India's Power Ministry Mandates Phased Manufacturing Program for Foreign Power Equipment Suppliers

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Researched by Industrial Info Resources (Sugar Land, Texas)--India's Power Ministry has detailed the rules for a phased manufacturing program (PMP) that will be mandatory for global power equipment manufacturers that supply Indian power projects. As requested by domestic equipment manufacturers, the program will be implemented in lieu of a 14% levy on imported power equipment.

According to Power Ministry officials, no levy will be imposed on imports of power equipment for the next five years. The mandatory PMP, which is to be submitted by foreign equipment manufacturers at the time of bidding for supplies, will ensure a level playing field between domestic and foreign equipment manufacturers; a high level of technology transfer; and the development of a back-up vendor base for service and spares when project supplies and implementation are complete.

Officials said that 60% of all new thermal generating capacity by 2017 will be through supercritical equipment, and the PMP will ensure the creation of an indigenous manufacturing base through a transfer of technology. The Central Electricity Authority (CEA), the apex power regulatory body, has communicated the PMP requirements to all Indian power-generating utilities.

Under the PMP, overseas manufacturers must have a registered company in India or an Indian joint venture partner to qualify as an equipment supplier. The bidder will have to give a commitment to indigenize the manufacturing of supercritical equipment within India over a period of time; if supplies are to be made through a joint venture with an Indian company, there should be a firm technology transfer agreement between the overseas supplier and the Indian company. Officials said that no specific percentages on the level of indigenization every year need to be submitted by foreign suppliers, but each PMP that is finalized between supplier and Indian buyer will have provision of liquidated damages for failure to meet milestones of manufacturing, as committed in the PMP by the overseas suppliers. The liquidated damages will be not less than 5% of the total value of the equipment supply bid, and this will have to be provided through a bank guarantee.

The PMP requirement also will be effective on the five new ultra-mega-power projects (UMPP) for which request for qualification of bids has been invited by the Indian government. Two UMPPs of 4,000 megawatts (MW) each are planned in the state of Andhra Pradesh, and one 4,000-MW project each is planned for in Orissa, Gujarat and Jharkhand.

Indian power equipment manufacturers led by Bharat Heavy Electricals Limited (BSE:500103) (BHEL) (New Delhi) and Larsen & Toubro (BSE:500510) (L&T) (Mumbai), demanded a 14% duty on imported equipment to ensure level competition between domestic and foreign companies. BHEL is government-controlled, while L&T is an independent company; but since both have manufacturing bases in the country, they face competition from fully built equipment imported from China at zero duties.

According to India's Planning Commission, equipment imports from China helped bridge the gap in demand and supply from domestic manufacturers, but as a fallout created a situation where foreign manufacturers gained an advantage over India companies. The Commission recommended an import duty. But Indian private power producers like Reliance Power Limited (BSE:532825) (Mumbai), Tata Power (BSE:500400) (Mumbai), Essar Power (BSE:523267) (Mumbai) and Adani Power (BSE:533096) (Mumbai) opposed the duty, arguing that it would increase costs of projects.

Power Ministry officials said that imposition of the PMP will achieve the objectives of the duty proposed by the Planning Commission, but not impact financial viability and power tariffs, as feared by private power producers.

During 2012-17, an additional 100,000 MW of new power generating capacity is planned, with about 90% through private investments. Equipment for half of the capacity could be sourced from China. According to figures from the Planning Commission, Chinese power equipment suppliers have won orders for 36,800 MW of power equipment over the last two years, which is equivalent to more than half the capacity that the country is expected to install by 2012.

Over the next five years, India's domestic capabilities to manufacture power generating equipment will go up to 43,000 MW, from 10,000 MW at present but well short of the power generation target of 100,000 MW by 2017. Some of the new equipment manufacturing capacities are L&T-Mitsubishi (4,000 MW), Toshiba JSW (3,000 MW), Alstom Bharat Forge (5,000 MW), NTPC-BHEL Power Projects (5,000 MW), Ansaldo Caldie GB (1,500 MW), Reliance Infrastructure (10,000 MW) and Bhel (5,000 MW).

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