Centre steps in as Jagan nixes power agreements
YSR Congress Party chief and chief minister YS Jagan Mohan Reddy’s decision has also raised questions over the sanctity of signed contracts in India, particularly among foreign investors.
The Prime Minister’s Office (PMO) has swung into action to save bank loans amounting to Rs 37,000 crore from turning bad in the aftermath of the new Andhra Pradesh government’s decision to renegotiate old power purchase agreements (PPAs) signed by its predecessor, officials with direct knowledge of the matter said.
YSR Congress Party chief and chief minister YS Jagan Mohan Reddy’s decision has also raised questions over the sanctity of signed contracts in India, particularly among foreign investors. Jagan Mohan Reddy decided last month to reopen the power purchase agreements (PPAs) signed under the previous Telugu Desam Party (TDP) government and reduce the price it agreed to pay for solar and wind energy supplied to state-run power utilities.
Since coming to power in assembly elections, held simultaneously with the April-May Lok Sabha polls, Jagan Mohan Reddy has revisited several projects undertaken by the TDP under former chief minister N Chandrababu Naidu, including the Polavaram multi-purpose irrigation project , and slashed funding to the plan to build a brand new capital city in Amaravati .
The PMO has asked the ministry of new and renewable energy (MNRE) to examine the matter of PPAs and find a quick solution, the officials cited above said, requesting anonymity. The PMO directive came after lenders expressed concern that loans extended to projects generating about 8,000 MW of wind and solar projects in Andhra Pradesh (AP) could turn into non-performing assets, or bad loans. Foreign investors were fretful of the state government reneging on signed contracts, they said.
An official at MNRE confirmed the development. “The Centre is seized with the matter and a solution is expected soon. It (the state government) is advised to honour the contracts and take action against only those where they have sufficient proof of any irregularities. It is understood from the officials of the state government that such cases may not be more than three or four. Action against them could be taken as per the law after proper investigation,” the official said, requesting anonymity.
Spokespersons for the MNRE, PMO and the Andhra Pradesh government did not respond to queries related to this issue.
In an email, Satoshi Takagi, second secretary of the Embassy of Japan in India, expressed concern that Andhra Pradesh was “trying to renegotiate the power purchase prices” although the contracts had been reached in a fair and transparent process.
“Our concern as a Japanese government is that if legally binding contracts are not honoured, it would cause significant impairment to the business environment of AP state,” he said .
In a letter to Jagan Mohan Reddy on August 7, Japanese ambassador Kenji Hiramatsu urged him to “uphold the law and ensure the adherence of terms and conditions of PPAs. “
“... it has been brought to our notice that AP intends to negotiate a significant downward revision in the power purchase prices, agreed upon under the Power Purchase Agreements (PPA) based on fair and transparent process of reverse auction. If legally binding contracts are not honoured, it would cause significant impairment to the business environment of your state. Many foreign investors, including Japanese companies, are now watching closely the situation unfolding in your state regarding the renewable energy sector,” he wrote in the letter reviewed by HT.
The officials quoted above said there had been some softening in the stand of the state government because of the international pressure. Mint on Wednesday reported, citing union power and new and renewable energy minister Raj Kumar Singh, that the Andhra Pradesh government had offered an assurance that it would not open all PPAs, but only those in which malfeasance is established.
According to the officials, the change in Andhra Pradesh’s instance came after the chief minister met Prime Minister Narendra Modi earlier this month. “The Centre, which is making every effort to bring down the NPA levels, is concerned about lenders of these projects, particularly about NBFCs [non-banking financial companies] as defaults in loan repayment have already started,” the first official said.
In a letter, the Wind Independent Power Producers Association (WIPPA) informed the Indian Banks’ Association (IBA) about the predicament faced by the wind and solar power developers and sought its help in convincing the Andhra Pradesh government not to insist on renegotiating PPAs.
“The total investment stands at close to INR 48,000 crore for these projects. The exposure of the banks in these projects consequently stands at close to INR 37,000 crore,” WIPPA president Sunil Jain said in his July 15 letter to IBA’s chief executive VG Kannan.
Indian banks have been engaged in an effort to clean up bad loans that have piled up in recent years after over-extended corporate borrowers failed to repay debt. Loans being classified as NPAs forces banks to set aside money to cover the risk of defaults, and impairs their ability to lend more.
The Asian Development Bank (ADB) on April 5 raised the issue of growing stress in the sector resulting in defaults by one of its lenders because the state utility failed to honour a contract.
“Development Finance Institutions like ADB rely on the contractual framework, sanctity of contracts and enforceability of contracts within the respective country jurisdictions to provide funding to the projects,” ADB said in the letter to Southern Power Distribution Company A.P. Ltd.
Vinay Rustagi, managing director of Bridge to India Energy Pvt. Ltd, said: “Much depends on how determined the AP government is to push through in its attempt to renegotiate or terminate the PPAs. If they persist, the developers will pursue litigation. And we are very confident that given the way projects have been allocated and tariffs determined, the Andhra government will lose the case.”
“The real concern here is that even if final outcome is beyond doubt, litigation could drag on for a long time and cause considerable harm to the investor confidence across the sector. Lingering uncertainty would slow down activity, cause rating downgrades and make it difficult for developers to raise funding for projects. The worst scenario is that some big ticket international investors get put off by this situation and exit the market,” he said.