Banks raise concerns on bidding documents for power projects

Change in development model, lack of security major issues

Two large banks financing power projects have raised major issues over the bidding documents being drafted by the power ministry. These could, they say, further delay the award of large projects, including the so-called ultra mega power projects (UMPPs).

State Bank of India (SBI), the country's largest lender, and ICICI Bank, the largest private lender in India, have objected to, among other issues, a proposed shift in the development model of these projects.

Under the draft standard bidding document (SBD), the ministry has proposed changing the development model from build-own-operate to design-build-finance-operate-transfer. The shift will make lending unsecured and unviable, the banks said.

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

The draft SBD does not allow lenders to use land or project assets as security and does not give banks rights in major project agreements. "A similar provision in the roads sector has rendered financing these extremely tardy. The quantum (of funds) needed by the power sector is likely to be a few multiples higher, and we do not see a way through which the banking sector can finance even a part of that as unsecured loans," SBI said.

The bank has also raised doubts over the ability of state distribution companies (discoms) to support the obligations placed by the draft SBD, given their poor financial health. In the case of UMPPs, the projects capable of generating 4,000 Mw, the agreements for off take of power would be with multiple discoms. Thus, arriving at a workable arrangement would remain a challenge.

Overall, SBI has said the measures proposed in the new SBD do not meet risk requirements and might not serve its purpose. The same benefits can also be achieved in the existing documents though. It has said a new format of SBD was not necessary, as this changes the fundamentals of the industry structure and invites a new set of problems.

ICICI Bank said the proposed design-build-finance-operate-transfer model was more suited to tolling projects such as those in the roads sector, where financial health and statutory constitution of the concessioning authority were robust. "However, power projects are capital-intensive and are based on non-recourse funding, and clear security rights are considered necessary," the bank said in its comments on the model power purchase agreements.

Another area of concern for ICICI Bank was that the provision of transfer of the project at the end of the concession period might act as a disincentive for developers. This could lead to quoting of higher tariffs because developers would like to recover equity before transferring assets after being denied revenue streams for the useful life of the projects.