Show me the money...

HYDRO financing in India, as in many other countries of the Asian region, has not been an easy task. However, following the new initiative taken by the Indian Government to help create an additional 50,000MW installed hydro capacity by the year 2012, things have started to look up. Federal-owned Power Finance Corporation (PFC), the main hydro-financier in the country, has cut its interest rates and liberalised the debt repayment terms, thereby reducing the costs of its lending. It has also expanded the modes of assistance to its clients. For equity-finance, it has launched a special fund with a Rs.50B (US$1.2B) corpus. Other domestic agencies are also now coming forward to fund hydro, including insurance companies. Overseas funds are more easily available for commercial borrowing.

Not everything is on the plus side. The big hydro multinationals, which have been energetic in India’s big equipment-supply and construction market, are still holding back on hydro project promotion. The hydro IPPs active in the country as of now are a few domestic industrial and power companies.

India’s experience in hydro-financing until now and the likely trends in the immediate future, would be of relevance to the other countries in the region and elsewhere. It is well-known that India is a major hydro-rich country, with a considerable power potential in its various geographical regions (Tables 1 and 2). However, much of its estimated 84GW+ potential has remained undeveloped. Despite the domestic power sector having been progressively opened to private investment and participation from 1991 onwards, hydro development has been picked up mainly by the big federal generators like the National Hydroelectric Power Corporation (NHPC). Even then, the increase in installed capacity in the last ten years has been slow, only rising from about 20 to 30GW, despite the many policy initiatives taken by the federal government during this period to facilitate the hydro development.

In the summer of 2003, the federal government launched a hydro power initiative to give a boost to this sector. Under it, 162 prospective projects, of a total estimated capacity of 50GW and spread over 16 Indian states, were identified for development. Seven federal or state-owned agencies were asked to undertake their feasibility studies, a task that is now nearly over. Seventy-eight of these projects (total: 33GWs) are going to be developed on priority because of their low project-cost. These would be in addition to the projects already under development or construction over the past few years.

In the National Electricity Policy announced by the government on 12 February 2005, it was mentioned that ‘central government is committed to policies that ensure financing of viable hydro projects’ (Para 5.2.7). In that context, the current scenario of hydro financing in India is examined in the following paragraphs.

Equity financing

Of the two main components of hydro financing, the equity portion has presented more difficulties in India. The small and undeveloped size of the domestic capital markets is a major obstacle.

As R. Krishnamoorthy, former PFC Chairman said, ‘Indian debt-market is not deep, and long-term funds are not available.’ Then again, the hydro sector is not considered favourably because of its history of delays, long-gestation, environmental and other problems. For the state electricity boards (SEBs), their cash-crunch and hazy bottom-lines have also come in the way of securing outside funds.

The federal government recognised the realities, and its 1998 Policy on Hydro Power Development admitted that for some more years, ‘the involvement of public sector in hydroelectric projects would not only have to continue but will also have to be enlarged’. Under that Policy, the federal government – through its annual budgets – is now providing increased equity contributions to the six hydro-generation companies, wholly or jointly owned by it. These relate to (a) on-going federal projects, (b) major schemes under development, and (c) certain identified projects to be taken up in the future. The state governments are also expected to take similar steps for the state hydro sectors.

To get over the difficulties in finding equity for private power projects (including hydro), a number of innovations and steps have been initiated. Some of these are:

• PFC has recently launched an India Power Fund as ‘a catalyst for mobilisation of funds for equity investments in power projects’. Its initial corpus of Rs.50B (US$1.11B) is to be subscribed by power companies, banks, financial institutions, multilaterals, and overseas agencies.

• India’s federal budget has provided for the creation of an Infrastructure Equity Fund (IEF) with a corpus of Rs.100B (US$ 2.2B).

• A ‘special purpose vehicle’ is proposed to be set up by the federal government to manage the IEF. It would also utilise a portion of India’s huge foreign currency reserves for financing imports required by infrastructure projects.

• To strengthen the domestic money market, the federal government has recently proposed that the private-sector Provident Funds could be allowed to be invested in equity markets and corporate debt. An estimated US$45B of such funds could flow into these channels.

• Multilaterals like the Asian Development Bank and International Finance Corporation are being encouraged to take up power equity.

• In certain cases, portions of past debt (such as depository receipts) are being converted by power companies into equity.

Private participation and investment in India’s hydro power sector has been very small, and definitely much less than what the government expected when it privatised the sector. Of the over one dozen memoranda of understanding then signed by IPPs with the various state governments, only a handful have been converted into projects. Those too are by the domestic IPPs – like the Jaypee Group (300MW Baspa–II, 400MW Vishnaprayag, and 1000MW Karcharn Wangtoo) or the Bhilwara Group (86MW Malana, 192MW Allain Duhangan). The few overseas promoters who had then shown interest did not pursue matters, notably Synergics which sold off its interest in the 330MW Shrinagar project to India’s Tata Power.

It is not as if the overseas hydro IPPs are facing a flush of markets abroad. As R. Shrivastav, Country Director India of France’s edf says: ‘Given the right environment here, big European hydro companies would like to come. They have invested heavily in men and material back home, and do not have enough hydro opportunities in Europe.’ In fact last year, Norway’s SN Power acquired 49% equity (for a reported US$45M) in India’s Malana Power of the Bhilwara Group, thus getting a stake in the latter’s two hydro projects and helping develop new schemes in the future. The trend could continue as other domestic companies look for overseas partners.

However, in the vast portion of the hydro sector which is controlled by the generation companies owned by the federal or state governments, joint ventures with overseas IPPs have still to materialise. A few years ago NHPC’s efforts in calling for expressions of interest from the hydro companies abroad came to nothing. Shrivastav attributes this to the disinclination of the public-sector utilities to share management-control with the prospective private partner in a joint venture. A senior executive of federal-owned NHPC explains: ‘We wanted IPPs to take up only minority stake in our ventures. Can you imagine the government permitting us to hand over the running of the new company to the minority partner?’ NHPC Chairman, Y. Prasad feels that the hydro multinationals were mainly interested in taking up hydro-EPC contracts in India. The conundrum continues, and needs to be solved quickly.

The one bright area of private investment is small and mini hydro. The 450MW+ of such capacity developed up to now in the various hydro states of India has mainly been by IPPs. The trend is continuing as the federal government encourages such efforts through incentives and concessions to the promoters.

A step that the Federal Ministry of Power took in early 2004 was to set up an inter-institutional group, comprising representatives of some major domestic commercial banks and financial institutions. Meeting at the initiative of Secretary of Power Ministry, the group has held nine conclaves in the first twelve months to smoothen the funding of some major power projects including hydro in the country.

The role of PFC

While reviewing hydro financing in India, one has to refer to the major role played by the New Delhi-based PFC. It was set up in 1986 by the federal government with the main aim of providing institutional finance to the fund-starved power sector in the country. It was conceived as a specialised development finance agency which was to undertake a variety of functions, all related to a steady development of that sector. It was to help undertake skill-enhancement, management improvement and operational efficiency among its country-wide clients, mainly the SEBs; also to provide project finance to the sector.

PFC became operational in early 1988. Over the subsequent 27 years, it has lent Rs.140B (US$3.2B) to the hydro power sector in the country.

Types of funding

Most of the funds given by PFC have been in the form of debt, both Rupee and in foreign currency. Apart from lending directly, PFC has increasingly gone in for consortium-lending, loan syndication, and co-financing.

During the last ten years, the fund services of PFC have expanded in range to cover certain types of assistance which till then were given only by the banks and commercial agencies. These include: bridge loans, given temporarily to cover a short period during pre-project or pre-commissioning times; working-capital loans, unrelated to a project but based on the financial status of the borrower; take-out financing, where PFC takes over an existing project-loan of another funding agency and lease financing, whereby PFC takes over the plant or machinery and leases it back to the owner.

Related to the supply of equipment and EPC, PFC can undertake bill-discounting, buyer’s line of credit and lending directly to equipment manufacturer.

It has also helped the borrowers through debt-restructuring and refinancing. This step became important in recent years, as India had been gradually moving to a low interest-rate economy. PFC’s lending, which used to be in a range above or around 10% annual rate of interest has lately come down and its interest rate is now mostly below 9%.

There have been further refinements to these rates. From 1997, the federal government had initiated a country-wide programme of accelerated generation and supply of power (AG&SP). This was aimed at funding such projects as gave faster benefits, higher returns with low investment and added to the economy of operation. These included on-going generation projects, refurbishment schemes, and systems-improvement.

PFC was made the funding agency for the programme, with subsidy component provided in the federal budget. Loans to the projects under this programme were to get interest-subsidy up to 4% per annum, during the first five years of the programme (since reduced to 3%). An additional 1% subsidy in interest-rates was provided where such projects were located in the northeastern region, the immense power potential of which had remained largely undeveloped (Table 2).

In February 2005, PFC announced that it has liberalised the repayment schedule for its loans. For hydro generation projects, the maximum repayment period has been extended to 20 years (from 15 years) after the initial moratorium (which is up to six months after the commissioning of the project.) This in effect means an almost 25-year hydro loan. For some other term loans, the period has been extended to 15 years.

PFC has an order of priority for funding various types of projects. That also determines the extent of its exposure as a percentage of the project cost.

Other domestic fi’s and banks

A number of financial institutions (FIs) exist in India for funding industrial and infrastructure projects. In the power sector itself, apart from PFC, the federal government owns two other agencies, both New Delhi-based: the Rural Electrification Corporation (REC) and the Indian Renewal Energy Development Agency (IREDA). Of these, REC, which was expected to diversify into small generation projects like small-hydro, has found its efforts tied up with rural electrification schemes. However, IREDA has been in the forefront in funding small hydro, out of its own resources and utilising lines of credit given by agencies such as the World Bank.

There have been other big domestic FIs which, until the last decade, had kept out of hydro finance. Some of these FIs, such as the Industrial Development Bank of India (IDBI) along with a few big government-owned commercial banks, have now come forward to extend debt-finance to the hydro sector. This is being done generally through the consortium mode. A recent example is the 450MW Baglihar hydro project in the state of Jammu & Kashmir. Despite being embroiled in a long controversy between India and Pakistan over its siting and design features, the project tied up its debt-funding last January with a consortium of domestic banks and FIs. Apart from project finance, these agencies have also funded through other modes such as working-capital loans.

Domestic insurance companies

Domestic insurance companies have been a new source of hydro finance. The two giant, federal-owned insurance companies, The Life Insurance Corporation of India (LIC) and General Insurance Corporation (GIC) have long been cash-rich investors in the domestic economy. Recently – especially LIC – they have turned attention to funding the power sector, including hydro projects. NHPC has been a major beneficiary, getting a credit line of Rs.25B (about US$555M) from LIC at a favourable interest-rate for its hydro schemes.

Suppliers credit

A traditional source of funding, suppliers credit is coming more in view as the project promoters generally ask the EPC bidders and equipment suppliers to arrange funds for the projects.

Overseas funding

Here again, there have been a variety of sources. An early source were the credits arranged bilaterally by the Indian Government with that of an aid-giver. The 1000MW Tehri dam project was initiated with USSR aid. The 390MW Dulhasti hydro project of NHPC was the recipient of French credit. Such direct credits by overseas Governments were later substituted by aid from their export credit agencies. Japan’s OECF (now called JBIC) gave a 5.6B yen (US$53.7M) loan for the 280MW Dhauliganga project of NHPC. Other projects receiving OECF aid include the 900MW Srisailam Left Bank and 900MW Purulia pumped-storage. For NHPC’s 480MW Uri project, the foreign-debt portion of about US$614M was given by UK’s ODA (now DFID) and a group of Swedish funding agencies. Canada’s EDC lent C$175M (US$140.7M) for the 300MW Chamera-II project. Uprating and refurbishment of some old plants has been funded by DFID and by Germany’s KfW.

Among the multilateral funding agencies, the World Bank had been quite active until a decade ago. Some important projects to which it had lent were the 1500MW Nathpa Jhakri (US$437M) and the 600MW Upper Indrawati (US$156M). The Bank backed off from big-hydro in the 1990s, but still gave two lines of credit, totalling US$180M to IREDA for privately-promoted small hydro schemes in India. There are indications that the Bank is now reviewing its policy in the light of India’s 50,000MW hydro power Initiative.

Over the last decade, more hydro promoters in India have been tapping overseas money-markets including commercial banks for raising foreign debt. Apart from NHPC (for Uri and Teesta-V projects), another federal-owned company NJPC used this source for its Nathpa Jhakri project, raising about Rs.8B (US$178M). It is even more pronounced among the IPPs. The Jaypee Group, owning three big hydro projects of a total capacity of 1700MW, and constructing half a dozen others as a contractor, has also gone in for external commercial borrowing. Earlier another IPP, the S. Kumars Group, had taken the same resource for its 400MW Maheshwar project.

Conclusion

As mentioned earlier, a number of key initiatives taken by major stakeholders in the last three to four years have made hydro financing easier to obtain in India. These steps need to be continued, elaborated and fine-tuned.

The most important of these are the power-sector reforms in the country, which are still proceeding by fits and starts. For SEBs and other state power utilities to be credible and viable borrowers, the various reform steps have to accelerate.

PFC has been and will continue to be the major financier of the hydro sector. It has already increased its range of lending, and brought down the costs of borrowing. Its rates could however be cut still further, but to enable this the federal government would need to help PFC access cheaper resources (like tax-free bonds).

Overseas equity investment and participation in India’s hydro sector continues to be scarce. That is a negative sign for the success of the ambitious hydro power initiative of the government. Not enough is being done by the major domestic stakeholders to attract such investment. Overseas companies have until recently been drawn more by the expanding equipment and EPC market in Indian hydro. This lacuna needs to be rectified. A major step would be for the government to evolve a set of satisfactory payment-security mechanisms, to ensure that the IPPs get their power-supply bills paid promptly and in full by the purchasers under the PPAs.

The resort to overseas borrowing, which generally is cheaper than from the domestic sources, needs to increase. There is still a considerable ignorance about the procedures, and the required paperwork is often not up to the mark. Both domestic and foreign investment banks already present in India can act as fund managers, apart from PFC itself. That being so, such borrowing whether from overseas money-markets or institutions, through bonds, depository receipts and other suitable instruments should become a regular feature of hydro financing in the country.

I.M. Sahai is an independent consultant in hydro power, and based in New Delhi, India (sahaiindra@hotmail.com)