Teesta-III set to ease North's power crunch; REC to pump in Rs 995 cr

GANGTOK: In a significant development that may see the power woes of Northern states easing from July next, REC has set the motion in rolling for early completion of the 1200 MW Teesta Hydel project in Sikkim by increasing its loan sanction to the project to Rs 3,095 crores.

Sikkim Government on its part has appointed a high powered committee to expedite the completion of the State’s hydro power projects, including Teesta-III, and has committed to fund its share of the equity for Teesta-III in an expedited manner.

About 12% of the power produced by Teesta-III will go to Sikkim (as free power per the contract) while the rest 85% supplied to four northern States – Delhi, UP, Haryana and Rajasthan - which recently witnessed serious power crisis due to overdraw from the grid by some states.

Teesta-III, the largest of the six hydel projects on the Teesta river, is being executed by an SPV called Teesta Urja in which the Sikkim Government has a 26% stake.

REC has approved the fresh lending of Rs 995 crores to the project on account of cost over-run. The original estimated cost of the project was pegged at Rs 5,700 crores but lenders like REC and PTC have agreed to increase infuse Rs 8,500 crores to meet cost over runs on account of a massive earth quake, which Teesta-III survived, and so on.

As per revised commercial operation dates, the first unit of Teesta-III will go on stream in July 2013 for Unit-1, thereafter all the six units will become operational one after the other with the sixth and final unit becoming functional by December 2013.

The Sikkim state government has also agreed to bring in its equity share of equity. It is significant that Sikkim Power Secretary Mr A K Giri attended a recent meeting convened by REC.

In a latest development Sikkim Government appointed a high powerered committee under the chairmanship of Chief Secretary Karma Gyatso. State Power Secretary Mr A K Giri is the member secretary of the panel. The government has issued a gazette notification to this effect stating that the committee report is to be submitted by August 10, 2012.

Sikkim government has also signed the share holder agreement with Teesta Urja Limited acquiring 26% stake in the SPV executing the project, apart from agreeing to contribute its share to the base cost as well as the cost overrun.

What comes a major relief to all stake holders is the fact that the State government has decided to end its legal dispute with Teesta Urja on share holding issue and accelerating the project execution.

All equity investors, including a group of six private equity partners, have also expressed their full support and commitment to bring in equity for the revised costs. REC and PTC are among the big lenders to the project.

Six PE players led by Morgan Stanley, who have already pumped in Rs 750 crore into the project through Asian Genco, will also raise their commitment, a source familiar with the development said. “They may have to chip in another Rs 400 crores or so, to proportionately match the cost increase,” the source said.

Besides Morgan Stanley, the group of investors includes Everstone Capital, General Atlantic, Goldman Sachs Investment Management and Norwest Venture Partners.

Cement industry cracks under cost burden; CCI hefty penalty adds to crisis

The cost of making cement in India has jumped by half over the last four years, and the rising prices of raw materials, energy and freight all indicate that manufacturers have a tough job on their hands to keep their plants ticking.

Ironically, almost all the costs related to the production of cement and its transportation are the monopoly of the government, leaving companies with no elbow room to control these factors. Adding to the problems, the growth in demand for cement has lost momentum due to the sharp slowdown in economic expansion, analysts say.

Cement is a bulk commodity and it needs to be shipped across vast distances to reach the consumer. Freight makes up a little more than a fifth of the total cost of cement. It has climbed more than a quarter on a compounded annual growth rate over the past seven years. This includes transportation costs of clinker, but excludes freight on raw materials which is usually added to the cost of raw materials.

So, the 30 per cent hike in freight rates in the March railway budget meant a stiff increase in costs. To move a 50 kg bag of cement from Andhra Pradesh, a key producing state, to Maharashtra the new rail freight rates added Rs.15 to each bag; to Kerala Rs.22 and as much as Rs.30 to the north east.

Cement Factory: A representative pic

Because the railways are state-owned and freight rates set by the government are not negotiable, cement producers have been using the improving highway network to move cement via road. About 35 per cent of cement produced in India is today carried by the railways, down from more than 60 per cent until a decade ago.

The railways are expected to ship at least 30 per cent of the cement in the years to come, given its predominance over longer distances. The economic size of a cement plant has risen to 5 million tonnes a year from 1 million tonnes, meaning larger long haul costs to get the stuff to the ultimate buyer.

It’s only a matter of time before the government raises diesel prices. This would have the potential to balloon transportation costs further. Again, this is out of bounds of cement producers.

The two other major costs are energy and raw materials. Stable supplies of power and coal, also mostly controlled by the state, have always been a challenge. In the absence of competition, the coal produced by government-run mines is of poor quality with high ash and low calorific value.

As a result, cement companies also depend on imported coal of high calorific value. However, the rupee’s sharp depreciation and Indonesia’s – a major coal supplier – recent moves to jack up prices and restrict exports pose huge risks to costs.

All these factors have resulted in a sharp rise in the cost of building a new cement plant over the past two years. With prices not keeping pace with the increase in input and other costs,  EBITDA (earnings before interest, tax, depreciation and amortisation) have plummeted to $1,000 per tonne from a greenfield cement plant, compared with $1,500 that was initially expected.

It is against this background that the punitive fines of Rs.63 billion imposed on 11 cement companies by the Competition Commission of India must be viewed. Although the penalty for alleged cartelisation is being appealed in a higher tribunal, the stated objective to control pricing without taking into consideration costs and slowing demand is bound to cause more harm.

India is the world’s second biggest producer of cement after China, with output soaring after the sector was completely decontrolled in 1989. But the emerging scenario is detrimental for the industry and the country.