Poor bidding, again PDF Print E-mail
Thursday, 28 August 2014 00:00
AddThis Social Bookmark Button

Larger implications of how we deal with Tata-Adani

The Supreme Court’s staying of the interim order passed by the Appellate Tribunal for Electricity (Aptel), allowing Tata Power and Adani Power compensatory tariff, would not have been worrying in the normal course, except for some accompanying observations. While asking the tribunal to reach a decision quickly, the bench was quite stinging in its comments—“...it’s a contract which you agreed to … now you can’t claim that it is a loss”. The comments, in line with the argument the state electricity boards (SEBs) have been making, could have a bearing on the case which, in all probability, will come back to the SC after Aptel finalises its order.

There is little denying, as the judges have said, Tata-Adani have signed a contract and it has gone horribly wrong. But here is the catch: if the compensatory tariff the Central Electricity Regulatory Commission (CERC) awarded is not agreed to, what are the options? Shutting the plants down is one option, but that could take decades as all concerned—the SEBs, the power companies and the lenders—will go to court. Two, even after the compensatory tariffs are added in, both Tata-Adani power tariffs are significantly cheaper than some of the new projects—at around R2.8 per unit after the compensatory tariff, the Tata power tariff is way below the R4.1-4.5 it would cost were new units to be set up today. It is important to keep in mind here that CERC did not grant Tata-Adani the force majeure—due to the change in the Indonesian law, they wanted to renegotiate tariffs. Instead, CERC took recourse to Section 61 of the Electricity Act which enjoins it to ensure the cost of electricity is recovered in a reasonable manner. And while doing so, it did various things. For one, it offset the profits the Tatas would make by selling Indonesian coal at higher prices. Two, the power produced above a PLF of 80% is to be sold in the market and the profits from this used to lower the compensatory tariff. Also, in order to ensure Tata-Adani don’t get away scot-free, CERC has cut their return on equity by 1 percentage point. Indeed, many other power projects are also in the same kind of trouble as Tata-Adani—a large part of the blame has to lie with a faulty ‘single-part tariff’ which asked bidders to take a call, completely unreasonably, on what fuel costs would be over 25 years.

The larger point which has implications for all PPP projects in the country is what happens if a project runs into trouble, either due to costs shooting up or revenues collapsing? If they were PSU projects, there is no doubt, the costs would just be absorbed by the budget. In both PSU and private projects, banks routinely restructure loans as the costs of not doing so are higher. Given this, it makes sense to adopt a more flexible approach for PPPs. Indeed, the reason why all manner of PPP projects in India are stuck is precisely because there is no framework to allow for projects to be reworked; indeed, the CERC deserves to be lauded for its attempt to interpret its mandate in a more liberal manner so as to ensure the sector remained viable.


You are here  : Home Goverment Poor bidding, again
intalk.eu - This website is for sale! - intalk Resources and Information.