EQ in Exclusive Interview with Sandip Agarwal – MD & CEO at EverStream India / Think Energy Group

• “Lives vs Livelihood”, the world seems to be scrambling to solve this puzzle. How do you think that the Government has responded to it?

The choice is straightforward. It is life first whether saving them for disease or hunger. Let us not be mistaken that lockdown means life and lifting lockdown means livelihood. We must balance between various form of responses to reduce the effective loss of life. The difficult part is how to implement the same in a balanced way.

Lockdown (coupled with increasing testing, contact tracing and quarantine enforcement) has generally been the initial response so that the country can ramp-up its healthcare infrastructure to fight the pandemic. Let us take the example of India. Infection rate since the lockdown has not increased exponentially but has remained linear at around 5%. Between March 23 and April 22, 2020, India increased its testing capability 25 times (to 500,000 now), there has been an increase of 3.5 times in total dedicated hospitals (to 736 now) and 3.6 times in isolated hospital beds (to 1.94 lakh now).

Now the challenge is to bring the economy back to work in a way that we can minimize the spread of infection to a level that can be supported by existing healthcare capabilities. We might see repeated lockdowns in areas where the rate of infection grows too fast with the ultimate objective of reducing death rate and thereby allaying fear.

The response of the government to the conundrum of lives vs livelihood can be fully comprehended only over a period. While on the one hand weak healthcare system & dense population can lead to loss of life directly from the rampant spread of disease and  on the other hand loss of millions of jobs in the low income groups will push them towards poverty and hunger leading to loss of life in a number of cases (and loss of dignity of life in most of the cases). Therefore, lives and livelihood must be balanced equally.

• Experts are predicting about a 10% decline in GDP this quarter and possibly negative growth rate for the whole year. What do you think would be the Impact of COVID 19 on the Indian Economy?

10% fall in GDP this quarter and a near zero 0% GDP growth rate for the year would be the best possible outcome. I expect economy to contract by a larger number for the whole year. However, the numbers for this year is not as important as the path we choose to fight the pandemic, to spread the pain of such disruptions more fairly and the recovery plan.

Even if the lockdown is lifted completely sooner than later, it is almost certain that we will see multiple lockdowns followed by intermediate period when the economy would operate  with less restrictions. It is pertinent to note that even when the restrictions are lifted economy would operate at best at 95% with spending on hospitality, entertainment, tourism and aviation expected to see more than 50% slowdown before the vaccines are out. It would be war against fear of getting infected more than the infection itself and unfortunately fear find its way through the gate until the vision is blackened.

Having said that, India has always been a resilient economy. We came out of every economic crisis since financial liberation in less than 2 years on the back of strong domestic demand supported by healthy saving rate, unending entrepreneurial spirit, parallel economy (which no analyst can predict beyond a point) and bank lending supported by fiscal / monetary policies. On the back of strong monetary and fiscal measures followed by a surge in private consumption and subsequently private investments, India’s GDP growth rose to pre-crisis levels in 2010. This time around we have added complexity of slower credit growth and falling growth rate at the time we entered the crisis but we also have the advantage of substantially higher foreign reserve cover, sound external sector and domestic wealth.

If Govt responses were to abate flight of capital and more importantly provide the required push to private consumption leading to a surge in private investments and remove supply constraints at the same time then we should expect recession for the full year, muted growth next year followed by a strong recovery in 2022.

• You mentioned that Government responses would be crucial in fighting the pandemic on the economic front. Do you want to provide certain suggestions for the Government to consider?

We are in this vacuum between the Old World and the New World where what we do today will decide what the New World will bring with it. Make no mistake that Governments should refrain from making the mistake of yielding to excessive worries about budget deficits and rating downgrades. The Indian government should bring a massive fiscal stimulus package in the range of 10% of the GDP to tackle the crisis (in addition to monetary policies to create more liquidity). The pertinent questions are: a. Where to get the money from; b How to repay it; and c. How to design and administer the stimulus package. If Government decide to run a large fiscal deficit primarily on account of lower revenue & increase borrowing, then it must convince the world then there is a credible plan in place to bring back the fiscal deficit to desirable level and to repay the debt.

India has an unfair distribution of wealth where the top 1% of the population holds about 73% of the wealth. Additionally, the bottom 70% the population holds about 0.25% of the wealth and were left out in the Old World. This has caused resentment and anger among the bottom half for decades. By changing the social contract and ensuring that the top 1% pay for the crises Government can find money in a way which does not affect its fiscal outlook and bring harmony in the society.

Where to get the money from?

The government can raise funds by issuing special COVID Bonds domestically, which will be long term low interest-bearing bonds even at the cost of some form of Financial Repression by pushing the top 1% of the population to buy these COVID Bonds. The Government can also resort to low interest borrowing from international associations e.g. borrow from World Bank, utilize its quota of SDRs from IMF. Further, Reserve Bank of India on the back of strong reserve cover can buy bonds to an extent.

How to repay the new debt?

Through a combination of short term taxes, which could include a higher income tax for the super-rich category (> INR 1cr), additional wealth tax, increasing the excise on liquor and tobacco, increased taxes on high value land deal, dividend distribution taxes on undeployed portion and increased carbon emission taxes levied on petroleum products, the government could mobilise in the range of $75bn-$100 bn/annum.

How to design and administer the package?

It is critical that government come with co-ordinated fiscal and monetary support to push demand and ensure that the benefit reach to those who truly deserve it. a. improve the medical infrastructure to fight the pandemic; b. provide livelihood support  by direct transfer particularly to migrant or displaced labourers; c. bail out SMEs in the informal sector; and d. Ensure lending to otherwise profitable projects and organization through credit guarantee from the government.

A Revised Budget

India should think about coming out with a revised budget with new fiscal targets for next few years and clear & credible path for funding stimulus package required to push the economy to recovery.

• Many Experts are saying that the “World will Change Forever” or we will see “The New World”? Can you provide your views on this?

By the time we come out of the fear of the physical damage and start understanding the economic damage, some things would have altered near permanently.

Healthcare – This crisis could bring about three welcome changes as pandemic become high probability high impact event: a. spur in investments in public healthcare infrastructure (expected to increase more than 50% from the current level of $134 bn globally); b. global collaboration with more aid for poor nations as virus does not obey border law; and c. advancement in science of vaccinology & virology.

Aviation Sector – The global aviation industry is expected to lose around $250bn in 2020 and over 25 million jobs could be impacted (with over 3 million jobs in India alone). We have seen Virgin Australia, FlyBe, Compass Airline and Trans State Airline fall and more are likely to go away. While airline demand would pick up one vaccine is available, there will be significant reduction in traffic as businesses reassess the need to fly after finding out a way to work remotely. Reversal in the industry’s dramatic expansion is expected with consolidation and less competition leading to higher fare and less low-cost routes.

Globalization & Global Supply Chain – Recalibration of the expanding era of globalization and a new equilibrium at a lower level will be the new normal. Global supply chain management and decisions are going to be at the top of the boardroom discussions. Localization and diversification would be the themes expected to disrupt the existing supply chain. The existing supply chain inherently incorporate policies related to currency management and geo-political strategies which would hard to predict as all of this unfolds.

Democratic Rights – Around 84 countries have declared some sort of national emergency. Suppression of freedom of speech, right to protest and controlling the press are various forms being used to exercise unprecedented power. Coronavirus Law in Hungary and arrest of Hong Kong’s leading pro-democracy activists by China are just examples of how leaders have usurped more power which they do not intend to give away entirely even after the pandemic.

Protectionism & Populism – Global politics underwent a sea change with a surge in populism and nationalist sentiments after the impact of Global Financial Crisis 2008 was felt and understood. The impact that COVID 19 would leave behind would be much larger in scale and by the very design of the problem people in low income group in hospitality and entertainment be the hardest hit and the anger that it would bring could lead to an unprecedented demand for change. Both protectionism and populism are expected to make a grand come back at a scale not been in decades.

Relations between Employers, Informal Workers, and the State – Migrant Workers are often seen as the driving force of Developing Economies as they provide an inexhaustible pool of cheap rural labour. The pandemic has exposed the relation between the State, Employer and these Migrant Workers. The State must choose between protecting the intertest of these workers or succumbing to the demand of capital provider and almost reverse the evolution process of labour laws to go back in time to the colonial era. If this is not done in the right spirit, we will unfortunately trade short term trivial gain for permanent loss of trust. It would take decades if not centuries to cultivate trust back into this relationship.

• MNRE has been proactive and trying to balance the needs of the Generators and Discoms. What other aspects should the MNRE address to have a more meaningful impact?

At the outset, I would like to thank MNRE, the Hon’ble Minister and the Hon’ble Secretary for their immense contribution to the sector. It is through their perseverant efforts and direction that India today is on track to achieve the almost impossible target of 175 GW of renewable capacity by 2022.

MNRE has stepped up in these times of crisis and has been taking all efforts towards ensuring the sector does not face distress in these trying times. Disbursement of long outstanding incentives, working with lending community so that Discoms get soft loan to clear long outstanding dues, solving a number of regulatory hurdles in implementation of ISTS projects, reiterating the  ‘must-run’ status and clarifying its stand on Force Majeure related to supply and work disruption are commendable achievement in the first month of the crises itself. As you know these are good first steps but a lot need to be done to reap its benefits.

Most large developers are currently implementing projects under state bids (along with SECI/NTPC projects) and there is a lag in adoption of the blanket extension by the Energy Departments of States. We would therefore like to see MNRE to notify a relevant communication directing the Energy Departments in the states to clarify that the extension as provided in MNRE OM dated April 17, 2020 shall apply for the Projects currently under implementation in the respective states.

Without certainty of these extension there would be further delays in implementation of projects which would put millions of jobs in the supply chain at stake. Leadership in providing certainty on the extension goes a long way in starting the economic engine and that too at little cost to the exchequer.

• State Discoms inability to pay has been in the global media for most part of the last year. How do you think global investors are looking at it? What are your personal views on this?

DISCOMs owed renewable energy generators ₹62.19 billion (~$856.2 million) in overdue payments at the end of January 2020. MNRE’s recent steps to make opening LCs compulsory and ensuring soft loans to Discoms will provide much needed short-term liquidity to the developers.

However, the only medium-term solution, in the current structure, is to ensure that the Discoms are financially sustainable, with tariffs reflecting the cost of supply and subsidies being paid directly to the beneficiary. The proposed amendments in the Electricity do take care of much of these concerns. However, we must see whether these amendments can be notified and implemented effectively.

In the long run, we would need to let the state allow the privatization of distribution companies with required regulatory safeguards or independence of Discom in decision making to ensure long-term viability.

We must realize that Discoms in India tend to exhibit cyclical patterns when it comes to outstanding period. But the relevant point is that Discoms pay at the end. We must not forget that all contracts in India have been upheld in spite of few attempts by the Discoms to change them and the courts have always shown the right path in this regard. Therefore, it is a myth that Discoms in India will not pay. However, we should include reasonable level of working capital in our financial model and try to diversify our investments across Discoms.

• Experts believe that the Government may fall short of its target of 40 GW by 2022 when it comes to rooftop installations. What do you are the major hindrances for the rooftop segment to grow?

There are two key issues here, regulatory and project financing.

India has taken the concept of Net Metering from the world but probably did not consider two unique aspects that exists here:  a. the tariff structure is inverted and b. the tariff for agriculture and domestic (lower consumption segment) are cross subsidized. So, when the higher paying industrial and commercial customers move out, Discoms are left to bleed. This is unsustainable.

Potentially we need a three-way sharing of benefits where the consumer pays both the generator and Discom yet reduces its energy bill. That process is underway, with Discoms trying to come with policies to recover a part of the saving in cost, and it would take 6-12 months before stakeholders comes to an acceptable equilibrium. Regulatory framework will be tested in the meantime.

In spite of multiple attempts to promote rooftop financing, there has been limited success. Multiple Government backed FIs, with the support of Multinational DFIs, have taken up the mandate to fund rooftop projects. Inherent risk aversion is exhibited by the kind of financing terms and guarantee/collateral requirement that the lender requires.  Further a number of rooftop developers are small to mid-size companies and find it very difficult to get project financing for such project.

• You have earlier mentioned that “the dynamics of C&I PPA can change completely in the aftermath of COVID 19”. Can you provide more details in this regard?

As the post-COVID world realigns, there will be some industries that will be more impacted than the others.  We can clearly see the impact on airline, hospitality, entertainment and tourism industry.  Changes in the Global supply chain management decision would complicate this further. As the economy evolves out of the pandemic, localization and diversification shall disrupt the current Global supply chain management which would hard to predict as all of this unfolds.

The criteria for selection of C&I PPAs would become more complicated. Given such Black Swan events, it is likely that developers would re-look at the contracts to incorporate clauses which can clearly cover such situation in future. Further, developers should beyond current credit rating and will analyse broader global geopolitical and economic factors affecting the industry and specifically the client. Go back to Old Basics, review client revenue base, their operating metrics and how much they are sustainable in the environment likely to emerge, would be the New Mantra.

• We understand that this platform TEPSOL is a part of a larger global platform. Can you provide more details here?

TEPSOL is majority owned by Everstream Capital, an independent investment firm that manages over $500 million of funds and assets on behalf of some of the world’s largest institutional investors. It invests in energy and infrastructure assets with a primary focus on sustainable energy sources. Over the years EverStream has built platforms in Japan, India, Mexico, US and Europe.

EverStream’s “Principals” are highly experienced operators and investors who have created and/or led some of the largest companies in the industry including SunEdison and two of the largest publicly traded pure-play companies in the renewable industry globally namely TerraForm Power (Nasdaq: TERP) and TerraForm Global (Nasdaq: GLBL); both were recently sold to Brookfield Asset Management.

In India, we are focused both on the solar and water market. We have an existing portfolio of 120 MW of operating assets, including both ground mounted and rooftop projects, and a pipeline of 281 MW of ground mounted projects. We have built an extraordinarily development company in India and what sets this team apart is the global perspective and the linkages that we are able to leverage using the Everstream connect. We believe that the current market dislocation will provide an opportunity to acquire operating assets at attractive valuations apart from executing greenfield projects. We are increasingly looking at doing more water projects in water re-use and desalination segment.