Andhra’s IPP Policy: Private Loot of Public Finances

Andhra Pradesh 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 field”. 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 from Indians FI’s who also guaranteed another $700 million borrowed by Enron from foreign lenders. The Maheshwar Project of S. Kumar’s is being provided 90% of its funds from FIs, the public sector and the M.P. 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 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 crores.

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 that.

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.

Incidentally, 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 FI’s 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.

Six Proposed IPPs

Ramagundan Extn (BPL Group)  520 MW
Konaseema Oak Well Power Ltd  445 MW
Vemagiri CCGT (Ispat Power Ltd.) 370 Mw
NCC-Gautami Consortium 464 MW
BSES Andhra Power Ltd.  220 MW
Jegurupadu II (GVK Industries)  220 MW
Total 2,239 MW

In the above 2,239 MW of IPP capacity, only 520 MW – Ramagundan 520 MW 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 claims; 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 than successful projects. 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

Spectrum Power Generation Limited Scam

Originally, NTPC was supposed to put up the 200 MW Godavari Gas based combined cycle plant t in Kakinada. It had secured the gas allocation, procured 600 hectares of land and received the necessary clearances. With the new twist in the power policies in 1991  — the IPP policy – NTPC was asked to hand over the project to a company called Spectrum Technology Limited, promoted by an NRI, A.V.Mohan Rao. Mohan Rao then brought into the project another company called Jaya Foods, owned by a relation of his, Krishan Rao. NTPC was also given a small stake –a 10% equity holding — in lieu of its development expenses. The new company that was floated was Spectrum Power Generation Limited (SPGL), in which Mohan Rao and Krishan Rao held 90% of the shares.
Krishan Rao came to control the company right from the beginning and decided to unilaterally cancel the promoters’ agreement with Mohan Rao and NTPC and deny them shares in the company. Both NTPC and Mohan Rao filed suits in the Delhi High Court against Krishan Rao as a result.

As a result of these litigations, a number of documents have been furnished to the courts, which bring out the true nature of these IPP projects. There are two major charges that have been raised against Krishan Rao. One of it pertains to the EPC contract – the contract granted to Rolls Royce of UK, who was the prime contractor for the project. Rolls Royce not only had to supply the plant and equipment, but as turnkey contractors had to build the entire plant and hand it over in working condition to the Spectrum. Documents submitted by Mohan Rao now show that Rolls Royce paid as “commission” a sum of US $19.3 million plus 1.3 million pounds to Tawanada Services, a bogus company set up by Krishan Rao in British Virgin Islands. Krishan Rao also awarded fake contracts worth Rs.30 crore to other companies, again run by his sons and other relations, contracts that were finally also included in the scope of the EPC contract. In the same period, he also declared under the VDIS scheme, income worth Rs.35 crore. The total turnover of Jaya Foods, a vermicelli company then was Rs.2 crore per year. All the equity that Krishan Rao brought into the project was nothing but money paid to him as kickbacks by the contractors and fraudulently siphoning of project funds. This is no longer conjecture, documentary evidence submitted in courts, audits carried out at the behest of IDBI, one of the lenders and Income Tax audits have all borne out the tale of fraud that we have narrated above.

These have not only hiked up the cost of this project to 1100 crore for what was for NTPC a Rs.400 crore project, but have also resulted in criminal violations of law. The above are criminal violations of FERA, Company Law and also a fraud on IDBI who were the prime lenders to SPGL. However, neither the Government nor IDBI are at all keen to follow up the matter. Krishan Rao’s entire so-called equity is a fraud as it has been brought in from the loans given by IDBI to pay contractors such as Rolls Royce. If we just total up the amounts that can be clearly shown as monies secured by fraud, it amounts to about Rs.180 crore. And this is only what is visible.
The interesting part of the Spectrum project is that it is not more expensive than other similar projects. Jegurpadu I project, has a higher capital cost as does Enron’s Dabhol project. This makes clear what the IPP policy is all about and why IPP power is so expensive