On 25 September 2013, as many as nine companies bought the request for qualification (RFQ) document for the Bhedabahal ultra mega power project (UMPP) in Orissa. Apart from government-owned NHPC and NTPC, the other interested parties were Tata Power, Adani Power, JSW Energy, Jindal Power, Sterlite Infraventures, CLP and L&T. For the Cheyyur UMPP in Tamil Nadu, eight companies: NTPC, Adani Power, JSW Energy, Jindal Power, CLP, GMR Energy, L&T and Sterlite Infraventures — showed interest. A year on, only four of the eight bought the request for proposal (RFP) document for the Cheyyur UMPP. The document costs around Rs 50 lakh, and is non-refundable. The Bhedabahal UMPP saw NTPC and NHPC evincing interest.
Soon after, notwithstanding the investment in the RFP documents, all the private sector companies suddenly decided to back out of the bidding process for the Cheyyur project, leaving only NTPC in the fray. With central guidelines stipulating a minimum of three bidders for awarding a project through competitive bidding, the year-long process came to nought. The government set up a committee with Pratyush Sinha, former chief vigilance commissioner, as head. The committee has met twice until now to discuss changes to the bidding document and is likely to submit its report soon.
Concerns Galore
So, what triggered the boycott by the private sector? Apparently, the concerns over various clauses in the revised Standard Bidding Document (SBD) brought in by the UPA-II government. Of the lot, the most contentious clause was to do with the Design, Build, Finance, Operate and Transfer ( DBFOT) model, which replaced the earlier Build, Operate, Own (BOO) model.
Private players were also unhappy with the concessionaire substitution clause that was introduced to make the private sector more accountable for putting in aggressive bids and terms for UMPPs. Many private players were also worried about the treatment of fuel charges for captive mine-based UMPPs.
DBFOT Dilemma
Private sector players claimed that DBFOT would make it difficult for power producers to convince banks to fund their projects. The cost of setting up a UMPP is around Rs 25,000 crore and no bank will agree to grant a loan of that size to a company without it having rights over the land.
Chanda Kochhar, MD and CEO of ICICI bank, who also advised the government at the time of formulation of new policy, expressed her reservations thus: “The proposed DBFOT structure has materially altered the existing PPA document on BOO framework for Case 2 competitive bidding on which about 29,000 MW capacity has been awarded (including 16,000 MW for UMPPs). A considered opinion may be taken for retaining the old document structure with suitable modifications to achieve the purpose of discovery of competitive tariffs.”
Says Salil Garg, analyst at Fitch Ratings, “Developers want to own the land. Under the DBFOT model, the developers will not own the land after 25 years. This will result in a substantial loss in RoE because land holds a substantial cost. Also, banks will be vary of lending to projects that are transferable at the end of a certain period. In case the developer has not been able to service his debt in 25 years, the bank will have a problem in recovering the debt by selling land.”
Concessionaire Substitution
The clause on ‘concessionaire substitution’, which means that the power generator can be substituted in case it fails to abide by the terms of the contract, is also a matter of concern to private developers. According to private power producers, the clause will result in uncertainties and risks for contractors and suppliers who will be discomfited by this lack of stability.
Fuelling Fire
Under the earlier UMPP bidding framework, fuel prices were not a complete pass-through. Any variation in the price of power was allowed only on the escalable energy charge component. Developers had to split fuel costs into escalable and non-escalable components at the time of bidding. But plants reliant on imported coal do not have any control over fuel prices. Tata Power, for instance, quoted a 45 per cent escalable fuel component and a 55 per cent non-escalable component in its Mundra UMPP bid. When Indonesia effected changes to its coal regulations, causing prices of coal imported from that country to shoot up beyond the level projected by Tata Power in its bid, the latter suffered losses on account of the non-escalable component in its energy mix.
When the new UMPP bidding framework replaced the earlier rules, fuel price variation became a complete pass-through to the power purchasing utility. There were, however, different formulations governing this, depending on the fuel source. In the case of a captive coal mine-based UMPP, a developer is expected to quote a fixed charge in his bid, which will include the cost of mining, equipment and the bank base rate. This fixed charge will then be escalated according to a suitable index. The concept of escalable and non-escalable charges was thus done away with. But even this did not fully address the concerns of power project developers. Says Garg, “Developers are not ready to take any risk vis-a-vis fixed charges as envisaged under the new SBD. Due to the element of competition in managing costs, a developer can either make windfall gains or lose money over 25 years.”
Adds Ashok Khurana, director general of the Association of Power Producers (APP), “More than 95 per cent of projects that are in trouble today are struggling with issues regarding treatment of fuels and their pricing. It is a well accepted fact that fuel price risk for 25 years cannot be taken by any developer and, therefore, this risk needs to be apportioned in a manner that does not create problems in the future. The proposed document recognises this need but fails to deliver the necessary treatment in the document as it attempts to pre-determine the fuel pricing trajectory over the project cycle by introducing arbitrary price caps and escalation rates.”
Closure Pangs
The new bidding framework requires the concessionaire to achieve financial closure of the project “within one year from the date of agreement or an extended period of 180 days with damages”. In case of failure, the agreement will be terminated. Most private firms are already languishing under debt. Adani Power, which participated in the technical qualification round, had a debt of Rs 22,317.20 crore on its balance sheet as of March 2014.
“Lenders will consider financing a project only when utility obligations related to land, environment and forest clearances are met. Even after these obligations are met, financial closure of such capital-intensive projects would require significant time,” read a presentation by APP to the power ministry. APP, which represents all private sector power producers, has written to the government asking for concessionaires to “be allowed 365 days for financial closure after all utility obligations have been met”.
The Flip Side
A government official, who worked on the new SBD, gives the boycott by the private sector a twist. “The private sector was part of the consultations when the new SBD was framed. There were as many as five drafts that were prepared just to incorporate the demands of the private sector. Why did the corporates buy the RFQ and RFP documents which cost them Rs 60 lakh if they had to boycott the bidding? It is the change of government that has given them an opportunity to get the document altered to support crony capitalism.”
He points out that the criticism heaped on the UPA government for allowing corporates to frame one-sided contracts for infrastructure projects and then hold it to ransom was what prompted it to go for the DBFOT model. “We wanted to keep land with the government. In case a developer faltered in building a project, we could take it back.”
The UPA-1 government had come out with its UMPP policy in 2005-2006 to deliver power at competitive prices and achieve efficiencies of scale. As many as 16 UMPPs with 64 GW in capacity were envisaged at coal pitheads and coastal locations. However, only four UMPPs were awarded between FY07 and FY09. Following this, the government had to stop the process as the earlier projects had run into trouble.
Reliance Power, which bagged three out of the four UMPP projects, filed tariff review petitions with the Central Electricity Regulatory Authority and APTEL (the appellate authority) for the operational Sasan plant and the yet-to-be-set-up Krishnapatnam plant. The Mundra UMPP, operated by Tata Power, also faced similar issues. The company is mired in battles over compensatory tariff with buyers. Reliant on expensive imported coal, Tata Power has moved the the Central Electricity Regulatory Commission for permission to revise tariffs from the contracted Rs 2.26 per unit to Rs 3.
Keeping all these issues in mind, the UPA government came up with measures to rein in developers who showed a tendency to abandon projects midway or force the government to revise contracts after bagging the projects.
The government has set a target of 88,000 MW in generation capacity in the 12th Plan. Given the problems on the UMPP front, it is unlikely that it will meet the target.
(This story was published in BW | Businessworld Issue Dated 04-05-2015)