Dangerous Diversion?

Talk of negotiated bids sparks concern and anxiety

In a major volte face, the power ministry at the time considered reverting to the MoU route, sparking concern, anger and frustration amongst IPPs. This 1997 story cautioned the government about the perils of such “flirtations” and policy swings, and urged it to not move away from competitive bidding to negotiated bidding.

Perhaps the minister of power merely wanted to float a trial balloon and see how the industry responds. Or perhaps he wanted to put pressure on the IPPs and their financiers to get things moving. Or, then again, maybe he really does intend to go for the so-called negotiated bids.

Whatever his motivation, his comments have most IPPs concerned about the government’s commitment to their projects. The only parties happy about the minister’s statement are companies which have proposed the negotiated bid route. According to sources in the ministry, these are “leading power companies from Japan, Korea, Italy, Germany and Ukraine.”

If the government has received some good proposals with attractive terms, there is no harm in giving them a look… it will be foolish not to consider them.

– Dr. Y. K. Alagh

No one is disputing the need for drastic action to move things along. While the proposed private projects amount to 150,000 MW in capacity, less than 5,000 MW is actually operating or under construction or financially closed.

What the IPPs are objecting to is the ministry’s apparent strategy. These lPPs would like to see the Ministry concentrate on getting the existing projects off the ground rather than chase new ones. The solution to the current crisis, they say, lies in resolution of issues like fuel and financing.

The IPPs are wondering why the ministry is reverting to old policies. After all, it was not too long ago that the ministry had abandoned the MoU approach because it was “lacking in transparency” and opted for competitive bidding instead. The ministry says it is doing so because the proposals it has received offer power faster and cheaper. This is possible because these companies have promised to bring along “financial comfort and lower interest rates”.

The “only” condition stipulated by these companies is that these projects be awarded on an MoU basis. They do not want to go through the lengthy process of competitive bidding. And they would prefer that the negotiations be done on a “government-to-government” basis.

The ministry is understood to have responded favourably to this request. It has appointed another high-level committee of experts, this time headed by Justice P.N. Bhagwati, to look into the credentials of these proposals.

“If the government has received some good proposals with attractive terms, there is no harm in giving them a look,” says Y.K. Alagh. “We should not forget that our country is facing acute power shortages and in order to bridge the gap between demand and supply, it will be foolish not to consider good proposals.”

On the face of it, all this sounds very sensible. At least from the government’s point of view. But when it is put against the background of what has happened and is still happening, it represents an alarming attitude. It is tantamount to changing the rules half-way through the game. It represents yet another swing in policy by a government that has already demonstrated an inability to be consistent.

And it shows the government flirting with a new option. That would have been fine if it had resolved all the pending issues standing in the way of the projects. But it has not. “Going back to the MoU route without addressing the fundamental issues leaves over 150 proposed projects in a state of limbo,” says Harry Dhaul, head of the Independent Power Producers’Association.

Such flirtations make financiers very nervous and unwilling to put up the funds. It increases the perceived political risk in their minds. As a result, they want more risk premium. The net result is higher capital costs for most IPPs.

In fact, these bankers may very well question the worth of PPAs signed with SEBs from states where the proposed mega projects may be set up. Says an IPP chief executive, “The direct implication of going back to the MoU route will be the transfer of our share of power, to be sold to SEBs, going into their basket. And more than the IPPs, it is the financial institutions who have expressed concern over the large projects coming up in a state where the projects they are funding are located.”

IPPs are not just concerned. They are also angry and frustrated. The general feeling is that they are being discriminated against. As one said, “It took us months to negotiate the agreements with the SEBs and sign PPAs. In some cases, we had to re-negotiate the PPAs. It is taking us a long time to get to financial closure. The long delays have resulted in huge project escalations. Now the government wants to award projects based on direct negotiations.”

The anger is most evident among the Indian IPPs. They are afraid that they will be at the bottom of the ladder and eventually kicked off. But most MNC developers are not amused either.

They are taking serious note of the minister’s statement and questioning the logic. “If the objective of the government is to get large capacity on fast, why doesn’t it make sure the fast-track projects get off the ground? Why doesn’t it work on removing the hurdles these projects are facing?” asks one such developer.

The MNCs are not buying the argument that these negotiated bids are needed to reduce tariffs. If the government wants lower IPP tariffs, they say, there are better ways of doing this. Transparent and competitive bidding is one way. Reducing uncertainty, speeding up approvals and thus lowering risk premiums is another.

But what has these MNCs most riled is the talk of “soft-financing and subsidized equipment.” This, they say, sends the wrong signals to the market and is not consistent with the talk of liberalisation and a market economy. “In my view, this policy is unfair and anti-competitive. It is also unsustainable,” says another developer.

The unsustainability of the showcase approach is what concerns the economists. India needs at least 50,000 MW of private power over the next five to seven years. The so-called showcase approach may deliver, if all goes well, up to 10,000 MW. Who will provide the other 40,000 MW?

Not the Indian IPPs. Without the benefit of low-cost government funding and subsidised equipment, they will not be able to meet the low benchmark tariffs established by these showcase projects.

So there is a real danger that many of these Indian IPPs will be killed off in the process. For many developers, Indian or foreign, this may prove to be the last straw. They will retreat and probably not come back.

One should note, however, that there are many who are happy with the approach of the ministry. An executive with a Korean multinational says it’s understandable the government chose to revert to the MoU route because it saves time, the promoter is identified from the start and all that remains are the negotiations. Competitive bidding, he said, was simply too rigorous an exercise which caused immense delays.

At the same time, it is not entirely clear whether all companies from these countries are on board. Many German, Japanese and Korean companies have private projects which may suffer at the expense of the showcase projects. So these countries’ interest in negotiated bids may not necessarily last.

There are many other uncertainties. The Indian IPPs are not likely to take it lying down. They will go to court, alleging breach of contract. They may also enroll the support of sympathetic politicians. We could see a swadeshi versus videshi row all over again. The showcase projects could get stuck the way the fast-track projects did.

If the new policy were a guaranteed formula for success, the government’s approach would perhaps be more acceptable. But no one knows if and when it will deliver. Given this, the ministry needs to concentrate on solving the problems at hand instead of digressing into unknown areas.

Even if it produces short-term results, what about the negative long-term consequences? Everything hinges on perceptions. If the government creates an indelible per- caption in the industry that it is incapable of deciding on a policy, sticking to it and keeping its commitments to developers, undoing the damage later could be very difficult.

But more than the Indian IPPs, more than the foreign investors, it is the Indian business and the Indian consumer who will suffer the most from this latest dangerous diversion.

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