INDIA POWER SECTOR:
CHALLENGES & INVESTMENT OPPORTUNITIES
PLENARY SESSION IV: FINANCING OPTIONS
New Delhi
May 12, 2006
Salman Zaheer
Lead Energy Specialist
The World Bank
STRUCTURE OF PRESENTATION
Indian Power Sector Investment requirements (2007-12)
Overview of market conditions
India
International Investors
Potential role of the World Bank Group (CAS 2005-08)
Concluding Remarks
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Investment Needs over 2007-12 period
reasonably well established…..
Installed generation capacity to increase by about 60,000 MW
(from 125,000 MW to 185,000 MW)
Of this about 20-30,000 MW hydro
Investment program estimated to cost US$100 billion
Generation – US$60 billion (Rs. 2,70,000 crores)
Transmission & Distribution – US$40 billion (Rs. 1,80,000 crores)
In addition:
About 20,000 MW of existing thermal capacity to be rehabilitated and
modernized
Distribution networks to be upgraded and MIS strengthened
Human resources to be revitalized
And:
A “low carbon growth” strategy to be followed with international
support (Post G8+5 meeting at Gleaneagles in 2005)
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Indian market environment also broadly
known…..
Industrial, commercial, urban household demand
increasingly commercialized. Willing to pay cost-recovery
tariffs provided:
Service is Efficient – not willing to pay for theft and utility
inefficiency
Service is demand responsive – willingness to pay declines with
outages, voltage fluctuations, billing hassles, etc.
Industrial and commercial demand now about 43-45% of
total consumption.
60% of Indian firms rely on costly captive or back-up self-generation
(compared to 21% in China)
Urban household demand about 20-25% of total consumption
Urban consumers becoming wealthier and more service conscious
Rural – including agricultural - demand not ready for
commercialization. Still needs effective government support
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Some barriers to commercialization…..
Governance of distribution utilities
Over 40% of energy supplied into state transmission systems is lost, not
billed, incorrectly billed or payment not collected
Reducing to 20% would save Rs. 15-20,000 crores/y ($3.3-4.4 billion) of
generation cost (@Rs. 2/kWh) or generate 25% more revenue if billed at the
average tariff (Rs. 2.77/kWh)
Sector is a conduit for about Rs. 20,000 crore ($4.5 billion) of poorly targeted
and poorly accounted subsidies each year (from budget & cross-subsidies)
Even in advanced reforming states, only 55-65% of electricity sales metered
State regulatory commissions are still finding their feet
Tariffs are distorted and do not cover costs
Industry tariffs are high by international standards (about USc 8-10);
agricultural tariffs (accounting for 25% of consumption) are well below cost
Data quality is improving but progress on energy accounting/audits is slow
Regulations on service quality and service obligations yet to be enforced
Limited outreach efforts to enhance public participation
Fuel supply bottlenecks
Early stages of competition and liberalization
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India market environment …..(3)
Government of India policy response is appropriate:
Electricity Act, 2003
National Electricity Policy (March 2005)
National Tariff Policy (January 2006)
Correct focus on:
Governance Commercialization Private participation
Competition Rural services
Key challenge:
Ramp up pace and quality of policy implementation –
What must be done to move from about $6 billion to $20 investment/year?
Overcome concerns and resistance at state level
Accelerated reform of distribution still a critical bottleneck
Resolve fuel supply bottlenecks
Engage the private sector
Let‟s visit the views from some major international investors…
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Global market environment –
Demand for Power Investment - a large Growing Gap?
Financing required for the Power Sector in Emerging Markets 1990 - 2020
Cumulative
160.0 Sum ($Bn)
$2,300 Bn
Total Power Investment ($Billion)
140.0
High Investment Demand
120.0
Scenario (3%)
Gap covered by public financing, $1,900 Bn
100.0
self -financing, donor funding,
and rationing.
80.0
Low Investment
Demand Scenario (2%)
60.0
40.0
20.0
Private Capital Mobilized in Power Sector
0.0
2000
2004
2006
2010
2016
1990
1992
1994
1996
1998
2002
2008
2012
2014
2018
2020
Historic Future
Source: : World Bank, IEA, Deloitte Touche
Tohmatsu Emerging Markets Group 7
Global market environment –
Feedback from Power Investors Roundtable
(World Bank 2004)
The Target Group
Firms that invest their own equity outside their home countries
Local/domestic firms not included
Lenders not included – they follow the equity sponsor
The Target Universe
65 firms in final survey. An ever decreasing number:
7 mergers
7 exits from emerging markets
2 went into receivership
The Survey Instrument
A 7-page standardized survey to all firms
Sent by email/fax – follow-up phone calls.
The Response Rate
48 valid responses – a 75% response
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International Power Investors –
Firms Targeted
1. ABB Equity Ventures 23. El Paso Energy 44. Mirant
2. AEP 24. Electricite de France 45. Mitsui & Co.
3. AES Corp International 46. NRG Energy
4. Alliant Energy International 25. Electricite de Portugal 47. Panda Energy
5. Alsons Consolidated 26. Elyo 48. PPL Global
Resources 27. Endesa 49. PSEG Global
6. Amata Power 28. EIF Group 50. Reliant Energy
7. Banpu Public Co. Ltd. 29. Entergy Power Group 51. Rolls-Royce Power
8. BG Group 30. Eskom Enterprises Ventures
9. BP Global Power 31. FondElec 52. Saur International
10. CHI Energy (Energia 32. Fortum 53. Scudder Latin America
Global) 33. GE Capital Global Energy Fund
11. Chilectra 34. GMS Power 54. Sempra Energy
12. Cinergy Global Resources 35. HEI Power 55. Siemens Power
13. CLP Power International 36. Hydro Quebec Ventures
14. CMS Energy Corporation 37. Ibedrola 56. Sithe Energies
15. Cogentrix Energy 38. Independent Power 57. Statkraft International
16. Commonwealth 39. InterGen 58. Steag AG
Development Corp. 40. International Power 59. Tomen Power
17. Covanta Energy 41. Keppel FELS Power 60. Tractebel
18. Delma Power 42. Korea Electric Power 61. TransAlta
19. Duke Energy Company 62. TXU Corp
20. Dynegy 43. Marubeni Power 63. Union Energy
21. E.ON Energie 64. Union Fenosa
22. Edison Mission Energy 65. Wartsila NSD
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What conditions are important?
Minor Major Critical
Rated Relative
“Dealbreaker” Rank “Deal-breaker”
63% 1 Legal Protection of Investors
Legal Protection of Investors' Rights 3.57
36% 2 Consumer Payment Discipline 3.11
3.11
40% 5 Gov’t/Multilateral Guarantee
13% 7 Government Efficiency 2.98
15% 3 Judiciary's Independence 2.91
19% 4 Clear Rules for Exit 2.83
19% 6 2.83
Investment Grade Debt Rating
8% 9 Transition to Competitive Market 2.68
10% 8 2.66
Corruption Index Ranking
4% 10 2.49
Domestic Borrowing
4% 11 Competitive Selection 2.43
13% 12 Possibility of Vertical Integration 2.00
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Top Three Conditions Sought by Investors
1. Legal protection and framework defining investor rights
63% of firms rated it a “deal-breaker” – ranked 1 of 12 factors
“contract enforceability”
“clarity in market rules” [Brazil , Guatemala ]
“protection „to do business‟ – labor laws, property rights; laws that work”
“enforceable exit strategy” [Separately ranked 4 th]
2. Payment discipline and enforcement
40% of firms rated it a “deal-breaker” – ranked 2 of 12 factors
Both generation and distribution investors considered it important
“we cannot fix it on our own” – government support essential.
“worsening payment discipline – strong negative”.
3. Guarantee from Government or Multilateral
36% rated it a “deal-breaker” – overall rank 5 of 12
“support needed till the business becomes commercial”
“why should we take on the risk of a bankrupt business?”
Interestingly not a determinant for success – “best” and “worst”
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experience.
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Interesting Results – conditions not highly
valued
Domestic borrowing costs and tenors inconsequential
Ranked 10th of 12 factors – only 4% rated it critical
“domestic Debt markets – too shallow; unwilling to do limited/non-
recourse”
“international banks exuberant in 1990s – future appetite uncertain”
Investors don‟t value vertical integration.
Ranked last
“each segment of value chain must be independently profitable”
“we are too specialized to consider vertical integration”
Transition to competitive market welcomed
“means to improve transparency”
“promotes other necessary legal and regulatory reforms”
“provides alternative markets” (for generation)
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Why did investments succeed or fail?
1. Retail tariff level and cash-flow discipline
65% of firms rated it critical - First overall rank for success or failure
“we have learned enough to avoid countries with unsustainable retail tariffs”
“Government assurances to raise tariffs or provide subsidies – not very comforting”.
“Tariff levels should be high enough without subsidies”
2. Fair adjudication of tariff adjustments and disputes
50% of firms rated it a critical determinant of failure. Second rank in case of failure.
“new regulators show little appreciation of investor needs”.
“Regulators showing an increasing tendency to change rules and targets on which
investment decisions are made”.
3. Operational Control and Management Freedom
60% of firms rated it a critical success factor. Second overall rank
Key to deriving value from investment – economies, cost reduction
Unanimous verdict that public-private operational partnerships are not important
(lowest ranked)
4. Regulatory commitment sustained through long-term contract
50% of firms rated it a critical determinant of failure. Third overall rank
“a contract is a contract”
“if the contract looks cozy – it probably is”
“need to make sure that the contract is on firm economic and financial ground” 13
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How Satisfied are Investors? –
A Country Assessment
Being a small country is not a liability
Multiple entrants (over 4) – No dissatisfied investors
Latin America – Bolivia, Jamaica, Panama, Costa Rica, Guatemala,
Nicaragua, Dominican Republic
Africa – Kenya, Morocco
Respecting contracts under stress
Thailand, Philippines
Czech Republic, Colombia, Argentina, Indonesia, China, Pakistan, India
Regulators perceived to be exercising “excessive” discretion and risk on
the increase
India, Colombia, Brazil
Are regulators just doing their job – or are investor expectations unrealistic?
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Factors that Enable and Attract Investment
Well-managed reform: Increasing ability of utility to generate
internal cash for investment through –
cost reductions
timely tariff adjustments to recover the cost of supply, and
efficient collection of posted tariffs
Keeping the financial house in order:
Improving access to debt financing from domestic/international debt
markets by maintaining profitable operation + acceptable debt
service ratio
Reducing risk & maintaining a healthy regulatory
environment: Attracting domestic & foreign equity funding -
creating and maintaining sector structure, regulatory and legal
environment conducive to minimization of country/project
investment risk 15
World Bank role in India: Conforming with
Country Assistance Strategy (2005-08)…
State level (2-4 states) – Finance investments, provide
advisory services and implementation support to:
Improve efficiency, service quality and governance of state utilities
National level program – Investment support to:
Develop hydropower potential in an environmentally and socially
sustainable manner
Strengthen capacity of 1-2 state governments to manage and utilize
hydro resources in an efficient and responsible manner
Reduce barriers for rehabilitating thermal power plants and improving
their fuel efficiency (part of “low carbon growth” agenda)
Expand national transmission system to facilitate access and trade
Expand rural access and improve rural electricity services
Promote renewable energy development (through IREDA/MNES)
Analytical and advisory support to:
Build awareness and consensus around sector reform issues –
governance of publicly-owned distribution utilities, open access, etc.
Improve regulatory effectiveness in infrastructure services 16
World Bank‟s Assistance Program…(2)
Current portfolio consists of the following operations:
Project Loan Amt Balance Closing Date
Powergrid II $450 m $ 60.6 m June 2006
Powergrid III $400 m $400.0 m July 2011
Rajasthan Power $178 m $ 38.3 m June 2006
Renewable Energy II $112 m $ 45.1 m March 2007
Under Preparation:
Rampur Hydropower – 412 MW approx. $400 m (2006-07)
Thermal Power Rehab – 600 to 1000 MW ($120-140 m IBRD; $40-60 m GEF)
Being Identified:
State utility development & reform – dialogue with 3-4 states
Rural electricity services – dialogue with Ministry of Power
Hydropower development – dialogue with Ministry of Power and 2 states
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International Finance Corporation also has
an active power portfolio in India…
Allain-Duhangan 192 MW hydropower – first for IFC on merchant basis
Powerlinks - Tala Transmission Project – Tata Power & Powergrid JV
Mini hydro – IHDC (2-5 MW projects); considering windpower
Considering financing private distribution companies (NDPL)
TA (with North American Rural Electrification Cooperatives
Association) to PFC for rural electrification
Worldwide, IFC has a power portfolio of US$2.5 billion (11% of business)
Good performance to date
Invested (since 1990) in 14,815 MW of generation capacity and
US$15.2 billion in aggregate project costs. The portfolio currently
has:
7 distribution clients; 5 transmission clients;
61 projects in 33 countries
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World Bank Group risk mitigation guarantees
- to leverage private investment
IFC MIGA IBRD/IDA
IFC Guarantees (partial Political Risk Insurance Guarantees
credit structures usually for expropriation partial risk
local financing) transfer restriction partial credit
Interest Rate and Currency breach of contract
swaps
war & civil disturbances
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IBRD Loans - Lending Terms
(As per currently applicable waivers to Indian Portfolio)
LIBOR-based, Variable spread loan Interest
USD loans Yen loans
6 month LIBOR 5.03% 0.15%
Spread over LIBOR 0.18% 0.18%
Commitment Fee 0.07% 0.07%
Front-end Fee 0.04% 0.04%
Total World Bank Interest Rate 5.32% 0.44%
+ currency exchange rate impact
– deemed export/import duty exemption*
*Applicable to ICB procurement funded from loans provided by multilateral agencies.
Principal Moratorium 5 years 5 years
Repayment period (incl. moratorium) 20 years 20 years
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In closing….
World Bank is committed to helping India meet its power sector objectives:
Improve efficiency and quality of electricity distribution – key to “unblocking”
internal resources
Expand rural access
Enable electricity trade and transmission of power
Develop hydropower and other renewable energy potential in an environmentally
and socially sustainable manner
Reduce barriers for rehabilitating thermal power plants and improving their fuel
efficiency – other financial support for a “Low Carbon Growth” strategy being formulated
Policy framework has improved considerably – regulatory frameworks are also
becoming more competent and transparent. However:
Scale of investments needed cannot be mobilized unless enterprise level reforms,
particularly of distribution companies, are ramped up
Private or public companies cannot fix cash inadequacy without government help
AND
We know from painful experience that a policy environment that is lousy for the
private sector will be lousy for the public sector too!
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