MANAGEMENT DISCUSSION AND ANALYSIS REPORTThe Management of the Company is pleased to present its Report on Industry scenarioincluding Company’s performance during the year 2009-10.
Industry Structure and Development
In the year 2009-10 the power sector recorded its best performance in the past sixdecades with an aggregate capacity addition of 9,585 MW or two thirds of its target i.e.14,507 MW. This was enabled by the massive contribution of the thermal sector thatconstituted 95% of the total capacity addition. Even nuclear power contributed animpressive 4.6% against the contribution of the hydro power sector that added only 0.4%during the year.
This improved performance was also facilitated by the improved availability of gas forthe power sector. Out of the total installed generation capacity in the country, about 11%is based on gas or liquid fuel (excluding diesel). The availability of gas from KG(Krishna Godavari) basin (D6) and utilization of surplus gas available on fallback basisresulted in better utilization of capacity and higher plant load factor (PLF) as also highgrowth in electricity generated from gas based plants.
As on 31st March, 2010 the country had an installed generation capacity of 1,59,399 MW.The Government of India, Ministry of Power in the Eleventh plan has set a target of 78,700MW capacity addition out of which 59,693 MW would be from thermal power projects, 15,627MW from hydro projects and 3,380 MW from nuclear projects. A greater role was envisagedfor the Government, whose contribution would be 81%.
In the light of delays in project implementation, the Central Electricity Authority(CEA) estimated that about 62,374 MW of capacity could be added by the end of eleventhplan. Further, additional 12,590 MW could be possible in the best effort scenarioresulting in total 74,964 MW of capacity addition during the XI plan.
During the first three years of the plan period, 22,302 MW of new capacity has beenadded, which is more than the entire capacity addition of 21,180 MW during the five yearsof the tenth plan.
Ministry of Power, Govt. of India recognizes the fact that private investors haveimportant role to play in the power sector growth of India. The stipulation under Section63 of Electricity Act 2003 has provided impetus to the participation of private sector inGeneration and Transmission. Provision of open access and tariff framework under TariffPolicy has been put in place to create an enabling environment for the private investors.
Private investors have responded to the policy initiatives very positively. As aresult, out of 19,797 MW envisaged under private sector during XIth Plan, a capacity of4,990 MW has already been commissioned and capacity of 14,807 MW is likely to becommissioned during the remaining Plan period with a high level of certainty
The Government of India has set an ambitious mission of ‘POWER FOR ALL BY2012’. This mission would require that the installed generation capacity shouldbe at least 2,00,000 MW by 2012. To be able to reach this, an expansion of the regionaltransmission network and inter regional capacity to transmit power would be essential. Thelatter is required because resources are unevenly distributed in the country and powerneeds to be carried great distances to reach areas where load centers exist.
Efficient Distribution of electricity is also essential for achieving the abovemission. Bringing down the AT&C losses which are very high is another big challenge.High technical losses in the system are primarily due to inadequate investments over theyears for system improvement works, which has resulted in unplanned extensions of thedistribution lines, overloading of the system elements like transformers and conductors,and lack of adequate reactive power support. The commercial losses are mainly due to lowmetering efficiency, theft and pilferages.
The Government of India has launched the Restructured Accelerated Power Development andReforms Programme (R-APDRP) in the XIth Five Year Plan. The focus of the Programme is onactual, demonstrable performance in terms of reduction in Aggregate Technical andCommercial (AT&C) losses. Projects under the scheme shall be taken up in two parts.Part – A shall include the projects for establishment of base line data and ITapplications for energy accounting/ auditing and IT based consumer service centre. Part– B shall include regular distribution strengthening projects. Further, there is anenabling component under Part – C for implementation of R-APDRP and for facilitatingthe process of reform in power sector. The programme size is ` 51,577 crore, out of which` 10,000 crore is for Part - A and ` 40,000 crore is for Part – B activities and theremaining ` 1,177 crore for Part - C enabling activities to be implemented by Ministry ofPower.
Energy is an important input required for economic and social development. India ranksas the world’s sixth largest energy consumer in the world, but, per capitaconsumption of energy is very low as compared to world consumption which needs to beincreased to meet the goals of economic and social development. The National ElectricityPolicy (NEP) stipulates power for all and per capita consumption of envisages electricityto rise to 1,000 units by 2012. This entails provision of adequate reliable power, ataffordable cost with access to all citizens. Electricity is in the Concurrent List of theConstitution and the primary responsibility of structuring its availability anddistribution is that of States. However, both the Centre and the States have to play adecisive and positive role. The installed power generation capacity has grown many timessince independence, however, there is still a peak demand shortage and energy deficit isvery high in the country. To mitigate shortage of energy in general and electricity inparticular, in addition to augmenting the capacity of energy supply, its efficient use andconservation is also essential. Keeping this in view and to maintain GDP growth of atleast8 to 10%, the Government is initiating several policy measures to accelerate powergeneration and promote energy efficiency to meet power requirements which will necessitatehuge funds requirement.
Growing concern about pollution and global warming has led many individuals and nationsto consider the nuclear power as an excellent alternative for future power generation.Apart from technological advancements and increased public awareness, heavy investmentsare critical to the success of the nuclear industry. Investments by the nuclear industryin both technology and education will likely be seen in the near future. It is definitethat the future power reforms will be in the field of nuclear energy.
The devastating impact of climate change has become an issue of critical importance.Energy production using fossil fuels is the major contributor to green house gas emission.The solution lies in effecting an accelerated transition to a low carbon energy economy,which means large scale development of renewable energy. India has huge potential forproducing electricity from renewable sources which needs to be explored with adequatefunding.
The funding requirement of Power Sector i.e. for Generation, Transmission, Distributionand R&M Projects for the 11th five year plan has been estimated about ` 10,59,515crore which includes ` 4,24,259 crore as debt and ` 2,13,614 crore as equity thus leavinga funding gap of ` 4,21,642 crore which is required particularly to complete thetransmission and Distribution projects. For 12th plan period fund requirement is estimatedabout ` 11,00,000 crores for estimated capacity generation of 1,00,000 MW.
This huge requirement of funds simply indicates about the future opportunities forPower Financing sector including the PFC.
The Electricity Act, 2003 is an umbrella regulation towards creating a favorable policyenvironment for development of the power sector. Various power sector reforms have beenundertaken under the Electricity Act, 2003 which will bring the positive change in thePower Sector scenario.
Opportunities /Threats/Risks/Concerns
Power Finance Corporation (PFC) is a leading power sector public financial institutionproviding fund based and non fund based support for development of Indian Power Sector.Its primary objective is to provide financial resources and encourage flow of investmentsto the power and associated sectors.
PFC draws upon its vast knowledge of the power sector and its financing expertise toprovide tailor made products and services to its clients. In addition, PFC providestechnical, management advisory and consultancy services related activities through itssubsidiary Company namely PFC Consulting Limited. PFC’s clients include the powerutilities of state, central and private sector. These clients are involved in variousaspects of the power sector in India including generation, transmission and distributionand other related activities.
PFC’s priorities include not only accelerating the pace of existing business offunding generation, transmission and distribution projects, but also to exploit the newopportunities available in the sector . With this Philosophy PFC has established differentstrategic business units, focusing on different business segments, conventional &consortium lending to generation, transmission and distribution projects, lending to powerequipment manufacturers and fuel producers and suppliers, renewable energy and CDM.
PFC is a key agency in various Govt. of India’s power sector schemes andprogrammes and has implemented and/or is implementing schemes like Re-structuredAccelerated Power Development & Reform Programme (R-APDRP), Accelerated Generation andSupply Programmes (AG&SP), Distribution Reform, Upgrades and Management (DRUM) andDelivery through Decentralized Mechanism (DDM). In addition Govt. of India has designatedPFC as the nodal agency to develop Ultra Mega Power Projects (UMPPs) and IndependentTransmission Projects (ITPs), based on tariff based competitive bidding process.
In order to promote short term trading through Power Exchange, PFC took the initiativeby promoting National Power Exchange Limited jointly with NTPC, NHPC and TCS. Further, PFCalso participated in the equity of Power Exchange India Limited (PXI), a company promotedby NSE and NCDEX.
PFC is focusing on renewable energy and accelerating the development of business inRenewable Energy Generation Projects such as Wind, Biomass, Small Hydro, Solar projects soas to give thrust to funding of Renewable Energy Projects in the country. PFC is takinghigher exposure in Renewable Energy Generation Projects and offers special interest ratesfor such projects.
In order to accelerate implementation of Energy Efficiency Projects, a new company bythe name of Energy Efficiency Services Limited (EESL) has been incorporated as a JointVenture Company of PFC, NTPC, Power Grid and REC. PFC has taken lead role in incorporatingthe company. PFC is also facilitating State Power Utilities in availing CDM benefits ofR&M of old thermal and hydro projects. The general health of the power sectorutilities in India and maintaining a high standard of assets quality are the other areasof concern for PFC.
Inadequate availability of Coal and dismal hydel generation owing to the failure ofmonsoons, attests to its potential is also a constraint in the way of sustained growth ofpower sector. The power sector is a major consumer of coal using 74% of the total coalproduction. Coal based power generation projects are put to a stiff test of proving theirmatter due to shortage in domestic supply of coal. Of late the competition scenario fromthe banks is increasing with the increasing bank credit to the infrastructure sector(including power sector). Interest spread of the banks is higher than PFC, even when yieldon assets are higher in cases of PFC. The main reason is that banks are having cheapersource of funds in the form of CASA (current accounts & saving accounts).
The risk levels in power projects are quite high. Due to long gestation period andlarge capital outlay, it makes them susceptible to changes in various factors such asinterest rates, statutory regulations and policies, the cost and availability of rawmaterials and other key inputs and general economic conditions which could affectprojects’ viability in the implementation and operation stages with impact on theability of borrowers to service the loans. The various risks involved are credit risk,market risk, poor financial health of power sector utilities, regulatory restrictions,forex risk, operational risk and the ability to maintain its recovery performance andasset quality.
Outlook
Large funds needed for setting up power infrastructure augurs well for PFC, which hasstrong domain expertise and a good track record.
The power deficient situation in the country has seen various governments, both pastand present, lay emphasis on attracting investments across the generation, distributionand transmission segments of the power sector. While the initiatives have led companies tocommit to setting up new capacities, it entails huge investments. Thus, it has enhancedopportunities for PFC. While concerns pertaining to higher interest rate, tight liquidityconditions and fears over deteriorating asset quality haven’t spared most of thesectors including infrastructure financing, PFC has been relatively insulated with stablegrowth in loans, greater expertise, dominant position and, an ability to sustain spreadsand asset quality.
Even as huge investments are being made towards setting up power-relatedinfrastructure, the growing energy requirements are relatively unmet demand-supply gappegged at close to 10 per cent. As India’s economy is expected to grow at areasonably good rate for many years, the current low per capita energy consumption shouldinch towards international benchmarks. The Government has already envisaged plans to addaround 78,700 MW of power generation capacity by the end of eleventh plan period to coverthe demand-supply mismatch. This will require huge funds. Likewise, the addition of newgeneration capacity would require an equivalent amount towards allied activities in thetransmission and distribution segments, which put together indicates enormous fundsrequirement.
PFC has a dominant position in the power financing business with over 20 per centmarket share and PFC’s loans sanctioned to the power sector grew substantially in thelast five years. Also, considering that a power project which takes long time to completesees maximum disbursements happening towards the end of a project implementation cycle,this indicates robust disbursement in the future as well.
PFC has been designated as the nodal agency for implementation of various power schemesas well as Ultra Mega Power Projects (each costing around `16,000 crore); this enables thecompany to undertake all activities necessary to obtain the appropriate clearancesrequired to establish the UMPPs for a fee. Four UMPPs have already been awarded tosuccessful bidders. With PFC being closely associated with the passage of these projects,there is also possibility to lend to these projects.
PFC has also been designated as the nodal agency to operationalise the R-APDRPprogramme and shall act as a single window service. As nodal agency PFC shall receive afee as well as the reimbursement of expenditure in implementation of the programme as perthe norms to be decided by the R-APDRP Steering Committee.
As a specialized power financier with a sound track record, PFC has vast domainexpertise. As power projects involve a large portion (around 70 per cent) of debtfinancing, PFC ensures easier accessibility of funds as a single source compared to banks,which typically have to adhere to caps on the amount of loans given to a singlesector/company/business group. Being a NBFC, PFC is also not required to maintainstatutory funds (like CRR, SLR in case of banks) thus, enjoys an exemption from blockingsignificant portion of funds in low-yielding assets. Despite the movement in interestrates, PFC has been able to maintain a good interest spreads (difference between lendingand borrowing rates) as well as good asset quality.
Overall the future of the power sector as well as the Company seems very promising.
Internal control system and its adequacy
The Company maintains a robust system of Internal Control including suitable monitoringprocedures which ensures accurate and timely financial reporting of various transactions,efficiency of operations and compliance with statutory laws, regulations and companypolicies. Suitable delegation of power and guidelines for accounting has been issued foruniform compliance. In order to ensure that all checks and balances are in place and allinternal control systems are in order, regular and exhaustive internal audits areconducted by experienced firms of Chartered Accountants in close co-ordination withCompany’s own Internal Audit Department. Besides, Company’s Audit Committeeperiodically reviews the important findings of different Audits keeping a close watch oncompliance with Internal Control System.
PFCs internal audit system is strong and independent and works on a continuous basis,covering the entire gamut of operations and services. The Internal control system has beendesigned to ensure that the financial and other records are reliable for preparingfinancial statements and other data and for maintaining accountability of assets. Theinternal control systems are supplemented by management reviews and documented policies,guidelines and procedures. There exists a reliable internal check system, which helps inimproving the efficiency and effectiveness of internal control system.
PFC is an ISO 9001:2008 certified Company. These stringent internal control processesand credit review mechanisms reduce the number of defaults and ultimately contribute ingaining the faith of all the stakeholders.
Segment–wise or product-wise performance
Company’s main business is to provide financial assistance to the power sector andCompany does not have any separate reportable segment.
Financial and Operational Performance
The Company continued to accomplish a healthy growth during the financial year 2009-10.The total revenues grew by 22.68 % from ` 6,583.54 crore to ` 8,076.86 crore in financialyear 2009-10. Profit before Tax (PBT) grew by 51.40% from ` 1,990.47 crore to ` 3,013.48crore. Profit after Tax (PAT) grew by 19.66 % from ` 1,969.96 crore to ` 2,357.25 crore.However, Profit after Tax (PAT) grew by 58.55% from ` 1,486.72 crore (without taking intoconsideration of ` 483.24 crore due to reversal of Deferred Tax Liability (DTL) on SpecialReserve created and maintained u/s 36(i) (viii) of Income Tax Act) to ` 2,357.25 crore.
Further, Net Worth of the company grew by 15.10% in 2009-10 to ` 12,419 crore ascompared to ` 10,790 crore in 2008-09 and the total loan assets (net) as at 31stMarch, 2010 grew by 23.94% to ` 79,855.76 crore from ` 64,428.99 crore as at 31stMarch, 2009. However, the gross Non Performing Assets (NPAs) remain constant at ` 13.16crore in 2009-10.
Human Resources
Your Company recognizes the employees as the real assets of the organization and laysdue emphasis on all around development of its human recources. Since the company is inknowledge intensive business, it has always been an endeavour of the company to update thecompetencies of the employees and equip them to handle the challenges and intricacies ofthe power sector. As a step towards this, the company has a systemic training plan wherethe training needs are assessed and professional skill are imparted at all levels ofemployees through customized training programmes. The Company has very cordial andharmonious relationship with its employees and are committed to keep them satisfied at alltime. There were no man-days lost during the period under review. The Company had 324employees on its rolls as on 31.03.2010.
Cautionary Note
Certain statements in the "Management Discussion and Analysis" section may beforward looking and are stated as required by applicable laws and regulations. Manyfactors may affect the actual results, which could be different from what the Managementenvisages in terms of future performance and outlook.