Risk Description & Evaluation

The criteria for appraisal , given in the proposal have been defined as
follows.

Criteria Definitions Scale Rating

A function of the ease of
risk mitigation. High 0-5 Low
Value
value implies difficult to
mitigate 5-10 High
A function of criticality, 0-5 Low
Weight
and its relevance to the
age
given project 5-10 High

A. Social Risk

• The project is planed a region comprising of people engaged in

farming activity. This in turn would mean a high degree of
dependence on rainfall as a water source.
• Thus this project would face a high degree of opposition from
locals which is the biggest risk both in terms of relevance
(40%) and value of the risk (7).
• The absence of land acquisition and farmers relocation program
further add to this risk

B. Environmental Risk

• This risk arises due to variability in precipitation patterns

highlighted in the proposal.
• This variability is likely to be amplified due to diversion of natural
water and land resources on a large scale (500MW project).
• This in turn would impact the power generation capability of the
plant
• We consider this of low relevance (10%) as compared to the
social risk as it is more of a detailed planning exercise.
• However we believe this risk would require sizeable resources
namely periodic approvals and environment protection plans for
mitigation hence have allocated a high value to criticality (6).

C. Structure of the project

o The absence of a separate SPV makes the project

susceptible to promoter and Offtaker bankruptcy.
 Additionally the absence of an SPV reduces project rating as the
risk is only shared between the promoter (MS Energy) and
Offtaker and not the parties such as the contractors.
o MSEB has a low equity stake (20%) and it is a government
backed enterprise thus is relatively safe. Despite MS energy
(80% equity) being a leading player in the infrastructure sector
we would consider such financing to be risky.
o Finally the strength of the project is a low equity contribution
by the Offtaker (MSEB), in a sense implying that he is not
anticipating financial returns thus making him a strategic
investor.

We consider the structure to be of medium relevance (25%)

and floating an SPV is relatively easy so low value to criticality
(3)

D. Means of Financing

This is a long term project demanding huge upfront capex; the

absence of following is thus a source of risk

o Contingency (debt/equity), escrow account or any form of liability

funding
o Central, state government guarantee and contingent promoter
support
o Guarantees for the loan by sponsors till completion of the
project, this guarantee could ensure project completion
o Forward contract to insulate project from raw material cost
escalation

E. Variability of Cash Flows

o Plain equity and debt funding and absence of quasi equity such
as convertibles implies low variability of cash flows .Convertibles are
normally present when the initial cash slows are uncertain
o However there is a risk diversion of revenue to show equity
return. A waterfall mechanism of revenue fund flow to ensure
continual debt servicing and regular operation before equity
returns.
o PPA limited to just one Offtaker (MSEB), high source of risk try
and include power trading may reduce the associated market
risk.
o As asset utilization more important than asset value, in
the absence of rainfall water as power source ensure
turbine operation via other water sources. This may be
 done by cogeneration coupling of hydro plant operation with
thermal power (Steam) to ensure continual operation.

Thus based on the above analysis the following Risk/Return

Matrix is constructed.

Risk Weight age Value at Risk Net Risk

Social 0.4 7 2.8
Environmental 0.1 5 0.5
Structure 0.25 3 0.75
Means of Financing 0.1 5 0.3
Cash Flow 0.25 3 0.75

Risk Analysis

The return in a project is a profitability measure. This project is a

capital and time intensive project. However it has very low O&M cost
as compared to thermal and other power generation technologies once
commissioned. Thus it can be classified as a high return project.
Cumulative risk as analyzed above is 5.3, on the border of high
risk.