Money, money, money

INDIA, as one of the major hydro-resource countries in the world, has a hydropower potential estimated at around 84 000MW (at 60 per cent plant-load factor). The first hydropower plant in India, of only 130kW capacity, ‘started up’ in 1897, so the current fiscal year marks the centenary of Indian hydropower.

In this hundred-year period, around 130 hydel plants (having 585 generating units) with a total installed capacity of around 21 000MW, have evolved. This itself shows that the bulk of the total hydel potential in the country - about 75 per cent - remains unexploited. Out of a small hydro potential of an estimated 10 000MW, only about 500MW have been developed.

One of the major reasons for this had been the paucity of financial resources leading to tardy investment in the hydropower sector. This was seen in the disinclination of the utilities to take up new plants and the long gestation of plants under construction (where funds tended to dry up mid-way). Lack of resources had also come in the way of renovation and retrofitting of old plants: 75 units out of 585 were 40 years old or more, and another 200 were between 20-40 years. And it was seen that in certain poorer utilities, only bare maintenance of a plant was being carried out merely to keep it running.

Until the 1990s, nearly all hydropower in India was in the public sector, mainly the State Electricity Boards (SEBs). As a result of an unrealistic tariff structure, which included subsidisation of rates for rural and domestic consumers, the SEBs ran up huge commercial losses (estimated at Rs71.3bn, equivalent to UK£1.16bn in the fiscal year 1995-96).

On an all-India basis, rural power supply was 31 per cent and domestic supply 19 per cent of the total power sales in the country. This left the SEBs cash-strapped for undertaking meaningful hydropower development. The state governments, which owned SEBs, themselves were short of finances and could not fulfil their commitment to the SEBs to make full cash reimbursement of subsidy, due to the SEBs for supplying below-cost power to rural consumers. Such subsidy payment as was given was partial, made after some delay, and mostly through accounts book adjustment (instead of in cash).

The poor financial health of the SEBs, in turn, reflected adversely on the balance sheets of big hydropower corporations, wholly or partly, owned by the Government of India (GOI), which had been set up over the years to develop, own and operate big dam-based projects and which sold such generated power to the SEBs.

The latter ran up huge dues to such utilities, mainly the National Hydroelectric Power Corporation (NHPC), the Damodar Valley Corporation (DVC) and the Bhakra-Beas Management Board (BBMB). This fact, in turn, affected the capability of these utilities to take up new hydro projects as their own.

In this context, not only had there been inadequate generation of internal resources by hydro utilities, their ability to raise finances within the country and abroad had been limited by the state of their balance-sheets.

General wariness

In addition, there had previously been, a general wariness, shown by the Indian Banks’ and Financial Institutions’ (FIs) disinclination to lend to state power utilities. Even where lending did take place, it was circumscribed by the guidelines (called ‘prudential norms’) laid down by the Indian Reserve Bank for commercial banks etc., limiting the amount of loans to a single project, borrower, or even industrial sector (such as power).

There was also a lack of appropriate debt-instruments: while a hydropower project is gestating over a long period the traditional debt by a bank/FI is not sufficiently mature.

Lastly, as the financial position of state governments themselves deteriorated, the domestic banks looked for security mechanisms other than mere government guarantee, to safeguard their investments in the power sector.

As the emphasis moved to a quick and all-round development of the power sector (including hydropower) in India, a number of steps have been taken over the last ten years by the various players in the field to overcome the prevailing difficulties in project finance. It was realised that the existing FIs in India, even the big three - Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and the Industrial Credit and Investment Corporation of India (ICICI) - would not be able to cater fully for the needs of the Indian power sector.

Flow of funds

In mid-1986, a specialised FI for the sector, called the Power Finance Corporation (PFC), with an authorised capital of Rs10bn (UK£167M), later doubled to Rs20bn, was set up. Fully owned by the GOI, and meant to not only give project finance to the power sector, but also to use its growing clout to bring about sectoral improvements, PFC initiated its lending operations from 1988.

Until 1996, PFC had sanctioned loans of over Rs10bn (UK£167M) to hydropower projects, both new units and refurbishment of old units. These were nearly all for medium and large-sized schemes.

For small hydro (along with other renewables), another government-owned agency called the Indian Renewable Energy

Development Agency (IREDA) was set up in 1987, to offer concessional credit to individual projects in the renewable energy sector.

A further boost to the flow of funds to power and other infrastructure sectors (such as telecom, roads and ports) was given in 1997 by the establishment of a new financial entity called the Infrastructure Development Finance Co. (IDFC). Born out of the report of a governmental committee on infrastructure, the IDFC was initiated by the GOI which along with Reserve Bank of India (RBI) would subscribe to a portion of the Rs10bn (about UK£167M) authorised capital of the new company.

The balance, being the majority portion, was to come from multilateral finance agencies (such as the IFC and Asian Development Bank) and other overseas and Indian FIs. The Managing Director of the IDFC, D.J. Balaji Rao, explained that its main role is to help the flow of private capital into infrastructure by mitigating risks.

Thus rather than compete with other Indian FIs, the IDFC intends to step into uncharted waters. The areas it has considered at the initial stage are credit and maturity enhancement, risk management, and development of innovative financing modes, in the context of structural financing.

In power projects, the IDFC feels that the immediate need may be to bridge the gap in financing of a particular project or enhancing maturity in the case of a debt-service problem (as seen in hydropower). It feels that investors may be more comfortable with the IDFC behind projects. In the case of Indian FIs who may become ‘over-exposed’ to a project or to a sector, the IDFC could undertake ‘take-out’ finance to transfer the FI’s old loans to itself.

Constrained

The IDFC started its operations in early December 1997 by approving financial assistance to two cases, both IPP projects. The nature of the assistance illustrates the points made. In one case of a 260MW, coal-fired power project under construction, Rs500M- (about UK£32.25M) worth of guarantees was given to back up a proposed bonds issue, and a similar amount as direct rupee-funding to achieve financial closure for the project.

The other case, also of a thermal power project under construction, got Rs2bn-worth of guarantees for it to secure loans from overseas institutions. In December 1997 the IDFC considered requests from another five projects from Indian power and telecom sectors, at its corporate office in Bombay, India.

Overall, in the short-run, project lending to the power sector by domestic FIs in India is likely to be constrained by the size of their respective balance sheets, their commitments to other (developing) economic/industrial sectors and, from the view point of cost of borrowing, by the relatively high interest rates (16-17 per cent) charged by them - although these have recently been lowered.

The setting-up and operations of the IDFC are expected to lead to a greater inflow of funds to power sectors in India. In addition, a stronger institutional support is also sought to be given through a series of steps initiated by the GOI and RBI since the middle of last year.

Following a strong message sent by the GOI to the RBI and the domestic FIs, the prudential norms for project lending (mentioned earlier) were relaxed by the RBI in August 1997. The monetary ceiling imposed by it on banks and FIs to lend up to a maximum of Rs5bn for a project loan (Rs10bn for a power project), was totally removed. This would benefit, both imminent and proposed, large greenfield projects in thermal and hydropower areas.

This, however, was still subject to the RBI limit on exposure up to 25 per cent of net worth of the lending institution to a single project or borrower, and up to 60 per cent (earlier 50 per cent) of net worth to a group of companies promoting an infrastructure project - continuation of these limits, meant to safeguard the overall lending by FIs, was not expected to pose a problem.

Lease finance

Apart from project loans, lease finance to power sector is also being given a boost. A number of leasing companies such as Infrastructure Leasing and Financial Services (ILFS) are exploring this area. PFC itself has opened a second window in this regard, and in the fiscal year 1995-96, it began by giving lease finance to a thermal power project. Lease finance is suitable for the procurement of domestic machinery, though PFC covers imported equipment too.

Lease finance could go along with direct discounting of suppliers’ bills by an FI, enabling the supplier to extend deferred-payment facility to the client. In the meantime, in August 1997, the RBI removed the time-restriction on the term of a leasing arrangement by an FI - the latter could enter into lease for any term that it thought appropriate on the merits of the case.

A variety of overseas institutions and agencies have been resorting to project finance. Under bilateral arrangements between the Government of India and some donor countries, what is termed as ‘protocol’ (concessional) credit, is available at low interest rates and long maturity. Thus, Dulhasti hydropower project being constructed by state-owned NHPC had in the past, been the beneficiary of French credit. The ODA of the UK has administered a government energy grant to India and part-financed renovation of two units (75MW) of Hirakud-I hydropower station in Orissa State.

Potential source of finance

During this fiscal year, the Overseas Economic Cooperation Fund (OECF) of Japan gave a loan to the 280MW Dhauliganga project of NHPC in UP state and a loan to the 900MW Srisailam Left Bank project of Andhra Pradesh SEB. In certain cases, especially those promoted by IPPs, overseas banks either separately or in consortium, are being approached for finance. The 400MW Maheshwar project in MP state, promoted by S. Kumars of Bombay, is sought to be so financed.

KfW of Germany came up in 1995 with a loan to PFC to help with the renovation and retrofitting of stages I & II (560MW) of Koyna Power Station in Maharashtra. Another potential source of finance could be export credit agencies such as the World Bank (which financed renovation of Sharavathi Plant in Karnataka), the IFC and Asian Development Bank could be willing to lend to suitable power projects.

With the opening up of the Indian power sector to private investment and ownership in the current decade, private funds (in equity and loans) and resources raised by IPPs from various sources using their own strengths, have become a major source of hydro finance in India. For that reason, most Indian IPPs are going in for joint ventures with overseas companies and investors. Under the present policy of the Indian Government, up to 100 per cent foreign equity participation in a new power plant is permitted.

However, any promoter whether Indian or overseas would have to contribute at least 11 per cent of the total outlay on the project - also, the Indian public FIs can be tapped only up to 40 per cent of that outlay - all of which lays the onus on the private promoter to arrange for the majority of the funds needed for the project. Apart from the traditional sources, a trend recently seen is for an EPC contractor to pick up a small portion (five to ten per cent) of the equity in a project, in addition to offering suppliers’ credit.

Renewed emphasis

In the light of a renewed emphasis by the Indian Government on hydropower development in India, a wide variety of sources of finance are now available to fund such projects, both greenfield and for renovation and retrofitting. Innovative financing is being introduced through structured loans, credit enhancement and other steps. The newly-created IDFC is expected to play a significant role in this regard.

The Indian Government has progressively offered a series of opportunities and incentives to encourage private investment in hydropower. This process is likely to gain speed when the already-delayed new hydropower policy is announced later this year, following the future formation of a new government as a result of the country’s general elections.

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