India's Power Struggle

India 's hunger for power is growing fast and its government is aggressively courting private investors, a move that has resulted in an avalanche of initial public offerings of power companies from some of country's biggest industrial houses.

These may just be a drop in the ocean when considering the total investment needed in the long-ignored sector, however, and burgeoning demand presents significant opportunities for both domestic and foreign players.

For overseas investors, joint ventures with Indian private operators may be the best route in.

	 -- Pressure -- 

Decades of underinvestment have led to a growing deficit between supply and demand in the country, with peak power deficits as high as 17%. A 2007 McKinsey report estimates that by 2017, India's annual power demand will exceed 300 gigawatts, up more than three-fold from current peak production of around 97 GW. In order to meet its growing power demand, India needs investments of around $600 billion across the value chain.

McKinsey estimates that by 2017, the power sector may boast annual earnings before interest, taxes, depreciation and amortization of $135 million-$160 billion.

The government of India is committed to an ambitious rural electrification program. "By 2012, everyone in the country will have electricity without fail," Power Minister Sushil Kumar Shinde told a press conference in New York last week.

	 -- Help -- 

To attract private capital, the Indian government has launched a series of so-called Ultra Mega Power Projects, each with a minimum capacity of 4 GW. The projects, expected to cost around $3 billion each, are being auctioned to private bidders, with the government expected to provide speedy regulatory clearance, fuel linkage and captive mining blocks and land for development.

The government has already helped private bidders in sourcing coal, water and land and loan acquisitions, Shri Gireesh Pradhan, Additional Secretary in the Power Ministry, told Dow Jones Investment Banker.

For example, it provided assistance in the 4,000 megawatt Sasan ultra mega power project in Madhya Pradesh, a bid won by India's Reliance Power Ltd. (532939.BY).

The ministry will also smooth paths with other agencies, such as environmental bureaucrats. "We assist them if they have problems with other ministries," Pradhan said.

So far, bidding for these projects has been dominated by traditional Indian conglomerates, which have rushed in to capitalize on the opportunity by floating publicly listed shell companies for the purpose. Together, they have announced or raised IPOs worth some $7 billion.

Assuming these projects will be financed with one-third equity, the implied total expected capital raise is around $21 billion. Still, that amounts to less than 4% of the total investment needed over the next seven years, implying there is still plenty of opportunity for new investors, especially for foreign utilities, that have been missing from the action.

	 -- Hurdles -- 

The Indian government has long allowed 100% foreign direct investment in the power sector but has so far failed to attract the desired dollars, for several reasons.

The main issue is the poor financial condition of India's state electricity boards, or SEBs, which own the local distribution infrastructure and are the primary customers of the power producers.

The Indian government refuses to guarantee the power purchased by SEBs. One famous case is Enron's withdrawal from the Dabhol power project in 2001 because the Maharashtra government defaulted on a payment.

Another issue is the lack of a reliable supply of coal, the primary fuel for power generation in India. In June, the Indian Minister of State for Power said a number of power plants faced critical supply shortages with available supply of fuel at less than seven days.

The Indian conglomerates, with their deep political connections, and long history of operating under India's cumbersome bureaucracy and dealing with infrastructure issues, are much more comfortable with these challenges.

But foreign firms can still capitalize on the opportunity. One viable strategy may be to form joint ventures with the Indian private operators taking the plunge.