ap power reforms

 sickle_s.gif (30476 bytes) People’s Democracy

(Weekly Organ of the Communist Party of
India (Marxist)


No. 02

January 13,2002

Andhra’s IPP
Policy: Private Loot of Public Finances

Prabir Purkayastha

has recently signed a Memorandum of Agreement (MoA) with a set of Financial Institutions
(FIs), primarily Power Finance Corporation (PFC) and Industrial Development Bank of India
(IDBI), so that that these FIs can finance six Independent Power Producer (IPP) projects
in Andhra. Andhra and the central governments have claimed these steps as a great
innovation in power sector reforms.

Before we go
into the salient points of the Agreement, it is necessary to see why such an agreement is
necessary at all. The prime objective that the IPPs were supposed to have fulfilled –
bringing in additional capital to reduce the burden on public finances — never happened.
The proposal to induct private capital in the power sector was to allegedly address the
lack of resources for public investment in power projects. The Gazette of India
notification issued by the ministry of power in 1991 stated “With the objective of
bringing in additionality of resources for the capacity addition programme in the
electricity sector, government has formulated a policy to encourage greater participation
by privately owned enterprises in the electricity generation, supply and distribution
“. The IPPs however, brought in very little capital but have all
“borrowed” public funds for most of the capital costs of their projects.


Dabhol Project,
for example, saw Enron “borrowing” 1.2 billion dollars from Indians FIs who also
guaranteed another 700 million dollars borrowed by Enron from foreign lenders. The
Maheshwar Project of S Kumar is being provided 90 per cent of its funds from FIs, the
public sector and the MP government. The Spectrum Godavari case (see Box) has shown how
the promoters have taken public money – loans from FIs — and re-circulated a part of
it through the turnkey contractor, Rolls Royce, and brought it in as their
“equity”. The net result of these shenanigans has been high plant costs and
expensive power to the consumers. With such high costs, the IPPs are becoming increasingly
unviable, and the FIs are faced with their loans turning into Non Performing Assets
(NPAs). The Dabhol case alone will see NPA due to one IPP of the order of Rs 9,000 to
12,000 crore.

It is in the
context that we have to see the existing and future IPP projects. Even after the Dabhol
fiasco, the FIs have learnt nothing. Nor has the government. This is why they are trying
to push this bankrupt IPP mode of power development in Andhra.
As public outcry has
made it difficult to raise tariffs continuously, the IPPs need guarantees to borrow money
for their projects. If they can borrow enough funds, they would take out their equity plus
profits by recycling it through their contractors in the same way as in Spectrum or in
Dabhol. They would then “own” these plants as well have made a tidy sum even
before a kilowatt is produced. If the project becomes sick like Dabhol, the FIs, will be
left holding the bag. Only their money – public money – will be at stake. If the
state government and the Regulator agrees to the high price of IPP power, the
“owners” will continue to rake in the moolah without spending a single paise of
their money towards equity.

The important
issue here is the bankability of the projects. None of the “owners” are willing
to mortgage any of their assets for taking loans. They have argued that AP Transco must
take the entire risk of the project and give suitable guarantees to the lenders. The above
MoA signed between FIs, AP Transco and the Andhra Pradesh government has done precisely


Let us forget
all the cosmetic measures that have been promised, such as 100 per cent Metering, Energy
Audit, reduction of T&D losses etc. These are measures that need to be taken in any
case whether there is an IPP policy or not. The operative part of the agreement relevant
to the IPP policy is that AP Transco is going to mortgage its assets to the FIs for loans
that will be taken by the IPPs. If this is not enough Transco has also agreed to
hypothecate all its present and future receivables till it opens an “escrow”
account. This “escrow” account will be such that the IPPs will have the first
charge on the money that will be received by AP Transco. In other words, all the risks of
the IPP projects are being guaranteed by the state owned AP Transco.

after restructuring of the erstwhile AP State Electricity Board, there are a number of
distributors that have been hiked off which are slated for privatisation. The transmission
system is with the state owned AP Transco, who will buy power from the generators and sell
it to the distributors. The generators, who are also to be privatised, will sell power,
not directly to the distributors but to Transco. The question here is a very simple one.
If the FIs are giving the money on the basis of AP Transco’s guarantees, why should
the IPPs own the projects? Textbook capitalism tells us capitalists get profits as they
take risks. Apparently, this is not true for capitalists in India and certainly not in the
power sector. Gone also is the argument that IPPs bring in additionality of resources.


It is now clear
what is going on in the power sector reforms; it is private loot of public capital. FIs
are simply bankrolling private capital. This is what we have seen in the UTI scam as the
Tarapore Committee Report makes clear. And this pattern is continuing in the power sector
with money coming to private coffers from PFC, IDBI and IFCI.

It is bad enough
that the entire MoA is geared to forcing AP Transco to carry all the risks of IPPs. Even
worse, is that the projects proposed are themselves viable. Whether the risk is borne by
AP Transco or the FIs, the six IPP projects (given in table below) are likely to sink even
if the project costs are not unduly inflated.

    Sr. No. Proposed IPP MW
    1. Ramagundan Extn
    (BPL Group)
    2. Konassema Oak
    Well Power Ltd
    3. Vemagiri CCGT
    (Ispat Power LTd)
    4. NCC-Gautami
    5. BSES Andhra
    Power Ltd
    6. Jegurupada II
    (GVK Industries)
    Total 2,239

In the above
2,239 MW of IPP capacity, only 520 MW – Ramagundan plant — is coal based. The rest
1719 MW – is naphtha or gas based. As there is not enough gas to support these
projects over and above what has already been implemented: Vijjeswaran, Jegurupadu I,
Lanco Kandapalli and Spectrum Godavari Projects. In the absence of gas, these projects
will be largely liquid fuel based.

This brings up
the next question. If there is not enough gas, why is the AP government pursuing the
hydrocarbon fuel route? Once these projects go on-stream and we see that there is not
enough gas, then the true cost of IPP power will become clear. It is in order to hide this
reality that the Andhra government is talking about there being enough gas for all these
projects. There may be gas, but only in Chandra Babu Naidu’s imagination
unfortunately this gas does not burn and cannot produce any power.


The IPP policy
and the so-called MoA and facilitation agreements are emerging clearly as another big
scam. Already the existing IPP projects have pushed up the rate of power in Andhra sky
high. With naphtha as fuel for the new projects, the entire power sector in Andhra will
turn sick. For those who are signing these agreements and the IPP promoters, it may
matter very little as they are more concerned about sanctioning projects and securing
loans rather than making these projects successful. The promoters will have made their
money; those who hold the reigns of power in the state today, will mostly probably have
been consigned by then to the rubbish bin by the people of AP. However, the Indian people,
whose money the FIs are gifting lavishly to the IPPs and the people of Andhra, who will be
left with a bankrupt power sector, will have to pay a very heavy price for these misdeeds.

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