Stressed power assets: Is there any clear and ultimate 'Samadhan'?

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Replying to the Union power ministry’s request for extension to stressed power projects, the Reserve Bank of India (RBI) has said that no such extension would change the fundamental issues facing the power sector. “No special dispensation could resolve the underlying problems for the sector,” it has said.

With the August 2018 deadline for 30,000 Mw of stressed power assets to seek a resolution nearing, and another 50,000 Mw staring at a debt crisis, the RBI statement holds a cruel mirror up to them. In February this year, the central bank had mandated banks to classify a delay of even one day in debt servicing as a default. The notification also mandated that resolution proceedings against stressed accounts be completed in 180 days.

Since then, leading bankers like SBI and sector-focused ones like Power Finance Corporation (PFC) have been designing several bailout schemes. Among lenders, PFC has the highest exposure to the sector, at Rs 587 billion, and it is staring at the possibility of 14,000 Mw of projects landing under insolvency proceedings. SBI has a debt exposure of around Rs 297 billion, and PNB of Rs 279 billion. Among others likely to face the issue of mounting bad debt on account of power generation assets are Axis Bank, IDBI and ICICI Bank.

SBI is planning to select some assets for its pilot scheme under which it, along with a funding agency, will take over the debt, hire an operations & management (O&M) company, and sell it off later. To start the process, the bank has shortlisted 11 power projects in which it is one of the lenders.

The industry is sceptical about this initiative bearing any fruit, given the tight deadline. But SBI is confident that the plan will at least be the touchstone for buying power projects, even when they land at NCLT.

Officials said SBI was unable to find agencies to join hands as it alone could not take over the debt. Finding buyers for these assets would be another uphill task, according to executives.

PFC, on the other hand, has invited expressions of interest (EoI) for three assets and received initial interests from some marquee global investors. It is expecting to take a haircut of more than 50 per cent when power assets go through the insolvency route. Sector experts say, after a haircut, most assets will be available for Rs 2.5-3 per unit cost, which is an attractive proposition for many institutional financers.

Another sector lender – REC Limited, which has a low exposure to power generation assets, is also planning a bailout scheme, at the behest of the power ministry. It is learnt that REC will form a special-purpose vehicle (SPV) to take over the debt of stressed assets and issue bonds against it.

“The plan depends on whether the RBI would approve the SPV and also agree to provide forbearance for the bonds. The deadline for the issuance of bonds is also tight,” said a power ministry official.

While there are efforts being made to resolve coal supply and lack of power demand, no bailout scheme seems to focus on this.

“Although the demand for electricity is getting ramped up (7.7% in Q4 FY18) with an acceleration in the economic activity, it will not immediately result in new medium- and long-term power-purchase agreements being offered by power distribution companies (discoms). This is because the existing PPAs are being better utilised and increasing renewable procurement,” says Debasish Mishra, partner, Deloitte Touche Tohmatsu India LLP.  

While the power sector pleads for a deadline extension, the success rate of reform plans has been low. Coal auction under the SHAKTI scheme for stressed power projects was a success with around 9,000 Mw of projects lining up to cut their power selling rate for assured coal supply.

Private power producers have since complained about less coal supply under the scheme. The coal ministry, on the other hand, has pointed out to power producers’ delays in getting PPAs amended for supply of low-cost power in lieu of coal supply, under the SHAKTI guidelines.

Of the 40,000 Mw of capacity identified by the finance ministry as under stress due to several reasons, around 10,000 Mw are without any PPAs. Mishra says, unlike the steel sector, where a resolution was possible with a sectoral turnaround, “it’s difficult in power without long-term PPAs and assured coal supply in sight”.

There has been only one scheme from PFC to invite states to participate in a pooled bidding for purchasing 2,500 Mw from stressed assets. The result of the bidding is yet to be disclosed.

Around 8,500 Mw of stressed projects have made no significant progress on ground, raising questions over the process of their award. Some 11,000 Mw of assets are those where a resolution is possible. With legacy issues weighing more than resolutions, debt recast and bailout tend to solve the immediate problem, but the fundamental problems run deep.

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