The recent electricity tariff cut by the Delhi Government and Maharashtra wanting to follow suit has raised serious concerns among generators, electricity distribution companies, lenders and investors.
Pradeep Bavadekar, Managing Director, Mitcon, says such tariff cuts would lead to evolution of a new business model to provide some relief on the cost of funds for the electricity providers. Mitcon is a technical consultancy formed in 1982 by ICICI, IDBI, IFCI, SICOM (State Industrial & Investment Corporation of Maharashtra), MIDC (Maharashtra Industrial Development Corporation) and various banks. In a chat with Business Line , Bavadekar spoke of industry concerns and the impact of such tariff cuts on the financials of electricity service providers and generators.
Banks hire us for services such as techno-economic viability and feasibility studies, due diligence and valuations. For non-performing assets (NPAs) our services are sought as an agency under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI).
Then, there are businessmen, industrial houses and entrepreneurs for whom we prepare detailed project and market research reports for submission to banks.
You work across sectors. How much of it is in power?
We work in the power sector. However, decentralised power has been our forte. We are also strong in environmental engineering and have our own laboratory which is approved by the Ministry of Environment and Forests.
Maharashtra too wants to cut power tariffs, like Delhi. What are the implications?
The authority to take decisions on tariffs is the electricity regulatory commission in the States. If one wants to make any recommendation it should be done to the commissions.
But here the State is reducing the tariff...
I am not taking sides. Anyone who sets up a project has invested after due diligence. He may have acquired land, raised money which could be from the market, shareholders, investors and banks. He has projected a business model to investors and said it was an opportunity.
For example, one enters a restaurant, orders food and consumes it. Then, when it comes to settling the bill, he demands a discount. In case, one wants a discount, that should have been made clear when he entered the restaurant.
This attitude is sending shock waves. My point is any document signed by a sovereign authority needs to be honoured.
Though there is talk of a subsidy/ tax concession, what will be the impact if more States follow suit?
If you reduce the rate of return, a new business model has to be worked out.
Probably the longevity of the contract has to be extended. Assume 15 per cent is the rate of return for the contract valid for 15 years. If the rate of return goes down, the tenure has to be increased.
However, this should be acceptable to the lenders who have funded the projects. Investors do not take out money from chests, they organise it. It is a chain. A fund invests in B and B invests in C, besides which there could be public sector investments and so on.
Still the annualised rate of return will be low?
At least the company will go down. Assume you reduce the rate of return and keep the tenure same, then it is an out and out loss.
Many power projects have got Chinese equipment and reports indicate issues in repair and maintenance.
This is a big question. I know about one company which got its turbine from one Chinese company, accessories from a second one and the commissioning was done by a third firm. A fourth firm is to provide after-sales service. The risk is obvious as the cost advantage.
shanker.s@thehindu.co.in