There has been no resolution so far to the issue of assured fuel supply from Coal India Limited (CIL) to power producers. According to reports, while CIL released a model supply agreement in April 2012, so far only around 13 Fuel Supply Agreements (FSAs) have been signed. Originally around 50 power units were expected to sign FSAs with CIL. Power producers have objected to the model FSA released by CIL, particularly its force majeure provisions and the dilution of financial penalties in case of lower than contracted supply. Background The adverse power supply situation has attracted greater attention in the past few months. According to Central Electricity Authority's data, the gap between peak demand and peak supply of power in March 2012 was 11 per cent. The decreasing availability of fuel has emerged as a critical component of the worsening power supply situation. As of March 31, 2012, there were 32 critical thermal power stations that had a coal stock of less than 7 days. The gap between demand and supply of coal in the past three years is highlighted below: Table 1: Coal demand/Supply gap (In millions of tonnes)
|
2009-10 |
2010-11 |
2011-12 |
|
| Demand |
604 |
656 |
696 |
| Supply |
514 |
523 |
535 |
| Gap |
90 |
133 |
161 |
Source: PIB News Release dated May 7, 2012 Coal accounts for around 56 per cent of total installed power generation capacity in India. Increased capacity in thermal power has also accounted for almost 81 per cent of the additional 62,374 MW added during the 11th Plan period. Given the importance of coal in meeting national energy needs, the inability of CIL to meet its supply targets has become a major issue. While the production target for CIL was 486 MT for 2011-12, its actual coal production was 436 MT. Fuel Supply Agreements In March 2012, the government asked CIL to sign FSAs with power plants that have been or would be commissioned by March 31, 2015. These power plants should also have entered into long term Power Purchase Agreements with distribution companies. After CIL did not sign FSAs by the deadline of March 31, 2012 the government issued a Presidential Directive to CIL on April 4, 2012 directing it to sign the FSAs. The CIL board approved a model FSA in April 2012, which has not found acceptance by power producers. According to newspaper reports, many power producers have expressed their dissatisfaction with the model FSA released by CIL. They have argued that it differs from the 2009 version of FSAs in some major ways. These include:
Most power producers, including NTPC, the country’s biggest power producer, have refused to sign the new FSA. Reports suggest that the Power Minister has asked the Prime Minister’s Office to mandate CIL to sign FSAs within a month based on the 2009 format. CIL has received a request from NTPC to consider signing FSAs based on the same parameters as their existing plants, but with the revised trigger point of 80 per cent (down from 90 per cent earlier). Underlying this situation is CIL’s own stagnating production. Various experts have pointed to the prohibition on private sector participation in coal mining (apart from captive projects) and the backlog in granting environment and forest clearances as having exacerbated the coal supply situation.
The Minister of Railways, Dinesh Trivedi, presented the Railways Budget 2012 to Parliament on 14th March. While commenting on the financial position of Railways, the Minister said that 'the Indian Railways are passing through a difficult phase'. The Operating Ratio for the closing year is now estimated to equal 95%. This is significantly higher than the 91.1% figure budgeted last year. Operating Ratio is a metric that compares operating expenses to revenues. A higher ratio indicates lower ability to generate surplus. Surplus is used for capital investments such as laying of new lines, deploying more coaches etc. Therefore, a smaller surplus affects the Railway’s capability to make such investments. Budget v/s Revised estimates 2011-12 Budget 2011-12 had estimated the performance of Railways for the financial year. Revised estimates have now been submitted. Taken together, these two figures help in comparing actual performance against targets. Some observations are enumerated below:
Budget estimates 2012-13 In 2012-13, Railways plan to improve Operating Ratio to 84.9% and to increase surplus to Rs 15,557 crore. This is more than 10 times the surplus generated in 2011-12 (Revised Estimates). The effective increase in freight rates is estimated to average 23%. During this time, passenger fares are also estimated to increase by an effective average rate of 19%. [1] Infrastructure Performance during the 11th Plan Under the 11th Five Year Plan, the total plan expenditure for Railways had been approved at Rs 2,33,289 crore. The Outcome Budget shows that the actual expenditure is only likely to be Rs 1,92,291 crore. Thus, expenditure will fall short by Rs 40,998 crore. This gaps exists despite a significant increase in the Gross Budgetary Support approved by Parliament. Plan expenditure during 2007-12 (In Rs Crore)
|
Approved Expenditure |
Actual Expenditure |
|
| Gross Budgetary Support |
63,635 |
75,979 |
| Internal Resources |
90,000 |
67,763 |
| Extra Budgetary Support |
79,654 |
48,549 |
| Total |
2,33,289 |
1,92,291 |
The Standing Committee on Railways, in its 11th report presented in August 2011, had sought an explanation from the Ministry. According to the Ministry, lower mobilization of internal resources and lack of extra budgetary support are the main reasons for the shortfall. Internal resource mobilization has been low because of (i) impact of the 6th Pay Commission; and (ii) slow growth in freight earnings due to the economic slowdown. Extra budgetary resources have been low due to non-materialization of funds through the Public-Private Partnership route. Proposals for the 12th Plan Two recent committees – Kakodkar Committee on Railway Safety and the Pitroda Committee on Railway Modernization – have called for large investments in the next five years. The Kakodkar Committee has recommended an investment of Rs 1,00,000 crore in the next five years to improve safety; the Pitroda Committee has recommended an expenditure of Rs 3,96,000 crore in the next five years on modernization. The Railway sub-group of the 12th Five Year Plan has also estimated a requirement of Rs 4,42,744 crore for various other investments proposed to be undertaken during the Plan period. [2] All three groups have called for significant investments in infrastructure augmentation in the next five years. Budget proposals 2012-13 According to the Minister’s speech, the Annual Plan outlay for the year 2012-13 has been set at Rs 60,100 crore. The plan would be financed through:
What happens now? The Budget is likely to be discussed in the two Houses within the next few days. Post the discussion, the Ministry's proposals will be put to vote. Once passed, the Ministry can put its proposals into action. For more details on the Railway Budget, including the projects proposed this year and the status of proposals made last year, please see our analysis here. To understand some of the challenges faced by the Indian Railways, see our blog post from last year. Notes: [1] The ‘effective average fare’ has been calculated by dividing the total income from the segment (freight/ passenger) by the total traffic (in NTKM/ PKM). This would vary with changes in fares as well as the usage by different categories of users (including the proportion of tickets booked through Tatkal). [2] Source: Report of the Expert Group on Railway Modernization (Chairman: Sam Pitroda)
