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PublicPrivate Partnership in Power Sector: A Focus on Ultra Mega Power Projects
Rajesh Gangakhedkar and R.K. Mishra Journal of Infrastructure Development 2012 4: 27 DOI: 10.1177/0974930612449535 The online version of this article can be found at: http://joi.sagepub.com/content/4/1/27

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Journal of Infrastructure Development 4(1) 2739 2012 India Development Foundation SAGE Publications Los Angeles, London, New Delhi, Singapore, Washington DC DOI: 10.1177/0974930612449535 http://joi.sagepub.com

PublicPrivate Partnership in Power Sector: A Focus on Ultra Mega Power Projects

Rajesh Gangakhedkar
Assistant Professor, Institute of Public Enterprise, Hyderabad rajesh@ipeindia.org

R.K. Mishra
Director, Institute of Public Enterprise, Hyderabad rkmishra@ipeindia.org Abstract Publicprivate Partnership in power sector is another significant development in the domain of power sector reforms. The Ultra Mega Power Projects which are based on PublicPrivate Partnership, are perceived as harbingers of change in the power sector. This article focuses on the study of Ultra Mega Power Projects, with special reference to Sasan and Mundra projects which are the first two Ultra Mega Power Projects that have achieved financial closure. The article is conceptual and uses secondary source of information. The article makes a critical evaluation of Ultra Mega Power Projects. In the process, the article dwells at length on the factors that contribute to the cost-effective power generation by these projects. It also examines the factors that favour the growth of these projects. The article also examines the emerging issues and challenges related to these projects that need due attention. JEL Classification: L-94 Keywords: Ultra Mega Power Projects, special purpose vehicle, supercritical technology

1. Introduction
Robust infrastructure is sine qua non for a rapid economic growth. When India embarked on the path of economic reforms, strengthening the infrastructure had become absolutely essential. Power being a vital input for the economic development of the country, the entire sector came under the ambit of reforms. The fact that on the eve of reforms, the Indian power sector was plagued by problems is well known. Bankrupt state electricity boards, as a result of skewed, politicised and irrational tariffs, high T&D losses, power theft, peak deficit of power, to mention a few. The first decade of reforms from 1991 to 2000 set the tone for reforming the power sector. Unbundling of state electricity boards, setting up of regulatory commissions and privatisation were some of the reforms during this period. The secondgeneration reforms commenced from 2001 and the passage of Electricity Act in 2003 was the milestone

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in the process of reforms. It would not be an exaggeration to say that the act is the most comprehensive legislation in the annals of Indian power sector. PublicPrivate Partnership (PPP) is one such reform measure among the second-generation reforms. PPP refers to a cooperative relationship between government and private sector for the effective provision of infrastructure services. Each of the partners in this relationship brings with it what the other lacks. The private participation could help to bring technical and managerial expertise and injection of huge capital, which the government may not possess. On the other hand, a private developer would take many years to arrange for land, water, roads and ports and obtain all the clearances required, which the government as the largest land owner is best suited to do. It is strongly believed that the PPP approach is best suited for the infrastructure sector. It supplements scarce public resources, creates a more competitive environment and helps reduce costs. It facilitates the best practices related to management by private sector. Considering the paucity of public funds, more so in developing countries, it is imperative that private participation be invited in the process of strengthening infrastructure. Developing countries are adopting PPP model on a wide scale for infrastructure. Be it airports, highways, ports, power, PPP is fast emerging as a solution for infrastructure bottlenecks. India is no exception to this rising trend of adoption of PPP model. Not just the physical infrastructure but even in economic infrastructure, such as education and health, PPP is seriously being considered as a panacea for the problems of infrastructure inadequacies.1 The present study discusses PPP in power sector with a focus on Ultra Mega Power Projects (UMPPs). The entire article is divided into four parts. The first part is Introduction. The second part discusses the factors contributing to the cost-effective power generation by the projects. The third part discuses the factors that favour the growth of the projects and the emerging issues and challenges. The last part is the conclusion.

2. PPP in Indian Power Sector

Private sector participation in power sector was one of the key areas of reforms since 1991, when the reforms began. Indias current installed power generation capacity is 160,000 MW. By 203132, the generation capacity required would be 800,000 MW (Integrated Energy Policy 2006). In spite of expected strong growth in capacity addition, Indias power shortage is likely to remain very high. By the end of 2009, the peak power shortage crossed 14 per cent (Department of Economic Affairs 2009). The 17th Electric Power Survey which is conducted by Central Electricity Authority has forecast that the peak demand will be growing at a compound annual growth rate (CAGR) of 7.8 per cent during the eleventh plan. This calls for encouragement in private participation in the sector as public sector alone would not be able to achieve the plan targets. The private players in the power sector have announced a target of 100 GW of capacity addition. PPP model is being hailed as the harbinger of change in power sector. PPP got an impetus during the second-generation reforms. However, PPP existed even prior to the second-generation reforms in power sector. The first effort for PPP was the Dabhol power plant in Maharashtra which started in the year 1992. The American company Enron owned about 85 per cent along with other American companies and the Maharashtra State Electricity Board owned 15 per cent. The project got bogged down by various problems and had to be closed. The other PPPs in power sector are as follows: Journal of Infrastructure Development, 4, 1 (2012): 2739

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1. Tala Transmission Project: This PPP is a joint venture model. It is a joint venture between Power Grid Corporation of India Ltd (PGCIL) which has 49 per cent stake and Tata Power with 51 per cent stake. The project is meant to evacuate surplus power from 1,020 MW Tala hydroelectric power plant in Bhutan and bring it to India. 2. Franchisee model of Maharashtra State Electricity Distribution Company Limited (MSEDCL): In this case, the PPP model is based on management contract. The selected private player will be a franchisee of the discom to purchase and distribute electricity in the franchisee area. As a distribution franchisee, the discom acquires all rights. The Torrent Power, which is the distribution franchisee for the Bhiwandi circle of Mumbai, has been successful in bringing down the distribution losses.2 3. AP Gas Power Corporation Ltd: This is an example of PPP that existed even before the reforms in power sector were envisaged. It is a joint venture between the erstwhile APSEB and several companies from public and private sectors.3 It was successful in meeting the objectives for which it was promoted. For example, it was successful in supplementing power from grid, meeting the demands of energy of the participating industries without restrictions. UMPPs are the new PPPs in power sector. They are being developed on Build, Own and Operate (BOO) basis.4 It has now become a thrust area in the reforms of power sector. This study is focussed on UMPPs with special reference to Sasan and Mundra Power Projects which are first to come into existence. Table 1 gives details of the present UMPPs.
Table 1. Details of UMPPs UMPP Sasan, Madhya Pradesh Mundra, Gujarat Krishnapatnam, Andhra Pradesh Tilaiya, Jharkhand Sundegarh, Orissa Cheyyur, Tamil Nadu Girye, Maharashtra Tadri, Karnataka Developer Reliance Power Tata Power Reliance Power Reliance Power Expected Commissioning Year 2012 2012 2015 2015

Source: Position Paper on Power Sector in India, Department of Economic Affairs, Ministry of Finance (2009).

3. Ultra Mega Power Projects

UMPPs are very large-sized projects, of 4,000 MW each, involving an estimated investment of `16,000 crore. These UMPPs are expected to generate power at a cheaper rate, which would ultimately help to provide affordable tariffs to the consumers because the generation costs are a pass through in the consumer tariff. The electricity act, the national electricity policy and the national tariff policy emphasise that it is the competition among the multiple power suppliers that will drive down the consumer tariffs. It is the competition that would bring down price and not the cost plus exercise of determining the tariffs which has been the practice in power sector all these years. Moreover, the act and the policies mentioned earlier underscore the importance of competitive bidding as the basis for determining the tariffs. It becomes necessary to discuss the way an UMPP comes into existence. Journal of Infrastructure Development, 4, 1 (2012): 2739

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3.1 The Bidding Process

The process consists of two stages. Request for Qualification (RfQ), which is the first stage, contains qualifying criteria for the selection of bidders. The RfQ documents are properly evaluated and those bidders who would be eligible for the second stage of bidding process are identified. At this stage, which is called as Request for Proposal (RfP), the documents are verified and the successful bidder is identified on the basis of the lowest levelized tariff.

3.2 Special Purpose Vehicles (SPVs)

The Power Finance Corporation (PFC) has set up separate SPVs for each of the UMPPs identified so far to act as authorised representatives of the procurers, that is, the distribution companies of the power procuring states. The SPVs are 100 per cent owned subsidiaries of the PFC. For example, the SPV in case of the Sasan power project is Sasan Power Limited. In case of Mundra power project, it is Coastal Gujarat Power Limited. On completion of the entire process for selection of the project developer, the SPVs are to be transferred to the selected bidders. The SPVs play a vital role in the development of UMPPs. Their role includes a host of activities, such as appointment of consultants to undertake preparation of project report, to finalise RfQ/RfP documents, acquisition of land for the project, obtaining coal blocks for pit head projects, getting clearance regarding allocation of water by the state government, obtaining clearance from State Pollution Control Board, to name a few.

3.3 Role of the Ministry of Power

The Ministry of Power plays a significant role as a coordinator. In this capacity, it synchronizes the efforts of various ministries in ensuring coal block allotment, environmental clearances and water linkage. It also works towards obtaining the support from the state governments and its agencies, and in allocation of power to different states from UMPPs in consultation with the states. Another key area which requires the intervention of Ministry of Power is in facilitating the Power Purchase Agreement (PPA) and the proper payment security mechanism with state government.

4. Role of States
The states in which the UMPPs are located play no less a significant role. They play a vital role in the implementation of the Rehabilitation and Resettlement plan and authorise PFC/SPV to carry out the bidding process on behalf of the distribution utilities, participate through its representatives in various committees set up for undertaking the competitive bidding process, facilitate the signing of the PPA.

4.1 UMPP at Mundra in Gujarat

It is a 4,000 MW project. Mundra in Gujarat is one of the coastal sites. The project will use imported coal. The policy of using imported coal is in line with recommendations of expert committee which Journal of Infrastructure Development, 4, 1 (2012): 2739

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concluded that along the western and southern coasts of India imported coal is more cost competitive when compared to domestic coal. The Mundra port is equipped with facilities to handle imported coal with railway siding. All the clearances related to environment and water have been obtained. The estimated cost is `160 billion. The financial closure was achieved in April 2008. The consortium of lending agencies include International Finance Corporation (IFC) and Asian Development Bank (ADB). After the competitive bidding process, Tata Power Company Ltd was identified as the developer because it quoted the lowest levelised tariff of `2.26 per kilowatt-hour (kWh). The PPA was signed in April 2007, according to which Tata Power has indicated the commissioning schedule of five units of 800 MW each. The first unit would be commissioned by the end of August 2012 and the last unit would be commissioned by August 2014. The PPA has been signed with five states and the tentative power allocation is presented in Table 2.
Table 2. Off-take by Various Procurers State Punjab Maharashtra Gujarat Rajasthan Maharashtra Total Off-take (MW) 500 800 1,900 400 400 4,000

Source: Power Finance Corporation of India Ltd.

4.2 UMPP at Sasan in Madhya Pradesh

It is a 3,960 MW project. It uses domestic coal; that is, it is a pit head project. Three coal blocks have been allotted to the plant; 90 per cent of land has been acquired. All clearances related to forest, environment and water have been completed. The estimated cost is `200 billion. The financial closure was achieved in April 2009. Initially, through RfP bids it was Lanco Infratech that was identified as the developer. Because of certain legal issues, this was cancelled and later on Reliance Power Limited was identified as the developer. Reliance Power quoted the lowest levelised tariff of 1.196 per kilowatt hour. PPA was signed in August 2007. Reliance Power has indicated the various target dates for commissioning the five units of 660 MW each. The first unit would be commissioned by May 2013 and last unit by April 2016. The Power Purchase Agreement has been signed with seven states. The tentative allocation of power is shown in Table 3.

5. Review of Literature
Prayas Energy Group in its study (2006) underscores the significance of UMPPs as a cost-effective way of generation of electricity creating a favourable impact on the resultant tariffs for the consumers. In this study, the group talks about the importance of competitive bidding through which the UMPPs come into being. Journal of Infrastructure Development, 4, 1 (2012): 2739

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Table 3. Off-take by Various Procurers State Uttar Pradesh Delhi Uttaranchal Punjab Rajasthan Haryana Madhya Pradesh Total Off-take (MW) 500 450 100 600 400 450 1,500 4,000

Rajesh Gangakhedkar and R.K. Mishra

Source: Power Finance Corporation of India Ltd.

Grimsey and Lewis (2007), dwelling at length on the intricacies of PPP, mention that rather than being a model of partnership, PPPs should be thought of as a process designed to ensure that all the risks are valued and taken into account in a meaningful way, because both the parties have committed their resources and prestige to the success of the project. A study made by Global Trade Review magazine (2008) mentions the fact that the Mundra plant marks the introduction of more environmentally friendly supercritical boiler technology into India. The study talks about the significance of selection of the project developer based on competitive bidding process, which is likely to create a favourable impact on tariffs. Ghosh (2009), in her study, discusses the Sasan and Mundra UMPPs. She mentions the fact that with UMPPs, the competitive bidding has been firmly established against the previous cost plus norm. The competitive bidding process coupled with the economies of scale arising from large projects has resulted in highly competitive tariffs that will benefit the end user. The UMPPs are being perceived as cost-effective generators of electricity. There are reasons as to why they are being perceived so.

6. Factors Contributing to Cost Effectiveness of UMPPs 6.1 Supercritical Technology

It is a well-known fact that fuel costs make up most of the variable cost of generation and it is a pass through in the consumer tariffs. It is because of this reason the fuel that is used in power-generation plant and the consequent fuel efficiency determines the consumer tariffs. In India, coal is the most important fuel in power generation and its importance can be known from the fact that it accounts for about 54 per cent of power generation. When compared to other alternatives, such as naptha and LNG, it is cheaper. Hydropower generation has societal concerns. Considering all these facts, it is but natural that in the portfolio of fuel for power generation, coal would continue to occupy the top-most position in future. This being the case, the efficiency of coal plants assumes significance. Coal-based powergeneration plants are one of the major contributors of air pollution and emit carbon dioxide (CO2). As per the World Bank report, released in 2005, India is the fourth-largest emitter of CO2. This underscores the necessity of developing clean coal technologies. It is here that the supercritical technology being used by Journal of Infrastructure Development, 4, 1 (2012): 2739

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UMPPs comes into picture. Power-generation plants based on supercritical technology is considered superior to sub-critical technology, as they require less coal per megawatt hour, leading to lower emissions of CO2, higher efficiency finally leading to lower fuel cost which in turn would have a favourable impact on consumer tariffs. It is necessary to resort to supercritical technology and not to the sub-critical technology. The plants based on supercritical technologies have faster starting time and load changes and are more suitable for daily start-up and shut down operation. Table 4 depicts the advantage of having supercritical technology over the sub-critical technology.
Table 4. Comparative Analysis of Sub-critical and Supercritical Technologies Description Plant efficiency (%) Fuel consumption CO2 emissions (gm/kWh)
Source: Power Line (February 2010a).

Sub-critical 34 Base 1,008

Supercritical 37 Base minus 8 per cent 926

As the table shows, the supercritical technology has an edge over the sub-critical technology in terms of plant efficiency, fuel consumption and CO2 emissions, making it a cost-effective technology. Both the UMPPs, Sasan and Mundra use supercritical technology. This would bring down the variable cost resulting in lower tariffs for the consumers. 1. Competitive bidding: Absence of competitive bidding in the initial years of reforms was the bane of the power sector. The euphoria generated by Independent Power Producer (IPP) phase was short lived. The power that procured was not on the basis of competitive bidding but on the basis of closed door negotiations. In the anxiety to reach the targets, contracts were signed in a haphazard manner. In the absence of competitive bidding, the power produced by IPP was very costly, the obvious consequence of which was high tariffs for the consumers. The Electricity Act, 2003, and the Tariff Policy, 2006, emphasise the need of procuring power by competitive means so that it leads to significant benefits for the consumer. The competitive bidding route and the resultant competition would serve as the reducer of electricity prices. 2. Payment security mechanism: In order to enhance investor confidence, it was decided that the investors would be provided the site, fuel linkage, water and also obtain environment and forest clearance. As said earlier, this task would be performed by the shell companies. This is a sharp deviation from the earlier policies during the IPP phase when the developer was supposed to take up the task of obtaining all clearances on his own. Moreover, there was inadequacy of safeguards because in almost every case it was the bankrupt state electricity board (SEB) which was the buyer of the power. It is apt to quote here:
IPPs, consulting organisations and related supporting companies, while remaining the most vocal supporters of the policy, were indignant about delays in obtaining clearances and hurdles to securing adequate supply and were generally apprehensive of recovery of dues from SEBs and the countrys overall political stability. (Dubashi and Rajan 2001)

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Rajesh Gangakhedkar and R.K. Mishra In case the power generator is not able to recover the amount due from the distribution utility, for the power supplied, the generator has a right to claim the amount through the Escrow account. If there is default by the distribution utility, the power generator has a right to sell the power to any other credible distribution licences or to HT consumers. (a) Purchase of power equipment at a cheaper rate: The cost of power equipment used in the power generation plants have an impact on the capital costs of the plants. It is necessary that the power equipments are inexpensive, so that it has a favourable impact on the power tariffs. To this end, the power projects in India are increasingly sourcing their equipments from China and South Korea which offer power equipments at a cheaper rate, thus, driving down the capital costs and tariffs of power plants. In fact, China has been the favourite destination for sourcing of the power equipments. Shangai Corporation is executing the highest capacity, which includes Sasan project also. Donfang Electric Company is another company which is prominent. Equipment supplied by Chinese being competitive and cost effective, it will certainly lead to reduced capital costs. This is another reason for the cost-effective tariffs of Sasan and Mundra. (b) Ownership of resources: If the developer himself has the control over the resources, it facilitates supply of cheaper power resulting in cheaper tariffs. In case of Sasan and Mundra, coal blocks have been allotted to them. These UMPPs would benefit from the coal blocks allotted to them. Sasan would use captive coal from three blocks from Madhya Pradesh. Together, these blocks are estimated to have reserves totalling 750 mt. For the Sasan project, Reliance Power can meet the entire annual requirement of 16 million tonnes of coal from two of the three blocks (Sarita 2009). In case of Sasan project, there is another advantage that the developer would have. The empowered group of ministers has now allowed Reliance Power to use surplus coal from Sasan blocks for the groups other projects.

The cumulative effect of all these factors make the UMPPs cost effective, when compared to purely private projects, state-run power plants and even central generating stations. The tariff from the Sasan bid is about 40 to 50 paisa per kWh lower than the plants being promoted through non-competitive means. The annual savings from 4,000 MW plant would be nearly `1,200 crore. The variable cost for the Sasan project is only 0.30 paise per kWh. Even the NTPC pit head coal plants which are cost effective do not have such a cost-effective variable component. For example, in case of Talcher 2 or Korba, the fuel cost of power is about 60 to 85 per cent more than that of Sasan plant (Prayas Energy Group 2006). As the winning bidder himself will take up the mining, it would add to cost efficiency. The variable costs of state generating plants, central generating stations are not so low when compared to that of Sasan and Mundra, as shown in Tables 5 and 6. As can be seen from the tables, even the central generating stations operated by NTPC which are considered to be cost effective have a much more higher variable component when compared to that of UMPPs such as Sasan and Mundra. In a nutshell, it can be said that in case of UMPPs the bidding process by which they come into existence, the technology being used, the ownership of resources, cost-effective inputs would be the contributory factors for the cost-effective generation.

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Table 5. Variable Costs of APGENCO Power Plants (`/kWh) Station VTPS (I, II, III) RTPP stage I RTPP stage II KTPS (A, B, C) KTPS D (KTPS-V) RTS-B Variable Cost 1.2583 1.6296 1.4700 0.99953 1.0118 1.2089

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Source: Andhra Pradesh Electricity Regulatory Commission (2008).

Table 6. Variable Cost of Central Generating Stations (`/kWh) Station NTPCSR (Ramagundam) stages I and II NTPC Ramagundam stage III NTPC Talcher stage 2 NTPC Simhadri Variable Cost 1.05 1.14 0.74 1.12

Source: Andhra Pradesh Electricity Regulatory Commission (2008).

7. Factors Favouring the Growth of UMPPs

The development of UMPPs has added another chapter in the power sector reforms of our country. The electricity act and the tariff policy underscore the need of having cheaper consumer tariffs, which is possible if generation is cost effective. The UMPPs are expected to achieve this end. The following factors would have a favourable impact on the growth of UMPPs: 1. A progressive legislation such as Electricity Act, 2003, and Tariff policy, 2006, unambiguously state that competitive bidding is vital for having competitive tariffs. With such highly reformative pronouncements in place, we can say that UMPPs would get the necessary push. 2. The PPA between the developer of the UMPP and the procurers are very diligently made. It unambiguously lays down the obligations of both the developer, who is called as seller, and the procurers. Article 3 deals with conditions subsequently to be satisfied by the seller and the procurers. Article 4 deals with obligations related to the development of the project. Sellers responsibilities regarding construction of the project, commissioning and commercial operation are mentioned in Articles 5 and 6, respectively. Article 11 contains provisions regarding the payment of bills by procurers and the rights available to seller of third-party sales in the event of default by procurers. The Force Majeure5 provision contained in Article 12 is another effective provision that protects the non-performance of both the seller and the procurers in case of events which are beyond their control. The Force Majeure Exclusions6 ensure that the parties do not take undue advantage of protection given to them. A well-written agreement would certainly reduce the probability of disputes which works in favour of the future UMPPs.

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Rajesh Gangakhedkar and R.K. Mishra 3. The achievement of financial closure by Sasan and Mundra, and now the Krishnapatnam project shows that the lending agencies are optimistic about the viability of the projects. The international lending agencies such as IFC and ADB are willing to lend to these projects. Among the domestic lenders the nationalised banks are the part of the consortium. The UMPPs do not seem to face any dearth of finance. In fact, experts7 associated with Sasan project feel that it is remarkable that such a large integrated project could raise debt amidst such tight conditions. 4. Particularly noteworthy is the role of PFC. As the SPVs are the subsidiaries of PFC, the UMPPs are likely to make rapid strides. The association of PFC with UMPPs, right from the stage of bidding process, raises the confidence of the investors in the power sector, which during the days of IPP was woefully lacking. 5. Allocation of coal blocks to the projects would solve the problem of uncertainties related to coal.

8. Issues and Challenges

The expectations from UMPP are high. The Indian power sector has travelled a long way from the early stages of the lack of investor confidence8 to now when the confidence is at its highest. The perception among the experts9 is that the planners want to prove that the UMPP would become a good model of governance. Hence they ensured a tight control. It is expected that planners would make concerted efforts to make it a success. However, if we infer that nothing would go amiss in the case of UMPPs, then we are being too optimistic not to fathom the problems that may crop up. We cannot remain oblivious to the issues that we may have to grapple with. A well-documented PPA apart, there would always be a room for dispute between the parties. The capacity additions by UMPPs are humungous. UMPPs are being looked as catalysts of change in the domain of power generation. Any backtracking by the developer would jeopardise the future plans of power generation. The escalation factor is one such factor that may deter the developer notwithstanding the provision of escalation index10 in the PPA. The escalation of fuel cost and the inadequacies of fuel are the issues that need serious attention. All the UMPPs are coal based. According to the Integrated Energy Policy-Report of the Expert Committee, coal shall remain Indias most important energy source till 203132. The government looked at 11 scenarios using a variety of fuel mixes, such as gas, coal, renewable, nuclear. On the basis of these scenarios, the projections of fuel needs of various sources were made. The government came to a conclusion that coal would continue to be the dominant fuel. Figure 1 gives the need of coal in million tonnes till 2032, in order to sustain a growth of 9 per cent in GDP. As Figure 1 shows, in order to sustain a 9 per cent GDP growth over 1,600 million tonnes of coal would be required. This being the case, concerted efforts are required for cheaper coal and its assured supply, so that the UMPP developers do not back out on the grounds of escalation cost and supply bottlenecks. The recent policy of Indonesian Government, which is one of the significant suppliers of coal to India, to put restrictions on export of coal is a cause for concern in coastal UMPPs, such as Mundra (Power Line 2010b). This would have an adverse impact on the cost economies of the project. The other issue that may crop up, which is a regulatory issue, relates to the merit order dispatch, according to which the cheapest power is dispatched first. If the power generated by UMPPs becomes costlier, the state regulatory commissions would direct the discoms to purchase power from a cheaper source. This is easy. However, the problem would arise in the event of state generating plants supplying much more costlier Journal of Infrastructure Development, 4, 1 (2012): 2739

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Figure 1. Demand for Coal from 201132

Source: Integrated Energy Policy-Report of the Expert Committee (2006).

power when compared to that of UMPPs. In such a case, is it the case that the state regulatory commissions direct the discoms to purchase power from the UMPPs only and not from the state generating plants?11 Apart from these regulatory issues, the possibility of international lending agencies refusing to fund the UMPPs in India would be a serious threat. It is reported that IFCs performance standards are much more stringent when compared to the environment and social guidelines in India. In the process of funding the Mundra project, IFC helped Tata Power to conduct a social impact assessment. There is a probability that if IFC continues to have significant presence in funding of UMPPs, the developers would always have the challenge to meet its stringent standards, failing which IFCs financial support might not be forthcoming. Given the enormous size of the UMPPs, financing from international lending agencies would always be required. The developers of UMPPs not only have the challenge of meeting the conditionality of international lending agencies but also the challenge of any change in domestic policies related to external commercial borrowings. For example, Reserve Bank of India putting restrictions on external commercial borrowings. Political interference has always been a stumbling block in the process of reforms. This quote would bring forth the point: We probably still do not have a clear answer why a committed reformer should not be able to cut through the resistance with the political backing of the beneficiaries of power reform (Lal 2005). Political interference is one of the reasons why many a reform measures remained a dead letter.12 One such interference in case of UMPPs is related to the sourcing of power equipment. Government is seriously considering changing the policy to restrict imports of power equipments from China (Noor 2009). If the government goes ahead with its decision, the UMPP developers would have to source their equipments from domestic players, which would mean higher costs; this in turn would force the bidders to quote higher tariffs. In spite of competitive bidding being made a policy, we still find some states not following this mandate. For example, Maharashtra is planning to extend an existing sub-critical unit at a cost of 4.5 crore. In fact, some of the states are requesting that they be allowed to invite IPPs through MOUs (Prayas Energy Group 2006). Land acquisition issues would continue to haunt any private participation in UMPPs. Incidents such as those in Nandigram discourage the private players, both domestic and foreign. People who have been closely associated with the development of UMPPs sadly note that some of the UMPPs are struggling to move ahead with land acquisition issues. If there is a delay that is beyond the control of the developer, it may lead to cost overruns necessitating the revision of project costs.13 Issues such as resettlement and rehabilitation have Journal of Infrastructure Development, 4, 1 (2012): 2739

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resulted in several projects being stalled, like UMPPs in Maharashtra and Karnataka. The Enron incident is still fresh in memory of any close observer of developments in power sector reforms. The project was marred by problems such as high cost of fuel, sustainability of the project itself, to mention a few. The main issue was that the PPP project risks were not properly assessed. All the players in UMPPs have to be cautious not to create another Enron among the UMPPs. Disputes among the participants could pose a serious threat. Tata Power challenged the government decision that allowed Reliance Power to divert surplus coal from the Sasan power project (Sasan 2010). This is the first dispute between the first two UMPPs. Such disputes are not a happy augury for the UMPPs in future. Above all, there is the challenge of balancing the interests of profit motive of the private sector and the public sector interest for public service. The perpetual challenge would be apportionment of risk that is fair, rational and sustainable.

9. Conclusion
The idea of UMPP is definitely a laudable measure. There are high expectations on it in terms of capacity additions, bridging the demandsupply gap, cheaper tariffs and other factors that would add to the positive side of the power sector. The role of Ministry of Power needs to be appreciated. So also, the role of the lending agencies, specially the PFC. The sheer size of the UMPPs poses many challenges and issues, ranging from regulation to logistics. The challenges have to be met. Moreover, all these positive developments would be nullified if the weaknesses such as lack of political will is not corrected and other concerns are not addressed. Those who do not learn from history are condemned to repeat it. Therefore, if we have conceived the idea of UMPPs and are going ahead with it, let us take it to a logical conclusion.

Notes
1. There are about 515 projects. Highest number of PPP is in road sector, followed by urban development which has 78. In education sector, there is one project and in health, it is 2 (PPP India database, Ministry of Finance, Government of India). 2. The model has been successful, although facing some problems. 3. Hindustan Zinc Ltd, Larsen and Toubro, BHEL, Cement Corporation of India Ltd, Tata Teleservices Ltd are some of them. 4. In contrast to BuildOperateTransfer (BOT) case, in which the formal ownership of the assets is with the government, in BOO case, the private investor retains ownership and the control of assets. 5. As per this article, Force Majeure events are those which are beyond the control of the affected party, that unavoidably delays the affected partys performance of its obligations under the agreement. They are either Natural Force Majeure Events or Non-natural Force Majeure Events. Act of God such as earthquake, drought, flood, etc., belongs to the former category. Nationalisation or compulsory acquisition by government, act of war, embargo, blockade, riot, industry-wise strikes, radioactive contamination are some of the events that belong to the latter category. 6. Force Majeure shall not include any act or event or circumstance which is within the reasonable control of the parties. For example, unavailability, late delivery or changes in cost of the plant, equipment, fuel, insufficiency finances or funds or the agreement becoming onerous to perform to mention a few. 7. Interview of J.P. Chalsani, Power Line (September 2009).

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8. The IPPs were not at all confident of the financial soundness of state electricity boards. They were resorting to non-recourse financing to develop the power projects which means that the projects are not being developed on the balance sheet of the parent company but through a separately created project company. 9. Interview with senior researcher from Prayas, an NGO, which has done considerable research in the area of power sector reforms. 10. The value of escalation index shall be computed by applying the per annum inflation rate specified by CERC for payment of escalable capacity charge and escalable energy charge, as per the provisions of the competitive bidding guidelines. For example, if the prevailing inflation rate specified by CERC is 5 per cent per annum, then after the end of the first month after the bid deadline, the value of escalation index shall be 100.4166 (100 + 5/12) for quoted escalable energy charges. After that, at the end of the second month beyond such first month, the value of escalation index shall be 100.8332 (100.4166 + 5/12). 11. Interview with senior professor from ASCI. 12. Charging 0.50 paise in a rupee for the agriculture sector is one such reform measure which has remained a pious resolution. 13. Interview of S. Ramkrishnan, Power Line (September 2009).

References
Andhra Pradesh Electricity Regulatory Commission (2008), Andhra Pradesh Electricity Regulatory Commission Tariff Order. Hyderabad: Andhra Pradesh Electricity Regulatory Commission. Department of Economic Affairs (2009), Position Paper on the Power Sector in India. Department of Economic Affairs, Government of India. Dubashi Navroz K. and Sudhir Chella Rajan (2001), Power PoliticsProcess of Power Sector Reform in India, Economic and Political Weekly, 1 September: 336791. Ghosh, Saptadwipa (2009), UMPP Update-Progress on the Ground, September, pp. 2324. Grimsey, Darrin and M.K. Lewis (2007), Public Private PartnershipsThe Worldwide Revolution in Infrastructure Provision and Project Finance. UK: Edward Elgar publishing. Integrated Energy Policy (2006), Report of Expert CommitteePlanning Commission. Lal, Sumir (2005). Can Good Economics Ever Be Good PoliticsCase Study of Power Sector in India, Economic and Political Weekly, 12 February: 64956. Noor, Mohammad (2009), Equipment Sourcing Restriction Could Hurt UMPP Scheme, Economic Times, December. Power Line (2010a), Coal CostsTrends in Pricing, February. (2010b), Coal Crunch Supply Side Issues. Prayas Energy Group (2006), Some Good News in the Power Sector: Initial Success in Solicitations for Ultra Mega Power Projects. Sarita C. (2009), Rel Power Can Get Enough Coal for Sasan Even without Chattrasal. Available online at http:// www.mydigitalfc.com, accessed on 23 July 2010. Sasan (2010), UMPP: SC Seeks Centres Reply on Tata Power Plea. Available online at http:// www.yahoo.com, accessed on 23 July 2010.

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Sanjeeb Kumar Mohanty and Jinendra Nath Mahanty

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