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PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist The World Bank
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Page 1: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

PLENARY SESSION IV: FINANCING OPTIONS

INDIA POWER SECTOR:CHALLENGES & INVESTMENT

OPPORTUNITIES

New DelhiMay 12, 2006

Salman ZaheerLead Energy Specialist

The World Bank

Page 2: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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

Page 3: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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)

Page 4: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 5: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 6: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 7: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 8: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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?

Page 9: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 10: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 11: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 12: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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…

Page 13: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 14: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 15: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 16: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 17: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 18: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 19: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 20: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 21: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 22: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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

Page 23: PLENARY SESSION IV: FINANCING OPTIONS INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES New Delhi May 12, 2006 Salman Zaheer Lead Energy Specialist.

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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….


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