Let me explain.

First, the basics of power. We get electricity through to our homes due to three stages – power generation (at the power plant – thermal, hydel, nuclear etc), power transmission (through all those wires and transformers you see along the highways) and power distribution (at your local power plant, local transformer in your colonies etc.). That said, let’s move ahead.

We have all heard the following data ad nauseam time and again –

a) The growth of the economy, calls for a matching rate of growth in infrastructure facilities. The growth rate of demand for power in developing countries is generally higher than that of Gross Domestic Product (GDP). In India, its around 1.5 times GDP. That is, if our GDP is growing at 8% annually, we need to increase our power output by 12% (10% atleast).

b) India is planning to nearly treble its electricity capacity to almost 450 GW by 2020 from around 167 GW currently, which means a yearly addition of nearly 23 GW for the next 9-10 years.

c) In spite of rapid power generation, figures available with the Central Electricity Authority show an average power deficit of 6.4% across the country in November. The national average of peak hour shortage during the month was 8.7%. The deficit was highest in the western region, where peak hour shortage was at 15.6%.

d) The Electricity Act 2003 repealed a old legacy of 1910 and another of 1948 and had, in one stroke, forced the inevitability of total reforms in the electricity sector. The best beneficiary of the Act being the industry – large and small – and the commercial establishments which had been hitherto bearing the brunt of the SEB onslaught in terms of high tariff, unstable supply, impossible conditions and the wrath of a state monopoly. After the Act went through, generation of electricity did not require any approvals from any body so long as the same is used for own use. The new-found freedom allowed commercial and industrial users to set up their generation facilities and the industry was supposed to install power generation capacities to profit from the paucity in the country.

I thought there was a definite need (and hence a business opportunity) to set up power generation plants, supply uninterrupted power to consumers and make a lot of money.

Till I read this article in the Economic Times –

“Cash-strapped state power utilities have cut offtake from thermal power generators, hitting their output and driving down tariffs in the short-term market. State power utilities, which buy the entire output of thermal power generators such as NTPC, Adani Power and Monnet Ispat, have cut off take because of a cash crunch and are resorting to load shedding, industry experts said.”

“NTPC sells most of its power under long-term power purchase agreements. With states back tracking, the company’s net profit has taken a hit, rising only 1.12% in 2010-11. The situation is grim at electricity trade markets too. Private power producers such as Adani Power and Monnet Ispat say states purchase power at 11 a unit during elections, but resort to load shedding in the normal course. A top executive at Monnet Power said the company was forced to sell electricity at 0.50 per KWH in January, as there was no demand from states.”

Think about the article for a while.

You’d probably think that SEBs being a part of the State Government are being subject to discrimination, since the State has only so much money to buy electricity, after doling out a million sops to the aam aadmi (these sops sometimes include laptops and TVs).

You’d also be inclined to think the issue to be simplistic – why not buy power and pass on the costs to consumers? Why should the State Govt. have any say in this? The SEB supplies me power, and if I use that power for 24hrs a day, I pay for 24hrs a day. Why is the SEB reluctant to buy power, when I, the consumer am willing to pay for 24hrs of uninterrupted power supply?

The issue is a little more complicated than that.

Tariff increases have continuously lagged increases in costs of fuel and salaries (due to obvious political pressures), and widening inefficiencies (transmission and distribution losses, power theft with 18% pilferage and faulty metering) have added to the woes of SEBs. Sum total of all cash  losses of SEBs and distribution companies in India have jumped 4.4 times between FY07-09 to Rs. 2.5 trillion, and expanding by nearly Rs. 1 trillion a year (In A Raja’s standard, 1 lakh crore). The SEBs are losing money on almost every unit they sell. With increased growth come increased losses in case of SEBs.

To arrest these losses, many state-owned distribution companies are suspending power supply for hours, even in the winter when demand is low, because they are unable to pay for power. This has forced many generation companies to scale back production.

And then there is the newly set up Central Electricity Regulatory Commission (CERC), which is supposed to manage tariffs and transmission. Why are they not able to solve this problem? Simply because they only have a say in inter-state transmission of electricity and not intra-state distribution, which is in the hands of the state SEBs. So, we have more committees and lesser solutions.

So, what are we doing about all this?

The Union Ministry of Power is working on a set of guidelines (to be ready in 2-3 months), which will address issues of SEBs such as collection and billing efficiencies, long term power purchase agreements etc. However, we do know in India, there is no dearth of reports and laws and guidelines (and committees and GoMs and empowered GoMs). Implementation of these guidelines would probably take another decade.

What is the bottom line? The collateral damage is that suppliers (i.e., power generation companies) are seeing their payment cycles elongated on an ongoing basis and are having to scale down on ambitious projects to generate electricity. In the long run, its bound to hurt everybody.

I personally don’t see a bright road ahead for these power generation companies for atleast the next 2-3 years. And I need not feel sorry for them, because in the end, I would be one who would be suffering. And that’s the bottomline, because some committee said so.

General data on current power generation companies: NTPC (current capacity 33GW, 75GW by 2017), NHPC (current capacity 5GW, 10GW by 2016), Tata Power (3GW), Reliance Power (everything is in the air, and in planning stage. Supposedly planning 35GW. Good luck with that), Adani Power (current capacity 2GW, planning 17GW by 2016), Lanco Infratech (current capacity 2GW, 18GW in planning), SJVN (current capacity 1.5GW), Torrent Power (current capacity 1.7GW), JSW Energy, Monnet Ispat among many others.

Here’s an example from Bloomberg and an explanation as to why I would not take it at face value.

July 14 (Bloomberg) — Sales at U.S. retailers rose in June, helped by incentives at car dealers and higher gasoline prices that boosted service-station receipts. Purchases excluding automobiles and gasoline dropped for a fourth consecutive month. While the increase in total purchases reinforces forecasts for economic growth to resume this quarter, analysts anticipate job losses and falling home values will weigh on household budgets and mute a recovery.

Wait a minute. Did some mention recovery? Hmm. Ok.

Gas prices have been shooting through from $1.5 to $2.6 recently. Given that almost everyone in the US (except for NY residents I guess) travel to work by an automobile (car/truck/SUV), the demand for gasoline is usually inelastic. If gasoline prices have been rising, then so will overall purchases.

And then, this comes – Purchases excluding automobiles and gasoline dropped for a fourth consecutive month. Other Purchases like semi-luxury and disposable income stuff you mean? Ah, I see.

And then, this… While the increase in total purchases reinforces forecasts for economic growth to resume this quarter…Hmm, where was the increase Mr. Author? How can rise in purchases due to inelastic and essential commodities reinforce your forecast for economic growth? Taking out gasoline, your net purchases for the economy actually decreased and not increased. So, the economy is in what it is – serious crap.

Nowadays, with all the greenshoots stupidity flying around, media will say anything.

2) Did you look at Goldman Sach’s results? Spellbound and Astounding, aren’t they? I mean, an average bonus of $770k per employee (no typo, it is $770k), you only wish you were working for GS. Couple of points here -

a) Big credit to Goldman for those results. However (and there is always a ‘however’ if the bonus of one company’s         employee is $770k while the rest of the economy is in tatters with not even a minimum wage available), Goldman          used taxpayer’s money to backstop all its derivatives thereby bringing cost of capital close to zero. Investing money      whose cost of capital is close to zero – heck, even I can generate atleast 15-20% every year.

b) Other employees, don’t be jealous. The average bonus, say for a 2nd year or a 3rd year analyst is around $50-65k.    Combine that with NYC state taxes (50% for bonuses), the analyst will probably just end up with $25-30k. That’s a            crap load of money but nothing in comparison to the $770k that is getting marketed. So, chill.

]]> http://kirandhanwada.com/2009/07/15/random-thoughts-3/feed/ 0 http://kirandhanwada.com/2009/03/02/obama-and-outsourcing/ http://kirandhanwada.com/2009/03/02/obama-and-outsourcing/#comments Mon, 02 Mar 2009 03:12:41 +0000 Kiran http://kirandhanwada.com/?p=192 “We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas,” Obama said in his first address to the joint session of the US Congress. Leave it to the media to distort this statement so very twistedly, and come to a conclusion that ‘Obama is against Outsourcing’. Leave it to our politicians too to misinterpret this statement. Our dear Commerce and Industry Minister Kamal Nath said “We have to ensure what they (US) are doing is WTO compatible when we are talking about trade, movement of goods, movement of people and movement of services”.

Dead wrong – atleast this particular statement of Mr. Obama didn’t mean it.

Let me explain.

Among the major companies which have shipped jobs to foreign countries such as India include General Electric, Microsoft, Hewlett-Packard, Motorola, Pepsico, Honeywell and IBM.  Back in 2004, the Bush administration passed an Act called the American Job Creation Act (AJCA) under which there was a specific provision called ‘Invest in USA’. US companies could exploit this provision and repatriate profits back to the US from their offshore operations. Not BPO, KPO or any other outsourcing operations – these are ‘business operations’. What it basically meant was that, if Motorola set up a phone manufacturing facility in Taiwan, and if they made profits out of this particular plant, they could repatriate profits back to the US by paying a lower tax rate. There would be a tax break on 80% of the repatriated earnings and the rest 20% of repatriated earning would be taxed at 35% making the effective corporate tax rate on companies repatriating approximately 5.25%.

This lower tax rate encouraged various companies to utilize this provision, bring back earnings and invest in the US, thereby creating more jobs. This provision though, was meant to be a one-year tax holiday only. Republicans did try their best to extend this tax holiday and re-introduce it along with the stimulus bill, but was shot down by the Obama/Democratic administration. Obama was referring to this provision of tax breaks (the provision having already expired, Obama was just making a political point!) rather than any IT or Business Process outsourcing that our media and political establishment has raised a frenzy on.

Allen Sinai makes a compelling case in the WSJ that on average, of the repatriated funds that came back to the US, 25% of those funds for U.S. capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction. Per recent studies, if this provision is introduced now, this could help bring in USD 545 billion, which we all agree would be a pretty sum to battle the crisis.

So much for the media frenzy, so much for wild discussions on different discussion boards on protectionism. Ben Bernanke, the Fed’s chairman is an authority on the Great Depression, and he more than anyone else would know that banning outsourcing is the same as erecting trade barriers, which are universally acknowledged as having worsened and prolonged the Great Depression – he would never allow that to happen in this market.

Let’s not get caught up in the frenzy in these depressing times – let’s look at facts, arguments and then come to a conclusion. The incentive to the media is to grab more eye-balls (and hence declare through a catchy line, ‘Obama is against Outsourcing’) than present rational arguments. Let’s not add fuel to the wrong fire.