investment opportunity and challenges
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Investment Opportunity and ChallengesUltra Mega Power Projects
May 2006
Navin Wadhwani
“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 crEquity investment
Past: Power sector liberalisation
Present: India Rising
Future: Ultra Mega Power Projects
Significant interest generated in 1990s
Domestic Players Foreign Players
Tata Power
Enron
AES
Cogentrix
CMS Energy
CLP
PowerGen
PSEG
EDF
J Power
BSES
Aditya Birla
Essar
Ispat
Nagarjuna
Hinduja’s BPL
GMR
GVK
National Power
Clutch of Foreign and Indian players were vying to get a slice of the power play in 1990s
Lanco
Torrent
Jindal
National Grid
NTPCNHPC
CESC
Appollo
RWE
Eastern Generatio
n
Marubeni
United Utilities
Videocon
JP Group
Mirant Corp
Daewoo
OgdenBayerwerk
View
Tractebel
Mission
Energy
VEWEnergie
NRG
Pacgen
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
Though interest could not be sustained
Only few focused players remain
Domestic Players Foreign Players
Tata Power
AES
CLP
Genting
Reliance
Energy
Ispat
GMR
GVK
Essar
Lanco
Torrent
Jindal
NTPCNHPC
CESC
Bhilwara
Appollo
Entry through acquisition
route
Limited presence of foreign investors in the sector
Some domestic players have
displayed strong development
skills
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
Fifth-largest and fastest growing market for Pepsi
Bharti is amongst Warburg’s most successful investments (~ US$ 2bn realized from part stake sale), including sale of
stake to Vodafone
Contributes c. 12% of Unilever’s global profits
GE realized US$ 500mn from 60% stake sale in its BPO
arm
Amongst the fastest growing markets for Coke in the past
decade (19% CAGR)
Temasek investments in India are approaching
US$ 2bn
India is averaging above 15% of the group profits of Standard Chartered
In a study by FICCI, 77% of foreign investors in India were found to be
profitable
Foreign players have created wealth across sectors…
Other sectors have attracted investments
Capital market support to power sectorMarket has rewarded domestic players
Mar
ket
Cap
ital
izat
ion
Rs
cro
re
109,211109,211
May 2003May 2000 May 2006
625625
3,9353,935
370370
2,5912,5913,0103,010
351351155155
11,12511,12512,44812,448
1,7931,7932,7282,728
7397391,8831,883
Tata PowerTata Power Reliance EnergyReliance Energy TorrentTorrent CESCCESC NTPCNTPC
GVKGVK JaiprakashJaiprakash
Significant in
crease in M
arket Capita
lizatio
n
leading to w
ealth creatio
n
Source: BloombergSource: Bloomberg
(Chart not to scale(Chart not to scale))
185185
Capital market support to power sector
Positive response from the capital markets to public issues in the power sector
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)
Successful listing of power companies
Rs. croreRs. crore
Source: Bloomberg, Source: Bloomberg, News reportsNews 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
Requiring a total of~Rs 100,000 cr
With Rs 25,000-30,000 crEquity investment
FinancialInvestors
Debt Financing
Leveraged StructuresTarget large Target large Infrastructure focused Infrastructure focused PEH for last mile PEH for last mile financingfinancing
Extended tenuresExtended tenures
Mezzanine debt / structured Mezzanine debt / structured financingfinancing
Given the large quantum of financing required an optimal mix of multiple sources of financing is quite essential
Strategic ForeignInvestor
Providing capital & Providing capital & technical know-howtechnical know-how
Equity Capital MarketsFund raising through booming Fund raising through booming capital marketscapital markets
DomesticDeveloper
Focused power & Focused power & infrastructure infrastructure companies with companies with proven track recordproven track record
Global interest being generated
UMPP road shows generating interest – Key players
Domestic Players Foreign Players
NTPC AESCLP
Korea Electric
Reliance
Energy
Tata Power
EssarTorrent
GMR
GVK
Jai Prakas
h
Jindal Steel and
Power
Mitsui and
CompanySuez
Energy
Sumitomo Corp.
Aditya Birla
PowerVideo-con
Siemens
Itochu
Energy Infra.
Alstom
ABB
Caterpillar
Tronoh Alco
Combine
Duncan Machneil
EDF
Positive interest from Domestic Players though limited/ cautious interest from foreign players
Includes equipment suppliers
Key investor concerns/ issues
Will the Government deliver this time
– Delays in project implementation
Poor financial health of the SEBs
– Availability adequate payment security mechanism
Regulatory Risk – Reopening of PPA’s
Key issues raised based on past experience
Transmission capabilities to evacuate and transmit power across States
Timely availability of captive mine
Fuel supply arrangement for imported coal projects
Poor financial health of the SEBs
– Availability adequate payment security mechanism
Partnership with domestic players involving huge financial commitment
– Control/ ownership issues
Risk/ return profile
Key issues in context of UMPP Initiative
Government initiatives
Some past concerns proposed to be mitigated
Delays in project implementation
Poor financial health of the SEBs
Regulatory Risk – Reopening of PPA’s
Problems in project configurations
SPVs created to ensure initial requirements of sanctions and securing clearances
Ministry of Power coordinating with concerned ministries/agencies
Adequate payment security mechanisms being proposed
Electricity Act 2003
Open access in transmission
Tariff based bidding
Competitive tariff structures
Focus on coal based projects
MitigantsPast concerns
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
1
2
3
4
Suggested Approach
To achieve successful
investment in UMPPs
One on one investor interaction – Would lead to higher investor confidence
2 staged approach for implementing UMPPs – Successfully award 2-3 projects and then garner greater interest for the balance projects
Phased manner of project development - Will reduce stress on financing
Key pre-requisites to be put in place(e.g. Bankable payment security mechanism, Fuel supply etc)
Ultra Mega Investment for
Ultra Mega Power
Requiring a total of~Rs 100,000 cr
With Rs 25,000-30,000 crEquity 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
Opportunity and Challenge
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