PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New...
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Transcript of PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New...
PLENARY SESSION IV: FINANCING OPTIONS
INDIA POWER SECTOR:CHALLENGES & INVESTMENT
OPPORTUNITIES
New DelhiMay 12, 2006
Salman ZaheerLead Energy Specialist
The World Bank
2
STRUCTURE OF PRESENTATION
Indian Power Sector Investment requirements (2007-12)
Overview of market conditions India International Investors
Potential role of the World Bank Group (CAS 2005-08)
Concluding Remarks
3
Investment Needs over 2007-12 period reasonably well
established….. Installed generation capacity to increase by about
60,000 MW (from 125,000 MW to 185,000 MW) Of this about 20-30,000 MW hydro
Investment program estimated to cost US$100 billion Generation – US$60 billion (Rs. 2,70,000 crores) Transmission & Distribution – US$40 billion (Rs. 1,80,000
crores) In addition:
About 20,000 MW of existing thermal capacity to be rehabilitated and modernized
Distribution networks to be upgraded and MIS strengthened
Human resources to be revitalized And:
A “low carbon growth” strategy to be followed with international support (Post G8+5 meeting at Gleaneagles in 2005)
4
Indian market environment also broadly known…..
Industrial, commercial, urban household demand increasingly commercialized. Willing to pay cost-recovery tariffs provided: Service is Efficient – not willing to pay for theft and utility
inefficiency Service is demand responsive – willingness to pay declines
with outages, voltage fluctuations, billing hassles, etc.
Industrial and commercial demand now about 43-45% of total consumption. 60% of Indian firms rely on costly captive or back-up self-
generation (compared to 21% in China)
Urban household demand about 20-25% of total consumption Urban consumers becoming wealthier and more service
conscious
Rural – including agricultural - demand not ready for commercialization. Still needs effective government support
5
Some barriers to commercialization…..
Governance of distribution utilities Over 40% of energy supplied into state transmission systems is
lost, not billed, incorrectly billed or payment not collected Reducing to 20% would save Rs. 15-20,000 crores/y ($3.3-4.4
billion) of generation cost (@Rs. 2/kWh) or generate 25% more revenue if billed at the average tariff (Rs. 2.77/kWh)
Sector is a conduit for about Rs. 20,000 crore ($4.5 billion) of poorly targeted and poorly accounted subsidies each year (from budget & cross-subsidies)
Even in advanced reforming states, only 55-65% of electricity sales metered
State regulatory commissions are still finding their feet Tariffs are distorted and do not cover costs Industry tariffs are high by international standards (about USc 8-
10); agricultural tariffs (accounting for 25% of consumption) are well below cost
Data quality is improving but progress on energy accounting/audits is slow
Regulations on service quality and service obligations yet to be enforced
Limited outreach efforts to enhance public participation Fuel supply bottlenecks
Early stages of competition and liberalization
6
India market environment …..(3)
Government of India policy response is appropriate: Electricity Act, 2003 National Electricity Policy (March 2005) National Tariff Policy (January 2006)
Correct focus on: Governance Commercialization Private participation Competition Rural services
Key challenge: Ramp up pace and quality of policy implementation –
What must be done to move from about $6 billion to $20 investment/year?
Overcome concerns and resistance at state level Accelerated reform of distribution still a critical bottleneck
Resolve fuel supply bottlenecks Engage the private sector Remain conscious of international commitments – clean
energy
7
India’s carbon emissions
Energy and carbon intensity of the economy is lower than in China, but not declining nearly as fast
156
251
337
453
0
50
100
150
200
250
300
350
400
450
500
1990 2000 2010 2020
Mill
ion
me
tric
to
ns
of
ca
rbo
n
Source: EIA International Energy Outlook 2003 (base case)
•The power sector accounts for about 60% of carbon emissions
•Projected emissions rise amounts to 7% of global increment
8
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
$2,300 Bn
$1,900 Bn
High Investment DemandScenario (3%)
Low InvestmentDemand Scenario (2%)
Historic Future
Private Capital Mobilized in Power Sector
Gap covered by public financing, self -financing, donor funding, and rationing.
Tot
al P
ower
In
vest
men
t ($
Bil
lion
)
Cumulative Sum ($Bn)
Source: : World Bank, IEA, Deloitte Touche Tohmatsu Emerging Markets Group
Financing required for the Power Sector in Emerging Markets 1990 - 2020
India’s vs Global investment requirements - a India’s vs Global investment requirements - a large Growing Gap between demand and supply?large Growing Gap between demand and supply?
9
World Bank role in India: Conforming with Country
Assistance Strategy (2005-08)…Continue to support state level reforms –
Critical for mobilizing the volume of investments needed to meet India’s demands in an affordable manner
Support rural access to spur rural development
Show-case mechanisms for scaling-up a low-carbon power generation program
Continue to support expansion of the national transmission system to facilitate access and trade
Continue to provide analytical, advisory and capacity building support
10
Bank assistance strategy builds on past engagement in power sector….
Pre-1990s: Investments in thermal and hydropower
generation at the central and state government levels
Expansion of the transmission systemInvestments in state distribution systems
1990-Present:Investment, budget and advisory support for
state level reforms (Orissa, Haryana, UP and AP)
Investment support for transmission and renewable energy (through IREDA)
Investment in 1500 MW Nathpa-Jhakri hydro plant
11
1. Legal protection and framework defining investor rights 63% of firms rated it a “deal-breaker” – ranked 1 of 12 factors
“contract enforceability” “clarity in market rules” [Brazil , Guatemala ] “protection ‘to do business’ – labor laws, property rights; laws
that work” “enforceable exit strategy” [Separately ranked 4th]
2. Payment discipline and enforcement40% of firms rated it a “deal-breaker” – ranked 2 of 12 factors
Both generation and distribution investors considered it important
“we cannot fix it on our own” – government support essential. “worsening payment discipline – strong negative”.
3. Guarantee from Government or Multilateral36% rated it a “deal-breaker” – overall rank 5 of 12
“support needed till the business becomes commercial” “why should we take on the risk of a bankrupt business?” Interestingly not a determinant for success – “best” and “worst”
experience.
…responds to consumer & Gov’t concerns; addresses investor
priorities…
10
12
1. Retail tariff level and cash-flow discipline 65% of firms rated it critical - First overall rank for success or failure
“we have learned enough to avoid countries with unsustainable retail tariffs”
“Government assurances to raise tariffs or provide subsidies – not very comforting”.
“Tariff levels should be high enough without subsidies”
2. Fair adjudication of tariff adjustments and disputes 50% of firms rated it a critical determinant of failure. Second rank in case of
failure. “new regulators show little appreciation of investor needs”. “Regulators showing an increasing tendency to change rules and targets on
which investment decisions are made”.
3. Operational Control and Management Freedom 60% of firms rated it a critical success factor. Second overall rank
Key to deriving value from investment – economies, cost reduction Unanimous verdict that public-private operational partnerships are not
important (lowest ranked)
4. Regulatory commitment sustained through long-term contract 50% of firms rated it a critical determinant of failure. Third overall rank
“a contract is a contract” “if the contract looks cozy – it probably is” “need to make sure that the contract is on firm economic and financial
ground” 15
What 50 global investors have reported on why investments
succeeded or failed…
13
19
Being a small country is not a liability Multiple entrants (over 4) – No dissatisfied investors
Latin America – Bolivia, Jamaica, Panama, Costa Rica, Guatemala, Nicaragua, Dominican Republic
Africa – Kenya, Morocco
Respecting contracts under stress Thailand, Philippines Czech Republic, Colombia, Argentina, Indonesia,
China, Pakistan, India
Regulators perceived to be exercising “excessive” discretion and risk on the increase
India, Colombia, Brazil Are regulators just doing their job – or are investor
expectations unrealistic?
How Satisfied are Investors? – A Country Assessment
14
What conditions are important?
92
Legal Protection of Investors' Rights
Minor
2.98
2.91
2.83
2.83
2.68
2.66
2.49
2.43
2.00
3.57
3.11
3.11
Major Critical
“Deal-breaker”
63% 1 Legal Protection of Investors
36% 2 Consumer Payment Discipline
40% 5 Gov’t/Multilateral Guarantee
13% 7 Government Efficiency
15% 3 Judiciary's Independence
19% 4 Clear Rules for Exit
19% 6 Investment Grade Debt Rating
8% 9 Transition to Competitive Market
10% 8 Corruption Index Ranking
4% 10 Domestic Borrowing
4% 11 Competitive Selection
13% 12 Possibility of Vertical Integration
Rated “Dealbreaker”
Relative Rank
15
Global market environment –Feedback from Power Investors Roundtable (World Bank 2004)
The Target GroupFirms that invest their own equity outside their home
countries Local/domestic firms not included Lenders not included – they follow the equity sponsor
The Target Universe 65 firms in final survey. An ever decreasing number:
7 mergers 7 exits from emerging markets 2 went into receivership
The Survey Instrument A 7-page standardized survey to all firms Sent by email/fax – follow-up phone calls.
The Response Rate 48 valid responses – a 75% response
16
1. ABB Equity Ventures 2. AEP3. AES Corp 4. Alliant Energy International5. Alsons Consolidated
Resources6. Amata Power 7. Banpu Public Co. Ltd.8. BG Group9. BP Global Power10. CHI Energy (Energia
Global)11. Chilectra12. Cinergy Global Resources13. CLP Power International14. CMS Energy Corporation15. Cogentrix Energy 16. Commonwealth
Development Corp. 17. Covanta Energy18. Delma Power19. Duke Energy 20. Dynegy21. E.ON Energie22. Edison Mission Energy
23. El Paso Energy 24. Electricite de France
International25. Electricite de Portugal 26. Elyo27. Endesa28. EIF Group29. Entergy Power Group30. Eskom Enterprises31. FondElec32. Fortum33. GE Capital Global Energy34. GMS Power35. HEI Power 36. Hydro Quebec37. Ibedrola38. Independent Power39. InterGen40. International Power41. Keppel FELS Power42. Korea Electric Power
Company43. Marubeni Power
44. Mirant45. Mitsui & Co.46. NRG Energy47. Panda Energy 48. PPL Global49. PSEG Global50. Reliant Energy 51. Rolls-Royce Power
Ventures52. Saur International53. Scudder Latin America
Fund54. Sempra Energy 55. Siemens Power
Ventures56. Sithe Energies 57. Statkraft International58. Steag AG59. Tomen Power60. Tractebel61. TransAlta62. TXU Corp63. Union Energy 64. Union Fenosa65. Wartsila NSD
International Power Investors – Firms Targeted
21
17
The fundamentals have not changed - Factors that enable and attract
investment Well-managed reform: Increasing ability of utility
to generate internal cash for investment through – cost reductions timely tariff adjustments to recover the cost of supply,
and efficient collection of posted tariffs
Keeping the financial house in order: Improving access to debt financing from
domestic/international debt markets by maintaining profitable operation + acceptable debt service ratio
Reducing risk & maintaining a healthy regulatory environment: Attracting domestic & foreign equity funding - creating and maintaining sector structure, regulatory
and legal environment conducive to minimization of country/project investment risk
18
The evolving World Bank program balances pragmatism with the
fundamentals… Support service improvements in 2-4 states
Improve efficiency, service quality and governance of state utilities
Support rural access to spur rural development Complement or supplement the Rajiv Gandhi Rural Electrification
Program to ensure demand-responsiveness and sustainability of rural services
Show-case mechanisms to scale-up low-carbon power generation Develop hydropower potential in an environmentally and socially sustainable
manner Strengthen capacity of 1-2 state governments to manage and utilize hydro
resources in an efficient and responsible manner Reduce barriers for rehabilitating thermal power plants and improving their
fuel efficiency (part of “low carbon growth” agenda) Promote renewable energy development (through IREDA/MNES)
Continue to support expansion of national transmission system to facilitate access and trade
Continue to provide analytical, advisory and capacity building support Build awareness and consensus around sector reform issues – governance of
publicly-owned distribution utilities, open access, etc. Improve regulatory effectiveness in infrastructure services
19
World Bank’s Assistance Program…(2)
Current portfolio consists of the following operations:
Project Loan Amt Balance Closing DatePowergrid II $450 m $ 60.6 m June
2006Powergrid III $400 m $400.0 m July 2011Rajasthan Power $178 m $ 38.3 m June
2006Renewable Energy II $112 m $ 45.1 m March
2007
Under Preparation: Rampur Hydropower – 412 MW approx. $400 m (2006-07) Thermal Power Rehab – 600 to 1000 MW ($120-140 m IBRD; $40-60 m
GEF)
Being Identified: State utility development & reform – dialogue with 3-4 states Rural electricity services – dialogue with Ministry of Power Hydropower development – dialogue with Ministry of Power and 2 states Establishment of institute for regulation and competition
20
International Finance Corporation also has an active power portfolio
in India… Allain-Duhangan 192 MW hydropower – first for IFC on
merchant basis
Powerlinks - Tala Transmission Project – Tata Power & Powergrid JV
Mini hydro – IHDC (2-5 MW projects); considering windpower
Considering financing private distribution companies (NDPL)
TA (with North American Rural Electrification Cooperatives Association) to PFC for rural electrification
Worldwide, IFC has a power portfolio of US$2.5 billion (11% of business) Good performance to date Invested (since 1990) in 14,815 MW of generation
capacity and US$15.2 billion in aggregate project costs. The portfolio currently has:
7 distribution clients; 5 transmission clients;
61 projects in 33 countries
21
World Bank Group risk mitigation guarantees - to leverage private
investmentIFC MIGA IBRD/IDA
IFC Guarantees (partial credit structures usually for local financing)Interest Rate and Currency swaps
Political Risk Insurance
expropriationtransfer restrictionbreach of contractwar & civil
disturbances
Guaranteespartial riskpartial credit
22
IBRD Loans - Lending Terms (As per currently applicable waivers to Indian
Portfolio)
LIBOR-based, Variable spread loan
InterestUSD loans
Yen loans
6 month LIBOR 5.03% 0.15%
Spread over LIBOR 0.18% 0.18%
Commitment Fee 0.07% 0.07%
Front-end Fee 0.04% 0.04%
Total World Bank Interest Rate 5.32% 0.44%
+ currency exchange rate impact – deemed export/import duty exemption**Applicable to ICB procurement funded from loans provided by multilateral agencies.
Principal Moratorium 5 years
5 years
Repayment period (incl. moratorium)
20 years
20 years
23
19
World Bank is committed to helping India meet its power sector objectives:
Improve efficiency and quality of electricity distribution – key to “unblocking” internal resources
Expand rural access Enable electricity trade and transmission of power Develop hydropower and other renewable energy potential in an
environmentally and socially sustainable manner Reduce barriers for rehabilitating thermal power plants and improving their
fuel efficiency – other financial support for a “Low Carbon Growth” strategy being formulated
Policy framework has improved considerably – regulatory frameworks are also becoming more competent and transparent. However:
Scale of investments needed cannot be mobilized unless enterprise level reforms, particularly of distribution companies, are ramped up
Private or public companies cannot fix cash inadequacy without government help
AND We know from painful experience that a policy environment that is
unfavorable for the private sector will be unfavorable for the public sector too!
In closing….