Editorial: Three cheers for UMPPs

The funding commitments which have been secured for the Rs 17,000 crore ($4.2 billion) "ultra mega" power project (or UMPP) at Mundra in Gujarat should silence the critics of the UMPP policy. When the idea was floated a couple of years ago, there were doubts about the ability and willingness of companies to come forward and build such large (4,000 Mw) projects. And even if there were some brave companies who were to step forth, they were expected to have trouble finding financiers. Well, not only has there has been a long list of bidders for these projects, now the first such project to get off the block "" backed by Tata Power "" has also managed to secure long-tenor funding of up to 20 years despite the sub-prime crisis. A host of public sector banks, led by the State Bank of India, have committed Rs 5,550 crore to the project. The exclusion of the private sector banks can be explained by their aversion to such long-tenor funding as well as their higher cost of funds vis-à-vis the public sector banks. About half of the non-rupee funding of $1.8 billion has been sourced from the International Finance Corporation and the Asian Development Bank for a 20-year period. There is also a funding commitment from the Export-Import Bank of Korea and the Korea Export Insurance Corporation, which can be linked to the fact that a Korean firm, Doosan Heavy Industries, has bagged the order for project equipment (boilers). Then there is the equity contribution of Rs 4,250 crore by the promoters of the project, which is to be based on imported coal. Equipment has already started arriving at the site and commissioning of the first unit of 800 Mw is expected in September 2011, while the whole 4,000 Mw is expected to come on stream by end-2012, more than a year ahead of the committed schedule. In one wide sweep thus, the country will be adding more capacity than the city state of Delhi typically has access to.

 

There are two key lessons that need to be drawn from this successful "ultra mega" experience. First, it helps to think big. The larger the project, the lower is the effort per Mw required to push it through. It is therefore better to work on a 4,000 Mw project rather than a 500 mw one, especially when the same 50-odd clearances will be needed for either project. In any case, with a huge demand-supply gap to be plugged in all key infrastructure sectors, no one can afford the indulgence of managing by tweaking policy at the corners. Instead, bold steps are required. Secondly, the government needs to work on "pre-cooking" more infrastructure projects, so that some basic work on greenfield projects is done before they are offered to private investors. The UMPPs, for instance, were housed in shell companies floated under the public sector umbrella. These special purpose vehicles piloted the preliminary work on clearances and supply linkages, and also signed provisional power purchase agreements with the buyers of power. This pre-cooking effort needs to be expanded in the power sector, as well as in other infrastructure sectors, so that a shelf of bankable projects is ready for picking. Otherwise, the $500 billion investment that is required to fix the country's infrastructure gap over the next five years may never materialise.