Power projects: Banks raise concern over bidding norms

Design, Build, Operate, Finance and Transfer model will deprive concessionaire of ownership rights to projects

Two of the largest lenders to power projects in the country, State Bank of India (SBI) and ICICI Bank, have raised major concerns over the newly drafted standard bidding documents (SBDs) of the power ministry. All large private companies, including Tata Power Co Ltd and Torrent Power Ltd, have also asked the power ministry to shelve the new draft bid documents and stick to the currently operational documents.

The banks and independent power producers (IPPs) say the new “regressive” bidding parameters outlined in the new bid documents, including the power purchase agreement (PPA), request for proposal and request for qualification, would make lending and investment unviable. The lenders and developers have objected to the proposed shift to the design, build, operate, finance and transfer (DBFOT) model, saying it will deprive the concessionaire of ownership rights to projects.

Objections have also been raised on provisions related to pass-through of imported fuel cost and the right of termination.

“The proposed arrangement might act as a major disincentive for domestic as well as foreign lenders to projects. In our opinion, the private sector will also find it difficult to take up fresh investment on the proposed terms,” SBI, the country’s largest lender, said in a recent letter to the power ministry.

The sector is currently facing critical issues such as delayed approvals, coal uncertainty, power off-take and worsening financial condition of utilities. Though the proposed PPA aims to address these issues through early availability of land, payment of capacity charge and pass-through of energy charge, these have not been adequate and risks remain, lenders say.

The new bid parameters do not allow lenders to create security on land or other assets. This will render lending unsecured with its attendant implications for the banking sector. “We do not see a way through which the banking sector can finance even a part of that (power sector’s fund requirement) as unsecured loans,” SBI said.

According to ICICI, the DBFOT structure might not work for power projects as it is more suited to tolling projects for public services like roads, where grants are provided by concessioning authority and its financial health is robust. “However, power projects are typically capital-intensive based on non-recourse funding from lenders and clear security rights are considered necessary,” the bank has said.

It has also said the transfer provision at the end of the concession period might act as a disincentive and could lead to higher rates being quoted as developers would want to recover their equity before transfer.

The country’s largest IPP, Tata Power, has raised objections on the termination clause arguing that the bidding document provides for termination of PPA by the procurers in many ways. “So much so that it can be terminated even owing to payment default by procurer -- an event that can be triggered by any procurer, any day,” Tata Power managing director Anil Sardana has told the power ministry.  

The fresh concerns raised now come almost a year after the new bidding parameters were drafted by the ministry. The delay in finalising the SBDs has taken a toll on the government’s plan to get the stalled ultra mega power project (UMPP) programme moving.