PLENARY SESSION IV: FINANCING OPTIONS

INDIA POWER SECTOR:

CHALLENGES & INVESTMENT OPPORTUNITIES
New Delhi
May 12, 2006

Salman Zaheer
Lead 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
Indias 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
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b
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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
1
9
9
0

1
9
9
2

1
9
9
4

1
9
9
6

1
9
9
8

2
0
0
0

2
0
0
2

2
0
0
4

2
0
0
6

2
0
0
8

2
0
1
0

2
0
1
2

2
0
1
4

2
0
1
6

2
0
1
8

2
0
2
0

$2,300 Bn
$1,900 Bn
High Investment Demand
Scenario (3%)
Low Investment
Demand Scenario (2%)
Historic Future
Private Capital Mobilized in Power Sector
Gap covered by public financing,
self - financing, donor funding,
and rationing.
T
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l

P
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(
$
B
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)

Cumulative
Sum ($Bn)
Source: : World Bank, IEA, Deloitte Touche
Tohmatsu Emerging Markets Group

Financing required for the Power Sector in Emerging Markets 1990 - 2020

Indias vs Global investment requirements - a 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 Indias 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 system
Investments 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 4
th
]

2. Payment discipline and enforcement
40% 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 Multilateral
36% 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 & Govt 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?
9 2
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

Govt/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 Group
Firms 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. AEP
3. AES Corp
4. Alliant Energy International
5. Alsons Consolidated
Resources
6. Amata Power
7. Banpu Public Co. Ltd.
8. BG Group
9. BP Global Power
10. CHI Energy (Energia
Global)
11. Chilectra
12. Cinergy Global Resources
13. CLP Power International
14. CMS Energy Corporation
15. Cogentrix Energy
16. Commonwealth
Development Corp.
17. Covanta Energy
18. Delma Power
19. Duke Energy
20. Dynegy
21. E.ON Energie
22. Edison Mission Energy

23. El Paso Energy
24. Electricite de France
International
25. Electricite de Portugal
26. Elyo
27. Endesa
28. EIF Group
29. Entergy Power Group
30. Eskom Enterprises
31. FondElec
32. Fortum
33. GE Capital Global Energy
34. GMS Power
35. HEI Power
36. Hydro Quebec
37. Ibedrola
38. Independent Power
39. InterGen
40. International Power
41. Keppel FELS Power
42. Korea Electric Power
Company
43. Marubeni Power

44. Mirant
45. Mitsui & Co.
46. NRG Energy
47. Panda Energy
48. PPL Global
49. PSEG Global
50. Reliant Energy
51. Rolls-Royce Power
Ventures
52. Saur International
53. Scudder Latin America
Fund
54. Sempra Energy
55. Siemens Power
Ventures
56. Sithe Energies
57. Statkraft International
58. Steag AG
59. Tomen Power
60. Tractebel
61. TransAlta
62. TXU Corp
63. Union Energy
64. Union Fenosa
65. 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 Banks Assistance Program(2)
Current portfolio consists of the following operations:

Project Loan Amt Balance Closing Date
Powergrid II $450 m $ 60.6 m June 2006
Powergrid III $400 m $400.0 m July 2011
Rajasthan Power $178 m $ 38.3 m June 2006
Renewable 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 investment
IFC MIGA IBRD/IDA
IFC Guarantees (partial
credit structures usually for
local financing)
Interest Rate and Currency
swaps
Political Risk Insurance
expropriation
transfer restriction
breach of contract
war & civil disturbances
Guarantees
partial risk
partial credit
22
IBRD Loans - Lending Terms
(As per currently applicable waivers to Indian Portfolio)
LIBOR-based, Variable spread loan Interest
USD 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.