Domestic firms to lead India power sector growth

Reuters | Sep 27, 2010 | 7:16pm IST

India’s power sector is increasingly attractive to investors, but domestic firms with local knowledge and improving access to offshore funding will still dominate the industry for the near future, a senior government adviser said. Overseas investors have mostly limited themselves to making loans or buying stakes in listed Indian firms, even though India allows 100 percent foreign direct investment (FDI) in power.

Power-Sector "The main entrepreneur continues to be Indian. This model we find is not a bad one because he knows the conditions here, he’s able to handle it much better than a foreign partner," said Bal Krishna Chaturvedi, the Planning Commission’s member in charge of energy and infrastructure. "I don’t see any completely independent plants being set up by foreign companies," he said in an interview on Monday for the Reuters India Investment Summit.

India has targeted investment of $350 billion to $400 billion in the power sector in the five years ending March 2017. Half of India’s total infrastructure expenditure between 2012 and 2017 is expected to come from the private sector. Difficulties over land acquisition and securing coal, navigating the thicket of regulatory red tape and delays that can derail assumptions on returns have kept all but a few foreign players such as Hong Kong’s CLP Holdings from operating their own plants in Asia’s third-largest economy.

The legacy of Enron Corp’s $2.9 billion Dabhol plant, which was mothballed for years over a billing dispute with a state utility, also looms large, and FDI flows into the sector totalled $1.44 billion in the financial year ending March 2010. Chaturvedi said the bulk of foreign money would come from domestic firms’ borrowings or in joint ventures. No foreign companies were likely to go it alone even in the time span of the next five-year plan, which starts in 2012.

India’s frequent blackouts are seen as a drag on an economy growing at 8.5 percent a year that nonetheless grapples with a peak power deficit of more than 13 percent and frequent outages. A slew of reforms dating back to the Electricity Act in 2003 from giving states the flexibility to partner private firms, open access to transmission networks and more transparent regulations, made private investment more attractive he said. The Reserve Bank also eased external commercial borrowing limits on infrastructure, giving domestic firms more access to foreign funds, he added.

But the Indian government must go further and faster on reforming the sector by tackling fuel shortages, strengthening loss-making distribution networks and speeding up construction of nuclear power plants, he said. The government has scaled down its power generation target for the current five-year-plan, which ends in March 2012, to 62,000 MW from an initial estimate of 78,700 MW. "The area of weakness continues to be distribution, the area of weakness continues to be generation," said Chaturvedi, a former oil secretary and cabinet secretary.

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