Investment Opportunity and Challenges

1. Investment Opportunity and Challenges Ultra Mega Power Projects Navin Wadhwani AFG May 2006

2. “If you are a global company and India is not part of your plan, then you have missed the bus” Dr. Manmohan Singh,Indian Prime Minister “We need to show the world the changes in the power sector” Mr. R. V. Shahi,Power Secretary

3. Ultra Mega Investment forUltra Mega Power Projects Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment

4. Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

5. Significant interest generated in 1990s Domestic Players Foreign Players • Clutch of Foreign and Indian players were vying to get a slice of the power play in 1990s NTPC Enron Cogentrix CMS Energy CLP NHPC Tata Power Bayerwerk View United Utilities Ogden CESC BSES PSEG Essar Videocon Eastern Generation VEWEnergie National Grid Lanco Pacgen Torrent GMR Marubeni J Power National Power Nagarjuna GVK PowerGen Aditya Birla Tractebel Mirant Corp EDF Jindal Appollo JP Group AES RWE Daewoo Ispat Hinduja’s Mission Energy NRG BPL

6. Though interest could not be sustained • Delays in decision making and project implementation • Poor financial health of the StateElectricityBoards • High T&D losses • Retail tariffs not cost reflective • No independent regulatory structure/ framework in place • PPA renegotiation • Problems with project configurations • Focus more on contracts rather than tariff competitiveness • Sub-optimal plant operating normative parameters • Focus on liquid fuel/ gas based projects rather than coal based projects • Acquisition of “Mega Watts” as a driver to increase global presence proved to be an unsustainable strategy for MNCs • Change in strategy to focus on domestic/ concentrated geography • Global consolidation

7. Only few focused players remain Domestic Players Foreign Players NTPC NHPC Some domestic players have displayed strong development skills Tata Power Entry through acquisition route CESC Reliance Energy Essar Torrent CLP Lanco GMR AES Jindal GVK Bhilwara Genting Appollo Ispat Limited presence of foreign investors in the sector

8. Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

9. Winds of change: In recent years Power sector • Introduction of Electricity Act 2003 and establishment of regulatory framework • Dabhol restructured and resolved – demonstrating Government’s ability to take tough decisions • Evolution of Indian promoters and emergence of focused power and infrastructure players • A high volume and low margin play recognized in the power sector • Relative improvement in financial position of SEBs • Competitive tariff based power projects

10. Winds of change: In recent years Other areas • GDP growth rate of 8% p.a. • Infrastructure development identified as core to achieving sustainable high GDP growth rate • Buoyant capital markets with the BSE Sensex crossing the landmark 10,000 mark • Significant increase in market capitalisation and successful IPOs of of power companies • Airports privatized (Mumbai, Delhi) in spite of serious resistance – demonstrating Government’s ability to take tough decisions • Impetus on improving fuel supply/ sufficiency (e.g. NELP VI, CBM III, Budget proposal to de-block coal reserves) India’s economy is projected to be the fastest growing economy in the period to 2050

11. Other sectors have attracted investments Foreign players have created wealth across sectors… • Bharti is amongst Warburg’s most successful investments (~ US$ 2bn realized from part stake sale), including sale of stake to Vodafone Fifth-largest and fastest growing market for Pepsi • India is averaging above 15% of the group profits of Standard Chartered • GE realized US$ 500mn from 60% stake sale in its BPO arm • Contributes c. 12% of Unilever’s global profits • Temasek investments in India are approaching US$ 2bn • Amongst the fastest growing markets for Coke in the past decade (19% CAGR) • In a study by FICCI, 77% of foreign investors in India were found to be profitable

12. Capital market support to power sector Market has rewarded domestic players 109,211 12,448 11,125 Significant increase in Market Capitalization leading to wealth creation Market Capitalization Rs crore 3,935 3,010 2,728 2,591 1,883 1,793 739 625 370 351 185 155 May 2000 May 2003 May 2006 Tata Power Reliance Energy Torrent CESC NTPC GVK Jaiprakash Source: Bloomberg (Chart not to scale)

13. Capital market support to power sector Successful listing of power companies • Positive response from the capital markets to public issues in the power sector • More IPOs on the anvil • PFC, NHPC, GMR • Successful raising of funds through FCCBs/GDR route • CESC GDR issue (Rs.180 crore) • Tata Power FCCB issue (Rs.900 crore) Rs. crore Source: Bloomberg, News reports

14. Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

15. Overview of UMPP Ultra Mega Power Projects • MoP, CEA and Power Finance Corporation are working together on developing seven ultra mega power projects under tariff based competitive bidding route • Projects will be awarded on Build, Own and Operate (BOO) basis • Each with a capacity of 4000MW with scope of further expansion Role of Ministry of Power • MoP is playing an important role as a facilitator to coordinate with concerned Ministries/ agencies and State Governments for ensuring: • Coal block allotment/ coal linkage • Environment/ forest clearance • Required support from State Government and its agencies • Financial closures by Financial Institutions • To facilitate PPA and proper payment security mechanism with State Govt./ State Utilities • Monitoring the progress of Shell Companies w.r.t. predetermined timelines

16. Potential financing avenues Domestic Developer Strategic Foreign Investor Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Focused power & infrastructure companies with proven track record Providing capital & technical know-how Debt Financing Extended tenures Financial Investors Target large Infrastructure focused PEH for last mile financing Leveraged Structures Equity Capital Markets Mezzanine debt / structured financing Fund raising through booming capital markets Given the large quantum of financing required an optimal mix of multiple sources of financing is quite essential

17. Global interest being generated UMPP road shows generating interest – Key players Includes equipment suppliers Domestic Players Foreign Players AES NTPC CLP Siemens Tata Power Reliance Energy Duncan Machneil Energy Infra. Sumitomo Corp. Aditya Birla Power Itochu Video-con GVK Mitsui and Company GMR Suez Energy EDF Korea Electric Torrent Essar ABB Alstom Jai Prakash Jindal Steel and Power Tronoh Alco Combine Caterpillar Positive interest from Domestic Players though limited/ cautious interest from foreign players

18. Will the Government deliver this time Delays in project implementation Poor financial health of the SEBs Availability adequate payment security mechanism Regulatory Risk – Reopening of PPA’s Key investor concerns/ issues Key issues raised based on past experience Key issues in context of UMPP Initiative • Transmission capabilities to evacuate and transmit power across States • Timely availability of captive mine • Fuel supply arrangement for imported coal projects • Poor financial health of the SEBs • Availability adequate payment security mechanism • Partnership with domestic players involving huge financial commitment • Control/ ownership issues • Risk/ return profile

19. Delays in project implementation Poor financial health of the SEBs Regulatory Risk – Reopening of PPA’s Problems in project configurations Government initiatives Some past concerns proposed to be mitigated Past concerns Mitigants • SPVs created to ensure initial requirements of sanctions and securing clearances • Ministry of Power coordinating with concerned ministries/agencies • Adequate payment security mechanisms being proposed • Electricity Act 2003 • Open access in transmission • Tariff based bidding • Competitive tariff structures • Focus on coal based projects

20. Key pre-requisites for successful delivery • Timely delivery of project development milestones committed by Government (e.g. consents, approvals, land acquisition etc) • Bankable payment security mechanisms • Reliable and effective power evacuation systems to enable transmission across states • Delivery of captive coal mines • Fuel price risk mitigation for the Coastal imported coal based power projects • Regulatory clarity – mitigate regulatory risk

21. 1 2 3 4 Suggested Approach To achieve successful investment in UMPPs • Phased manner of project development - Will reduce stress on financing • 2 staged approach for implementing UMPPs – Successfully award 2-3 projects and then garner greater interest for the balance projects • One on one investor interaction–Wouldlead to higher investor confidence • Key pre-requisites to be put in place(e.g. Bankable payment security mechanism, Fuel supply etc)

22. Ultra Mega Investment forUltra Mega Power Opportunity and Challenge Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Limited window of opportunity to attract long-term equity participation in the growth of Indian power sector Repeat/ replicate the success achieved in other sectors