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Power dampens infrastructure performance - Views on News from Equitymaster
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  • Feb 24, 2001

    Power dampens infrastructure performance

    According to the Economic Survey 2001, the performance of infrastructure sector is mixed. The combined growth rate of six key infrastructure industries namely electricity, coal, steel, crude oil, refinery and cement was 7.7% during the period April-December 2000. This was lower than the 9.1% growth recorded in the corresponding period of the previous year. These sectors have a combined weight of 26.7% in the Index of Industrial Production (IIP) (base: 1993-94 = 100).

    Electricity generation and cement, both of which lagged behind during this period, caused the slowdown. The deceleration in the power sector is attributable to the slowing down in thermal as well as hydropower generation. Seasonal water shortages and drought in some parts of the country during the concerned period and high capital costs has led to the poor performance of the hydro generation.

    (period April-December) Unit 1999 2000 FY01*
    1. Coal production m tonnes 207.3 218.2 300.0
    2. Electricity generated (utilities only) b kwh 355.7 372.6 480.7
    (a) Hydro-electric b kwh 63.2 59.8 80.6
    (b) Thermal (incl. nuclear) b kwh 292.5 312.8 400.0
    3. Petroleum        
    (a) Crude oil m tonnes 24.3 24.5 31.9
    (b) Refinery throughput m tonnes 61.1 76.9 86.0
    Cement m tonnes 72.6 74.3 100.2
    Tranport & communications        
    (a) Railway goods traffic (revenue earning) m tonnes 330.7 347.8 456.4
    (b) Cargo handled m tonnes 201.4 209.2 271.9
    (c)Telecommunications 000 Nos. 2,199.9 2,854.5 4,918.0
    (new telephone connections provided DELs)        

    It was a good year for coal. This sector saw a growth of 5.9% during April-December 2000, after 4 years of slowdown.

    The telecommunications sector continued its rapid growth. There is a slowing down in the growth of railway revenue-earning goods traffic, and cargo handled at major ports during April-December, 2000 compared to the corresponding period last year.

    Power generation stood at 480.7 bn kWh in FY00, a growth of 7.2% over FY99. The total generation of power in the first nine months of FY01 (April-December, 2000) stood at 373 bn kWh. This was a mere 4.7% growth over generation during the corresponding period in 1999 and hence slower than the growth displayed in FY00.

    Owing to heavy transmission and distribution (T&D) losses suffered by State Electricity Boards (SEBs), low user charges and other operational and technical inefficiencies full benefits are not being derived from existing capacities. The installed capacity which stood at 97,846 MW in FY00 has crossed 1,00,136 MW as on December 31, 2000. A capacity of 2,175 MW has been added against a target of 2,225 MW during April-October, 2000. Thermal plants at present account for 80% of the total power generation, hydro-electricity plants contribute 18% and the nuclear plants account for the rest.

    The average plant load factor (PLF) in the Central Public Sector Undertakings (CPSUs) in FY00 and during April-December, 2000 was appreciably higher than that achieved by the State Electricity Boards (SEBs) as a whole. Wide inter-state variations are noticed in the average PLF of thermal power plants with southern and western zones having better performances. The average PLF for Eastern and Northeastern regions continues to be much lower than the All-India level. If the PLF for North East and Eastern states is excluded, the PLF of the SEBs is not very different from the central utilities.

    Restoration of the financial health of SEBs and improvement in their operating performance continue to remain a critical issue in the power sector. Under Section 59 of the Electricity Supply Act, 1948, SEBs are required to achieve a rate of return (ROR) of not less than 3% on their fixed assets in service, at the beginning of the year, after providing for interest and depreciation charges less consumers contribution. This provision has become operative from the accounting year 1985.

    The SEB performance has gone from bad to worse in the last 10 years. In 1993-96, there were 14 SEBs, out of 17 SEBs (including Orissa SEB), which had a positive ROR (including subsidy). In FY99, 10 SEBs out of 16 SEBs (excluding Orissa SEB) had a positive ROR (including subsidy). Further, only 3 SEBs (MSEB, TNEB and UPSEB) had a ROR of more than 3% in FY99 (with subsidy). Managerial and financial inefficiencies in State sector utilities have adversely affected capacity addition and systems improvement. While the SEBs not having enough resources to finance future capacities, they are also unable to raise investible funds from alternative sources due to their poor financial and commercial performance. Also, the inability of SEBs to pay their dues, in full, to Central Power Utilities adversely affects the finances and investment plants of these CPSUs.

    The SEBs, have continued to suffer from high T&D losses which stood at 25% in FY98. These have increased to 26% in FY99. The net subsidy after accounting for amounts received from State Governments was Rs 54 bn in FY92, which has gone up to Rs 229 bn in FY00. The hidden subsidy for agriculture and domestic sectors has increased from Rs 74.5 bn in FY92 (accounting for 1.1% of GDP) to Rs 381 bn in 1999-2000 (accounting for 1.7% of GDP). It is projected to go up further to Rs 412 bn in FY02. The gross subsidy of the state power sectors as a percentage of gross fiscal deficit of state Governments was about 36% in FY00.

    The state controlled domestic carrier, Indian Airlines, has continued its profit-making spree for the third consecutive year. The company had incurred losses continuously for a period of 8 years from 1989-90 to 1996-97. During FY00, Indian Airlines recorded profit before tax of Rs 510 m. However, in the first half of FY01 (April-September 2000), the company has incurred a net loss of Rs 1 bn.

    FY00 turned out to be a good year for the international carrier, Air India too. The company, for the first time in five years, turned around its loss making financial performance and registered an operating profit of Rs 760 m. It registered its lowest net loss in the past 5 years at Rs 380 m. The operating and net profits would have been substantially higher but for the increased fuel prices, which reached a nine-year peak during the year under review resulting in additional fuel cost of Rs 1.8 bn.

    As per the provisional results for the period April-September, 2000, Air India has incurred a net loss of Rs 430 m (against a budgeted loss of Rs 617 m), which is lower than the Rs 570 m loss it reported during the corresponding period last year. The company’s performance was adversely affected by a steep increase in Aviation Turbine Fuel (ATF) prices, which increased by Rs 1.5 bn

    The government has decided to disinvest up to 60% of its equity in Air India, of which 40% would be offered to the private sector and the balance 20% will be offered to employees, financial institutions and public. However, it has been stipulated that not more than 26% of the total equity would be held by a foreign airline.

    During FY00, the total cargo handled at major ports was about 8% more than the traffic handled in FY00. About 84% of the total volume of port traffic handled was in the form of dry and liquid bulk, while the remaining 16% consisted of general cargo and containers.

    In the first nine months of FY01 (April-December 2000) the cargo handled by major ports registered only 3.9% growth when compared with the corresponding period in the previous year. The highest growth was observed in respect of coal followed by other liquid cargo and containerised cargo.

    Major ports handled 272 m tonnes cargo in FY00, as against the total capacity of 258 m tonnes implying that there is a need to augment port capacity. Capacity addition is being planned according to projected traffic requirements. It was expected that by the end of 9th five-year Plan, total capacity of major ports would be 377 m tonnes. The 9th Plan envisaged an outlay of Rs 94 bn for the port sector, with the annual plan outlay for FY01 at Rs 20 bn. Two mega projects, one at Ennore and establishment of mechanised coal handling facility at Paradip Port costing a total of Rs 19 bn are nearing completion.

    The process of phased corporatisation has been initiated for the major ports. Ennore Port Company is the first off the block. It has also been decided to corporatise existing major ports starting with Jawaharlal Nehru Port at Navi Mumbai.

    Postal Services
    Notwithstanding the revision in tariffs, the postal services recorded a deficit of Rs 16 bn in FY00. The emphasis on social objectives has outweighed other considerations and user charges are low.

    FY00 was a relatively good year for the railways. Against the target of 450 m tonnes of revenue-earning goods traffic, the Railways’ freight traffic aggregated to 456.4 m tonnes. This was 8.4 per cent higher than the performance in 1998-99. The revenue-earning freight traffic carried during April-December, 2000 constituted an increase of 5.2% over April-December, 2000. A positive growth in traffic has taken place in all the bulk commodity groups during this period.

    Roads and Road Transport
    The National Highways Development Project (NHDP) comprising 4/6 laning of 13,252 km of national highways having two components, i.e. (i) the Golden Quadrilateral connecting four metropolitan cities of Delhi, Mumbai, Chennai and Calcutta (5,952 km) and (ii) North-South and East-West corridors (7,300 km), connecting Srinagar to Kanyakumari and Silchar to Saurashtra respectively and Salem to Cochin is in progress.

    NDHP is estimated to cost Rs 540 bn (1999 prices). The Golden Quadrilateral part is to be completed by 2003 and North-South & East–West corridor by 2007. Project on the Golden Quadrilateral is making progress, 588 km have already been 4 laned and construction is in progress on 911 km. Project report preparation and contract award activities are in progress in 4,453 km. Similarly on the North-South and East-West corridors, 628 km have already been 4 laned and construction is in progress on 272 km and project report preparation activities are in progress in 403 km.

    There has been a phenomenal growth in the telecommunications sector in the last two decades. During April-December, 2000 the sector saw a growth of 29.8% in terms of new connections provided during the current year. The ongoing reforms in the sector were ahead of the schedule. The two service providing Departments of the Telecom sector were corporatised, viz., Department of Telecom Services (DTS) and Department of Telecom Operations (DTO). A Public sector company, Bharat Sanchar Nigam Ltd. (BSNL), has now taken up all service providing functions of these two Departments with effect from, October 1, 2000. The Company has an authorized capital base of Rs 100 bn with a paid up capital of Rs 50 bn. This initiative is expected to provide a level playing field in all areas of telecom services between government operators and private operators. The Department of Telecom (Telecom Commission) is now left with the functions of policy formulation, licensing, wireless spectrum management, administrative monitoring of PSUs, research & development and standardization/validation of equipment etc.

    FY00 witnessed a 40% jump in the switching capacity over the preceding year. Approximately, 4.9 m new connections were provided during the period. Similarly, capacities in Trunk Automatic Exchange (TAX), microwave and optical fibre network were considerably enhanced. The value of equipment production increased to Rs 108 bn in FY00 from Rs 100 bn in FY99. The telecom exports have also increased to Rs 37 bn in FY00 from Rs 29 bn in FY99.

    There were about 2.6 million cellular subscribers in the country as on September 30, 2000. The service is now available in 648 cities/towns in the country. The number of cellular subscribers has almost doubled in the last one year. The share of the cellular mobile subscribers in the total telephone subscribers (fixed line and mobile) has gone up from 5.8% in September 1999 to 8.6% as on September 30, 2000. As per the National Telecom Policy’s (NTP) objective, for every 500 persons there should be one public call office (PCO) in the urban areas. PCO-population ratio as on March 1, 2000 is one PCO for 383 persons of urban population on all India average basis.

    Urban Infrastructure
    During the current year HUDCO sanctioned Rs 18 bn for urban infrastructure schemes (as on October 31, 2000)

    The government’s Economic Survey in conclusion has recognised that the demand for infrastructure services continues to outpace supply. Unless these shortfalls are met by creating new capacities in power, telecom, rail, roads and ports there would be serious constraints on faster industrial and overall economic growth. Social welfare considerations also make it imperative that a minimum supply of water, housing, power and transport services are made available to every citizen.

    The Survey has also noted that greater private sector participation in infrastructure development is essential not only due to constraint in government resources but also to improve the quality of services and the delivery system. Although considerable progress has been made in attracting private investment, much more needs to be done for sectoral reforms, rationalization of user charges and strengthening of institutional, legal and regulatory framework for ensuring fair competition among private and public operators and protecting consumer interests.

    There is a need to look at the existing regulatory legislation and to bring a comprehensive and uniform approach to regulation in infrastructure.

    The Power network is critical infrastructure for overall economic development. Despite significant reforms in the power sector such as, setting up of a regulatory authority and opening power generation to private investment, the performance of the power sector have been disapproving. The private investors in the sector are deterred by high risks of non-payment by financially weak SEBs which are sole buyers. The large investment flows may not materialize unless the important issue of commercial viability of SEBs is properly addressed and re-structuring of SEBs, unbundling of risks initiated by several States, are expedited. There is an urgent need to rationalize the present system of tariff setting, and develop a scientific method for long-term demand forecasting. The captive power generation also needs to be encouraged to reduce the large gap between demand and supply. With appropriate policies and institutional arrangements power generated by such captive plants could be optimally utilized.



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