The Economic Times daily newspaper is available online now.

    Privatisation of discoms to unlock a market bigger than telecom: Vinayak Chatterjee

    Synopsis

    ‘Keep an eye on goods and services companies that enter the electricity distribution space.’

    Vinayak Chatterjee, Feedback Infra-1200ETMarkets.com
    For corporate India, privatisation of discoms is probably the biggest investment opportunity that is staring at it right now, says the Chairman, Feedback Infra.

    The government has made moves towards privatisation of discoms and has released draft bidding guidelines. The state governments have been trying to address some of the operational issues for a long time and you have been very vocal in your call for privatisation. Has there been a change in the way state governments are looking at this?
    The Government of India power ministry issued the draft standard bidding documents for privatisation of power distribution activities across the nation both for states as well as the union territories. In my view, this is one of the most important steps that the government has announced. While a lot of discussions are going on about the farmers bill, this is one of the most important reforms that has been unleashed on two counts.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit
    IIM LucknowIIML Chief Operations Officer ProgrammeVisit
    IIM KozhikodeIIMK Chief Product Officer ProgrammeVisit
    One, it gives a very clear message about the revival of PPP as a concept. The fact that it is applied to one of the largest consuming sectors in the country which is electricity and so the market is going to be as large or bigger than telecom. The government has issued a document for privatisation of distribution and it is important to grasp the enormity of this step as well as the positives and concerns.

    The biggest positive interestingly in all urban areas is that the government expects the private sector to own 100% of electricity distribution operations and in mixed rural-urban areas, it expects private sector to own 74%. That is a significant handover of a sector which has largely been 100% state controlled, into private hands.

    The second point where I would like to complement the power ministry and their advisors is that there is a very good process overview on how the transaction would be moving. For example, the document clearly lays out the pre-transaction handling of processes, transactions stage activities and the post transaction activities. It also takes the bull by the horns by saying that unlike the earlier discussions on Air India and some other PSUs, the discoms come with very complicated accounts but the standard bidding document puts forth very clearly that the winning entity will be provided with a clean balance sheet, free of accumulated losses and all unserviceable liabilities.

    The market today is mixed between what we call the licensing model and the franchise model and this bidding document clearly recognises the role that franchises play and have included them in the eligibility criteria. There are some issues but we can look at the details later. Then there is obviously a concern when the people who are power generators, who have medium to long term power purchase agreements called PPA with the discoms. The document is very clear in its stand that all existing power purchase agreements will be transferred to the new SPV which will be controlled by the private sector. There is some flexibility required but that again is a matter of detail which I will come to later.

    "It is a vast new market and would mark a major milestone in the economic history of this country."

    — Vinayak Chatterjee


    Remember, most of the time when the private sector is allowed to enter an area dominated by the government, it comes up against the baggage of overstaffing and people. The document also has a clear glide path on how staff transfer and absorption or reabsorption of staff will happen. Historically, this sector was eligible only to people who had qualifications in electricity generation or in distribution. But there is a small set of players. It enlarges the catchment area of potential bidders by including BOT/PPP players in generation and transmission.

    All these points send some very strong signals to the market and I think a lot of investors now are going to go back to their project departments, to their boards and try and look at how they can enter this vast new segment. It is much larger than many things being discussed now like railway train privatisation or certain other issues. It is a vast new market and would mark a major milestone in the economic history of this country.

    Having said that, let me point out some of the issues that need addressing. In any complicated exercise of this type, even a single entity transaction like Air India has gone through so many hoops that when you talk about the privatisation of electricity distribution across the country, there are some wrinkles to be ironed out and the document and the people who are behind it have also recognised that in the weeks and months ahead, there needs to be a lot of positive engagement and discussion to iron out the wrinkles.

    Let me speak about a few of the wrinkles that are important. One is that there is the eligibility criteria. While it enlarges the number of players from different sectors like BOT operators, it is very restrictive in its financial stand. For example, it asks for a critical net worth of Rs 2,000 crore of the bidding entity and Rs 400 crore of internal cash. Now this is an omnibus eligibility criteria which to my mind has very little meaning.

    Let me give you an example. The union territory of Lakshadweep has a market size of Rs 130 crore of electricity consumption whereas the large discom in Maharashtra or UP could easily touch Rs 5,000 crore. To have the same financial eligibility criteria of Rs 2,000 crore net worth for Rs 130 crore bid or a Rs 5,000-crore bid to my mind does not make sense and therefore the most logical thing to do would be to get an estimate of the size of the SPV and make the financial condition a certain ratio of that that is point number one.

    Point number two is that most state governments are today subsidising electricity. A state like Madhya Pradesh for example gives 90% subsidy to people below a certain consumption level, bottom of the pyramid. Now you cannot have a drastic overnight change by asking a private sector company to just come and clean it all out. There has to be a glide path, a transition path where for the next four-five years the state government gradually brings down its subsidy and its support which has been happening for the last four decades. It cannot vanish overnight. Now this element in the bid document does not seem to have got the attention it deserves.

    The way discoms work is that they have PPAs, they purchase power and they distribute it. Do you think setting up a complex mechanism where there is pilferage, there is complexity, will be very easy to implement?
    Well, yes and no. After all, Delhi has got privatised. The complexity was managed pretty well. Mumbai has for years been running with a private system and so has been the case in Ahmedabad, Kolkata and many new areas have also come in recently. In Agra, there is Torrent and recently in Odisha, there is with Tata Power. The Feedback Energy Distribution Company (FEDCO) runs areas in Meghalaya and Tripura. There are complexities but there is a complete understanding with the electricity department and the regulators as to how the complexity will be handled.

    But what is important is the fact that there will be disputes. In the big document as of now, there is a certain dark shade of grey in how disputes will be quickly resolved. While they have set out some kind of a roadmap as to what will happen during the transaction management period, the question is disputes, which are bound to happen, need to be resolved very quickly and right now the private sector does not have great confidence in the regulatory authorities’ speed of decision making as well as with the appellate authorities and then from appellate authority you go to the Supreme Court.

    So if that is going to be the dispute resolution mechanism then I am afraid that the enthusiasm will be muted and therefore it is important for the policymakers to to lay out a very clear dispute resolution, dispute redressal mechanism which will be quick, neutral and impartial in the next round of discussions on the standard bidding document. There genuinely has to be a level playing field between the government and the private sector.

    That is to my mind one of the bigger grey areas in the document. And the other element that needs to be taken care of is that the document says that every bidder should be a registered company. Now please note that some of the biggest electricity utilities in the world are owned by PE funds, pension funds, provident funds which are not necessarily organised as companies but are organised as limited partnerships or are organised as trusts and are organised on a different entity so it is a restrictive clause to say that only companies should be allowed to bid.

    There is a second level of restriction which says only two people can form a consortium. I personally think that you need not throw open the floodgates but you should at least make it eligible for a consortium of three so that there is a technical partner, a financial partner and an operations and maintenance partner. So that is required.

    Also, the condition of lock-in of shares for 10 years is rather restrictive for people who want to come in as PE funds and others to fund these SPVs. There should be a provision for non important or non co-investors to be allowed to exit if they are financial investors after five or seven years. And the last and the most important point is that there is very little drill down on capex.

    Now one of the biggest things in electricity distribution is to address the operational chori and issues on the ground. The other is to completely upgrade the network and upgradation of network which has not been addressed for decades and that requires a significant amount of capex. That capex will ultimately result in the efficiencies coming into the system but the document is silent on the extent of capex that the person coming in or the private sector coming in will bring in. There has to be some normative issues outlined here as well as how much will the regulator allow the capex in a pass through into the tariff structure so that the cost of capex is allowed to be passed on to the tariff to the consumer. So it is a very big, un-addressed area in the document.

    And the last thing is it appears that the bidding document is geared towards immediately addressing the government’s concerns or starting off with UTs. It needs to recognise that the larger discoms are too big to handle, so there has to be a carve out of smaller areas maybe comprising four, five or six districts to enable the complexities to be handled in a much more disaggregated manner.

    When a sector changes, there are second derivative beneficiaries you. Could the electricity distribution upgrade of infrastructure happen now?
    I have said this earlier in a larger context that do not look at the EPC and the BOT players but look at the second differential of people who supply goods and services to these sector. Investors should keep their eyes on any goods and services companies that enter the electricity distribution space. It could be software companies that will redesign the software programmes that will work with smart grids and smart meters. It is the suppliers of smart meters, cables, insulators, transformers every kind of stuff that goes in because this is now going to be the biggest market reform that is happening after the agriculture stuff settles down. So keep your eye on all those companies that make electricity stocks and I would probably bet that in about 10 or 12 months from now, you will see a rise in those stocks but not immediately.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in