TEXT-S&P report says India needs to up power sector investments

(The following statement was released by the rating agency)

Aug 08 - A recent massive power outage in India highlights the country's poor power infrastructure and to the urgency of improvements. That's according to a report, titled "Adequate Infrastructure Is Essential To Lighten India's Power Woes," that Standard & Poor's Ratings Services published today. Activity in much of India ground to a halt early last week as the outage plunged 20 of the country's 28 states into darkness for nearly two days.

"The blackout was, in our view, a consequence of capacity growth and infrastructure improvements that severely lag the country's mushrooming demand for power," said Standard & Poor's credit analyst Rajiv Vishwanathan. "However, the lack of fuel security is a major constraint to the growth of India's power generation capacity, and the slow pace of tariff reforms is hindering infrastructure investment at the state level."

According to the report, India's aggressive economic growth targets for the next five years will add to the already high demand for power. This calls for a significant increase in funds to the sector. Power capacity has increased about 41% over the past decade. But, while the government has increased funding allocations to the power sector in its recent five-year plans, it has consistently failed to meet its planned capacity expansions.

Standard & Poor's believes that the Indian government isn't placing enough focus on improving the country's inadequate transmission and distribution infrastructure, particularly at the state level, despite the large increase in installed power capacity. Although the recent outage was the only reported mass blackout in the past 10 years, the stability of the transmission has been managed through rotating power cuts--a less than optimal solution, according to Standard & Poor's.

"The weak credit quality of the downstream distribution companies, which the state electricity boards largely control, is a major hindrance to investment in the power sector," said Mr. Vishwanathan. Political resistance to tariff increases has often prevented generation companies from fully passing through cost increases, particularly for fuel, to end customers. Subsidies on power tariffs and free power to certain sections of the population have widened the chasm between tariff revenue and the cost of power supply to distribution companies.

The report notes that some states have taken steps to increase distribution tariffs. However, due to the slow pace of implementing tariff reforms, only a gradual improvement in the finances of state utilities may be possible.