Chinese Firms Win Indian Power Contracts

Chinese power equipment makers have lately been eating their Indian counterparts’ lunch, winning contracts in India’s electricity sector over domestic suppliers who are unable for various reasons to meet demand.

In a move that could further deepen China’s presence in India’s power generation business, Chinese banks have approached New Delhi for permission to finance at soft rates more than US$50 billion of power equipment purchases by Indian energy producers.

While the equipment-starved domestic producers are supporting the move, domestic suppliers such as Bharat Heavy Electricals Limited (BHEL) and Larsen & Toubro (L&T) are not happy about it.

The Chinese financiers meanwhile are hoping for quick clearance of the yuan as an accepted currency for external commercial borrowing (ECB) by Indian power firms. Presently, Indian external borrowings are denominated in US and Australian dollars, yen and euro.

India is targeting 100,000MW of additional electricity capacity in the next five years and needs investment of over US$400 billion in the power sector to tide over acute electricity deficits. India’s present power capacity is 170,000MW.

Supporting China

There is considerable backing among India’s power producers to encourage Chinese equipment suppliers, given the inability of domestic suppliers to meet the requirement due to insufficient capacity.

The state-owned monopoly BHEL’s 15,000 MW annual power equipment generation capacity is not enough to meet the power producers’ demand. The company, sitting on a massive Rs1.5 trillion order book, is also seen as slow in delivery. On the other hand Chinese firms such as Shanghai Electric Corp, SEPCO Electric Power, Dongfang Electric Corp and Harbin, boast large capacity and advantages of economies of scale that make their products cheaper.

Further, loans from China are estimated to be 200-300 basis points lower than local rupee debts from Indian banks. The cost arbitrage has widened in the wake of the rise in domestic interest rates from 9 percent to 13 percent, given New Delhi’s tight monetary policy to control inflation.

Reliance Power, the winner of three ultra-mega-power projects of 4000MW each, has thus purchased US$10 billion worth of coal-fired power generators, boilers and turbines from Shanghai Electric Corp, enough to generate 30,000 MW.

The company is tying up finance through leading Chinese banks such as Bank of China, China Development Bank, Industrial and Commercial Bank of China and The Export-Import Bank of China.

Dongfang Electric Corp, China’s third-biggest power equipment maker, has meanwhile won US$3 billion in orders for power generating equipment from the Indian firm Abhijeet Group.

Even state-owned NTPC has said it is open to contracting with overseas vendors, including Chinese firms, to meet its targets. This is a major change in strategy as government entities usually promote local industry as a part of overall public policy.

India’s biggest power producer NTPC is in the process of handing equipment orders of a whopping Rs1.5 trillion (US$33 billion plus) for its power projects in this fiscal (2011-12, ending March).

Local Resistance

BHEL, India’s biggest power equipment producer, along with engineering major L&T have been lobbying with New Delhi to put in place “remedial action to counter the threat posed by Chinese power equipment suppliers” by imposing duties on Chinese imports to “create a level playing field.”

BHEL has been arguing that while Chinese equipment maybe cheaper, local equipment is more efficient. There have also been problems of maintenance and after sales support linked to Chinese supplies, the company argues.

BP Rao, the chairman of BHEL, said earlier this month that “any loan with soft rates by Chinese banks is welcome. But in the process, the country should not kill the domestic industry and source substandard goods.”

Under domestic pressure, New Delhi has already extended excise duty exemptions to local players. The government has also extended a tax holiday by a year for power firms. Both BHEL and Larsen &Toubro have welcomed the changes.

Last week, minister of heavy industries and public enterprises Praful Patel said in Parliament, “Power plants set up with Chinese equipment have not shown better performance than those using equipment supplied by BHEL.”

However, market forces seem to be playing out differently from the government’s assessment. Chinese firms look set to play a big part in India’s enormous power generation capacity plans provided some of the domestic coal supply bottlenecks are also overcome.

Security and strategic reasons have resulted in Chinese telecom players and investors in ports being kept out of India. Indian firms will however need to be on their toes to take on the muscle delivered by the Chinese in several other spheres, including power equipment.

Companies such as BHEL will have to move out of their comfort zones with new power equipment manufacturing capacities that are also emerging in India due to joint ventures such as Bharat Forge-Alstom, Ansaldo-GB Power, Toshiba-JSW, Thermax-Babcock & Wilcox and BGR-Hitachi.

(Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com)