemployment rate to 6.5% from 6.0% in 2008. The unemployment rate would relegate 26.8% of the world's workforce to the class of 'working poor' i.e., unable to earn more than US$ 2 (Rs 100) a day. The potential loss of jobs is particularly perilous for large populated economies like India and China and needs to be contained to evade social unrest.

Meanwhile, the UPA government will unveil an interim budget on Feb 16 ahead of a yet to be announced general election in April-May.

The Indian markets had a volatile trading session today. After opening on a positive note, the BSE Sensex slipped into the red only to hover around the dotted line for most part of the day. Optimism that lower interest rates and the stimulus packages will revive the global economy fueled a rally in other indices in Asia. Japan's Nikkei gained about 1.8%, while Hong Kong's Hang Seng surged 5%.Crude oil prices fell on the back of US crude inventories piling up more than expected last week and refiners reducing output as demand continued to decline. The European markets have opened on a weak note.

 Today's investing mantra
"The book value deserves at least a fleeting glance by the public before it buys or sells shares in a business undertaking. In any particular case the message that the book value conveys may well prove to be inconsequential and unworthy of attention. But this testimony should be examined before it is rejected." - Benjamin Graham

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