I had blogged earlier, here and here, about the continuing relevance of government guidance by way of effective industrial policies to promote economic development, especially in the emerging economies. Government of India's policies on procurement of boiler, turbine and generator (BTG) equipments for power generation units may be the latest example of the utility of "industrial policy".
Faced with achieving a massive generation capacity target of 78,500 MW during the Eleventh Five Year Plan, Indian generators, both private and state-owned, have been grappling with the challenge of sourcing power equipment. With overflowing order books and limited capacity (about 6000 MW per year), the sole Indian power equipment manufacturer, BHEL, has been unable to meet the huge requirements. The Chinese power equipment suppliers have seized the opportunity by leveraging their massive capacities and resultant economies of scale to promise delivery of these equipments at competitive prices.
Private generators have been sourcing most of their equipments from China, despite the concerns with the effectiveness of Chinese equipments with India's high ash content coal and their lower PLFs. The Chinese BTG equipments are 10-15% cheaper and are delivered well in time, compared to the persistent delays that plague the over-burdened BHEL's delivery schedules.
The major Chinese equipment makers - Dongfang, Harbin, SEPCO, CMEC and SEC - have emerged as among the largest and lowest cost manufacturers of BTG equipments required for thermal power generating plants across the world. Interestingly, government policies like standardization of equipment sizes (which has also enabled freezing of the critical and time-consuming task of plant designs) and bulk procurements for the huge domestic generation capacity additions, assisted by the country's galloping economic growth over the past two decades, have propelled these firms to the top of the global league, competing with the likes of established players like Alstom, Siemens, and Hitachi. China is not alone in having achieved success with such policies. Earlier, the Korean government had promoted Korea Electric Power Corporation (KEPCO), which after having successfully assisted in boosting domestic generation capacity is now seeking out markets elsewhere.
Taking cue from the Chinese experience and its own huge projected capacity additions and resultant equipment needs in the coming years, the Government of India has been making efforts to catalyze the development of a vibrant domestic industry in power equipment design and manufacturing. It has barred its generation projects (mostly NTPC) and advised state government generators from sourcing equipments from China and is insisting that prospective sellers, both Chinese and others, form joint ventures with Indian partners and set up manufacturing facility in India.
It has also outlined clear norms stipulating that bidders for all ultra mega power projects (UMPPs) would be entitled to source equipment only from equipment suppliers who provide upfront commitment for progressive indigenisation of technology or a phased manufacturing programme (PMP). While this may have been motivated more by an old-fashioned protectionist desires to keep out the Chinese from capturing the Indian market and also protect the local manufacturers (mainly BHEL), it has the potential to pave the way for strengthening the country's heavy and capital equipment industry and its ancillaries.
Early indications are that this policy has already started bearing results. L&T and Mitsubishi have formed a joint venture and set up a manufacturing facility which has already bagged a number of orders. Other Indian firms too have tied up with global majors like Alstom, Siemens, Hitachi etc, to set up equipment manufacturing facilities in India, including for boilers with advanced super-critical technology.
While this policy of a phased manufacturing programme for foreign equipment suppliers may have been partially responsible for the delays in meeting the generation capacity addition targets, it also lays the foundation for a swifter pace of capacity addition once the critical threshold of domestic manufacturing facilities are established. Further, the presence of domestic expertise and facilities also enables more effective servicing and maintenance support for the installed units.
However, such industrial policy to promote the development of heavy equipment sector cannot stop with merely banning the sourcing of equipments from outside and the insistence on domestic production. It will have to be complemented with efforts to hasten the actual capacity addition projects (so that the industry expands and matures by feeding on the increased capacity addition) by standardizing equipment design, expediting site clearances and environmental approvals etc. In the absence of the latter, industrial policy will end up as another example of the autarkic import-substitution policies of an earlier era, and benefiting a few firms and lining the pockets of decision makers and hangers on.