After a promising start to the decade in 2010-11 with GDP growth of 8.4 per cent, a fiscal deficit reduction to 4.7 per cent from 6.4 of GDP in 2009-10, and a fall in the current account deficit to 2.6 per cent from 2.8 per cent in 2009-10, GDP growth declined sharply to a nine-year low of 6.2 per cent during 2011-12. The slowdown is in all segments of the economy, including infrastructure. The past year was characterised by a burgeoning current account deficit, subdued equity inflows, depleting foreign exchange reserves, rising external debt and sluggish FDI inflows.
With growth imperatives warranting an investment requirement of around US$ 1 trillion for infrastructure during 2012-2017 (with approximately 47 per cent of this projected to come from the private sector), investment sentiment needs a boost to reassure investors that infrastructure development is sought on a viable basis (see Table A for details). Some “quick-wins” could fix the critical developmental/construction phase issues (land acquisstion, environment and forest clearance regimes require predictability and expedition) as well as some regulatory and project life-cycle issues (salvaging stranded assets of over US$160 billion) expeditiously to tackle the growth challenges.
There is an urgent need to recognise that, in Phase 2 of infrastructure development with PPP post 1991, the old model of risk allocation and institutional framework for infrastructure projects in India needs a revamp. We have learnt some telling lessons (negative and positive) from the “samudra-manthan” in the first 15 years of infra-build. Clearly the old risk-institutional compact of the 1991 era which garnered private investments with globally the largest set of project development in PPP mode [Table B], needs to refocus on the project life-cycle issues that deal with unforeseen and uncontrollable material changes in a business- like manner.
The recent decisions of the Central Electricity Regulatory Commission on imported coal impact on bid-out PPAs in the cases of Adani Power and Tata Power are a timely and important pointer of what needs to be done to strengthen the institutional and contractual matrix across various infrastructure sectors. Essentially, the issue relates to Adani Power and Tata Power resurrecting the long-term power purchase agreements entered into with the procurers (ie, the Discoms) which had been rendered unviable due to changes in the Indonesian regime governing coal imports and international coal prices. The agreements were entered into pursuant to a competitive bidding process and based on the standard documents issued by the Indian Ministry of Power. With bankruptcy imminent, the developers sought regulatory intervention to offset the adverse impact of the unforeseen, uncontrollable and unprecedented escalation in imported coal price arising out of post-award changes in law by the Indonesian Government that directly impacted availability and price of imported coal for the projects.
The regulator had the arduous task of balancing the sanctity of contracts while ensuring the economic and financial viability of the project. The regulator had the benefit of the statutory framework, which provided for determination of tariffs that safeguard consumer interest while guaranteeing recovery of the cost of electricity in a reasonable manner. The Commission recognised that the hardship arising owing to unforeseen events had totally destroyed the economic foundation of the project and, if not remedied, was bound to result in the project being shut down. The regulator acted in the interest of consumers to secure reliable power supply recognising here that increase in international coal price in the face of shortages in the nationalised domestic coal industry has to be addressed by providing a compensatory tariff mechanism to offset the adverse impact of the change in law and prices while ensuring that there was no gain to the developer on account of this. As and when the hardship is removed or lessened, the compensatory tariff would be revised or withdrawn. Such a mechanism will make the power purchase agreements workable while ensuring supply of power to consumers at competitive rates. Lastly, the Commission recognised that financial viability of the generating stations is an important consideration to enable them to continue to supply power to consumers and directed that through a consultative process, a compensatory tariff (over and above the tariff decided under the power purchase agreement) may be mutually determined through a consultative process so as to mitigate the hardship arising due to unforeseen circumstances.
While it is attractive to see the instant pronouncement of the Commission as not being pro-consumer because of potentially higher tariffs, that approach begs the questions of whether the same is prudent and in the national interest because (a) if this is not done what is the financial price of such decision (re stranded investment with 70 per cent to 75 per cent capex coming from banks as unserviceable debt finance which belongs to taxpayers and the economy), (b) economic price to be paid (i.e. loss of Re.1 of power supply is stated to cause loss of Rs.150 of productivity, as well as potential loss of FDI and private investment due to eroding investor confidence), and (c) as a nation we will be depriving ourselves of a chance of getting back to 8 per cent plus GDP growth.
Undoubtedly, the concerns of windfall profits and probity of the decision-making warrant the creation of a robust regulatory and legal regime to address such developments. The decision underlines the need for an independent statutory and accountable expert body (with law, finance, project management and engineering skills) and statutory objectives of balancing growth with affordability to address the emergent challenges faced in national highways, civil aviation, transmission and pipeline projects, coal, et cetera. It also brings to the fore something that the public discourse on this issue has lost focus of: infrastructure constitutes a public good, irrespective of ownership. The asset is established, maintained and operated pursuant to a permission/ concession/license granted by the sovereign, with 70 per cent to 75 per cent finances coming from scarce capital, that is public in nature and has significant welfare impact when utilised optimally. In the event of financial collapse of the concessionaire, provision of the infrastructure supply remains the responsibility of the state.
The expert statutory tribunals that deliver timely justice transparently while implementing public policy in the power, telecoms and capital markets offer a model to build upon . These bodies have a similar expert appellate body and the second appeal on substantial questions of law lies to the Supreme Court. Expert adjudication avoids the multi-stage interventions by civil courts as seen in arbitration and other alternative dispute resolution mechanisms making them ineffective on time and cost indices and can resolve issues in a couple of years. It can overcome collective/cooperative action failures in the political domain by reducing the chances of win-lose (eg, T&D losses in state electricity distribution), winner-take-all (eg, iron ore mining in Karnataka), or even lose-lose outcomes such as the case being discussed here. Of course, this model, virtuous in theory, works best in the challenging practical political economy of India characterised by distrust and litigiousness. Regulators need not just political and legal support but have to prove themselves over time on the parameters of transparency, impartiality and autonomy. Such is arguably indeed the case with the Central Electricity Regulatory Commission.
This decision shows the way forward to the big issue of stranded assets in diverse infrastructure sectors in India – with around Rs.750,000 crores of bank financing stuck and Rs.10,50,000 crores of sunk cost. There are around 30,000 megawatt of power capacity stranded owing to coal and gas supply issues costing between Rs.125,000 to 150,00 crores.
The time has come to recast the dice to let national economic interests overtake politics.
[Amit Kapur, Partner JSA, Advocates & Solicitors: This article represents personal views of the authors and not the views of the firm]
CERC decisions dated 2nd April 2013 in Petition 155/MP/2012 titled Adani Power vs Gujarat Urja Vikan Nigam Ltd & Others and 15th April 2013 in petition 159/MP/2012 titled Coastal Gujarat Power Limited vs Gujarat Urja Vikan Nigam Ltd & Others.