Pratyush Sinha panel turns down pass-through of currency risk
At any time during the tenure of a power purchase agreement — even before the commercial operations begin — , the developer of an ultra mega power project (UMPP) should be allowed to exit fully or partially, provided his stake is sold to an entity with experience in the field, according to a high-level panel reviewing the UMPP Case-2 bidding norms.
The Pratyush Sinha committee, appointed by the Union power ministry a few weeks ago following the withdrawal of private players from the bidding process for the UMPPs in Tamil Nadu and Odisha late last year citing ability to convince lenders and arrange finances, is also learnt to have favoured the developers retaining the ownership of the asset after the PPP’s tenure, which is usually 25-30 years.
While private power companies’ demand for a pass-through facility to mitigate the risk of currency fluctuations might not be accepted by the panel, it strongly felt that an easier exit option and ownership right were necessary to inspire confidence in the developers and lenders, sources familiar with the panel’s deliberations told FE. The committee met the bankers last week to fine-tune the contours of the exit clause, the sources added.
Under the current bidding model, there are few options for a developer to get out of a project and this has dampened the private power generation companies’ interest in UMPPs. The extant norms, according to private developers, are ‘lopsided’ as they provide the power procurers with more than 27 reasons to terminate the contract but only two for the producers.
The existing norms mandate that an UMPP developer would have to transfer his stake to either the lenders or power procurers in the event of the procures’ default on PPA conditions, but doesn’t provide for a facility for the developer to exit from the project by selling off his stake to another party.
“Exit policy being planned is a welcome step as a developer could face completely different circumstances from the time he wins the bid for the project when he is actual implementing it,” Ashok Khurana, director general, association of power producers told FE. He added that any substitute for the exiting developer must have the same level of financial and technical depth as the previous developer so that the project gets completed in time.
While addition of an exit clause would come as a relief to independent power producers, it would remain concerned about the lack of any facility mitigate the currency risk. The private developers, in their representation to the committee, had proposed that developers could bear the cost of currency fluctuation in the range of +/- 5% but the cost or benefits be passed onto the consumers for fluctuations beyond that range.
The committee, however, is believed to have rejected the proposal on the basis that a developer was an entrepreneur and must take certain risks for returns on offer, explained the source.
“Its easy to say developers should take risks but projecting foreign exchange rates for 30 years is not possible. This is why APP had requested for risk mitigation on that front in the Case-2 bidding norms. Besides, even when a developer hedges against currency fluctuation, it incurs a cost—nearly 7% of the amount—which is eventually passed on to the consumers.” Khurana said.
The committee, which will give its reports to the government shortly, is also likely to recommend that the design, build, finance, operate and transfer (DBFOT) model, that has come a cropper, be replaced with a build, operate, own (BPO) model. The DBFOT model introduced in the bidding documents adopted in 2013 has come under fire from private developers and lenders alike as the lender expressed their inability to finance projects when the ownership of the plant is not vested with the developers.
The Sinha panel, however, is mandated to review the Case-2 bidding norms and not Case-1 conditions. Under Case-1, the developer chooses the plant location, fuel type and fuel source along with other relevant clearances for setting up a plant. Under Case-2 norms, the location, type of fuel and its source are determined and provided by the government, reducing inherent project risk on the developer.