KSK Power Ventur plc is a power plant developer with extensive business operations in India. It is headed by Sethuraman Kishore and K.A. Sastry, both first-generation entrepreneurs. KSK Power is listed in London. KSK Energy Ventures, the Indian subsidiary, is listed in Mumbai. The company is in the business of developing, operating and maintaining power projects for major local and global industrial houses. Kishore, a speaker at the recent Wharton India Economic Forum, feels that Western entrepreneurs wait for everything to be cut and dried before signing up for Indian power projects. That doesn’t happen in this country. The result has been that while India was expecting strategic investors from abroad, only financial investors have come in, says Kishore in this interview with India Knowledge at Wharton.
India Knowledge at Wharton: To begin with, I wonder if you could tell us a little bit about the growth and evolution of the independent power sector in India, and some of the twists and turns through which it has reached the position where it is today.
Kishore: The sector was opened to the private sector in 1991. At that time, only private generation was permitted. I would say India is among the few countries that has actually evolved very well on the legislation side. The 1991 opening up did not really create a great amount of response. Our U.S. ambassador mentioned yesterday that any company must have an India strategy. And the legislation therefore was considered very responsive. Then we had a reform changeover in 1998 and very comprehensive legislation followed in 2003.
This is possibly one of the most comprehensive legislations in the world insofar as the sector is concerned. It’s the right approach to deregulation. And I must say that the response has been tremendous. To just give you a perspective, the private sector was hardly responsive till about 2005. We have added post-1991 approximately 110 gigawatt (gw) of capacity in the country. Of that, almost 37 gw has been added by the private sector. In the [11th five-year] Plan 2007-2011, the private sector is adding 30%. In the [12th] Plan 2011-16, the private sector is expected to add 60%. That speaks well of the legislation.
Knowledge at Wharton: Absolutely. Now in terms of international interest in investment in the power area, there was a very high-profile experiment made by Enron which did not go very well. Did that offer any lessons to the sector and how things could be done differently?
Kishore: Yes. I think the very interesting movement forward is that it really brought out a need for local developers versus international developers. We have seen the first phase of all the international developers like Enron coming in. We looked to the world for strategic investors. [But instead] a huge amount of financial investors have occupied the space. So the amount of interest has continued, money has come in — in large quantities, large numbers — but essentially driven by local developers.
India Knowledge at Wharton: That’s very interesting and I’ll come back a little later to the idea of international investment. But tell me a little bit about your own company KSK Power.
Kishore: Sastry and I are the two founders of this company. The KSK initials stand for our respective names, our expanded names, so to say. We were advisors, typically called investment bankers. We used to do a lot of work in the power sector. At that time I think we realized that we need to hold on to what we advise. So we took over a 20 megawatt (mw) plant in conjunction with a few strategic investors. But I think the real development we took up was in 2004.
We did 26 mw capacity in 2004 costing us approximately US$25 million. Today we are almost 1 gw capacity in operation. And we have also financially closed one of the largest projects in the country for about 3.6 gw. So, from 2004 to 2011, say, we have [invested] almost US$1 billion of equity and about US$3.5 billion of debt. The whole environment has been very responsive if you have the right business model that’s bankable, sustainable and competent.
India Knowledge at Wharton: What would you consider the right economic model?
Kishore: The customer must necessarily get power at a competitive price. This has been our thrust. Earlier on, India gave the impression, or the impression was created, that the country needs power at any cost. Take Enron as an example. It would give about 14% of the electricity for the state of Maharashtra and would take away 55% of the receivables of the state. It is abnormal. So there was a tremendous amount of resistance. Even today we live with 40% of the people not having electricity. So as a nation, we have to very clearly communicate that we need power, we need electricity, but not at any cost.
India Knowledge at Wharton: So what made it possible for the local power generators to come up with a revenue model that is so remarkably different that they were able to provide power at much more competitive rates, when Enron’s costs were so high, or at least the prices were so high?
Kishore: The western world seemed to communicate that we believe there is demand. But [we want] the supply to be supported by contracts. We all know there is demand for cars. We don’t insist on someone giving you a contract for the purchase of cars. We’re aware that electricity is a commodity; it’s not bankable. But we know there is a huge deficit.
Now the moment you use a generator as a financing intermediary, he will ensure that all contracts are secure. And the moment you make contracts very secure — in terms of an international lender coming in, an international investor wanting to endorse it — that reflects on the cost.
Indian developers are all very conscious of the realities. Just to give you an example, in the past 10 years, the Indian power sector has been getting about US$15 billion of debt annually. Not even 5% comes internationally; 95% of the debt is supported by Indian lenders. Now if you look at it from that perspective, the lenders are very conscious that almost 50% of the contracts are not fully tied up — land acquisition, power evacuation, water allocation…
Just imagine an international lender who sits outside the country wanting to take a view that all these will get sorted out. In my view it won’t be possible. So this is exactly where the whole opportunity is. The system has encouraged entrepreneurs like us [when we] find international entrepreneurs not coming in.
India Knowledge at Wharton: What kind of regulatory challenges did you face as you were going about building your company?
Kishore: Even today the complaint is the same. The power sector is deregulated. [But] every sector that needs to support the power sector continues to be government owned. So you have power sector generation delicensed. But evacuation is still a government-controlled monopoly. Fuel supply, government controlled. Water, government controlled. Railways, government controlled. Allocation of wagons, government controlled. Equipment supply, we only have one government company. So what are you doing? You are now enabling the sector, opening up, saying you’ll do anything. But you have a set of contradictions. And the reactions are completely ad hoc. All of us have been reading about how the environment ministry is reacting. So I keep saying there is no problem of lack of policy. There is lack of coordination. If you go to two departments, they’re talking two different languages. This is the problem, but I think this is where our opportunity is.
India Knowledge at Wharton: Coming back to the financing situation, could you tell me a little bit about the capital markets and the way you were able to raise the financing you needed for your venture?
Kishore: When we actually started off, we did a very interesting deal at stage one. We were the first company to look at the need for intermediation. We were the first company to look at sale of power directly to the consumers. And we actually got into a relationship with the consumers where the consumers invested in the equity of our company. They invested in equity and they got no return on their equity. They partly bridged us. That was an outsourcing model.
Additionally, we also got a very interesting, very unique deal with Lehman Brothers where Lehman Brothers invested US$9 for every US$1 we invested. So if you look at the extent of our leveraging, I think we have a company that leveraged almost 99 to one, where equity came partly from Lehman, and partly from our customers. We have now built almost a gigawatt of capacity based on this model and we continue to hold 65% of the equity. I would certainly urge all your people to look at our model. It’s very interesting, I’m not taking pride in that, but that’s what enabled us to go to a different level.
But as promoters we had no money. So ours is the first company that went directly to get listed on the London Market. Instead of listing the holding company that held the underlying assets, we listed the promoter holding company. We are a company that was listed first on the AIM [alternative investment market]. Now we’re on the main board. Our shares were quoted at about 107 pence in November 2006. The share is now trading at about 560 pence. It’s very heartening. So we raised money there. Then we raised money on the Indian stock market. We got the Indian company listed in June 2008. So with these two companies and Lehman and customers, in the last seven years we’ve raised almost US$1 billion of equity.
India Knowledge at Wharton: One last question. Through this entire journey, what would you regard as the toughest leadership challenge you have faced? How did you overcome it and what did you learn from it?
Kishore: I think the most important thing is that you cannot be very structural, you cannot be very hierarchical, you cannot have a very strong ego. In our sector we have seen that at the federal level the government of India is saying we desperately need power and we’ll give you all support. The local government is saying they’ll give you all support. There’s a huge amount of expectation. [But it is] completely contradictory at the local level, the ground level.
I think we need to just roll up our sleeves, go talk to the local people with the feeling that we belong to them. And I’m very happy to say that KSK has done possibly the maximum number of plants in number in the maximum number of locations. We did 20 mw, 25 mw, 58 mw, graduated to 135, made it 540, and now 3,600.
We have done about 11 plants in eight states. The entire learning has been to be completely micro on almost 50% of the issues and insist that all your people are motivated in that direction. The company today has grown from about 40 people in 2005-2006 to more than 1,400 directly employed now. These people have been motivated to understand that in this process you will do well [if you are] extremely responsive. I think that’s the biggest takeaway.