Adani catalyses change -- a three part series on Gautam Adani

By R.N.Bhaskar

September 2008 (published in the DNA).

How the affable entrepreneur has always managed to get governments to create enabling provisions for his projects.

---------------------------

Adani catalyses change – I

How Gautam Adani became a catalyst for policy change

Few industrialists in India have have done as much as Gautam Adani has in changing policies relating to business at both the state and central government levels. At 45 years of age, he has already begun doing things that have made governments sit up and modify their policies accordingly. And unlike many other industrialists whose growth was dependent on the government's licensing policies, Adani has chosen to adopt fields that require little or no government licensing.

Moreover, unlike several other industrialists who have chosen to grab an industrial licence -- and then spend great deal of time and effort in blocking other industrialists from adopting the same growth strategy -- Adani appears to have done quite the opposite. He prefers to show to the rest of industry another way of doing business – daring them to keep pace with him, and encouraging them to change their geographic areas through wealth generation.

Take a few instances. When Adani set up the Mundra port, he did so by influencing the state government to create a vibrant port policy., This has become the model policy for most other states as well, which in turn has allowed several private ports to come up.

At the same time, he had to find business for his port. Instead of lobbying with the government for helping him out, he opted to purchase large coal mines in Indonesia, and then went about talking to state electricity boards in Gujarat, Rajasthan and Mahrashtra to purchase good quality coal from him at the most competitive prices. By last year, he was importing around 2.5 million tonnes of coal into India through Mundra, benefitting his Indonesian mines, his port and state electricity boards who could now get better quality coal at proper delivery schedules, and at more attractive prices. Not surprisingly, Adani became the largest coal importer into the country.

Then take the manner in which his approach to developing an Special Economic Zone (SEZ) in India was quite different from that of other industrialists and developers. Unlike others, he began purchasing land first around the port of Mundra. Unlike others who could not even purchase 5,000 acres of land, Adani went about purchasing marshy and non-agricultural land from the government at prices that were around 30% higher than the prevailing market prices. By the time the SEZ policy was announced, Adani had already acquired through various companies and entities around 15,665 acres of land officially, without compelling governments to acquire land from farmers or private owners. Thus when the SEZ policy was announced, he could easily earmark 5,000 acres of land for the SEZ.

Having got the SEZ, he tried ensuring that it got assured 24 x 7 electricty at the best rates and began setting up a 2,640 MW power plant at Mundra. However, instead of just placing orders for boiler-turbine-generators (BTG) for that capacity, Adani decided to place an order for five times that capacity with the Chinese almost two and a half years ago. The result: he could place orders for BTGs which were at least 30% cheaper than most of his competitors. To ensure timely delivery, he even set up an office in China with Chinese staff to monitor the way work on his BTGs was progressing. It was a daring gamble, which received a slight setback when he lost the bid for the 4,000 MW UMPP plant earmarked by the Central government at Mundra to the Tatas. However, instead of looking at the Tatas as competitors, he promptly persuaded the Tatas to use a dedicated terminal for coal handling that could become the largest in the world with the capacity to handle 40 million tonnes annually. But more of that later. To meet their own coal requirements, the Tatas too have purchased a coal mine, but at Mozambique.

At the same time, painfully aware of how a port's success depended upon linkages, he decided to take the risk of constructing, at his own cost, a 65 km railway line from Mundra to a little distance away from the Adipur junction where the national Indian Railways junction lay. He then went to the Railway ministry and explained to the officials there that he had a port and a private railway line of 65 km and sought the government's help in crafting a policy to accommodate both for the entire country. That resulted in the government announcing a policy which allowed all port to national railway grid linkages as private-public-partnerships (PPPs), which then got adopted by every new port being set up across the country.

He then went about building a captive airstrip at Mundra which is now capable of becoming one of the largest commercial cargo airports in India. He has been persuading the government to announce a policy that would allow the country to use such privately owned assets to serve the national cause and build better linkages for trade in India. The policy is expected soon, and this could see the setting up of almost 200 new airports around India, at no cost to the national exchequer..

But the most impressive policy change that he has initiated appears to be in the area of power generation. And this could be the harbinger of things to come on the power front. But that will be the topic for another column.

================================================================= Top

Adani catalyses change – II

Adani has made some very 'power'ful moves

One criticism levelled against the government of India in respect of its private power purchase policy is its excessive concern about the returns investors get and not the price that Indian citizens would have to pay. True, ever since the Enron episode, the government has tried to closely examine the capital costs involved. But the flaw persists as the power purchase policy guarantees a return on capital costs involved. Thus, today, Indian thermal power project costs per MW compared to thermal-power-projects set up elsewhere under the ICB route are among the highest in the world. Gautam Adani could change all that.

His entry into the power sector began when he set up a 2,640 MW power plant a t Mundra for his SEZ. But, typically, instead of just limiting his purchase to equipment for this project alone, he decided to order equipment for a plant five times this size. Evidently he wanted to set up bigger power projects. Thus, when he lost to the Tatas the bid for the Mundra ultra-mega-power-project (UMPP) of 4,000 MW, many of his officers thought that Adani would be livid.

Instead, they were surprised to find a cheerful 'Gautam-bhai' happily remarking that he had “got a good neighbour”at Mundra. Aware that the Tatas too would require to import coal, in addition to the coal required for Adani's own 2,640 MW plant at Mundra, and also in addition to Adani's own future expansion plans in the power sector, Adani decided to build at a cost of Rs.2,000 crore a dedicated coal terminal for handling 40 million tonnes of imported coal -- the largest coal handling terminal in the world. The Tatas have been roped in a long term users of this facility.

But the loss of the Mundra UMPP made Adani look at the power sector again. He decided that he would persuade the government to adopt what is known as the “Case 2 bidding process”which would make government licensing in the power sector virtually irrelevant. Adani suggested that the government allow anyone to set up a power plant based primarily on the basis of the price at which a promoter was willing to sell power to the government. This would put the risk of land, capital and management on the entrepreneur and not compel the government to ensure the promoter's survival. It would force promoters to produce power more efficiently, and also allow power tariffs to go down, failing which penalties and forfeiture of bank guarantees would take place..

Not surprisingly, when the first bids for the supply of 1,000 MW were invited, Adani won hands down with the offer of power for 25 years at Rs.2.35 per kWh (unit). Then came another successful bids -- from Gujarat, from Haryana, and then even from Maharashtra. The bids from Rajasthan and Dahej are yet to be finalised. In the case of Haryana, Adani is also setting up a separate transmission line from Mundra to Haryana, along with substations, to ensure lower T&D losses.

All these prices are significantly lower than the prices at which the states get power from many other power suppliers.

Second, he gets much of his coal imports from his own mines in Indonesia and captive coal handling facilities at Mundra where his efficiency and management allows him to keep costs low.

Third, Adani also went in for purchase of two cape-sized vessels for coal imports as early as in 2006 when price tags were lower. The orders for ships being placed by other power producers today will involve costs at least 25% higher with significantly longer delivery schedules. Adani's ships are expected to be delivered by Korea by 2010, which should further contribute to his margins.

Fourth, except where power plants are to be built outside Mundra, Adani has the benefit of ample land and logistics that he can use to his advantage.

Lastly, he has also become one of the the largest players on the Power Trading Corporation so that he can sell surplus power from his power plants, or purchase the same when urgently required, thus allowing him to hedge bets.

Simultaneously, in order to consolidate his position in the energy sector further, he has also acquired exploration rights in three oil and gas fields in India and Thailand. All these bids are through Adani Welspun Exploration Limited (a 65:35 joint venture between Adani and the Welspun group). It has recently acquired a fourth gas block in Thailand and is bidding for more in India through the NELP VII programme.

Clearly, Adani as a power player has come of age.

================================================================ top

Adani catalyses change – III

Adani has done well by being collaborative, not combative

Gujarat has an unusual cultural practice of collaboration, though there are times when some industrialists have forgotten this practice and has chosen to be combative instead. The best example is how Gujarat could create the biggest and the most successful co-operative movement in milk production – through the joint efforts of Seth Tribhovandas and V.V.Kurien. The state has not been witness to industrial unrest, and both workers and management – even the government, irrespective of the political party ruling the state – prefer to negotiate a deal rather than see business and cash go down the drain. There have been fewer corporate closures in Gujarat than in any other state in India. It was also witness to the country's first and only corporatised co-operative power generation plant in the Gujarat Industrial Power Production Company Ltd (GIPCL) which remains even today one of the best power producers in the country. And this list could go on and on. . .

Gautam Adani, 45, has given collaboration a new meaning in India's corporate history. Instead of viewing other industrialists as combatants who must be mowed to the ground Adani has, instead, sought them out as partners, to mutual benefit.

The first partnership came – as with most Indian entrepreneurs – with a foreign equity partner. Adani set up Adani Wilmar Ltd AWL), a 50:50 joint venture with Wilmar of Singapore. This in itself was a bit unusual. Normally, one party has a 51% equity stake to rule out any misgivings about who is in control. Adani kept the ratio as 50:50 and the plan has gone from strength to strength despite this unusual equity holding structure. Set up for selling edible oil in the Indian market, the plant is located at Mundra and gets all its edible oil in tankers to the Mundra Port from where it is piped – virtually untouched by hand – right into the AWL plant. Today, it has become the largest selling edible oil brand in the country under the “Fortune”name. And it now wishes to increasing its crushing capacity from 2,900 tonnes per day (inclusive of 2,100 tpd capacities from other units) to 10,000 tpd, which in turn will allow it to increasing its refining capacities from 3,200 tpd to 7,200 tdp.

It was then, possibly, that Adani realised the benefits a partner brings. But unlike many Indian entrepreneurs who only trusted foreign partners, but not Indians, Adani has now broken fresh ground by announcing at least two major deals that could change the way many businesses collaborate in India.

He has announced a new energy initiative – for oil & gas exploration through Adani Welspun Exploration Ltd (AWEL) – in partnership with the Welspun group of B.K.Goenka. Equity control will be in the ratio of 65% to Adani and 35% to Welspun. But management decisions will be left with the Welspun group. Why did Adani do this? “Ï did this on two counts,”says Adani. “First to share management responsibility. Second, also to get the expertise of different like-minded promoters in different fields in order to ensure a faster growth.” AWEL already has three exploration blocks under its purview in India and Thailand, and has recently been awarded another block (L22/50) in Thailand in its latest bidding round. It is also exploring opportunities for other blocks in India and overseas including bidding through the NELP VII program. Total investments envisaged for this business are expected to be around US$1 billion.

Another interesting partnership is the Aashapura project where Adani has tied up with Chetan Shah of the Aashapura group for setting up a Rs.10,000 crore plant for producing 1 million tpa alumina, and 500,000 tpa of aluminium near the Mundra SEZ. Shah initially wanted to set up an alumina plant to convert bauxite available in abundance in Gujarat into alumina. The problem for converting alumina into aluminium is that it is energy intensive, and would require at least 850-900 MW of power each year. It would also require caustic soda. Adani came to learn of this and offered to supply power for this plant at competitive rates and later also consider the possibility of either procuring caustic soda from other suppliers or producing it through another enterprise. Applications have already been made to the government to set up this plant, and the first phase will involve an investment of Rs.3,000 crore for the bauxite to alumina plant, and then to move over to the second phase of making aluminium in around three years cost with the additional capital investment.

In the meantime, Adani is finalising a series of moves to consolidate his position in the agriculture sector by acquiring or developing palm oil plantations --. financed directly or with other partners -- all over the world, particularly in Indonesia, Malaysia, Africa and the Phillippines. This is likely to strengthen his hold over the edible oil market on the one hand, and in the trading of deoiled cakes on the other. Similarly, he wants to increase his presence in fruits and vegetables and pulses, and is busy setting up controlled atmosphere sheds to store them before finally shipping them to the eventual purchaser. Investments in this area are likely to be in the region of Rs.6,000 crore.

None of this frenetic pace of growth would have been possible without good partnerships. And that is possibly where Adani's biggest strength lies – of being able to identify the right partner, and hand over management charge to him, even though he may hold substantial stakes in the venture.

top