Bloomberg News

Blackout Risk Increases With Surging Populism: Corporate India

March 11, 2014

Battery-operated Light

A street vendor uses a battery-operated light as he sells clothes at a local market in Kotla Mubarakpur, New Delhi. Photographer: Sanjit Das/Bloomberg

In India, sporadic power outages have hobbled Asia’s third-largest economy for years.

The government’s solution was a $31 billion bailout of utilities, whose debts were so big and cash flow so small that they can’t provide a steady flow of electricity to homes and businesses. Now that bailout is in jeopardy.

A populist movement sparked by an anti-corruption crusader is forcing utilities to slash the price they charge consumers. Because most of these power retailers already lose money, this development is pushing them further into debt. They were supposed to boost rates, not cut them, under the bailout plan.

“The situation is as grim as ever,” Arup Roy Choudhury, chairman of NTPC Ltd. (NTPC), India’s largest generator of power. said in an interview. NTPC threatened to stop supplying unprofitable retailers that are behind on payments. That, in turn, could interrupt service to thousands or millions of end-users.

India already holds the world record for blackouts. In 2012, an estimated 600 million Indians went without power in the north and east for three days after a grid collapsed because some states drew more than their quota.

The country’s supply-chain disaster is deepening with the dawn of electricity populism. Arvind Kejriwal in December rose from an anti-corruption activist working Delhi’s streets to become Delhi state’s chief minister, pledging to slash consumer power bills by 50 percent. At least two more states copied the power-rates policy. More may follow as voters go to polls in nine phases April 7 through May 12.

The states are carrying forward Kejriwal’s campaign even though he resigned after 49 days in office, failing to get Delhi’s lawmakers to pass an anti-corruption bill.

Cheaper Electricity

With Kejriwal out of power, his plan to provide cheaper electricity in Delhi through state subsidies is set to end March 31. Yet the other two provinces, Haryana and Maharashtra, both ruled by the Congress party, will go ahead with state-funded cheaper power.

India’s pickle stems from trying to provide power to consumers below cost. It’s a policy goal seen in other nations, such as Indonesia and Spain. Basically, retailers, including Tamil Nadu Electricity Generation & Distribution Co. and Punjab State Power Corp., sell power at a loss, after having bought it from generators using ever increasing debt. It’s a debt spiral that Spain has failed to extinguish for more than a decade, while in India, it seems ever further from resolution.

The payments crisis in India will lead to losses at generation companies. The power retailers, including units of Reliance Infrastructure Ltd. (RELI) and Tata Power Co. (TPWR), owed 155 billion rupees ($2.6 billion) to state-run generators as of Jan. 31, according to power ministry.

Reliance Shares

Reliance Infrastructure, which also distributes electricity to India’s financial capital of Mumbai, fell 16 percent in the two months since Kejriwal was sworn in on Dec. 28 and rose as much as 3.6 percent in Mumbai trading today. Tata Power dropped 17 percent in the period and gained as much as 2.8 percent today. The benchmark S&P BSE Sensex (SENSEX) gained 12 percent in the two months.

Within three days of taking office, Kejriwal ordered an audit of the two companies’ electricity distribution units in Delhi.

S. Arulsamy, finance director of Tamil Nadu Electricity, and S.C. Arora, finance director at Punjab State Power, didn’t reply to e-mails or answer calls to their offices.

The issues behind India’s blackouts range from delinquent retailers, including some controlled by a billionaire, to antiquated transmission grids and alleged corporate corruption.

Yet the fixes may take a back seat to political promises -- at least until May. That’s when the new government is scheduled to be in office, after national elections in which Kejriwal’s party, Aam Aadmi, or “Common Man” in Hindi, runs for the first time.

Missed Payments

In the meantime, lenders are bracing for more missed payments and have threatened to not roll over loans.

In Delhi, home to 16.8 million people, shrinking credit has led to defaults in payment of dues and letters of credit by two electricity retailers, BSES Rajdhani Ltd. and BSES Yamuna Ltd., both controlled by billionaire Anil Ambani’s Reliance Infrastructure.

NTPC threatened to stop supplies if payments were not cleared by Feb. 11. The nation’s Supreme Court on Feb. 7 intervened, forcing NTPC to give the retailers more time.

A spokesman for Reliance’s units declined to comment.

Kejriwal, who won the Ramon Magsaysay award in 2006 for anti-graft crusades, fasted for days ahead of provincial elections last year. He scaled electricity poles to reconnect households whose lines were cut for overdue bills and vowed to end corruption in the distribution of electricity and water. The award is popularly called Asia’s Nobel.

‘Bad Economics’

“It’s bad economics and bad politics,” said Debasish Mishra, senior director of energy practice at Deloitte Touche Tohmatsu India Pvt. in Mumbai. “More states may follow Delhi’s example before the general election and this can push the sector turnaround by a few years” into the future.

The federal government in September 2012 approved plans to restructure 1.9 trillion rupees of short-term loans of distributors of seven states on condition they raise tariffs to consumers every year, curb thefts and cut transmission losses.

According to the debt-restructuring plan, the regional governments will take over half the debt of their distribution companies. The other half will be reorganized by banks through repayment moratoriums.

“Electricity reforms are no longer a choice; they are a necessity,” said Pawan Parakh, a Mumbai-based analyst at Dolat Capital Market. “Reason will prevail once the elections are over.”

Budget Deficits

The distribution companies are meant to make up the losses arising out of selling power at below cost through subsidies obtained from the provincial governments, which run large budget deficits. Often, the subsidies are delayed forcing the distributors to take on more debt.

Of India’s total generation capacity of 234 gigawatts, almost 10 percent is lying idle, according to Hari Das Khunteta, former chairman at Rural Electrification Corp. and chairman at Altius Finserv Pvt., a Mumbai-based consultant. NTPC keeps idle about 3,000 megawatts, or 7 percent of its capacity, due to lack of demand.

Meanwhile, generation costs increase, as coal shortages force power producers to import more fuel at higher costs and pass those on to the distributors.

“There continues be a gap between the cost of purchasing electricity and the selling price,” Dolat Capital’s Parakh said. “Tariff increases have become absolutely necessary for most state utilities to survive and any effort to prolong populist cuts will mean more trouble.”

To contact the reporters on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net; Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Todd White, Indranil Ghosh, Sam Nagarajan


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