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Read an interesting article today in The Financial Express, written by Noor Mohammad, on why the government should keep its hands off hydro PSUs such as NHPC while they try to make deals with states for hydro resources.

The matter is as follows: Hydro resources technically belong to the states, which try to maximise their revenues from these resources.

There was recently a proposal by some of the states for charging upfront premium on top of 12% free power for allocation of hydro power projects, and this has led to PSUs losing those contracts because they are not allowed to pay this premium.

On the face of it, it looks quite a lot to pay. But, the author’s argument is that the states need to be compensated for utilizing a resource that belongs to it, and anyway, why should the central government worry about the upfront payment if the final cost that factors in such payment can be borne by the market. I think the author has a point here. Power generated from large hydro projects is very economical and becomes even more so beyond the first 10 years of the project. So, a slight increase in capital costs and a 10-15% increase in operational expenses is unlikely to make such power unviable.

Currently, public sector companies are not allowed to pay this premium and as a result, some of the hydro-power projects awarded by the states are bagged by the private companies who have no restrictions on paying this premium. Now, you may or may not like private companies hogging most of the projects, but I think – like the author of the article does – that public companies should have a significant role to play in large hydro power projects, because there are a number of large uncertainties – geological, social and economic – in these projects that PSUs are equally well placed or better placed than private companies to succeed in this segment.

In the end, I think the central government should provide public sector companies with a good amount of flexibility their private sector counterparts enjoy if the PSUs are to compete and survive!