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REC flags unstable business environment as concerns

According to reports, the risks of financing power projects are quite high, state-run REC has said, citing the poor financial health of distribution companies and “unstable business environment” as concerns.

“The financial health of the state electricity boards and state power utilities across the country, barring a few, is in very bad shape,” Rural Electrification Corp, a leading funder of power projects, said in its 2012-13 annual report.

“As the company has a significant concentration of outstanding loans to these entities, the risk perception for our company is high. The failure of the entities in meeting their debt-related obligations may adversely impact our company’s ability to mobilise low-cost funds,” it said.

The combined annual losses of state electricity boards or discoms are estimated to be more than Rs 1.9 lakh crore, REC said in the report.

According to the company, there are concerns about prevailing exposure norms, constraints in raising money from tax-saving bonds and the financial position of state distribution utilities.

Other issues include the “entry of new players and competition from banks and multilateral agencies, unstable business environment, prevailing high interest rate scenario, fluctuation in rupee and likely increase in cost of capital due to volatile market conditions/large requirement of funds,” the report noted.

REC sanctioned loans worth Rs 79,470.49 crore in the last financial year, compared with Rs 51,296.77 crore during 2011-12. The figure excludes sanctions under Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), which aims to strengthen rural electricity infrastructure.

In his letter to shareholders, REC Chairman and Managing Director Rajeev Sharma described the “distribution sector” as the weakest link in the power sector value chain.

“…(distribution sector) is threatening to derail the entire process of power sector reforms as also jeopardise India’s growth story,” he said in the letter, which is part of the annual report.

REC is looking to strengthen its presence in the green energy financing space, such as solar, biomass and wind power projects. This is expected to help the company to also mitigate problems of power scarcity, carbon emissions and fuel supply.

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