Download Investor Perception and Concerns

Investment Opportunity and
Challenges
Ultra Mega Power Projects
Navin Wadhwani
AFG
May 2006
“If you are a global company and India is not
part of your plan, then you have missed the bus”
Dr. Manmohan Singh, Indian Prime Minister
“We need to show the world the changes in the
power sector”
Mr. R. V. Shahi, Power Secretary
Ultra Mega Investment
for
Ultra Mega Power Projects
Requiring a total of
~Rs 100,000 cr
With
Rs 25,000-30,000 cr
Equity investment
Past: Power sector liberalisation
Present: India Rising
Future: Ultra Mega Power Projects
Significant interest generated in 1990s
Domestic Players
Foreign Players
NTPC
NHPC
Tata
Power
CESC
BSES
Essar
Videocon
Lanco
CMS
Energy
Enron
Cogentri
x
CLP
Bayerwerk
United
Utilities
Ogden
Eastern
Generatio
n
VEWEnergie
Marubeni
J Power
View
PSEG
Nationa
l Grid
Pacgen
Torrent
GMR
Nagarjun
a
GVK
Jindal
Ispat

Appoll
o
Hinduja’
s
Aditya
Birla
JP Group
PowerGen
Tracteb
el
EDF
Mirant Corp
AE
S
RWE
Mission
BPL
Nationa
l Power
NRG
Daewoo
Energy
Clutch of Foreign and Indian players were vying to get a
slice of the power play in 1990s
Though interest could not be sustained

Delays in decision making and project implementation

Poor financial health of the State Electricity Boards
– High T&D losses
– Retail tariffs not cost reflective

No independent regulatory structure/ framework in place
– PPA renegotiation

Problems with project configurations
– Focus more on contracts rather than tariff competitiveness
– Sub-optimal plant operating normative parameters
– Focus on liquid fuel/ gas based projects rather than coal based projects

Acquisition of “Mega Watts” as a driver to increase global presence
proved to be an unsustainable strategy for MNCs
– Change in strategy to focus on domestic/ concentrated geography
– Global consolidation
Only few focused players remain
Domestic Players
Foreign Players
NTPC
Some domestic
players have
displayed strong
development
skills
Tata
Power
CESC
Relianc
e
Energy
NHPC
Entry through
acquisition
route
Essar
Torrent
CLP
Lanco
GMR
GVK
AES
Jindal
Bhilwara
Gentin
g
Appoll
o
Ispat
Limited presence of foreign investors in the sector
Past: Power sector liberalisation
Present: India Rising
Future: Ultra Mega Power Projects
Winds of change: In recent years
Power sector

Introduction of Electricity Act 2003 and establishment of regulatory
framework

Dabhol restructured and resolved – demonstrating Government’s
ability to take tough decisions

Evolution of Indian promoters and emergence of focused power
and infrastructure players

A high volume and low margin play recognized in the power sector

Relative improvement in financial position of SEBs

Competitive tariff based power projects
Winds of change: In recent years
Other areas

GDP growth rate of 8% p.a.
– Infrastructure development identified as core to achieving
sustainable high GDP growth rate

Buoyant capital markets with the BSE Sensex crossing the
landmark 10,000 mark
– Significant increase in market capitalisation and successful
IPOs of of power companies

Airports privatized (Mumbai, Delhi) in spite of serious resistance –
demonstrating Government’s ability to take tough decisions

Impetus on improving fuel supply/ sufficiency (e.g. NELP VI, CBM
III, Budget proposal to de-block coal reserves)
India’s economy is projected to be the fastest growing
economy in the period to 2050
Other sectors have attracted investments
Foreign players have created wealth across sectors…
Capital market support to power sector
Market has rewarded domestic players
109,211
Market Capitalization
Rs crore
12,448
11,125
3,935
625
3,010
2,591
370
185
May 2000
2,728
1,883
1,793
739
351
155
May 2003
Tata Power
Reliance Energy
GVK
Jaiprakash
May 2006
Torrent
CESC
NTPC
Source: Bloomberg
(Chart not to scale)
Capital market support to power sector
Successful listing of power companies

Positive response from the capital markets to public issues in the
power sector
Rs. crore
Recent Power Issues
NTPC
Mkt Cap on
Listing
Current Mkt
No. of times
Cap
oversubscribed
59,024
109,211
13.4 times
GVK Power
746
739
25.8 times
JaiPrakash
1,529
1,883
2 times
Suzlon Energy
14,664
38,219
40 times

More IPOs on the anvil
– PFC, NHPC, GMR
 Successful raising of funds through FCCBs/GDR route
– CESC GDR issue (Rs.180 crore)
– Tata Power FCCB issue (Rs.900 crore)
Source: Bloomberg,
News reports
Past: Power sector liberalisation
Present: India Rising
Future: Ultra Mega Power Projects
Overview of UMPP
Ultra Mega Power Projects

MoP, CEA and Power Finance Corporation are working together on developing
seven ultra mega power projects under tariff based competitive bidding route

Projects will be awarded on Build, Own and Operate (BOO) basis

Each with a capacity of 4000MW with scope of further expansion
Role of Ministry of Power

MoP is playing an important role as a facilitator to coordinate with concerned
Ministries/ agencies and State Governments for ensuring:
– Coal block allotment/ coal linkage
– Environment/ forest clearance
– Required support from State Government and its agencies
– Financial closures by Financial Institutions
– To facilitate PPA and proper payment security mechanism with State Govt./
State Utilities
– Monitoring the progress of Shell Companies w.r.t. predetermined timelines
Potential financing avenues
Domestic
Developer
Focused power &
infrastructure
companies with
proven track record
Requiring a total of
~Rs 100,000 cr
With
Rs 25,000-30,000 cr
Equity investment
Strategic Foreign
Investor
Providing capital &
technical know-how
Debt Financing
Extended tenures
Financial
Investors
Target large
Infrastructure focused
PEH for last mile
financing
Equity Capital Markets
Fund raising through booming
capital markets
Leveraged Structures
Mezzanine debt / structured
financing
Given the large quantum of financing required an optimal mix of multiple
sources of financing is quite essential
Global interest being generated
UMPP road shows generating interest – Key
players
Domestic Players
AES
NTPC
CLP
Tata
Power
Videocon
Siemen
s
Relianc
e
Energy
Aditya
Birla
Power
Energy
Infra.
GVK
Suez
Energy
GMR
Torrent
Includes
equipment
suppliers
Foreign Players
Duncan
Machneil
Sumitomo
Corp.
Mitsui
and
Company
Korea
Electric
Essar
Itochu
EDF
ABB
Jindal
Steel
and
Power
Jai
Prakas
h
Tronoh
Alco
Combine
Alstom
Caterpilla
r
Positive interest from Domestic Players though limited/ cautious interest
from foreign players
Key investor concerns/ issues
Key issues raised based on
past experience



Key issues in context of
UMPP Initiative

– Delays in project
implementation
Transmission capabilities to
evacuate and transmit power
across States

Timely availability of captive mine
Poor financial health of the SEBs

– Availability adequate payment
security mechanism
Fuel supply arrangement for
imported coal projects

Poor financial health of the SEBs
Will the Government deliver this
time
Regulatory Risk – Reopening of
PPA’s
– Availability adequate payment
security mechanism

Partnership with domestic
players involving huge financial
commitment
– Control/ ownership issues

Risk/ return profile
Government initiatives
Some past concerns proposed to be mitigated
Past concerns

Delays in project
implementation
Mitigants

SPVs created to ensure initial requirements
of sanctions and securing clearances

Ministry of Power coordinating with
concerned ministries/agencies

Poor financial health
of the SEBs

Adequate payment security mechanisms
being proposed

Regulatory Risk – Reopening of
PPA’s

Electricity Act 2003

Open access in transmission

Tariff based bidding

Competitive tariff structures

Focus on coal based projects

Problems in project
configurations
Key pre-requisites for successful delivery

Timely delivery of project development milestones committed
by Government (e.g. consents, approvals, land acquisition
etc)

Bankable payment security mechanisms

Reliable and effective power evacuation systems to enable
transmission across states

Delivery of captive coal mines

Fuel price risk mitigation for the Coastal imported coal based
power projects

Regulatory clarity – mitigate regulatory risk
Suggested Approach
4
3
2
1
One on one
investor
interaction –
Key prerequisites to be Would lead to
higher investor
put in place
(e.g. Bankable
payment security
mechanism, Fuel
supply etc)
confidence
2 staged
approach for
implementing
UMPPs –
Phased manner
of project
development -
Will reduce stress
Successfully award on financing
2-3 projects and
then garner greater
interest for the
balance projects
Opportunity and Challenge
Ultra Mega Investment
for
Ultra Mega Power
Requiring a total of
~Rs 100,000 cr
With
Rs 25,000-30,000 cr
Equity investment
Limited window of opportunity to attract long-term equity
participation in the growth of Indian power sector
Repeat/ replicate the success achieved in other sectors