[Debate] India Struggles to Deliver Enough Power / The Children’s Investment Fund Wages Battle With Coal India

[Yoshie Furuhashi]

Whether it's groceries in Venezuela or coal power in India, the New
York Times has the one and only one solution: remove price controls!

<http://nyti.ms/JgVFAB>
April 19, 2012
India Struggles to Deliver Enough Power
By VIKAS BAJAJ

NELLORE, India — India has long struggled to provide enough
electricity to light its homes and power its industry around the
clock. In recent years, the government and private sector sought to
change that by building scores of new power plants.

But that campaign is now running into difficulties because the country
cannot get enough fuel — principally coal — to run the plants. Clumsy
policies, poor management and environmental concerns have hampered the
country’s efforts to dig up fuel fast enough to keep up with its
growing need for power.

A complex system of subsidies and price controls has limited
investment, particularly in resources like coal and natural gas. It
has also created anomalies, like retail electricity prices that are
lower than the cost of producing power, which lead to big losses at
state-owned utilities. An unsettled debate about how much of its
forests India should turn over to mining has also limited coal
production.

The power sector’s problems have substantially contributed to a second
year of slowing economic growth in India, to an estimated 7 percent
this year, from nearly 10 percent in 2010. Businesses report that more
frequent blackouts have forced them to lower production and spend
significantly more on diesel fuel to run backup generators.

The slowdown is palpable at Sowmya Industries, a small company that
makes metal shutters that hold wet concrete in place while it
solidifies into columns and beams, a crucial tool for the construction
industry.

The company, located outside this city on the southeast coast of
India, is struggling with several issues, including a 20 percent
increase in the price of raw materials and falling orders.

But Sowmya’s manager, R. Narasimha Murthy, said the lack of reliable
power was an even bigger problem. His company loses three hours of
power every evening. And all day on Wednesdays and Saturdays —
euphemistically called “power holidays” — it receives only enough
electricity to turn on the lights but not enough to use its large
metal-cutting machines.

“It’s very frustrating,” said Mr. Murthy. “Power is a basic need.
Everything is dependent on power.”

It was not supposed to be this way. Two years ago, more than two dozen
large power projects were planned near the company’s workshop, but
most of them have been scrapped or put off because India cannot dig up
enough coal to fuel them.

Mr. Murthy’s frustrations reflect a broader national malaise. Analysts
say India’s economic woes could have been easily avoided if policy
makers had better addressed problems like its electricity shortage,
weak infrastructure and restrictive regulations. Instead, policy
makers have been distracted by corruption scandals and turf battles.

“There is virtually no new investment by both the government and
private sector,” said Ashok M. Advani, executive chairman of Blue
Star, the biggest maker of commercial air-conditioners in India. “We
have such an uncertain environment.”

In the last year, the nation’s power problem has grown acute, with the
gap between demand and supply jumping to 10.2 percent last month, from
7.7 percent a year earlier. In some states like Andhra Pradesh, where
Nellore is, and in neighboring Tamil Nadu, blackouts have become so
common that many factories report getting more electricity from diesel
generators than they do from the power grid, at a cost that is roughly
three times higher.

A major problem is the anemic production of coal, which provides 55
percent of India’s electricity. Coal production increased just 1
percent last year while power plant capacity jumped 11 percent. Some
electricity producers have been importing coal, but that option has
become more untenable recently because India’s biggest supplier,
Indonesia, has doubled coal prices.

India has one of the world’s largest reserves of coal but it has not
been able to exploit it effectively, largely because a state-owned
company, Coal India, controls 80 percent of production. The company
has been hamstrung by political decisions like a policy that requires
it to sell coal at a 70 percent discount to market prices. Critics
also say it has not invested aggressively enough in new mines and
technologies.

Policy disputes have also caused problems. In recent years, coal
regulators tried to open new areas to mining, but they did not
coordinate their decisions with environmental regulators, who have
blocked much of that mining because it would destroy dense forests.

India also appears to have a lot of cleaner-burning natural gas, but
it has not fully exploited those reserves, either. Private firms have
few incentives to do so because the government has capped the price of
that fuel.

“There is a huge crisis looming,” said Chandan Roy, a retired
executive at a state-run electricity producer, the National Thermal
Power Corporation. He added that potential solutions were well known
but political leaders were reluctant to carry them out because it
would mean raising prices for electricity and fossil fuels.

For many businesses, the power shortage has become debilitating.

In the southern state of Tamil Nadu, Srihari Balakrishnan, a textile
factory owner, said he goes through 6,300 gallons of diesel fuel on an
average day to keep his operation running, spending $3,000 more than
he would if power were available around the clock.

“We are not able to use 20 to 30 percent of our capacity,” he said.
“We can’t use grid power for two full days of the week. When we have
power, we have a six-hour cut,” he added, using an Indian term for
blackouts.

Mr. Murthy of Sowmya, the shutter maker, said that his production
could be 30 percent higher if he had access to reliable power. On a
recent Friday afternoon, his workers were rushing to cut metal plates
by the end of the day. They would not be able to use the machines the
next day, when they would turn to welding the plates into shutters,
which can be done with conventional power from the grid rather than
industrial-grade power.

“When the power shuts down, no machine here will work,” Mr. Murthy,
35, said as he walked through his workshop. “We have to plan in
advance.”

Mr. Murthy’s brother started the business nearly eight years ago, and
together they built it to $390,000 in annual revenue. They primarily
supply small contractors in the Nellore area, where the economy is
dominated by rice farming and an expanding port.

Just 18 miles from their workshop is the site of several proposed
power plants that should have eliminated the need for arranging their
work around the power schedule.

V. Balashowry, the entrepreneur behind one of those power plant
projects, Kineta Power, applied for a supply of fuel from Coal India
four years ago. He had hoped to be producing nearly 2,000 megawatts of
power by now, which would have increased the electric capacity in the
state of Andhra Pradesh by about 15 percent.

Mr. Balashowry, a former member of Parliament for the governing
Congress Party, has already bought 1,150 acres of wooded and pasture
land, including 850 acres from the state of Andhra Pradesh, and has
secured environmental approval for his plant. But no bank will give
him money to build it until Coal India agrees to give him fuel.

“We have resources in India, but they aren’t able to do the proper
thing,” he said, referring to government officials, during a recent
interview in New Delhi.

Other companies are also stuck. Reliance Power, controlled by the
investor Anil Ambani, says it has stopped construction on a large
electricity plant nearby because it can no longer afford to buy coal
from Indonesia as planned.

Mr. Murthy’s business suffers a double blow — he does not get enough
electricity and there is less construction in the area, which means
less demand for shutters.

He says a couple of years ago, the company was thriving because the
power shortage was not as acute and government projects and private
construction bolstered demand for its products. He now has 10
employees, down from 15 two years ago. “It was a very rapid drop-off,”
he said. “Last year, we had a night shift as well.”

Sruthi Gottipati contributed reporting.

<http://nyti.ms/Jo1JZE>
APRIL 19, 2012, 2:01 PM
The Children’s Investment Fund Wages Battle With Coal India

By VIKAS BAJAJ

MUMBAI, India — In 2010, when the Indian government sold 10 percent of
the shares of Coal India, one of the world’s largest coal mine
operators, the transaction was a way to raise money to help reduce its
budget deficit.

It did not anticipate that some of the shares would end up in the
hands of activist hedge fund managers who would demand that the
behemoth company, which employs more than 372,000 people, be managed
differently.

But in the last couple of months, that is just what has happened. The
Children’s Investment Fund, a British hedge fund run by Christopher
Hohn, has waged a public battle with the Indian government and Coal
India’s board about how the company is run.

The fund, which gives a portion of its profits to a charity that
supports children in Africa and India, has threatened to sue the
company, its independent directors and the government of India unless
they agree to make decisions with the interests of minority
shareholders in mind.

Chief among its demands is that Coal India be allowed to sell fuel at
market prices, not government-set rates, which are about 70 percent to
80 percent lower than prices the company has been able to get in
limited auctions. The fund also wants the company, which has 549
billion rupees (about $10.5 billion) in cash, to substantially
increase its dividend.

The Children’s Investment Fund and Mr. Hohn have had much experience
over the years in battling corporate boards, aggressively pushing
management to take steps to increase a company’s stock value. Among
their biggest coups was in 2008, when the Children’s Investment Fund
prevailed in a bitter proxy battle with the railroad giant CSX
Corporation. But battling the Indian government presents a whole new
set of challenges.

In a telephone interview, Oscar Veldhuijzen, the fund partner leading
the fight, said the biggest beneficiary of its proposals would be the
people of India because the government would earn a lot more money.
“The government owns 90 percent of the company and is depriving the
people of India by $18 billion per annum,” he said.

He said the fund had threatened to sue after its efforts to privately
persuade the government and Coal India to change their policies were
rebuffed. In a letter to India’s Ministry of Finance, the fund has
argued that the government’s management of Coal India violates its
right to “fair and equitable treatment” under India’s bilateral
investment treaties with Britain and Cyprus, locations from which it
has invested into the company. The fund, which says it is the
second-largest shareholder in Coal India, has also taken its case
public by setting up a Web site, coal4india.com.

Indian policy makers see the situation differently. They have argued
that Coal India is a government enterprise and has to act in the
public interest, which officials say includes providing inexpensive
coal to power companies, steel mills and other businesses that they
favor.

“Every shareholder in CIL must realize that India follows a
socialistic pattern of governance,” Sriprakash Jaiswal, India’s coal
minister, recently told the Indian Express newspaper, using the
company’s acronym. “We take decisions on the basis of the larger
welfare of people. Any foreign investor, before coming to India, must
realize that CIL is a government-owned company.”

For instance, in an effort to alleviate the country’s chronic shortage
of coal, policy makers have been pressuring the company to sign
agreements with power plant operators guaranteeing to provide them
with at least 80 percent of the fuel they need to run their plants.
The Children’s Investment Fund and other investors have opposed such
agreements because they would force Coal India to pay penalties if it
failed to meet the guarantees.

This week, Coal India said its board had agreed to sign such
agreements. But in a victory for outside investors, the company said
the penalties would begin after three years and would be relatively
minimal: 0.01 percent of the value of the coal it was unable to
supply.

As in the United States, minority shareholders in India can seek to
prevent a majority shareholder from running a company poorly or in
ways that are not profitable. But few investors have sought to press
such rights, in large part because the legal system moves slowly in
India.

Investors in India have long resigned themselves to the fact that
companies in which the government owns a majority stake will never be
run as profit-maximizing businesses. The government, for instance,
directs state-owned banks to give favorable treatment to farmers or
politically connected businesses. Oil companies are forced to bear the
cost of gasoline and diesel subsidies.

Analysts and investors have applauded the Children’s Investment Fund’s
challenge to that status quo, though some also see it as a quixotic
mission that is doomed to fail.

“I don’t think this one case will have an impact on accountability or
corporate governance” in state-owned firms, said Daryl Philip, a
senior research analyst at FinQuest Securities in Mumbai. “If there
are a few more such cases in the future, we might see a considerable
impact.”

Mr. Veldhuijzen says he is committed to the fight even if it takes
years. He believes he will prevail because the government plans to
raise $5.9 billion this year by selling minority stakes in state-owned
firms. He said India would eventually have to rationalize its
complicated maze of energy subsidies and price controls.

“I have been working on this for the last one and a half years,” he
said. “I am hopeful that we will come to a resolution because the
government can simply not afford to let this get out of hand.”


Neha Thirani contributed reporting.

-- 
Yoshie Furuhashi
<http://mrzine.org/>