Interview with Lalit Jalan: “The distribution segment will see more private sector participation”

“The distribution segment will see more private sector participation”

For de-stressing the distribution segment, the government needs to focus on addressing the legacy issues of discoms by devising customised solutions, believes Lalit Jalan, chief executive officer, Reliance Infrastructure Limited (RInfra). Excerpts from a recent interview with Power Line…

What have been the power sector’s most notable achievements in the past one year? What have been the major hits and misses?

In the past year, the power sector has had many notable achievements. India’s rank rose to 26 in 2017 as compared to 99 in 2015 on the World Bank’s Ease of Getting Electricity Index. For the first time, the energy deficit fell below 1 per cent (0.7 per cent) in 2016-17, while the peak demand deficit stood at 1.6 per cent. The sector also witnessed a 10 per cent increase in domestic coal production in the past two years. Another highlight was that under the new coal policy, power plants having letters of assurance have been made eligible to sign fuel supply agreements, while future coal allocations will be done on an auction basis. Also, coal swapping has been initiated, which will reduce transportation costs and help bring down the cost per unit.

There has been a 50 per cent growth in capacity addition in the renewable energy segment since 2014-15, till August 2017. The per capita electricity consumption (1,122 units) has increased at a compound annual growth rate of 5 per cent in the last four years. Almost 78 per cent of the village electrification target has been met.

Transformation capacity increased by 40 per cent from 530,000 MVA in 2013-14 to 740,000 MVA in 2016-17. The transmission line addition target was over-achieved by 12 per cent. Under the energy conservation drive, almost 262.9 million LED lamps were distributed.

There was an overwhelming response to the Ujwal Discom Assurance Yojana (UDAY), which saw the participation of 27 states. A loan amount of Rs 26.9 million has been taken over by the states and bonds issued for Rs 23.2 million. Regular monitoring of UDAY seems to have provided the desired impetus to improve the financial status of discoms. In addition, the Ministry of Power is trying to enhance transparency by launching apps on every aspect of sector performance.

What should be the topmost priorities for the new power minister?

The two top priorities for the new power minister should be ensuring uninterrupted fuel availability to power plants and working towards greater financial viability of discoms. In the long run, financially healthy discoms can de-stress the entire sector. A basic platform has been created by UDAY. Now specific issues related to the laggard discoms need to be addressed individually. For a turnaround, customised solutions need to be deployed for issues that have become chronic over the decades. The need of the hour is to sit down with an open mind to resolve the legacy issues faced by discoms. Further, the government should encourage private sector participation.

How would you assess UDAY and its impact on discom finances so far?

UDAY has resulted in a significant redrawing of discom balance sheets. The total liability opted for restructuring by 27 states through the issuance of bonds was 70 per cent of the total debt of discoms (Rs 2,690 billion of the Rs 3,820 billion debt). The average cost of supply (ACS)-average revenue realised (ARR) gap reduced by 26 per cent, from 61 paise in 2015-16 to 45 paise per unit in 2016-17. Aggregate technical and commercial (AT&C) losses reduced by 1 per cent from 21 per cent in 2015-16 to 20 per cent in 2016-17. For 2017-18, most state electricity regulatory commissions (SERCs) have realigned distribution losses equal to the UDAY targets and increased tariffs more or less in line with the UDAY loss trajectory. With debt restructuring and other operational interventions, discoms achieved savings of about Rs 150 billion in 2016-17. Moreover, book losses for participating discoms reduced by 22 per cent, from Rs 513.4 billion in 2015-16 to Rs 402.95 billion in 2016-17.

Although the performance of several participating discoms improved in 2016-17, they have still not been able to achieve the targets set under UDAY. For AT&C losses, they were unable to achieve the target of 18.7 per cent for financial year 2016-17. Also, the ACS-ARR gap target of 38 paise per kWh (actual 0.47 paise) was missed by 18 per cent. However, success hinges on relentless implementation by states. The timely issuance of tariff orders is key to the success of UDAY (four major states – Punjab, Uttar Pradesh, Rajasthan, Jammu & Kashmir – are yet to issue the tariff order for 2017-18). UDAY should not discriminate among end-consumers and include private discoms too. If implemented in Delhi, UDAY will help in reducing interest rates by up to 4 per cent and effectively bring down tariffs for consumers.

It is estimated that the demand for electricity will see a quantum jump after 2019 as discoms improve their performance under UDAY and other government initiatives. It is imperative that the targets under UDAY be achieved as these will be critical for the government’s Power for All objective by 2019. Complete village electrification is also expected to be achieved by May 1, 2018 and start yielding results thereafter. Once the financial condition of discoms improves, it will give them appetite to buy more power, leading to higher demand for power. Liquidation of regulatory assets in a timely manner by SERCs is key as it has reduced the ability of discoms to source additional power.

Recognising the limited success of the open access framework so far, the power ministry has recently released a consultation paper on the matter. What, according to you, would be the most effective strategies to create a more competitive market?

The consultation paper on the open access framework has proposed that consumers who choose their supplier under open access carry the associated risks and costs, and the balance consumers of the licensee do not bear the brunt. This is a welcome step as the paper recognises the various issues faced by discoms at the national level. Mandating power to be scheduled for at least 24 hours under open access will discourage consumers with a gaming motive while enabling discoms to manage power purchases efficiently. An additional surcharge would compensate the discoms for stranded capacity and a uniform approach will be followed in every state. The cross-subsidy surcharge is already capped at 20 per cent of consumer tariff in most states; hence, the need of the hour is to progressively bring tariffs also to ±20 per cent of the average cost of supply. Currently, tariffs allow the recovery of only 20 per cent of the fixed costs of discoms through fixed charges.

How has the distribution franchise model fared in India?

The distribution franchise model has existed for the past 10 years, with Bhiwandi being the first and the only successful franchise. In the recent past, few cities saw power distribution franchisees awarded with no major success. A few franchisees have recently been appointed in Rajasthan, Bihar and Jharkhand, but it is too early to comment on their performance. As power is the basic requirement for citizens, a long-term solution is needed. Privatisation is a better model and needs encouragement.

What have been some of the major business highlights for RInfra during the past year?

One of the major business highlights of the last one year was the favourable arbitration award of Rs 47 billion Delhi Airport Metro Private Limited. In the engineering, procurement and construction (EPC) segment, we won projects worth Rs 44 billion, of which the power sector accounted for Rs 37 billion and the road sector for Rs 7 billion. An EPC opportunity of Rs 200 billion is expected in the near future and we will be participating in it with a target to reach an order book of Rs 500 billion.

Defence will also contribute to the company’s growth as a sunrise sector. We are also operating the Mumbai Metro at world-class operational levels. Further, there are 11 road projects which are revenue operational and witnessing good growth. We are also going ahead with infrastructure investment trusts (InvITs) for seven road projects.

The performance of the Mumbai and Delhi discoms has improved on all fronts. There was a continued focus on loss reduction with AT&C losses now less than 8.5 per cent for the Mumbai distribution business and less than 12 per cent for Delhi. There is also increased focus on reaching customers at their doorstep through digital initiatives besides modern social media platforms.

What will be the company’s growth strategy for the next few years? What will be the key focus areas?

The company’s strategy for the coming few years will be a focus on transformation, a stronger balance sheet, stable cash-flows and an asset-light model, with respect to the three business verticals of power, EPC and defence. Our capex cycle is now complete as reverse cash flow has started. All projects are revenue operational. We are moving towards low debt and unlocking value for our shareholders. We are also focusing on getting pending arbitration awards at the earliest and trying to realise the arbitration awards given in our favour relating to the Delhi metro project and toll road projects.

EPC is our major pillar going forward. We have executed orders worth over Rs 500 billion in the last 10 years. We have won projects worth Rs 44 billion in the past year and another Rs 50 billion worth of projects are in the pipeline. We are awaiting the results for submitted bids worth about Rs 4,000 crore.

We are also open to participating in the opportunities that will come up in the power distribution space. We are focusing on growth through leveraging our expertise in various infrastructure segments – both organic and inorganic.

What is your outlook for the power sector in the next two to three years?

Discoms will become financially sustainable over the next few years. Fuel availability for power plants should not be an issue past this time frame. Substantial work will happen for de-congestion of the transmission corridor. Electrification of all villages will be completed in the near future and 24×7 power will be available to all in three years’ time. The contribution of renewable power will be more than 25 per cent of the total generation. The distribution segment will see more private sector participation.