The public-private partnership (PPP) model has brought about diverse results across sectors. While there has been spectacular success in telecom and somewhat satisfactory outcomes in power, it has led to conflicts in many other sectors, including highways, airports and metro rail. There is a wavering, if not waning, of investor interest in PPP model in many areas, owing to uncertainty over remunerative returns in the absence of a credible mechanism for user charges. The latest instance was the suspension of the Delhi Airport Metro services. This is the first of an FE series highlighting the performance of the PPP model in various sectors.
The Centre introduced a mandatory bidding regime for allocating power projects in January 2006 to revive investor interest in power. Several states adopted this model, but the subsequent fuel crisis has made the model unattractive. Issues like uncertainty about tariff revision ? which is necessary to pass on the increase in fuel cost to consumers ? and state power distribution companies? weak financial position have not helped matters either.
The result: Power capacities of 26,460 MW planned through Case-II bidding (where government arra-nges physical inputs like land and water besides regulatory clearances while the developer invests) are facing the prospect of defaulting on power supply contracts due to fuel shortage. Half of this capacity has already been commissioned. The balance is under construction and is expected to be commissioned during the 12th Plan.
The Centre had envisaged developing as many as 16 ultra-mega power projects (UMPPs), but so far it has allocated only four at Sasan, Tilaiya, Krishnapatnam and Mundra. Of these, Mundra and Krishnapatnam, which are based on Indonesian coal, seem to be headed for litigation.
Excluding Mundra and Krishnapatnam UMPPs, all others are state-level projects. Out of 26,460 MW capacity mentioned earlier, 8,000 MW is based on Indonesian coal which has become commercially unviable after that country changed its mining law to bring its coal price in line with international benchmarks.
Of the impacted capacity, 8,920 MW is based on coal linkage from Coal India and the balance is to be fired with coal from allocated mines.
While power projects based on CIL coal linkage are unable to meet their power supply commitment due to short supply of coal by the producer, projects which have been allocated captive mines are stuck due to environmental and land acquisition hurdles to the associated mining projects. Lanco Power?s Anapra C and Essar Power?s Mahan are examples where developers? cost calculations have gone haywire because of factors beyond their control.
?Difficulties in tying up coal supply and contractual inflexibility in passing on rise in fuel costs are the biggest problems facing PPP power projects,? said Abhaya Agarwal, Partner and PPP leader, E&Y.
Agarwal added: ?Several of these projects do not have long-term fuel linkage and may face difficulties in arranging bank financing.? Regulatory uncertainty about tariff revision is another big problem, he pointed out.
?Many times, special purpose vehicle (SPV) is transferred to the selected developer without full land acquisition, as in case of the Tilaiya UMPP and the Karchna, delaying project implementation. Developers might also face fuel shortage problem if mining work in captive coals gets delayed because of environmental hurdles or if CIL is unable to supply contracted quantity of coal on the basis of which bidding was held,? said Ashok Khurana, who is credited with supervising auctioning of Anpara C project as principal secretary to the UP government in 2007, India?s first power project to be developed through the competitive bidding route.
There is ample scope for PPP projects in transmission and distribution projects as well but not much has been done thanks to opposition from states. ?The main challenge is the states’ hesitation to extend private participation into distribution. But with the looming debt burden, it is now almost a necessity,? said Kameswara Rao, leader of energy, utilities and mining practices in PwC India.