"Power sector provides very large opportunities for investment in the next 10-15 years" - Views on News from Equitymaster

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  • Jul 19, 2000 - "Power sector provides very large opportunities for investment in the next 10-15 years"

"Power sector provides very large opportunities for investment in the next 10-15 years"

Jul 19, 2000

R. V. Shahi, a postgraduate in Industrial Engineering and Business Management has worn many caps. After long stints in Steel Authority of India and NTPC, he finally joined BSES as its Chairman & M.D. Since then he has been a man on the move. With the success at Dahanu plant behind him, he is exploring new avenues to chug the BSES growth engine.

In conversation with equitymaster.com Mr Shahi spoke about BSES’s plans, which include dominating distribution, transmission and generation in all parts of the country. Side by side he is looking Internet, telecommunications, broadband to spur future growth.

EQM: Please could you shed some light on the power scenario in the country and the growth opportunity it offers?

Mr. Shahi: Power sector continues to be a sector with shortages. Demand for next 10-15 years would be there and the sector will need to grow at a rate of 8-9% per year if the target of more than 7% GDP growth rate is to be achieved. This means that approximately 10,000 MW of additional capacity should be added every year for the next 10 years or so. Subsequently, that figure will have to be 12,000 to 15,000 MW per year. Demand is not going to be an issue in power, talking from the point of view of investors. This is the scenario in so far as additional power generation capacity is concerned.

Commensurate with this, huge investments will be needed for creating transmission systems and also by the utilities for distribution systems. Transmission and distribution together would require almost equal amount of investments as compared to generation of the power projects. In 1991, private power policy for generation was initiated. Government has recognized the importance of transmission and distribution and therefore transmission also has now been taken up for privatisation. Many of the states are thinking of first corporatisation and then divestment of their distribution system. Orissa was the first state to do so, where BSES managed to bag 3 out of 4 distribution companies. Similar patterns are also in the offing in other states.

In a nutshell, power sector provides very large opportunities for investment in the next 10-15 years. This also means opportunity for agencies, both at the national level and the international level that are interested in investing in the power sector. This is a great sector with enormous potential.

EQM: What are the chief bottlenecks in the government’s plans for the power sector? What do you suggest to rectify it?

Mr. Shahi: The main bottleneck right from the beginning has been the creditworthiness of the State Electricity Boards (SEBs). The power sector no doubt provides enormous opportunities for investment but these investments have to get service. This servicing has to take place at level of distribution and supply of electricity. Unfortunately, distribution and supply is mainly controlled by the SEBs (to the extent of more than 95%). The situation is grim because of huge distribution losses ranging from 30% to 50% in different states, because of inadequate tariff structure and because of poor collection of bills that are raised. These three problems have contributed to the bad financial health of most of the SEBs.

The bad financial state of the SEBs is the single most important factor that has been standing in the way of investors’ coming forward wholeheartedly. In many cases it has been seen that if investors’ are very keen to develop projects, lenders’ concerns make financial closure of these projects difficult and rightly so. The power sector has a debt equity ratio of 70:30. Obviously, lenders’ concerns are genuine. It has been established that in most of the SEBs, escrowable capacity to service the investments in new projects are limited. This is what has been standing in the way.

To cope with this problem, a number of states have taken initiatives of reforming or restructuring their respective electricity boards. Which means they will corporatise different aspects of the industry namely generation projects, transmission systems and distribution networks. Following such corporatisation, distribution is likely to be privatised. This is being done with a view to ensure that atleast at the distribution side, the privatised dispensation of electricity would be able to take care of the huge transmission and distribution losses and also of the poor collection of bills.

As far as inadequate tariff structure is concerned, the revised structure in the reform package includes setting up of regulatory commissions. This will therefore dispense the mechanism of tariff fixation from political influences. Political influence, it has been perceived, has been one of the most important reasons for development of inadequate tariff over a period of time. The regulatory mechanism will take care of not only the customers but also the investors, because it is the task of the commissions to make the power sector commercially viable. It can become commercially viable only if the sector is allowed a reasonable tariff. This takes care of not only debt servicing requirements but also investors’ concerns in the form of reasonable return on their capital.

EQM: Coming specifically to BSES, where do you see the company 3 to 5 years from now?

Mr. Shahi: BSES has a corporate plan according to which it wishes to create about 2000 Mega Watt (MW) additional capacity in five years and about 6000 MW of additional capacity in ten years time. This is one area of growth as far as far as the power generation projects are concerned.

As you know, for over 65 years BSES was only a distribution company. We have successfully entered into generation and transmission fields by successfully commissioning and subsequently attaining a very satisfying level of operational efficiency at the 500 MW power project at Dahanu. The Dahanu plant operated at a very high plant load factor of 89% during FY2000. In fact the plant availability was as high as 98%. As a result, the Dahanu the power station can be ranked among the top half a dozen power plants in the country. Therefore, the company has demonstrated that it is now a successful vertically integrated power utility.

Fortunately, different regions of the country provide a number of power project opportunities and BSES is embarking upon (on a selective basis) doing projects such as IPPs.

In the last 3-4 years distribution has also emerged as an opportunity. It wasn’t so earlier. Starting from Orissa, there will a number of states, which will be opening up to private investments in distribution. According to the corporate plan, the first 5 years will see BSES having distribution systems under control in three more locations (states) in addition to Orissa. In the subsequent 5 years BSES will acquire distribution control in another three locations.

So in a ten year time frame you should see BSES having a generation capacity of about 6000 MW and distribution networks in different parts of the country at six or seven locations.

We will also participate on a selective basis in transmission projects. The Government has advised Powergrid Corporation of India, to be the nucleus organisation to open up on a selective basis various transmission projects to the private sector. Private sector as independent power transmission companies would develop the transmission systems. BSES has entered into an arrangement with National Grid of UK to participate in the development of such projects. We would also enter into telecommunications. In fact, we identified synergy between distribution and telecommunication as early as 1995-96, when this phenomenon had just started in the whole world by only half a dozen utility companies. Today a large number of companies from the electricity arena have entered telecommunications. In the US alone, electricity companies own almost 30% of the optical fibre cable capacity.

Based on our call in 1995-96 we formed BSES Telecom and our stand has been more than vindicated. We have launched our Internet services in Mumbai in March 2000. On a selective basis, we would expand it to other cities. Uniqueness of Internet services launched by BSES Telecom is that the optical fibre cable network that we have started laying will support it. We have already finished half of this network. By the year end the entire primary and secondary network will be in place. Our ISP customers will enjoy higher bandwidth advantage because of this.

This is BSES’s overall growth plan in the coming years.

EQM: With respect to your ISP and Internet related business, are you planning any tie-ups? What will be your strategy in terms of revenue model?

Mr. Shahi: In addition to our ISP business, our subsidiary BSES Telecom has recently formed a joint venture company with Hyderabad based Sriven Multitech to set up touchscreen kiosks and cyber cafes in the city of Mumbai. This company is called Powersurfer Interactive India Limited. (Powersurfer is BSES’s Internet name). In the next two months, this company should install about 100 touchscreen kiosks across Mumbai and this number will gradually grow. The idea is to provide growth access to Internet, besides providing other services.

Services on the touchscreen will include information on the city, on hotels, on air and rail reservations, on the shopping malls, on the country, video on demand and so on. We are also planning an international tie-up for our multimedia operations.

On the operations front, BSES Telecom is evolving its plans considering the new developments that are taking place in this industry. Recently, the chief general manager (GGM) of VSNL, Mr. Nimal, joined BSES Telecom as its chief executive. We are looking to strengthen our manpower. Currently, we have 60 odd executives in the company. BSES Telecom provides computerised billing services to various state electricity boards. Of late, more and more utilities are becoming conscious about commercial activities and in particular about computerised billing services and various management information systems to control distribution losses and reduce the outstandings. We hope to take advantage of this and cover more electricity utilities. We have also come out with a plan to manufacture single-phase domestic consumer electronic meters. We plan to use these not only for our circle but we will also sell it to other utilities as well.

In a year’s time we are planning to come out with an IPO followed by a GDR or an ADR issue for BSES Telecom.

EQM: Which is the company globally, you will benchmark BSES to in terms of its business profile i.e. power and telecom businesses?

Mr. Shahi: We had started working on this business mix (power plus telecom) four years ago. In India we are No. 1 in everything, be it reliability of power supply (99.9%) or consumer services or very low distribution losses (around 11.5% currently as compared to losses of 30% to 50%, which prevail in the country). So there is hardly anything worth emulating here. Still, we collaborated with some of the US companies, namely Southern Company and Niagara power company and through an arrangement supported by USAID, we exported 30 to 40 of our key functionaries for getting a feel of operational level practices, consumer service practices and other managerial practices in these US companies. This has given us the base to benchmark all our services, be they in providing new connections, be they in ensuring reliability of supply or servicing of consumers.

EQM: In terms of the concern for the environment, does the company plan to venture into generating power from renewable sources i.e. solar and wind. Do you foresee a potential in such businesses?

Mr. Shahi: We have always ensured that power generation is made compatible with environment. Our power station at Dahanu has won much national and international recognition. We won in 1999-2000 the National Award for environment instituted by Council of Power Utilities and we also received the best power plant award by the Ministry of Environment, Government of India. We have also received an award from the International Chamber of Commerce, which is sponsored by United Nations Environment project.

Side by side, we have also entered non-conventional energy sources for electricity generation. Last year we commissioned 33 wind turbines in Karnataka, aggregating to a capacity of 7.5 MW. This set of wind turbines on an annual basis is likely to achieve a plant load factor of 35-40% as compared to generally acute figure in the country that is 20-22%. We hope to expand this activity in coming years.

EQM: What are your other interests besides managing BSES?

Mr. Shahi: I read books. I read management books in particular. I follow companies which have done well. I have tried to see and learn what made them do well, what practices they were following. My inquisitiveness is in knowing what is happening in other parts of the world and which are the successful companies here and elsewhere.

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