Govt’s Plan to Build Mega Power Projects may Trip on Funding Woes

Wary bankers say new rules for big power plants favour discoms and make funding unviable

    India's ambitious plan to build giant power plants to meet growing energy needs has hit a roadblock as financial institutions have refused to fund future projects saying the new norms make them unviable. 
The proposed new norms for ultra mega power projects (UMPPs) say the projects will be owned by power distribution utilities, and the qualified bidders will be mere contractors to build the project and will collect fee through tariffs for 30 years. Utilities will own the land, denying power firms the option to mortgage land to raise funds. 
Plants are proposed to be transferred to distribution utilities at the end of the concession period for a price, similar to the case of other infrastructure projects in road and port sectors, but bankers and industry officials say that in financial matters, cash-starved utilities are fundamentally different from strong organisations like the National Highways Authority of India (NHAI). A power ministry official said the change has been proposed as existing UMPP developers are facing problems in land acquisition. "The concept has been well thought of and is being discussed with stakeholders. Final guidelines will be ready in a month," he said. "Power plants are amenable to the previous build, operate and own model than the design, build, finance, operate and transfer model. There is a significant difference between roads and power projects since the NHAI is a AAA-rated utility unlike the power distribution utilities." SBI Capital vice-president Mukul Modi said. 
Modi said funding new UMPPs will be more risky since the companies setting up the projects will not own the land unlike the previous cases. He said the new guidelines did not provide for a sufficient security creation in favour of lenders. SBI Caps will express its concerns to the power ministry within a week, Modi said on the sidelines of an Assocham conference on Thursday. 
Association of Power Producers director general Ashok Khurana told ET that banks and financial institutions have said that certain risks in the proposed framework are not amenable to being priced and consequently are non-financeable. Similarly, even if certain risks are reflected in tariffs would result in very high bids, defeating the objective of competitive bidding. 
Lenders and power producers have questioned state distribution utilities' capability to purchase land, pay electricity bills and buy back UMPPs afterthe concession period. State power distribution companies' accumulated losses are estimated at . 1.9-lakh crore and the Center has recently approved a bailout package for them. 
Jindal Power MD RS Sharma said draft documents were loaded in favour of electricity distribution companies. He said even in case of non-payment of electricity bills by distribution companies, the concessionaire would terminate the contract and project assets will be transferred to the distribution utilities that will pay the power company. 
The proposed documents also provide for the appointment of independent engineers by state power distribution utilities for supervision of construction, operation and maintenance of UMPPs. Half of the cost of engineers would be borne by companies that set up these projects. 
"I will not work at any project to be supervised by an independent engineer who will be like a super boss at all levels. Such provision will give overriding powers to distribution companies, leading to delays without adding any significant value to the project," Sharma said at the Assocham conference. 
Khurana said that power plants already comply with various statutory requirements and are also subjected to review by engineers appointed by lenders for substantial part of their operating life. "The concept of independent engineer should be deleted from the documents," he said. 
Norms for UMPPs 
Projects to be owned by discoms 
Discoms will own the land, denying power firms the option to mortgage it to raise funds 
Plants will be transferred to discoms at the end of the concession period for a price 
State power discoms can appoint independent engineers. Half the cost of engineers must be borne by cos that set up the projects 
New norms do not provide for procurement of green clearances, fuel and water supply before a project is auctioned 
Qualified bidder will have to set up transmission facilities within the 
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