1. INDIA POWER SECTOR: CHALLENGES & INVESTMENT OPPORTUNITIES
New Delhi
May 12, 2006
Salman Zaheer
Lead Energy Specialist
The World Bank

2. STRUCTURE OF PRESENTATION
Indian Power Sector Investment requirements ( )
Overview of market conditions
India
International Investors
Potential role of the World Bank Group (CAS )
Concluding Remarks

3. Investment Needs over 2007-12 period reasonably well established…..
Installed generation capacity to increase by about 60,000 MW (from 125,000 MW to 185,000 MW)
Of this about 20-30,000 MW hydro
Investment program estimated to cost US$100 billion
Generation – US$60 billion (Rs. 2,70,000 crores)
Transmission & Distribution – US$40 billion (Rs. 1,80,000 crores)
In addition:
About 20,000 MW of existing thermal capacity to be rehabilitated and modernized
Distribution networks to be upgraded and MIS strengthened
Human resources to be revitalized
And:
A “low carbon growth” strategy to be followed with international support (Post G8+5 meeting at Gleaneagles in 2005)

4. Indian market environment also broadly known…..
Industrial, commercial, urban household demand increasingly commercialized. Willing to pay cost-recovery tariffs provided:
Service is Efficient – not willing to pay for theft and utility inefficiency
Service is demand responsive – willingness to pay declines with outages, voltage fluctuations, billing hassles, etc.
Industrial and commercial demand now about 43-45% of total consumption.
60% of Indian firms rely on costly captive or back-up self-generation (compared to 21% in China)
Urban household demand about 20-25% of total consumption
Urban consumers becoming wealthier and more service conscious
Rural – including agricultural - demand not ready for commercialization. Still needs effective government support

5. Some barriers to commercialization…..
Governance of distribution utilities
Over 40% of energy supplied into state transmission systems is lost, not billed, incorrectly billed or payment not collected
Reducing to 20% would save Rs ,000 crores/y ($ billion) of generation cost 2/kWh) or generate 25% more revenue if billed at the average tariff (Rs. 2.77/kWh)
Sector is a conduit for about Rs. 20,000 crore ($4.5 billion) of poorly targeted and poorly accounted subsidies each year (from budget & cross-subsidies)
Even in advanced reforming states, only 55-65% of electricity sales metered
State regulatory commissions are still finding their feet
Tariffs are distorted and do not cover costs
Industry tariffs are high by international standards (about USc 8-10); agricultural tariffs (accounting for 25% of consumption) are well below cost
Data quality is improving but progress on energy accounting/audits is slow
Regulations on service quality and service obligations yet to be enforced
Limited outreach efforts to enhance public participation
Fuel supply bottlenecks
Early stages of competition and liberalization

6. India market environment …..(3)
Government of India policy response is appropriate:
Electricity Act, 2003
National Electricity Policy (March 2005)
National Tariff Policy (January 2006)
Correct focus on:
Governance Commercialization Private participation
Competition Rural services
Key challenge:
Ramp up pace and quality of policy implementation –
What must be done to move from about $6 billion to $20 investment/year?
Overcome concerns and resistance at state level
Accelerated reform of distribution still a critical bottleneck
Resolve fuel supply bottlenecks
Engage the private sector
Remain conscious of international commitments – clean energy

7. India’s carbon emissions
The power sector accounts for about 60% of carbon emissions
Projected emissions rise amounts to 7% of global increment
Under any scenario, these plans and trends presage major increases in carbon emissions. The US Energy Information Administration expects carbon emissions growth to average 3% per annum through 2025, with the power sector a major contributor. Worryingly, India’s carbon and energy intensity – carbon emissions, and use of energy, per unit of economic output – have held fairly flat, instead of declining rapidly as in China – perhaps in part reflecting the impact of poor pricing and the pressing need for reform in so many energy-consuming industrial sectors in India.
Source: EIA International Energy Outlook 2003 (base case)
Energy and carbon intensity of the economy is lower than in China, but not declining nearly as fast

8. India’s vs Global investment requirements - a large Growing Gap between demand and supply?
Financing required for the Power Sector in Emerging Markets
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Cumulative
Sum ($Bn)
$2,300 Bn
High Investment Demand
Scenario (3%)
$1,900 Bn
Gap covered by public financing,
self -
financing, donor funding,
and rationing.
Low Investment
Total Power Investment ($Billion)
Demand Scenario (2%)
Private Capital Mobilized in Power Sector
Historic
Future
Source: : World Bank, IEA, Deloitte Touche Tohmatsu Emerging Markets Group

9. Continue to support state level reforms –
World Bank role in India: Conforming with Country Assistance Strategy ( )…
Continue to support state level reforms –
Critical for mobilizing the volume of investments needed to meet India’s demands in an affordable manner
Support rural access to spur rural development
Show-case mechanisms for scaling-up a low-carbon power generation program
Continue to support expansion of the national transmission system to facilitate access and trade
Continue to provide analytical, advisory and capacity building support

10. Bank assistance strategy builds on past engagement in power sector….
Pre-1990s:
Investments in thermal and hydropower generation at the central and state government levels
Expansion of the transmission system
Investments in state distribution systems
1990-Present:
Investment, budget and advisory support for state level reforms (Orissa, Haryana, UP and AP)
Investment support for transmission and renewable energy (through IREDA)
Investment in 1500 MW Nathpa-Jhakri hydro plant

11. …responds to consumer & Gov’t concerns; addresses investor priorities…
1. Legal protection and framework defining investor rights
63% of firms rated it a “deal-breaker” – ranked 1 of 12 factors
“contract enforceability”
“clarity in market rules” [Brazil , Guatemala ]
“protection ‘to do business’ – labor laws, property rights; laws that work”
“enforceable exit strategy” [Separately ranked 4th]
2. Payment discipline and enforcement
40% of firms rated it a “deal-breaker” – ranked 2 of 12 factors
Both generation and distribution investors considered it important
“we cannot fix it on our own” – government support essential.
“worsening payment discipline – strong negative”.
3. Guarantee from Government or Multilateral
36% rated it a “deal-breaker” – overall rank 5 of 12
“support needed till the business becomes commercial”
“why should we take on the risk of a bankrupt business?”
Interestingly not a determinant for success – “best” and “worst” experience. 10

12. What 50 global investors have reported on why investments succeeded or failed…
1. Retail tariff level and cash-flow discipline
65% of firms rated it critical - First overall rank for success or failure
“we have learned enough to avoid countries with unsustainable retail tariffs”
“Government assurances to raise tariffs or provide subsidies – not very comforting”.
“Tariff levels should be high enough without subsidies”
2. Fair adjudication of tariff adjustments and disputes
50% of firms rated it a critical determinant of failure. Second rank in case of failure.
“new regulators show little appreciation of investor needs”.
“Regulators showing an increasing tendency to change rules and targets on which investment decisions are made”.
3. Operational Control and Management Freedom
60% of firms rated it a critical success factor. Second overall rank
Key to deriving value from investment – economies, cost reduction
Unanimous verdict that public-private operational partnerships are not important (lowest ranked)
4. Regulatory commitment sustained through long-term contract
50% of firms rated it a critical determinant of failure. Third overall rank
“a contract is a contract”
“if the contract looks cozy – it probably is”
“need to make sure that the contract is on firm economic and financial ground” 15

13. How Satisfied are Investors? –
A Country Assessment
Being a small country is not a liability
Multiple entrants (over 4) – No dissatisfied investors
Latin America – Bolivia, Jamaica, Panama, Costa Rica, Guatemala, Nicaragua, Dominican Republic
Africa – Kenya, Morocco
Respecting contracts under stress
 Thailand, Philippines
 Czech Republic, Colombia, Argentina, Indonesia, China, Pakistan, India
Regulators perceived to be exercising “excessive” discretion and risk on the increase
India, Colombia, Brazil
Are regulators just doing their job – or are investor expectations unrealistic? 19

14. What conditions are important?
Minor
Major
Critical
“Deal-breaker”
Rated “Dealbreaker”
Relative Rank
63% 1
Legal Protection of Investors
Legal Protection of Investors' Rights
3.57
36% 2
Consumer Payment Discipline
3.11
40% 5
Gov’t/Multilateral Guarantee
3.11
13% 7
Government Efficiency
2.98
15% 3
Judiciary's Independence
2.91
19% 4
Clear Rules for Exit
2.83
19% 6
Investment Grade Debt Rating
2.83 8% 9
Transition to Competitive Market
2.68
10% 8
Corruption Index Ranking
2.66 4% 10
Domestic Borrowing
2.49 4% 11
Competitive Selection
2.43
13% 12
Possibility of Vertical Integration
2.00 9 2

15. Global market environment – Feedback from Power Investors Roundtable (World Bank 2004)
The Target Group
Firms that invest their own equity outside their home countries
Local/domestic firms not included
Lenders not included – they follow the equity sponsor
The Target Universe
65 firms in final survey. An ever decreasing number:
7 mergers
7 exits from emerging markets
2 went into receivership
The Survey Instrument
A 7-page standardized survey to all firms
Sent by /fax – follow-up phone calls.
The Response Rate
48 valid responses – a 75% response

16. International Power Investors –
Firms Targeted
ABB Equity Ventures
AEP
AES Corp
Alliant Energy International
Alsons Consolidated Resources
Amata Power
Banpu Public Co. Ltd.
BG Group
BP Global Power
CHI Energy (Energia Global)
Chilectra
Cinergy Global Resources
CLP Power International
CMS Energy Corporation
Cogentrix Energy
Commonwealth Development Corp.
Covanta Energy
Delma Power
Duke Energy
Dynegy
E.ON Energie
Edison Mission Energy
23. El Paso Energy
24. Electricite de France International
25. Electricite de Portugal
26. Elyo
27. Endesa
28. EIF Group
29. Entergy Power Group
30. Eskom Enterprises
31. FondElec
32. Fortum
33. GE Capital Global Energy
34. GMS Power
35. HEI Power
36. Hydro Quebec
37. Ibedrola
38. Independent Power
39. InterGen
40. International Power
41. Keppel FELS Power
42. Korea Electric Power Company
43. Marubeni Power
44. Mirant
45. Mitsui & Co.
46. NRG Energy
47. Panda Energy
48. PPL Global
49. PSEG Global
50. Reliant Energy
51. Rolls-Royce Power Ventures
52. Saur International
53. Scudder Latin America Fund
54. Sempra Energy
55. Siemens Power Ventures
56. Sithe Energies
57. Statkraft International
58. Steag AG
59. Tomen Power
60. Tractebel
61. TransAlta
62. TXU Corp
Union Energy
Union Fenosa
65. Wartsila NSD 21

17. The fundamentals have not changed - Factors that enable and attract investment
Well-managed reform: Increasing ability of utility to generate internal cash for investment through –
cost reductions
timely tariff adjustments to recover the cost of supply, and
efficient collection of posted tariffs
Keeping the financial house in order:
Improving access to debt financing from domestic/international debt markets by maintaining profitable operation + acceptable debt service ratio
Reducing risk & maintaining a healthy regulatory environment: Attracting domestic & foreign equity funding -
creating and maintaining sector structure, regulatory and legal environment conducive to minimization of country/project investment risk

18. The evolving World Bank program balances pragmatism with the fundamentals…
Support service improvements in 2-4 states
Improve efficiency, service quality and governance of state utilities
Support rural access to spur rural development
Complement or supplement the Rajiv Gandhi Rural Electrification Program to ensure demand-responsiveness and sustainability of rural services
Show-case mechanisms to scale-up low-carbon power generation
Develop hydropower potential in an environmentally and socially sustainable manner
Strengthen capacity of 1-2 state governments to manage and utilize hydro resources in an efficient and responsible manner
Reduce barriers for rehabilitating thermal power plants and improving their fuel efficiency (part of “low carbon growth” agenda)
Promote renewable energy development (through IREDA/MNES)
Continue to support expansion of national transmission system to facilitate access and trade
Continue to provide analytical, advisory and capacity building support
Build awareness and consensus around sector reform issues – governance of publicly-owned distribution utilities, open access, etc.
Improve regulatory effectiveness in infrastructure services

19. World Bank’s Assistance Program…(2)
Current portfolio consists of the following operations:
Project Loan Amt Balance Closing Date
Powergrid II $450 m $ 60.6 m June 2006
Powergrid III $400 m $400.0 m July 2011
Rajasthan Power $178 m $ 38.3 m June 2006
Renewable Energy II $112 m $ 45.1 m March 2007
Under Preparation:
Rampur Hydropower – 412 MW approx. $400 m ( )
Thermal Power Rehab – 600 to 1000 MW ($ m IBRD; $40-60 m GEF)
Being Identified:
State utility development & reform – dialogue with 3-4 states
Rural electricity services – dialogue with Ministry of Power
Hydropower development – dialogue with Ministry of Power and 2 states
Establishment of institute for regulation and competition

20. International Finance Corporation also has an active power portfolio in India…
Allain-Duhangan 192 MW hydropower – first for IFC on merchant basis
Powerlinks - Tala Transmission Project – Tata Power & Powergrid JV
Mini hydro – IHDC (2-5 MW projects); considering windpower
Considering financing private distribution companies (NDPL)
TA (with North American Rural Electrification Cooperatives Association) to PFC for rural electrification
Worldwide, IFC has a power portfolio of US$2.5 billion (11% of business)
Good performance to date
Invested (since 1990) in 14,815 MW of generation capacity and US$15.2 billion in aggregate project costs. The portfolio currently has:
7 distribution clients; 5 transmission clients;
61 projects in 33 countries

21. World Bank Group risk mitigation guarantees - to leverage private investment
IFC
MIGA
IBRD/IDA
IFC Guarantees (partial credit structures usually for local financing)
Interest Rate and Currency swaps
Political Risk Insurance
expropriation
transfer restriction
breach of contract
war & civil disturbances
Guarantees
partial risk
partial credit

22. LIBOR-based, Variable spread loan Interest
IBRD Loans - Lending Terms (As per currently applicable waivers to Indian Portfolio)
LIBOR-based, Variable spread loan
Interest
USD loans
Yen loans
6 month LIBOR
5.03%
0.15%
Spread over LIBOR
0.18%
Commitment Fee
0.07%
Front-end Fee
0.04%
Total World Bank Interest Rate
5.32%
0.44%
+ currency exchange rate impact
– deemed export/import duty exemption*
*Applicable to ICB procurement funded from loans provided by multilateral agencies.
Principal Moratorium
5 years
Repayment period (incl. moratorium)
20 years

23. In closing….
World Bank is committed to helping India meet its power sector objectives:
Improve efficiency and quality of electricity distribution – key to “unblocking” internal resources
Expand rural access
Enable electricity trade and transmission of power
Develop hydropower and other renewable energy potential in an environmentally and socially sustainable manner
Reduce barriers for rehabilitating thermal power plants and improving their fuel efficiency – other financial support for a “Low Carbon Growth” strategy being formulated
Policy framework has improved considerably – regulatory frameworks are also becoming more competent and transparent. However:
Scale of investments needed cannot be mobilized unless enterprise level reforms, particularly of distribution companies, are ramped up
Private or public companies cannot fix cash inadequacy without government help
AND
We know from painful experience that a policy environment that is unfavorable for the private sector will be unfavorable for the public sector too! 19