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Interaction | December 2013

Previous SBD norms were better than new ones

The only good thing that has been added to the new SBD norms is the clarity on what will happen in case of coal shortage, otherwise, in all the other respects, previous documents were better, says Rajiv Mishra, MD CLP India, also Chairman of Association of Power Producers, in an exclusive interaction with Pradeep Pandey.

Does CLP India has any interest in bidding for upcoming UMPPs?
The answer is yes, but at some point in the future. However, we will not be making further investment in thermal opportunities in India until we have sorted out our Jhajjar investment. I believe that we are on the path of streamlining it but are still some distance away from getting it in a sustainable position. The other aspect, of course, is that while we have seen some improvement in the revised SBD, it has brought in a few disadvantages that will have significant implications on the business model, which will influence decision-making. An investment of billions of dollars can only be viable if there are rewards for the investors' shareholders commensurate with the risk.

As you said, there are some disadvantages in new SBD. Please elaborate more on it?
As I said, barring the single most important improvement, we have seen in terms of clarity on how scenarios involving coal shortage will be dealt with, there's nothing much for the industry to cheer about. I don't mind going on record by saying that the older documents were better balanced. The revised structure essentially treats large investors as contractors, which affects the long-term business case and the very viability of a project. Now, one could argue that the heightened risk arising out of this development could be built in to the price. However, it is hugely impractical and unsustainable in my opinion. Having said that, I am in no position to guess whether and how many companies will bid, however, what we expect to see is an implication of the significant changes in the documents on the bids. How critical these implications might be, only time will tell.

What are those points that are actually bothering private producers?
Everything else; the fact that there is a DBFOT structure and in our opinion you cannot ask for so much investment and treat the investor as a contractor. While the Government's approach, of course, is to balance various stakeholders´ interests- the state utilities, the paying consumer, the investors, and we appreciate that, the private investors have to take shareholders' interest into account. Expecting them to bring in billions of dollars and not offering any right of ownership hugely weakens the business case. The inherent risks involved with thermal projects in India don't help this situation either.

Also, as I mentioned earlier, this notion of build-the-risks-into-price simply doesn´t work in the electricity sector, as most of our distribution utilities are under financial stress. This option might be appropriate for someone like NHAI but not the discoms.

Being a industry representative, what kind of response do you expect to see in the bidding for new UMPPs?
I´m in no position to guess how many will bid and at what prices. If I had to hazard a guess, I´d say there might be fewer number of bidders and higher tariffs. I could be wrong, and I am not saying this as a representative of the APP alone, I feel that as an erstwhile finance professional as well. Boards, shareholders and management teams will all look for a fair balance between risks and rewards. The new documents, I believe, have upped the risks quite significantly and our inability to bid-in sufficient rewards could make this difficult to meet investors' expectations. What's making this even tougher are the interest rates that have been at an all-time high and high volatility in exchange rates.

In addition to this, foreign lenders will likely continue to stay away from opportunities in the Indian power sector, and domestic players will find it difficult to attract foreign currency lending for their projects.

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