Why do we not have more global strategics investing in the power sector in India?

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By any standards India is a large market for most categories. A very, very large market Indeed. And given that across most sectors India is far below global benchmarks, or in many cases, even far below Asian or other developing country benchmarks. The size and the scale of the market opportunity makes India an attractive destination for strategics to consider India as a serious component of their growth strategy for the next decade or two. Many companies with global presence have engaged with India strongly since the 1990s when liberalization opened up opportunities in many sectors to foreign players.

From arms-length relationships to strategic partnerships, many strategics have now taken up serious positions in India, either by investing in and along with Indian majors in that sector or by setting up independent operations in sectors that permit overseas players to start independent operations.

The story in the energy sector is strikingly different though. Given the current status and the opportunity, the energy sector should have been a scene of the most solid activity and investments in India. Why then has that not happened?

Size of the opportunity is certainly not a reason for lack of participation by global strategics

That is certainly not the case. With a current power generation capacity of 225 GW, India is a long way away from the expected demand in the medium as well as the long term. An International Energy Association report estimates that India will require additional power generation capacity of over 600 GW. That’s a huge market opportunity.

Added to the fact that over 2/3rd of the power generation capacity in India is coal-fired thermal power. Renewables, which is where the world will largely move towards, is just 12% of India’s current power generation capacity. This represents one of the largest energy markets in the world in the mid and the long term.

The reasons for absence of global strategics in the energy sector in India is a result of policy and execution issues, both of which can be addressed by strong decision making and efficient implementation.

The power sector in India is suffering from a number of incomplete projects. Investors get very worrying signals from projects that get started after stressful policy clearances and which are left incomplete due to financial challenges or challenges from environmental NGOs or other reasons. The lack of transparency on strategic positions by political stake-holders and lack of political and institutional will to speed up the completion of incomplete projects is the single biggest deterrent for global strategics to make a move in India. The opportunity is large, it is an industry that requires large players to participate, and there the opportunity is not going to go away if firms do not act in a hurry, unlike say in other industries like mobile & telecom and consumer markets.

Global strategics therefore prefer to wait and watch the situation evolve in India, especially the coming Lok Sabha elections which are likely to provide a directional signal on which way the Indian march is headed and at what pace and with what challenges.

Past experiences of early-entrants have been less than pleasant.

Some of the energy majors who ventured into India in the past few decades have had to exit with very, very unpleasant experiences. They faced regulatory and policy hurdles, indecisive and delayed decision-making by political stake-holders, bottlenecks by environmental NGOs and despite all this, when they got clearances, they had to face poor quality execution, inordinate delays and often left projects incomplete.

Cutting losses and gong away is never a good signal. Unfortunately that is the message India sent in the energy sector.

But the situation is changing fast and we are bound to see more M&A and investments in the energy sector in India

There is a heightened sense of political accountability, which was lacking earlier. Across sectors Indian professionals are demonstrating world-class execution capabilities in large projects. Take a look at the airport projects and road initiatives across the nation.

Added to this is the fact that Indian infrastructure companies need to seriously deleverage, there will be many complete and unfinished assets available for strategics to make investments in. We have already started seeing some action with the likes of GDF acquiring substantive stake in Andhra Pradesh based Meenakshi Energy.

In summary

The opportunity is large. The conditions, though currently not enabling, are improving gradually. The direction is clear. Unless India moves to create over 500 GW of power generation capacity in the next 3 decades, the GDP growth will be impacted. Governments recognize this. Industry is ready.

Sanjay Bansal

Founder – Aurum Equity Partners LLP

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