Bailout or sell-out

The dance of democracy will unfold soon, as the poll dates have been announced. While the political fraternity gets down to the poll mathematics, the entire nation awaits the results with a hope of a stable government that can push growth volumes. And the overriding belief is that the infrastructure sector, with an estimated investment requirement of $1 trillion in the 12th Five Year Plan period (2012-17), does hold the key to mobilise growth in the country. The recent urgency in passing the food security, land acquisition, Lokpal and Telangana statehood legislations was driven by electoral compulsions, a number of decisions were left to sail through the ordinance route, which hasn’t gone down too well with observers of the macroeconomic front.

Another point of discontent that has been seeking attention has been the Central Electricity Regulatory Commissions (CERC) order in favour of Adani and Tata Power that has set the stage for other power producers demanding a similar exemption. The electricity regulator told buyers of power to pay an extra Rs 830 crore to Adani and Rs 330 crore to Tata Power. In addition, all future electricity would be sold at a higher price than what Tata and Adani promised when they won a competitive bid to operate these plants. The regulator has granted higher tariffs to the private power producers for costly imported Indonesian coal. State utilities are upset with this regulatory order that squeezed the margins of firms such as NTPC, NHPC, DVC and SJVN. The two players in question have managed in getting the government, end-users, taxpayers and consumers to pay for their owners’ errors and greed, making a complete mockery of the bidding process.

The issues stemming out of this action will have both economic and social ramifications. This move has created a situation where players can actually bid aggressively and later cry hoarse demanding compensation from the government citing price hike in resources. However, there is also a huge social cost too that cannot be ignored. And the best possible option to deal with such a scenario would include the promoters going in for an equity cut in the projects, making them suffer for their poor judgment about input cost. This will also ensure that future bidders will take into account the possibility of cost escalation or a consequent potential loss in equity.

While the power sector grapples with the tussle within, there was some good news for the stuck road projects. All road projects awarded on premium that are currently stuck can now apply to get their premium payments rescheduled, since the finance ministry has cleared the suggestions made by the C Rangarajan Committee. The panel was formed by the Union Cabinet to suggest ways to revive these projects, which had run into a hurdle. In its recommendations to the road transport ministry, the committee has said that the premium reschedule for projects should happen only if the toll revenues collected at a particular project are not enough to meet the cost of the project. The cost for a project, awarded on premium, will include committed premium payments to the government, operations and maintenance cost and debt servicing cost. Given the logic of the CERC order, the developers could seek relief on account of cost escalation on account of delays in getting regulatory clearances which should not be at the developer’s risk.

Although experts view this move as coming a bit too late as most of the projects will go in for re-bidding even after the new norms. That’s because out of 45 projects awarded in 2011-13, only a few have started work. The National Highways Authority of India (NHAI) will now take up these projects on a case-by-case basis. The existing cases needed to be sifted and defined, and the ones getting delayed because of their inability to get environmental clearance should definitely be given the option of renegotiation. The new dispute resolution bill can accelerate this process. But simultaneously the new guideline which permits promoters exit their projects earlier could see a churn as investor developers with deeper pockets could enter projects with revised terms and add fresh blood to the PPP projects which are stuck in a logjam.

Restarting & accelerating projects with sunk investments should be a priority for the new government.