I M Sahai summarises the financial investment that lies behind some of India’s current hydro projects

There are three specialised financial institutions in the Indian power sector: Power Finance Corporation (PFC), the Rural Electrification Corporation (REC) and the Indian Renewable Energy Development Agency (IREDA). All the three are located in New Delhi and are fully owned by the federal government.

Of the three, PFC has been the most active in funding the bigger hydro projects. In its 12-year existence it has sanctioned over Rs220B (US$5B) worth of loans for over 1000 power projects of various types. Within that total, about one-fifth of the loans have gone to the hydro sector. Rs41.44B (US$940M) has been used for funding 67 hydro projects and Rs619M (US$14M) for 49 schemes to uprate old hydro stations. The loan utilisation position by its borrowers has been unsatisfactory, however, with just over half of the total loan amount having to be disbursed.

In an attempt to clarify the division of responsibility between the three financial institutions, the federal Ministry of Power ordered last November that in future the REC, not PFC, would fund all new schemes of less than 25MW. The REC would thus supplement the efforts of IREDA in funding the small hydro sector. REC had previously limited itself to financing rural transmission and distribution schemes. Since most small hydro projects in India are in the rural areas, and the government aims to use such projects for local power distribution, roping in REC makes sense.

IREDA, the third agency, was set up by the federal government in 1987 with the aim of promoting renewable energy projects and systems through innovative packages of financial assistance and marketing techniques. By the end of 1999, IREDA had sanctioned loans worth Rs34.13B (about US$775M). Small hydro accounted for slightly over Rs8B (about US$180M), for 79 projects totalling 260MW. Here again, however, disbursements had been only about Rs2.5B (about US$56M) due to the slow progress in many of these projects: up to now only 24 of them (total capacity about 53MW) have been commissioned. IREDA has been using funds generated in-house, raised from the domestic markets, or lent by multilaterals such as the World Bank and UN Development Programme.

Domestic money markets

Since most of the hydropower projects in India have been developed by government-owned utilities, they have generally not made use of specific, project-related funding from the domestic money markets. The state electricity boards (SEBs) assess their annual fund requirements for the year for working capital and project finance as a whole, and then approach banks and public financial institutions for loans and/or subscription to their bonds.

Big domestic commercial banks like the State Bank of India have been quite active in funding the power sector, directly or indirectly. Federal utilities like the National Hydroelectric Power Corporation have favoured bonds issues in the domestic markets. This led two domestic financial institutions, acting as consultants to the Ministry of Power, to recommend in March that such big utilities should regularly enter the market with issue of “hydro bonds”, the revenues from which could be used for hydro development. The recommendation is being considered by the government.

Two recent instances of hydro financing by domestic institutions are worth mentioning. The US$180M domestic debt portion for the 300MW Chamera 2 project has been tied up with a number of domestic banks by its developer NHPC, and it achieved financial closure last June. For the $450M, 400MW Maheshwar project, promoted by Bombay-based S Kumars Group, leading domestic financial institutions such as the Industrial Development Bank of India, Life Insurance Corp and the General Insurance Corp are considering a joint equity subscription of $22.5M, taking 15% of the stock. Ogden Energy of the US holds the largest portion of its equity – 49% – while the balance is held by S Kumars, and Siemens and Noell of Germany. If this comes through, it would be the first known foray of domestic financial institutions into hydro equity: where previously they gave only debt. Domestic debt at Maheshwar has been provided by PFC, domestic financial institutions and some commercial banks (including the State Bank of India), either through loans or guarantees. A big disappointment on the financial front has nevertheless been the inability of the major domestic financial institutions to evolve innovative ways of funding hydro projects. In India, the major hydro projects take five to ten years to be commissioned, so the generators need long-term funds. A new financial institution, Infrastructure Development Finance (IDFC) was set up in India in 1997 specifically for this purpose by the federal government, multilaterals and others. But although IDFC has funded a few power projects, none has yet been in the hydro sector.

Government incentives

As well announcing financial incentives, both the federal and state governments provide funds in their annual budgets for the federal hydro corporations and the state power utilities. This comes in the form both of equity and soft loans. Government has also been issuing guarantees for loans taken out at home and abroad by the utilities, as a form of investment security. In the policy on hydro power development announced in August 1998, the Ministry of Power announced its intention also to levy a power development cess on each kWh of electricity consumed in the country. The rate proposed was Rs0.10 (0.22 US cents). Later, it was decided to reduce the levy by half and to make it indirect by letting the power generators pay it instead of the distributors. Even this diluted proposal has still to be cleared by the federal Cabinet, and it appears to have been shelved for the time being.

The federal government is also assisting hydropower by funding ongoing projects. They are Nathpa Jhakri (1500MWs) of NJPC, Tehri 1 (1000MW) of THDC, Ranganadi 1 (405MW) and Doyang (75MW) of NEEPCO, Dulhasti (390MW), Dhauliganga (280MW), and Rangit (now 80MW) all of NHPC. An assurance to this effect was given in the 1998 Hydro Power Policy. The federal government will give similar budgetary support through equity to 12 other federal projects (total 5555MW) to enable the respective utilities to initiate pre-project work in them. Two new, mega projects in this list are 13,400MW Dehang and 7300MW Subansiri, both in the north-east, where NHPC is to initiate survey and investigation.

Multilateral financial institutions have funded India’s hydro sector selectively, both directly and indirectly.

Of the direct loans, a major one has been by the World Bank – $437M for the 1500MW Nathpa Jhakri project. The Bank has also lent $156M for the Orissa SEB’s 600MW Upper Indravati project. Indirectly, it has financed 100MW in small hydro, through a $70M line of credit to IREDA. On 28 June this year the World Bank announced another $130M loan to IREDA, which included a second line of credit of $110M for small hydro. This could fund an extra 110MW of capacity. In the past the Bank has also financed new and uprating hydro schemes in Karnataka.

One of the reasons why multilaterals have not made more impact is a paucity of eligible projects. The federal government has now asked both its own and state hydro power utilities to prepare ‘shelves’ of projects, with appropriate documentation similar to detailed project reports (DPRs), to propose to the multilaterals. Both the World Bank and the Asian Development Bank ha ve, in the past, funded PFC to on-lend for efficiency improvement schemes like uprating of thermal projects. There is no reason why the same might not happen for hydro projects. Lately, even the private lending arm of the World Bank Group, the IFC, has shown a renewed interest in financing Indian power projects through equity and loans.

Ecological objections

Funding hydro would however require that the project does not elicit ecological objections. Recently the World Bank had to withdraw from the 1450MW Sardar Sarovar project due to prolonged and sustained agitation by the greens group, NBA. Also, the project authorities need to adhere to any prior commitments agreed with a lending multilateral, which can impose onerous conditions from the viewpoint of the borrower.

The same problem can arise while seeking funds from other overseas agencies, although Indian project promoters have had no great difficulty in obtaining credit from them. These include export credit agencies, development banks, financial institutions and commercial banks. Some of these are wholly or partly owned by the respective host government, and their funding follows intergovernmental agreements with India.

One of the most active institutions in India Hydro in the past was OECF (now JBIC) of Japan. It gave a ¥5.665B loan to NHPC for the 280MW Dhauliganga 1 project, due for completion in 2005. It gave even a bigger ¥24.65B loan for Sardar Sarovar, but the loan has been suspended due to a dispute between the developer and the Japanese equipment suppliers. Other OECF beneficiaries include Srisailam Left Bank (900MW), Purulia pumped-storage (900MW), Tuirial (60MW) and Teesta stages I, II & IV (45MW). The OECF suspended consideration of new loans in mid-1998, following the economic sanctions imposed by Japan on India for its nuclear tests.

Among other overseas agencies, a mention could be made of EDC of Canada which last year lent C$175M for Chamera 2 (300MW), KfW of Germany which signed up in 1995 for a DM46.5M credit to PFC for on-lending to state power utilities to uprate three plants, and ODA (now DFID) of the UK which gave through the Indian Government, a similar loan of $38.4M to PFC to uprate Hirakud 1.

There have been instances of hydro loans and guarantees by certain overseas banks and financial agencies for specific projects. An example is the $900M Uri project (480MW), developed and commissioned by NHPC in early 1997. The foreign debt portion of about $614M for that project was wholly met by loans and credits from ODA and a group of Swedish financial agencies and banks.

Suppliers credit

Suppliers credit is freely available from the beginning of a project. The equipment tenders often make its availability a condition for bids; at other times, the bidders themselves sweeten their offer by assuring such credit. In the case of Uri, for example, the EPC contractor – a Swedish-UK consortium – helped the develop, NHPC in obtaining the funds from those countries. Vendors, particularly those from overseas, often have a tie-up with a funding agency (sometimes a sister company created for giving finances) on a general or project-specific basis. India’s biggest domestic vendor, Bharat Heavy Electricals, has not managed to develop this kind of tie-up, and has felt constrained in utilising global bidding opportunities because it relies mainly on offering deferred-payment terms.

A recent development, is for the vendors to take up to 10% of the project equity, as at Maheshwar (see above). Such equity stake, however is temporary, and the vendor may decide to sell it once the project is completed and the performance guarantee period is over.

Private investment

Since 1991 the Indian Government has allowed for private participation and equity in the sector. A set of incentives and concessions were developed, which include up to 100% ownership of the project (without needing any prior approval), five-year exemption from federal taxes, concessional duty on import of plant & equipment (fully duty-free,

if the hydro project is more than1000MW), and choice of how to obtain project debt from domestic or overseas sources.

The State Governments also announced concessions. For small hydro, apart from federal subsidies for pre-project work and loan interest, guidelines were laid down by State Governments on issues like tariff, third-party sale of power and water charges. A separate policy was also announced by Government for private participation in uprating and refurbishment.

The response of IPPs has been mixed. Most private hydro projects have been promoted by domestic industrial groups, either wholly or in partnership. The two major hydro projects with sizeable overseas equity are Maheshwar and the 330MW Shrinagar project in the Himalayan foothills.

Maheshwar project is being developed by the Indian textiles group of S Kumars. PacGen of the US was a co-promoter but it pulled out. Two German power companies, Bayernwerke and VEW, came on board in 1998 with a joint 49% holding but they pulled out a year later for reasons not officially disclosed. Their minority equity was picked up in late 1999 by Ogden Energy of US.

Shrinagar has had even a longer history. Like Maheshwar it was originally to be executed by the state electricity board, but the Board found itself short of funds. After the sector was opened to private participation the state government signed a MoU with Calcutta-based Duncans group, which searched long and hard for an overseas partner and finally struck a deal with Voith’s US subsidiary Synergics Energy Development. Synergics is likely to own most of the equity in Shrinagar, leaving a small portion to Duncans, and is also arranging the debt portion of the project.

Private participation

Among the major hydro projects coming up wholly with Indian private participation are Vishnuprayag (400MW) and Baspa 2 (300MW), being constructed by JP Industries, an EPC company turned IPP. JP Industries, in collaboration with SNC-Lavalin of Canada, also signed a MoU to develop Baglihar in Kashmir (450MW). A smaller project which would be commissioned within a year is LNG Bhilwara’ s Malana plant (86MW).

Summing up

The Indian experience has shown that a variety of sources are available for hydro financing, both for equity and debt.

Many of these have not been fully tapped, due to inadequate knowledge, faulty homework, or government policies. For the investment to come through in the case of a state-owned project, the lender would like to be convinced that the utility is financially viable, operationally efficient, and capable of executing and commissioning the project in the specified time-frame. For a private project, apart from these criteria, a suitable investment-security mode has also to be offered – not the easiest thing to do.

Financial consultants have been working over a period of time to make hydro financing easier in India and other developing countries, though with mixed results.
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