BOO, exits to woo investors running scared of UMPPs

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New Delhi | Published: March 14, 2015 1:13:18 AM

An expert committee appointed by the power ministry may recommend reintroducing the build-operate-own (BOO) model and opt to ease exit policy and considerably reduce the developers’ currency risk

To bring back investor confidence in ultra mega power projects (UMPPs), an expert committee appointed by the power ministry may recommend reintroducing the build-operate-own (BOO) model and opt to ease exit policy and considerably reduce the developers’ currency risk. The revised norms, sources said, could also provide for a provision for pass-through of fuel cost escalations, although subject to a cap.

All these steps, deliberated upon by the committee headed by former chief vigilance commissioner Pratyush Sinha, are aimed at optimising the risk of equity investors and presenting these long-gestation, capital-intensive projects as commercially viable to the lenders, the sources added.
Earlier this year, the government had scrapped the bidding process for two UMPPs, one in Odisha and the other in Tamil Nadu, as private developers withdrew from the fray citing difficulty in securing bank finance due to the flaws in the bidding norms. Subsequently, the power ministry appointed the expert committee, which, having consulted all stakeholders, is now expected to submit a report to the ministry by the month-end.

Sources said the Indian Banks’ Association and private power developers have argued against the design-build-finance-operate-transfer (DBFOT) model incorporated in the new bidding criteria in 2013. Investors as well as banks have found these impractical. As per DBFOT norm, a developer would have to hand over the plant to the respective state government 25 years after winning the award. It is precisely this clause that did in the two UMPPs, as bankers turned averse to lending to these projects, due to the lack of ownership rights with the developers.

The government has awarded four UMPPs so far, one to Tata Power and three to Reliance Power, which were bid out on the basis of older (BOO) norms that allowed the operator to retain ownership of the project even after the life-cycle of a plant, usually 25-30 years. However, the power purchase agreement did not contain any facility for transferring any unforeseen increase in fuel cost to the consumers. This led to projects becoming unsustainable as imported coal prices sky-rocketed for three to four years until recently.

Further, the committee has also been apprised of the need to include a termination clause for developers that have been stuck with stranded assets and want to exit. “An exit clause in the bidding norms will reflect our learning from the past experiences. UMPPs awarded to Reliance Power in Andhra Pradesh and Jharkhand are stuck intractably. There must be a way out for such projects if we face similar situation in future,” an industry insider told FE.

A major sticking point for UMPPs has also been the depreciation in the rupee, making repayment of operators’ loans more expensive.

Suggestions made to the expert committee have proposed that if the rupee fluctuates in the range of 5% (+/-) for a project from the date of signing the agreement, the developer will be required to absorb the impact. However, if the fluctuations are wider, then the regulator must grant compensatory tariff. This would mean that if the rupee depreciates more than 5%, the consumers will have to pay a higher tariff and if it rises more than 5%, then the developer will have the benefit of compensatory tariff increase.

An advisory group on power sector, led by Suresh Prabhu, now railway minister, had in September last year proposed that the previous bidding norms allowing developers to own the project be reintroduced but with unlimited pass-through of fuel costs based on actual escalations be adopted.

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