DOING BUSINESS WITH INDIA
DOING BUSINESS WITH INDIA
FOREIGN INVESTMENT IN POWER SECTOR |
1. Indian Electricity scenario. For a developing country like India, electricity is the most commonly used form of energy. Indeed it is the fulcrum on which rests the future pace of growth and development. The demand of electricity in India is increasing as the tempo increases. Since independence India has multiplied electricity generation capacity by as many as 48 times - from a meager 1362 MW in 1947 to over 66,000 MW in 1991. Units generated have also leaped from 4 billion units to 264 billion units, in the same period. However, pressures of a developing economy necessitate a considerable increase in generation capacity with every passing year. Indeed, despite a per capita consumption as low as 208 kg oil equivalent (compared 5000 - 8000 kg for developed countries), India is still facing an acute energy shortage - This is currently of the order of 7.9%, with a peaking shortage of 16.7% as of July 1991, for the country as a whole. In its quest for increasing availability of electricity, the country has adopted a blend of thermal, hydel and nuclear sources. Of late, emphasis is also being given on non-conventional energy sources - Solar, wind and tidal. The need of all-round development is putting a heavy burden on our limited resources. Mobilisation of resources for achieving self-sufficiency in Electricity sector assumes high priority. Hitherto, development of the Electricity Sector has been primarily the responsibility of the Government, with a relatively small contribution from private enterprises. However, it is now clear that given the various constraints, the Government can only partially provide for incremental capacity addition in generation supply and distribution required to keep the demand for electricity in power sector. In this background, the Government has resolved to mobilise additional resources to help bridge the gap in incremental capacity requirement in the Electricity Sector.
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2. Incentives under the new policy. The scheme formulated under the policy throws the electricity generation, supply and distribution field wide open to private entrepreneurs. Opening up profitable investment opportunities. That offers a package of incentives which investors, both from India and overseas, will find really attractive. All private companies entering the electricity Sector hereafter will be allowed a debt-equity ration of 4:1. They will be permitted to raise upto a minimum of 20 percent of the total outlay through public issues. Promoters' contribution should be at least 11% of the total outlay. No more than 40% of the total outlay can come from Indian Public Financial Institutions. To ensure that private enterpreneurs bring in additionality of resources to the sector, they must find 60 per cent of the resources from sources other than public financial institutions. For both Licensee and Generating Companies, the following is permitted; * Upto Hundred percent (100%) foreign equity participation can be permitted for projects set up by foreign private investors. * With the approval of the Government, import of equipment for power projects will also be permitted in cases where foreign supplier(s) or agency(ies) extend concessional credit. Generating companies can be set up by Private enterpreneures. For safeguarding return on investment against possible under-demand of power arising from variations in demand, generating companies can now sell power on the basis of a suitably structured two-part tariff. This will be based on operational norms and optimal PLF(Plant Load Factor) prescribed by the CEA/Government, as also on a rate of depreciation notified by the Central Government, from time to time. The Indian Electricity Act and the Electricity(Supply) Act have been amended to bring about this new legal and financial environment for private enterprises in the Electricity Sector. As step towards liberalisation, schemes where the total outlay does not exceed 250 million crores need not be submitted to CEA for their concurrence. The specific incentives for Licenses are: a: Licenses of a longer duration of 30 years in the first instance and subsequent renewals of 20 years, instead of 20 and 10 years respectively as at present. b: Higher rat of return of 5% in place of the previous 2% above the RBI rate. c: Capitalisation of Interest During Construction (IDC) at actual cost (for expansion projects also) as against 1% over RBI rate as at present. d: Special appropriations to meet debt redemption obligations. [TOP]
3. Scope of private participation. Private sector participation is being welcomed in projects such as thermal (coal/gas based), hydel, solar and wind energy, investors must plan on importing or setting up only new power plants/equipment. A private enterprise entrant has two options. Either it can operate as a Generating Company for selling bulk power to the grid, without any responsibility of distribution. Or it can operate as a Licensee wherein it generates its own power and/or buys power from SEBs/other generating companies and sells to consumers--both HT and LT categories through supply and distribution lines. The country has a rich reservoir of trained manpower capable of tackling every aspect of power generation, supply and distribution. In addition, it has large well-equipped specialist manufacturers of heavy and mediumsized equipment for power plants. Manpower development and training services for the power plant personnel may be availed from the nationally governed four Regional Training Institutes under Power Engineers Training Society at Delhi-Badarpur(Northern Region), Nagpur(Western Region) Neyveli(Southern Region) and Durgapur(Eastern Region) and Power System/Hotline Training Institute under the Central Electricity Authority at Bangalore. The Institute at Delhi is equipped with Computer based 210 MW Simulator and at Bangalore with Computer based load despatch training simulator. This allows engineers to be trained to higher standards in a short time-frame. [TOP]
4. Rapid clearance procedure. 1) DETAILS OF MAJOR CLEARANCES REQUIRED For setting up a project in the Electricity Sector, the following clearances will be required: Statutory Clearances Clearing Authority --------------------------- ------------------------- 1. Cost Estimate Section 29(1) CEA 2. Techno-Economic Clearance CEA 3. Publication/Sec.29(2) State Government 4. Water Availability CWC/State Government 5. SEB Clearance SEB/State Government 6. Pollution Clearance(Water & Air) State/Central Pollution Control Board 7. Forest Clearance Min. of E&F/State Govt. 8. Environment & Forest Clearance Min. of E&F/State Govt. 9. Civil Aviation Clearance for National Airport Authority Chimney Height 10. Company Registration Registrar of Companies 11.Rehabilitation & Resettlement of Min. of E&F/State Govt. Displaced Families by Land Acquisition 12.Hydel Projects Min. of Water Resources 13.Equipment Procurement DGTD, CCI&E Non-Statutory Clearances Clearing Authority --------------------------- ---------------------- 14.Land Availability State Govt. 15.Fuel Linkage Dept. of Coal, Dept. of Petroleum & Natural Gas 16.Financing CEA/DOP/Dept. of Economic Affairs/ Financial Institutions 17.Transportation of Fuel Depts. of Coal/Petroleum & Natural Gas/Min. of Railway, Shipping & Surface Transport 2) PROCEDURES FOR PROJECT CLEARANCES SIMPLIFIED Any power project has to be necessarily cleared in terms of about 17 major parameters. Such clearances are given by specialist agencies and organisations of the Government. With creation of the Investment Promotion Cell (IPC), you now have a single point reference facility. The IPC will help expedite procedural clearances of your proposal. A high-powered Board has been formed under the Chairmanship of the Cabinet Secretary to the Government, to monitor the clearance of projects. This will ensure that statutory clearances are obtained and any outstanding issues resolved within a specific time-frame. Annexure - I List of clearances required for power projects ---------------------------------------------------------------- Sl. Item Agency Remarks No. ---------------------------------------------------------------- 1. COST ESTIMATES Any Power project involving CEA Required under Section 29 capital expenditure exceeding of Electricity (Supply) the limit by Govt. needs to Act, 1948 (E(S) Act,1948) be scrutinized by CEA for examination of salient features and benefits which may accrue therefrom. 2. TECHNO-ECONOMIC CLEARANCE/CONCURRENCE OF CEA: By CEA after examination of CEA Under section 30 of Elec- tricity (Supply) Act, 1948. (i) River works/dams to be SEBs, State Govts, Petrol- put up for Hydro and for eum & Natural Gas,Railways, water availability for Surface Transport involved. thermal plants. (ii)Greatest possible economic output of electric power. (iii)Transmission lines and Systems. (iv)Reasonableness of the Scheme. (v) Site location for optimum utilization of fuel resources, distance from load centres, transportation facilities, water availability and environmental considerations. 3. PUBLICATION Schemes to be published in the STATE Section 29 clause(2), official gazette/local newspapers GOVTS. (3),(4)and (6) as the generating company may ES Act,1948. consider necessary alongwith a State Govts. notice for atleast two months 13.EQUPT.PROCUREMENT DGTD, CCI&E Import & Export Acts NON STATUTORY CLEARANCES 14.LAND AVAILABILITY State Govt. 15.FUEL LINKAGE Deptt. of Coal Deptt. of Petroleum & Natural Gas 16.FINANCING CEA,DOP DEA, Financial Institutions 17.TRANSPORTATION Deptt. of Coal OF FUEL M/o petroleum Natural Gas, Ministry of Railways, Shipping& Surface Transport. 13.EQUPT.PROCUREMENT DGTD, CCI&E Import & Export Acts NON STATUTORY CLEARANCES 14.LAND AVAILABILITY State Govt. 15.FUEL LINKAGE Deptt. of Coal Deptt. of Petroleum & Natural Gas 16.FINANCING CEA,DOP DEA, Financial Institutions 17.TRANSPORTATION Deptt. of Coal OF FUEL M/o petroleum Natural Gas, Ministry of Railways, Shipping& Surface Transport.
IPC OFFERS IDENTIFIED PROJECTS The Investment Promotion Cell (IPC) can provide you with complete details of Power Projects, for which statutory and some non-statutory clearances have already been granted. So the lead time for implementation will be much shorter. All you have to do is select the one you prefer and submit a Feasibility Report on the Project, along with the data sheet. The IPC will provide complete information and assistance regarding procedures for obtaining the necessary clearances, as outlined in the previous Section. [TOP]
5. Two part tariff system & return of investment. The Government has given considerable thought to ensuring that private enterprises get an attractive return on capital investment in power projects. Careful planning has gone into ensuring that your cash-flow is secure and liquidity maintained through the formulation of a "two-part tariff" system which guarantees returns. The system provides for the signing of a Contractual Agreement, laying down rates for the bulk sale of power by a generating company to an SEB, for a specified period. The first part of the rate ensures recovery of fixed costs (including returns) based on performance at normative parameters. The second part ensures meeting of variable expenses, based on units of electricity actually supplied. Incentives will be provided for the achievement of efficiency levels, higher than the normative parameters. As mentioned earlier, the sale rate will be calculated with reference to operational and load factor norms, as well as on pragmatic rates of depreciation to be notified by the Central Government. Once the sale rate is fixed, no limits of any sort will be put on actual profits earned by a generating company. Under the novel two-part sale rate, fixed costs will cover : (1) Interest on Loan Capital (2) Depreciation (3) O & M Expenses (4) Taxes on Income, if any (5) Return on Equity component; and (6) Interest on Working Capital / Variable costs will comprise of : (a) Cost of Primary Fuel such as coal, oil or gas; and (b) Cost of Secondary Fuel. The two-part sale concept on the grounds that fixed charges cover sunken costs and do not vary with levels of generation. On the other hand, variable charges are additional costs related to actual generation varying directly with levels of generation achieved. On the other hand if you are a Licensee, the new policy brings you a return of 16% on your investment, which is 5% above the Reserve Bank of India rate. Since tax is treated as expenditure while fixing the tariff for a Licensee, the return is actually higher, being in effect, post-tax. Source-wise capacity addition in Eighth Plan -------------------------------------------- ----------------------------------------------------------------- Region Hydro Thermal Nuclear Total incl. gas ---------------------------------------------------------------- Northern 3,917.3 8,033.0 470.0 12,420.3 Western 2,587.5 5,950.3 235.0 8,772.8 Southern 1,286.0 3,968.5 470.0 5,724.5 Eastern 1,011.1 7,330.0 ----- 8,341.1 Northeastern 595.0 792.0 ----- 1,387.0 ---------------------------------------------------------------- All India 9,396.9 26,073.8 1,175.0 36,645.7 ---------------------------------------------------------------- The power generating sector has been accorded high priority for attracting foreign investment in view of the considerable gap between demand and supply projections. Foreign equity up to 100% is being permitted to companies investing in this sector. A high-powered board has been set up to facilitate relevant clearances and an investment promotion cell has been specifically set up in the Department of Power to facilitate entrepreneurs. N.B.: UPDATED ON JUNE 1, 1992.
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