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HYDRO POWER PROJECTS: RECENT TRENDS IN BIDDING Presented by Rajiv Malhotra COO Athena Energy Ventures Private Limited An initiative of PTC, IDFC and Athena.

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Presentation on theme: "HYDRO POWER PROJECTS: RECENT TRENDS IN BIDDING Presented by Rajiv Malhotra COO Athena Energy Ventures Private Limited An initiative of PTC, IDFC and Athena."— Presentation transcript:

1 HYDRO POWER PROJECTS: RECENT TRENDS IN BIDDING Presented by Rajiv Malhotra COO Athena Energy Ventures Private Limited An initiative of PTC, IDFC and Athena Power Summit 2008 Kathmandu Sept. 24, 2008

2 Outline Competitive Bidding for Infrastructure Projects – Rationale Frameworks deployed in India – a Chronology Outcomes Achieved Fit with Best Practices and Principles Possible Futures

3 Features of Infrastructure Projects 1.Complexity; interfaces with other systems likely 2.Based on long-term usage patterns 3.Externalities and Social Benefit-Costs 4.Structured Finance; non-recourse options 5.Governments / the States intent to limit role in businesses, stick to Governance 1.Complexity; interfaces with other systems likely 2.Based on long-term usage patterns 3.Externalities and Social Benefit-Costs 4.Structured Finance; non-recourse options 5.Governments / the States intent to limit role in businesses, stick to Governance

4 Why Competitive Bidding? 1.Transparency - both in public finance and process of award of `public / national resources 2.Basic tenet of public finance; as big a bang for the buck – to benefit as many as possible 3.Regulation is a surrogate for competition (considered an `either-or) – difficult to find the fine balance of optimal regulation 4.Socio-psychological reasons or stereotypes (risk-averse bureaucracy resentful private enterprise) 1.Transparency - both in public finance and process of award of `public / national resources 2.Basic tenet of public finance; as big a bang for the buck – to benefit as many as possible 3.Regulation is a surrogate for competition (considered an `either-or) – difficult to find the fine balance of optimal regulation 4.Socio-psychological reasons or stereotypes (risk-averse bureaucracy resentful private enterprise)

5 Outline Competitive Bidding for Infrastructure Projects – Rationale Frameworks deployed in India – a Chronology Outcomes Achieved Fit with Best Practices and Principles Possible Futures

6 1.Pre 2003; early and late 90s: Negotiations for small and medium size HEPs, Bidding route initiated in early 2000s. 2.Electricity Act 2003: Gave a framework for development of new capacity on competitive basis, puts statutory responsibility on Regulators for market development, also includes concept of Statutory policy (mainly Electricity and Tariff Policies 3.National Electricity Policy 2005: Hydro power development through private participation, stresses on the need successful models for Public Private Partnership. 4.Competitive bidding guidelines 2005: for procurement of power by discoms for medium term (1 to 7 years) or long term (more than 7 years) on competitive basis 1.Pre 2003; early and late 90s: Negotiations for small and medium size HEPs, Bidding route initiated in early 2000s. 2.Electricity Act 2003: Gave a framework for development of new capacity on competitive basis, puts statutory responsibility on Regulators for market development, also includes concept of Statutory policy (mainly Electricity and Tariff Policies 3.National Electricity Policy 2005: Hydro power development through private participation, stresses on the need successful models for Public Private Partnership. 4.Competitive bidding guidelines 2005: for procurement of power by discoms for medium term (1 to 7 years) or long term (more than 7 years) on competitive basis India; chronology of Policy / Regulation impacting Pvt.HEP Business

7 5.Competitive Bidding Guidelines 2005 provide for two situations: Case-1 (where the location, technology, or fuel is not specified) and Case-2 (For hydro-power projects, load center projects or other location specific projects with specific fuel allocation such as captive mines ) 6.National Tariff Policy 2006: Made competitive bidding mandatory on above guidelines 7.Scenario since 2006: (modified) Premium based bidding by State Govts. (most preferred), Case-1 and Case-2 (no instance of an HEP initiated yet) 8.New Hydro Policy 2008: stated objective of overcoming the problems experienced with respect to tariff based bidding for HEPs 5.Competitive Bidding Guidelines 2005 provide for two situations: Case-1 (where the location, technology, or fuel is not specified) and Case-2 (For hydro-power projects, load center projects or other location specific projects with specific fuel allocation such as captive mines ) 6.National Tariff Policy 2006: Made competitive bidding mandatory on above guidelines 7.Scenario since 2006: (modified) Premium based bidding by State Govts. (most preferred), Case-1 and Case-2 (no instance of an HEP initiated yet) 8.New Hydro Policy 2008: stated objective of overcoming the problems experienced with respect to tariff based bidding for HEPs India; chronology of Policy / Regulation impacting Pvt.HEP Business (contd…)

8 A Brief Overview of Hydro Power Development in India 1.States were entrusted the task of hydro power development. Initially projects were awarded through the MOU route. 2.After 1974 CPSUs were established to share the responsibility. 3.Till 1990 hydro power in the country was in the hand of Govt. After 1991, private participation invited and has been increasing. 4.From Feb, 1995, bidding for award of power projects to private sector was made mandatory. Policy revised in August 1998, and projects up to 100 MW allowed to come through the Negotiation Route. 5.TEC is not required for projects, capital cost upto Rs. 500 crores in all cases and Rs Cr., if project is allocated through transparent process of bidding and included in National Electricity Plan. 6.Hydro Policy, 2008 seeks to dispense with the requirement of tariff based bidding for award of HEPs to private sector for a period upto 2011 and to change the ground rules for bidding processes followed. 1.States were entrusted the task of hydro power development. Initially projects were awarded through the MOU route. 2.After 1974 CPSUs were established to share the responsibility. 3.Till 1990 hydro power in the country was in the hand of Govt. After 1991, private participation invited and has been increasing. 4.From Feb, 1995, bidding for award of power projects to private sector was made mandatory. Policy revised in August 1998, and projects up to 100 MW allowed to come through the Negotiation Route. 5.TEC is not required for projects, capital cost upto Rs. 500 crores in all cases and Rs Cr., if project is allocated through transparent process of bidding and included in National Electricity Plan. 6.Hydro Policy, 2008 seeks to dispense with the requirement of tariff based bidding for award of HEPs to private sector for a period upto 2011 and to change the ground rules for bidding processes followed.

9 Uttaranchal (2002): the first of the Competitive Bidding Experiences In 2002 (i.e. ahead of the Electricity Act, 2003), premium based bidding started under hydro policy of the State; 1.State to provide preliminary project portfolios of identified sites 2.Pre-qualification on the basis of technical and financial capabilities 3.Bid Parameters - Upfront premium payable over a threshold of Rs. 5 cr. per project. 4.50% amount of excess premium + Rs. 5 Cr. Payable upfront 5.Bank Guarantee for 50% encashable at the time of actual or schedule financial closure 6.Allotment: followed by Project Development and Implementation Agreements to definite timelines. In 2002 (i.e. ahead of the Electricity Act, 2003), premium based bidding started under hydro policy of the State; 1.State to provide preliminary project portfolios of identified sites 2.Pre-qualification on the basis of technical and financial capabilities 3.Bid Parameters - Upfront premium payable over a threshold of Rs. 5 cr. per project. 4.50% amount of excess premium + Rs. 5 Cr. Payable upfront 5.Bank Guarantee for 50% encashable at the time of actual or schedule financial closure 6.Allotment: followed by Project Development and Implementation Agreements to definite timelines.

10 Uttaranchal (2002): the first of the Competitive Bidding Experiences (contd…) 7.Term of allotment: 45 years; to maintain a residual life of thirty years at any point of time. 8. Mandatory inspection due: 10th/20th/30th/ and last Year of operation. (Termination if not found to be maintained properly; Termination Payment: DCF of Net Cash Flow to Equity for 10 years. 9.To conform to R&R policy of the State. 10.Third party sales allowed for full capacity. (State may purchase any subsequent requirement based on negotiated terms and conditions only) 11.Royalty: 12% free power for life of the project. 12.Incentive: Reduction of free power by 1% for each year of early completion. 13.1% more Free Power for each 1 year of delay. 14.Transmission System : build Own or by STU/CTU; wheeling 7.Term of allotment: 45 years; to maintain a residual life of thirty years at any point of time. 8. Mandatory inspection due: 10th/20th/30th/ and last Year of operation. (Termination if not found to be maintained properly; Termination Payment: DCF of Net Cash Flow to Equity for 10 years. 9.To conform to R&R policy of the State. 10.Third party sales allowed for full capacity. (State may purchase any subsequent requirement based on negotiated terms and conditions only) 11.Royalty: 12% free power for life of the project. 12.Incentive: Reduction of free power by 1% for each year of early completion. 13.1% more Free Power for each 1 year of delay. 14.Transmission System : build Own or by STU/CTU; wheeling

11 Arunachal (2007); modified Premium Based Bid BOOT basis, reverted to the State Govt. after 40 years from COD free of cost. Cost of all activities including DPR to be borne by the Selected bidder; 1.The Selected Bidder will not be allowed to sell the Project to any other party without the permission of the State Govt. 2.Suitable financial provision to be made in the Project cost for the catchments area treatment plans. The Site required for all the project associated works and facilities transferred by the state Govt. on lease. 3.Preference to the bidder quoting higher free power. The State has first right to purchase power from the project. The Selected Bidder shall be responsible for developing associated evacuation system. BOOT basis, reverted to the State Govt. after 40 years from COD free of cost. Cost of all activities including DPR to be borne by the Selected bidder; 1.The Selected Bidder will not be allowed to sell the Project to any other party without the permission of the State Govt. 2.Suitable financial provision to be made in the Project cost for the catchments area treatment plans. The Site required for all the project associated works and facilities transferred by the state Govt. on lease. 3.Preference to the bidder quoting higher free power. The State has first right to purchase power from the project. The Selected Bidder shall be responsible for developing associated evacuation system.

12 Cont… 4.The Selected Bidder to allow the State to use its infrastructures, after accounting for project requirements. 5.Developer to reserve 50 % of the total jobs to be filled up by the local people and preference to local contractors. 6. Developer to achieve the financial closure within 12 (twelve) months from receipt of Techno-economic clearance (TEC) other Clearances. If it is confirmed as impossible to achieve Financial Closure, the Govt. has right to terminate the agreement. 7.If construction works stops for more than 12 months (reasons not covered under Force Majeure) or implementation of the project not commenced within 4 years from signing of the agreement or within 1 year from receipt of all clearances, the State Govt. have the right to terminate the agreement and have the right to take over the Project on "As is where is" basis. Cont… 4.The Selected Bidder to allow the State to use its infrastructures, after accounting for project requirements. 5.Developer to reserve 50 % of the total jobs to be filled up by the local people and preference to local contractors. 6. Developer to achieve the financial closure within 12 (twelve) months from receipt of Techno-economic clearance (TEC) other Clearances. If it is confirmed as impossible to achieve Financial Closure, the Govt. has right to terminate the agreement. 7.If construction works stops for more than 12 months (reasons not covered under Force Majeure) or implementation of the project not commenced within 4 years from signing of the agreement or within 1 year from receipt of all clearances, the State Govt. have the right to terminate the agreement and have the right to take over the Project on "As is where is" basis. Arunachal (2007); modified Premium Based Bid

13 Cont…. 8.Upfront-Premium: Min. Rs. 1.5 Lakhs/MW (Upto 500 MW), Rs. 2 Lakhs/MW ( MW), Rs. 3 Lakhs/MW (above 1000 MW). {commitment of Rs.7.5Cr. To Rs.30 Cr.} 9.Developer to commission the project within 5 (Five) years from the receipt of all clearances, Financial Closure and land acquisition. Rs. 40,000/- per MW per month to the State Govt., except when delay is caused by Force Majeure. 10.Developer to allocate equity in SPV from it's equity share to the State Govt. On request from the State Govt., developer to arrange the funding for equity participation of State Govt. 11.One paise per unit of power sold for Local Area Development and environment cess one paise or more per unit of power sold. No other cess will be levied on the sale of electricity by the Selected Bidder within the State or outside the State. Cont…. 8.Upfront-Premium: Min. Rs. 1.5 Lakhs/MW (Upto 500 MW), Rs. 2 Lakhs/MW ( MW), Rs. 3 Lakhs/MW (above 1000 MW). {commitment of Rs.7.5Cr. To Rs.30 Cr.} 9.Developer to commission the project within 5 (Five) years from the receipt of all clearances, Financial Closure and land acquisition. Rs. 40,000/- per MW per month to the State Govt., except when delay is caused by Force Majeure. 10.Developer to allocate equity in SPV from it's equity share to the State Govt. On request from the State Govt., developer to arrange the funding for equity participation of State Govt. 11.One paise per unit of power sold for Local Area Development and environment cess one paise or more per unit of power sold. No other cess will be levied on the sale of electricity by the Selected Bidder within the State or outside the State.

14 Himachal Pradesh 1.Initially State followed the negotiation route. Under this route, out of projects allotted to private players, 400 MW is commissioned, 1300 MW achieved Financial Closure and other projects are close to financial closure. 2.Starting , the State opted for premium based bidding. In 2008, it invited proposals for HEPs in which Bidders were required to submit the Technical-Bids and Price-Bids. In Price-Bid, fixed upfront charges of Rs.20,00,000/- (Rupees Twenty Lacs) per MW of the Project to be quoted. 3.The Technical-Bid includes a fees One Lac per MW subject to maximum of Rupees Ten Lacs per Project. 4.Bidders were required to have strong financial and technical base. 1.Initially State followed the negotiation route. Under this route, out of projects allotted to private players, 400 MW is commissioned, 1300 MW achieved Financial Closure and other projects are close to financial closure. 2.Starting , the State opted for premium based bidding. In 2008, it invited proposals for HEPs in which Bidders were required to submit the Technical-Bids and Price-Bids. In Price-Bid, fixed upfront charges of Rs.20,00,000/- (Rupees Twenty Lacs) per MW of the Project to be quoted. 3.The Technical-Bid includes a fees One Lac per MW subject to maximum of Rupees Ten Lacs per Project. 4.Bidders were required to have strong financial and technical base.

15 Cont…. 5.The Govt. of Himachal Pradesh have rights of equity participation upto 49%. 6.Free power 12%, 18% & 30% upto 12 years, next 18 years and balance agreement period beyond 30 years from COD. Developer to quote uniformadditional Free Power. 7.Incentive for early commercial operation of the project and disincentive for delay. 8.Bidder to identify transmission system for the evacuation of power. 9.The operation period to be forty (40) years from the Commercial Operation Date (COD), then the Project to be reverted to the State Government free of cost. 10.Recruitment of 100% staff from Bonafide Himachalis. Company is permitted to maintain min. 70% of the total employees if 100% not possible % of final cost of the Project as Local Area Development. Cont…. 5.The Govt. of Himachal Pradesh have rights of equity participation upto 49%. 6.Free power 12%, 18% & 30% upto 12 years, next 18 years and balance agreement period beyond 30 years from COD. Developer to quote uniformadditional Free Power. 7.Incentive for early commercial operation of the project and disincentive for delay. 8.Bidder to identify transmission system for the evacuation of power. 9.The operation period to be forty (40) years from the Commercial Operation Date (COD), then the Project to be reverted to the State Government free of cost. 10.Recruitment of 100% staff from Bonafide Himachalis. Company is permitted to maintain min. 70% of the total employees if 100% not possible % of final cost of the Project as Local Area Development.

16 Sikkim – away from the bidding route 1.Sikkim tried the bidding route in 1990s, not proved fruitful. In 2005, State Govt. adopted the negotiation route in JV mode. 2.Selection on individual presentation representing managerial and technical capabilities. 3.Memorandum of Agreements (MoAs) signed with private developers provide for 26% stake and 35 yrs of operation period on BOOT basis. 4.Allotted around 3000 MW under this route, of which 1800 MW has already achieved Financial Closure in 2007 and another 600 MW is close to Financial Closure. 1.Sikkim tried the bidding route in 1990s, not proved fruitful. In 2005, State Govt. adopted the negotiation route in JV mode. 2.Selection on individual presentation representing managerial and technical capabilities. 3.Memorandum of Agreements (MoAs) signed with private developers provide for 26% stake and 35 yrs of operation period on BOOT basis. 4.Allotted around 3000 MW under this route, of which 1800 MW has already achieved Financial Closure in 2007 and another 600 MW is close to Financial Closure.

17 Tariff Based Bidding for Hydro Power Projects 1.Case-1: Where the location, technology, or fuel is not specified by the procurer. 2.Case-II: For hydro-power projects, load center projects or other location specific projects with specific fuel allocation such as captive mines available. 3.In Case 1 developers are required to offer power at competitive tariff from their projects. 4.In case-II the activities should be completed by the procurer before commencing the bid process are: Site identification and land acquisition required for the project, environmental clearance, fuel linkage, water linkage, Hydrological, geological, meteorological and seismological data for DPR, where applicable. 1.Case-1: Where the location, technology, or fuel is not specified by the procurer. 2.Case-II: For hydro-power projects, load center projects or other location specific projects with specific fuel allocation such as captive mines available. 3.In Case 1 developers are required to offer power at competitive tariff from their projects. 4.In case-II the activities should be completed by the procurer before commencing the bid process are: Site identification and land acquisition required for the project, environmental clearance, fuel linkage, water linkage, Hydrological, geological, meteorological and seismological data for DPR, where applicable.

18 Tariff Based Bidding for Hydro Power Projects 5.Two stage process: Request For Qualification (RFQ) and Request For Proposal (RFP). 6.In case a bidder offers hydro power, under Case 1 or the procurer invites bids of hydro power under Case 2, the hydrological risk shall be borne by the Procurer. 7.RFP is issued to selected bidders at RFQ and includes PPA proposed to be signed, payment security, bid evaluation methodology. 8.The project site is transferred to the successful bidder at a declared price. 5.Two stage process: Request For Qualification (RFQ) and Request For Proposal (RFP). 6.In case a bidder offers hydro power, under Case 1 or the procurer invites bids of hydro power under Case 2, the hydrological risk shall be borne by the Procurer. 7.RFP is issued to selected bidders at RFQ and includes PPA proposed to be signed, payment security, bid evaluation methodology. 8.The project site is transferred to the successful bidder at a declared price.

19 New Hydro Policy (2008): seeking to `fix things? In 2008 GoI announces New Hydro Policy to address the problem with respect to Tariff Based Bidding and provides exemption to Pvt. Projects that obtain CEAs concurrence, sign PPAs and achieve Fin.Close before Jan.2011 (alternative of ERC determined tariff. Stipulates; 1.States to follow a transparent procedure for awarding sites. (selection on financials, experience, track record) 2. Adopt a single Bid Parameter - Upfront premium payable, higher free power or equity participation `etc. 3.For tariff determination, ERCs not to allow expenditure incurred or committed for getting the allotment 4.Additional 1% free power towards LAD 5.For recovery of costs incurred, `merchant sales upto 40% (reducing by 5% for every 6 month delay in implementation) allowed. This is also applicable to allotted project of over 100 MW In 2008 GoI announces New Hydro Policy to address the problem with respect to Tariff Based Bidding and provides exemption to Pvt. Projects that obtain CEAs concurrence, sign PPAs and achieve Fin.Close before Jan.2011 (alternative of ERC determined tariff. Stipulates; 1.States to follow a transparent procedure for awarding sites. (selection on financials, experience, track record) 2. Adopt a single Bid Parameter - Upfront premium payable, higher free power or equity participation `etc. 3.For tariff determination, ERCs not to allow expenditure incurred or committed for getting the allotment 4.Additional 1% free power towards LAD 5.For recovery of costs incurred, `merchant sales upto 40% (reducing by 5% for every 6 month delay in implementation) allowed. This is also applicable to allotted project of over 100 MW

20 Outline Competitive Bidding for Infrastructure Projects – Rationale Frameworks deployed in India – a Chronology Outcomes Achieved Fit with Best Practices and Principles Possible Futures

21 Recent Trends on Bidding: Bidding Parameters ParameterArunachal Pradesh (AP) Himachal Pradesh (HP) Year Capacity*8020 MW (13 Projects)1968 MW (17 Projects) BasisBoot Basis (40 Years) Free Power#Min. 12%12%/18%/30%...12/12- 30/30-40 Years Upfront Premium Min. INR 0.15 MM/MW for 500 MW INR 2 MM/MW (Fixed) State Govt. Equity To be Offered by the Developer Govt. Has Rights upto 49% Equity Net-WorthINR 750 Cr.Adequate (Figures Not Mentioned) *In the bid by AP, min size of the project was 150 MW and max was 3000 MW. PFRs of many projects were provided by the State. In HP min size was 7 MW and max was 484 MW. PFR for 4 projects cumulative to 117 MW was provided and for 13 projects cumulative to 1851 MW was not available. #In AP additional free power more than 12% had to be offered by bidder. In HP fixed % of free Power corresponding to slabs of years was specified. Few other States including Sikkim, Meghalaya had allotted projects as per their power policies.

22 Recent Trends on Bidding: Bidding Parameters ParameterArunachal Pradesh (AP) Himachal Pradesh (HP) Turn-overINR 500 Cr.Should be Adequate Earlier Experience 500 MW Installed by the Bidder Not Required Local Recruitment 50% Skilled & Managerial & 100% Unskilled 100% of Total Staff (Min. has to be 70%) Local Area Development 1 Paisa/Unit of Electricity Sold 1.5% of Project Capital Cost State Govt. Clearances To be Given by State Under its Purview Supposed to be Taken by Bidder

23 Risk Sharing Matrix Premium Based BiddingTariff Based Bidding RiskDeveloperBeneficiary/i es DeveloperBeneficiar /ies Mode of Power Sale ERC determined/Case-1 Competitive Bidding Case-2 Bidding Hydrological RiskX Geological RiskX Seismological Risk X X Force Majeure Risk Completion RisksXX Cost overrun Risks X X

24 Risk Sharing Matrix Premium Based BiddingTariff Based Bidding RiskDeveloperBeneficiary/i es DeveloperBeneficiar/ ies Policy RisksX Technological Risks X X Market RiskX Financial RisksXX Transmission RisksX Political RisksXX Revenue Risks*X *Irrevocable Letter of Credit by the SEB in favor of the IPP and a designated prime area escrow account.

25 Bidding for Hydro Power Projects: Some Common Experiences Major Issues 1. The uncertainty about mode and cost of power transmission in hilly areas is high. (Modified) Premium based bidding effectively burdens on the project cost. The core objective of providing power at most economic price gets defeated; also makes projects less financeable. 2. Information available is inadequate: Developers are provided with a PFR (and sometimes even PFR may not be available. DPR quality Survey and investigation are completed much later. 3.Construction of large hydro projects gets delayed mainly due to delay in land acquisition and lack of law and order in remote areas. State Govt., before bidding assure only site and not land availability. 4.Developers experience Lack of coordination between various government departments and lack of uniform policy. Suggestions 1.PPP model is appropriate (but freeze it upfront) in most situations. Governments equity in the project has advantages: a.Easy grant of various State clearances. b.Government earn additional revenue as dividends with part / no investment, as developer may arrange part-financing of Governments equity. Major Issues 1. The uncertainty about mode and cost of power transmission in hilly areas is high. (Modified) Premium based bidding effectively burdens on the project cost. The core objective of providing power at most economic price gets defeated; also makes projects less financeable. 2. Information available is inadequate: Developers are provided with a PFR (and sometimes even PFR may not be available. DPR quality Survey and investigation are completed much later. 3.Construction of large hydro projects gets delayed mainly due to delay in land acquisition and lack of law and order in remote areas. State Govt., before bidding assure only site and not land availability. 4.Developers experience Lack of coordination between various government departments and lack of uniform policy. Suggestions 1.PPP model is appropriate (but freeze it upfront) in most situations. Governments equity in the project has advantages: a.Easy grant of various State clearances. b.Government earn additional revenue as dividends with part / no investment, as developer may arrange part-financing of Governments equity.

26 Outline Competitive Bidding for Infrastructure Projects – Rationale Frameworks deployed in India – a Chronology Outcomes Achieved Fit with Best Practices and Principles Possible Futures

27 Benchmarking the Bid Processes; a Framework Preparation of the Invitation Process 1.Is adequate information for making the bid made available to all participants? 2.If information available is limited, has the process been broken into stages? Sequenced correctly? Preparation of the Invitation Process 1.Is adequate information for making the bid made available to all participants? 2.If information available is limited, has the process been broken into stages? Sequenced correctly? Risk and Cost of acquiring the Information 1.Is the stage at which selected bidder understands the complete risks of the project reasonable; a.In terms of timeline? b.In terms of capital put at risk? (and will potential upsides be able to keep the project attractive) Risk and Cost of acquiring the Information 1.Is the stage at which selected bidder understands the complete risks of the project reasonable; a.In terms of timeline? b.In terms of capital put at risk? (and will potential upsides be able to keep the project attractive) Qualification of Bidders 1.Ensuring sufficient competition versus 2.Not evaluating technical, financial and experience parameters in detail Qualification of Bidders 1.Ensuring sufficient competition versus 2.Not evaluating technical, financial and experience parameters in detail Evaluation Criteria What is the focus; End-user benefit? versus Near-term benefits to the State? Evaluation Criteria What is the focus; End-user benefit? versus Near-term benefits to the State?

28 How each of the Processes Measure Up 1.Preparation of the Invitation Process: Most modified Premium Based Bid Processes score low on this, only Case-2 amounts to a high level of preparation – but implies a greater role and responsibility for procurer, apart from longer timeline. 2.Risk and Cost of acquiring the information: Modified Premium Based Bid Processes expose the developer to a higher risk level, Case-2 mitigates this. However, acquiring the information could be costlier. 3.Qualification of bidders: all processes provide flexibility, however is the information sought (particularly on technical capability) adequate? 4.Evaluation Criteria: only Case -2 focuses on end-user benefit. Premium based methods focus on near-term benefit (revenue) to the State. 1.Preparation of the Invitation Process: Most modified Premium Based Bid Processes score low on this, only Case-2 amounts to a high level of preparation – but implies a greater role and responsibility for procurer, apart from longer timeline. 2.Risk and Cost of acquiring the information: Modified Premium Based Bid Processes expose the developer to a higher risk level, Case-2 mitigates this. However, acquiring the information could be costlier. 3.Qualification of bidders: all processes provide flexibility, however is the information sought (particularly on technical capability) adequate? 4.Evaluation Criteria: only Case -2 focuses on end-user benefit. Premium based methods focus on near-term benefit (revenue) to the State.

29 Outline Competitive Bidding for Infrastructure Projects – Rationale Frameworks deployed in India – a Chronology Outcomes Achieved Fit with Best Practices and Principles Possible Futures

30 Will we get what we set out to do? 1.Does the process adopted differentiate between a Winners Pay-Off and a Winners Curse situation? Should the process attract bids for project development or encourage speculation and irrational behavior? 2. Does a financial model and its sensitivities capture all the uncertainties added by a lack of execution experience? (should the capability check not be more comprehensive?) A Common Anthem; we are not looking at only this project. There are several options that we can play with. we will financially close the project in no time we can sell the entire output on merchant basis 1.Does the process adopted differentiate between a Winners Pay-Off and a Winners Curse situation? Should the process attract bids for project development or encourage speculation and irrational behavior? 2. Does a financial model and its sensitivities capture all the uncertainties added by a lack of execution experience? (should the capability check not be more comprehensive?) A Common Anthem; we are not looking at only this project. There are several options that we can play with. we will financially close the project in no time we can sell the entire output on merchant basis

31 Some Reality Checks 1.The Complexity of hydro power projects takes more than just mobilisation of resources. The quality of execution teams has been noted to be a Key Success Factor. 2. How deep is the merchant power opportunity? - Even exchange traded power touches the range of Rs.10/kWh -Remember – its a miniscule proportion of even the short term market (which is itself only about 3% of total generation) -Pricing in the exchange can vary from Rs.8 plus for an hour today to `no deal during the same hour tomorrow ….and HEPs produce a fair part of output during monsoons. 3. And Finally…good times for the capital markets do not last forever, but show a cyclic trend. In summary…we may be staring at a situation of winners and losers..well after the bid processes have been concluded 1.The Complexity of hydro power projects takes more than just mobilisation of resources. The quality of execution teams has been noted to be a Key Success Factor. 2. How deep is the merchant power opportunity? - Even exchange traded power touches the range of Rs.10/kWh -Remember – its a miniscule proportion of even the short term market (which is itself only about 3% of total generation) -Pricing in the exchange can vary from Rs.8 plus for an hour today to `no deal during the same hour tomorrow ….and HEPs produce a fair part of output during monsoons. 3. And Finally…good times for the capital markets do not last forever, but show a cyclic trend. In summary…we may be staring at a situation of winners and losers..well after the bid processes have been concluded

32 Heard in passing….. Hydro Project development (and hence bidding) is an art. Indeed it is……if you keep aside all semblance of the commercial logic Hydro Project development (and hence bidding) is an art. Indeed it is……if you keep aside all semblance of the commercial logic

33 Take-aways for us…. 1.Bid processes (or the complete absence of them) has to be grounded in objectives of the State / Countrys power development. 2. The objectives in turn flow from the specifics of the community served. 3. Replicating a model adopted elsewhere, particularly if done selectively…... a possible recipe for disaster. 1.Bid processes (or the complete absence of them) has to be grounded in objectives of the State / Countrys power development. 2. The objectives in turn flow from the specifics of the community served. 3. Replicating a model adopted elsewhere, particularly if done selectively…... a possible recipe for disaster.

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35 Bidding for Hydro Power Projects Premium Based Bidding 1.Under this process States invite bids for a particular project/site with the bidding parameters Free Power, Upfront Premium or State Equity. 2.PFR if available for of the bidding project/site, shall be provided to bidders. 3.The project site is transferred to the bidder who quote maximum numbers on for above parameters. 4.Free power may be 12%. Government may sell the additional free power after its own consumption and earn revenues for 40 years. 5.By charging upfront premium link to the project capacity, implementation of the project by the developer can be ensured. 6.Governments equity in the JV may be 26%. The proposed JV / PPP arrangement has the following inherent benefits. Presence of Government in the JVC is likely to expedite the grant of various statutory and other clearances. Government would not only earn additional revenue as dividends from its equity. The private developer may arrange for financing of the Governments equity. Thus, while there would be no upfront investment by the Government, it would still reap the benefits accruable to the shareholders. Premium Based Bidding 1.Under this process States invite bids for a particular project/site with the bidding parameters Free Power, Upfront Premium or State Equity. 2.PFR if available for of the bidding project/site, shall be provided to bidders. 3.The project site is transferred to the bidder who quote maximum numbers on for above parameters. 4.Free power may be 12%. Government may sell the additional free power after its own consumption and earn revenues for 40 years. 5.By charging upfront premium link to the project capacity, implementation of the project by the developer can be ensured. 6.Governments equity in the JV may be 26%. The proposed JV / PPP arrangement has the following inherent benefits. Presence of Government in the JVC is likely to expedite the grant of various statutory and other clearances. Government would not only earn additional revenue as dividends from its equity. The private developer may arrange for financing of the Governments equity. Thus, while there would be no upfront investment by the Government, it would still reap the benefits accruable to the shareholders.

36 Hydro Power Development in Nepal 1.Study/survey license issued within 30 days, period of such license up to 5 years. 2.Before end of study license period, generation license to be applied for and issued within 120 days. 3.Period of such license up to 35 years (30 years for export orients projects). 4.Government land provided on lease. Hydro Power Development in Nepal 1.Study/survey license issued within 30 days, period of such license up to 5 years. 2.Before end of study license period, generation license to be applied for and issued within 120 days. 3.Period of such license up to 35 years (30 years for export orients projects). 4.Government land provided on lease.

37 Premium Based Bidding for Hydro Power Projects 1.States invite bids for a particular project/site with the bidding parameters Free Power, Upfront Premium or State Equity. 2.PFR, if available for the project, to be provided to bidders. The site is transferred to the bidder who quote maximum numbers on for above parameters. 3.Free power provisions. Government may sell the additional free power after its own consumption and earn revenues for 40 years. By charging upfront premium, implementation of the project by the developer can be ensured. 4.Governments equity in the JV may be 26%. The proposed JV / PPP arrangement has the following inherent benefits. Presence of Government in the JVC is likely to expedite the grant of various statutory and other clearances. Government to earn additional revenue as dividends from its equity. The private developer may arrange for financing of the Governments equity. 1.States invite bids for a particular project/site with the bidding parameters Free Power, Upfront Premium or State Equity. 2.PFR, if available for the project, to be provided to bidders. The site is transferred to the bidder who quote maximum numbers on for above parameters. 3.Free power provisions. Government may sell the additional free power after its own consumption and earn revenues for 40 years. By charging upfront premium, implementation of the project by the developer can be ensured. 4.Governments equity in the JV may be 26%. The proposed JV / PPP arrangement has the following inherent benefits. Presence of Government in the JVC is likely to expedite the grant of various statutory and other clearances. Government to earn additional revenue as dividends from its equity. The private developer may arrange for financing of the Governments equity.


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