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Finances the Entire Power Infrastructure Chain…
Interview with H. D. Khunteta, CMD, Rural Electrification Corporation

With what object was REC set up?
REC was set up 42 years ago, on 25th July 1969. The Company was initially set up to finance rural electrification schemes including rural electricity cooperatives. Gradually the emphasis moved from general village electrification to include energisation of agricultural pumpsets and further to financing of transmission and distribution sector projects. The mandate of REC evolved with time and REC started financing of power generation projects in the country. Today REC finances the entire power infrastructure chain across the country without any limit for state / centre utilities as also private sector borrowers.

What is the exact role of REC in the Indian Power Sector?
As mentioned, REC is a non-banking financial institution and finances the entire power infrastructure chain including power generation, transmission and distribution projects, across the country without any limit, to state / centre utilities as also to private sector borrowers. It is one of the two apex financial institutions under the Ministry of Power who exclusively deal with the power sector.

What are the major milestones of REC since its year of operation?
Long after its inception in July 1969 REC was declared a Public Financial Institution in Feb-1992. In Feb-1998 REC was registered as a Non-Banking Finance Company (NBFC) and later upgraded as a Schedule ‘A’ PSU in the same year. In 2002 REC was conferred Mini Ratna Grade-I Status along with expansion of mandate to finance any power project without any restrictions. In 2007 we set up our first subsidiary-REC Transmission Projects Co. Ltd. (RECTPCL) followed by setting up of REC Power Distribution Company Ltd. (RECPDCL) in the same year. We came out with our maiden IPO in March 2008 when we were successful in raising capital in quite adverse market conditions. The same year REC was conferred the coveted NAVRATNA PSU status. We came out with a FPO (Further Public Offering) in March 2010 post which, GoI shareholding in the company stands diluted to 66.8%. In 2011 we have been accorded the status of “Infrastructure Finance Company’ (IFC) by the Reserve Bank of India. Operationally, REC has seen tremendous growth after being declared an NBFC and has been delivering excellent performance since then. For fiscal 2011 we delivered record net profit of Rs 2570 Crore with an EPS of Rs 26.03. Our loan book as on date is about Rs 87000 Crores.

What are the key issues that the Indian Power Sector is facing today?
GoI has planned the power sector requirements in line with the long term projections for the Indian economy which includes addition in installed power generation capacity, augmenting the inter-regional and intra-regional transmission capacity and providing adequate impetus to upgrade the efficiency of the distribution sector.

As regards issues, the main underlying issues are the huge amount electricity losses. Over 30% of electricity generated is lost upto the point of consumption and remains unaccounted. There is an urgent requirement to improve the health of the distribution utilities and state electricity boards and rationalization of subsidies, tariff structures and removal of cross subsidies. Also, execution of targeted reforms in the distribution sector which is primarily a state sector subject, need to be expedited. Consolidation and strengthening of the national grid network is required to be achieved in fast track mode, by augmenting the inter-regional and intra-regional transmission capacity. Integrated Project Management of the power sector along with its dependencies on fuel linkages, fuel availability, freight corridors, land and environment issues, evacuation infrastructure etc needs to be done.

What is the overall scenario of power sector in India?
The Indian power sector has historically been beset by energy shortages. The total energy deficit on annual basis remains around 8% to 10% with peak deficit being even more. In this scenario our electric energy generation has been growing at over 5% for last several years. In terms of installed capacity, during the fiscal 2011 additional capacity of 12160 MW was added taking the total installed capacity to 173,626 MW at the end of the fiscal 2011. As per the Working Group Report on Power for Eleventh Plan of the Government of India (fiscal 2008 to fiscal 2012), the overall requirement of funds for the power sector has been estimated a t 10.31 lakh crore. For the Twelfth Plan period, CEA estimates that in order to meet the projected demand requirement by 2017, capacity addition of 1,00,000 MW would be required; and including additions required in matching transmission and distribution systems, the total fund requirement for the plan period would be about 11 lakh crore. Thus the outlook and potential is tremendous however the execution challenges remain.

What are the major constraints for growth in this sector?
Reduction of overall energy loss from the current about 30% to a level of around 15% together with restoring the health of the distribution utilities is important. A coordinated approach and action plan for timely fuel availability and transportation infrastructure; adequate transmission and evacuation infrastructure is required. Manufacturing facilities for Capital equipment need to be further enhanced and encouraged so that the delivery times are expedited and faster capacity addition is made possible.

Even as the power generation capacity has increased substantially in recent years, the level of achievement vis-à-vis targets has been low. During the 9th Five Year Plan (1997-2002), and 10th Five Year Plan (2002 to 2007) target achievement for installed generation capacity 47.5% and 51.6% respectively. In these plans we added 19015 MW and 21,180 MW respectively. The 11th Five Year Plan (2007-2012) originally targeted 78700 MW which has since been revised downward to 62374 MW of which 34,462 MW was achieved as on March 31, 2011 with one more year remaining for completion of the plan. Therefore the execution of projects needs to be stepped up and the hurdles need to be identified and mitigated.

What are the challenges and threats in the next decade? What is your strategy to overcome the situation?
As far as REC is concerned, we have a significant concentration of outstanding loans to State Electricity Boards and State Utilities and if our loans to these borrowers become non-performing, the quality of our asset portfolio may be adversely affected. The power sector financing industry is also becoming increasingly competitive and our profitability and growth will depend on our ability to compete effectively and maintain a low effective cost of funds. Further, the non-availability/increasing cost of the fuel may affect construction and viability of the Generation projects, and consequently operations of the Company may get affected. We are closely monitoring the situation and keeping the various factors affecting the health of the borrowers in view while taking financing decisions. 

What are your major thrust areas in the coming days? Elaborate REC’s future plans?
Apart from continuing to fund the debt requirements of the power sector projects including Generation Transmission and Distribution, we are also developing new opportunities to have fee-based income and are already scaling up the performance of our subsidiaries. We are also pursuing financing of Renewable Energy sector as a thrust area, as a result of favourable interventions by the Government in this sub-sector. Our objective is to ultimately make REC a comprehensive financial hub, to cover the entire segment of finance.

What about ‘Power for all by 2012?
This is a broader mission being targeted by the Ministry of Power. REC role is restricted to financing of proposals which are received from prospective borrowers. While this mission has helped to channelize investments into the sector, there may be some slippages with respect to the timelines, if one looks at the achievement to-date.

Any comments on government policy?
By and large the policy making and regulatory framework has been in line with the requirements of the sector. Perhaps the need is to improve the execution of projects and also adopt an integrated project management approach for the power sector as mentioned in the key issues.

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