Industry Making a Mistake by Staying Quiet on the Andhra Skirmish

By now, no one in the renewables sector is unfamiliar with the situation in Andhra Pradesh. Soon after coming to power, the new government of Chief Minister Jagan Mohan Reddy has (as promised, it must be said) initiated moves to renegotiate PPA’s (Power Purchase Agreements) signed by its predecessor TDP government of N Chandrababu Naidu.

The blow has fallen particularly heavily on the renewables sector, both solar and wind, with close to 5.2 GW of projects with Rs 21,000 crores of debt under risk when reports last came in.

The basic premise of investment is rule of law, and enforcement of contracts. Without those, or when those are ignored at will, a businessman might as well stop planning for the long term.

And you know what happens when they do. Manufacturing assets are not created, you have more traders than real businessmen, and those who do invest in a manufacturing set up want to extract super normal profits as early as they can leading to even more corruption.  The Andhra Pradesh government risks starting off just such a cycle.

Keep in mind that at $4.8 billion, FDI has been a critical component of growth for the renewable sector, and Andhra Pradesh has been a frontline beneficiary of that investment. A hit here could impact all FDI flowing into the sector.

Worse, despite a court stay obtained by the affected players, the state discom has apparently curtailed power off-take from the renewable projects under the lens.

So could the rest of the stakeholders in the system have reacted differently?

Let’s consider the actual reactions first. While the directly affected parties or the renewable players who had invested on the basis of the aforesaid contracts have pushed back — either refusing to talk to the government, or filing a case to protect the sanctity of their contracts and getting their industry associations to issue strong letters of support — it is the broader industry that has let them down.

National level industry bodies have been completely silent on the issue, perhaps considering it as a sector specific issue.  If at all, noises have been made around another move by the same state government, to reserve 75% jobs in the private sector. Again, a move questionable in law, and in practice.

Indian industry has an opportunity here to stand together and make it clear that when it comes to such unilateral moves, they will all stand together. That means, all industry members unitedly pausing all negotiations with the state government on all future investments. They will have  the law on their side, for it seems safe to  assume here that the judiciary will back them.

But that is probably wishing for too much. Already, we have heard noises from some about making ‘small adjustments’ to help the state government save face and get on with work in a leading state for the sector. They do that and we can guarantee that in the long term it will be good neither for industry, nor the power consumers of the state.

Not good for the industry as bending once will open the floodgates to pressure or the threat of more such from the other sectors and other states. And consumers will suffer as fresh investments get pricier to factor in the new risk of contracts not worth the paper they are signed on.

Of course, even the central government has not exactly come out smelling of roses here despite their letters and advice to the state government of Andhra Pradesh to desist.

After all, the plethora of tender cancellations for ‘high’ prices and encouraging states to force second and third lowest bidders to match the lowest price bids has become a regular practice now making a joke out of the whole idea of auctions. And exercise which was already ‘controlled’ with ceiling rates and much more.

It is but obvious to any lay observer that industry is paying the price in a game of political poker. They have no reason to play along with a guaranteed losing hand.

It’s time to exit and stand together.