Energy Policy 46 (2012) 427–433

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Energy Policy

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Indian UMPP dream turned sour: A case study based discussion

Mohit Goyal a,b,n, Hemant Dujari a,c,1, Sarthak Misra d,2

a Indian Institute of Management (IIM), Ahmedabad, Indiab Department of Electrical Engineering, Indian Institute of Technology (IIT), Delhi, Indiac Institute of Engineering and Management, Kolkata, Indiad Department of Management Science & Engineering, Stanford University, CA, USA

a r t i c l e i n f o

Article history:

Received 2 November 2011

Accepted 2 April 2012Available online 18 April 2012

Keywords:

Ultra Mega Power Plants

Competitive bidding

Energy policy

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x.doi.org/10.1016/j.enpol.2012.04.005

esponding author. Tel.: þ91 9814735056.

ail addresses: goyal.mohit@gmail.com (M. Go

.dujari@gmail.com (H. Dujari), sarthak@stanf

l.: þ91 9903525685.

l.: þ1 650804 8274.

a b s t r a c t

India has experienced a peak power deficit of more than 12% in the last decade. In order to reduce the

deficit, policymakers initiated a new energy planning policy through the introduction of Ultra Mega

Power Projects (UMPP). However, since the introduction of UMPP Policy in 2006, a number of instances

have exhibited the limitations in its implementation and its inability to adapt to changes in the external

factors. These limitations have ranged from a change in the bidding guidelines post awarding of project;

to external threats such as regulatory changes in a foreign country. This paper attempts to draw

learning from issues in the implementation of UMPP policy through short case discussions. The authors

subsequently illustrate the issues faced during implementation and actions taken by the Government;

and suggest possible measures to resolve these issues.

& 2012 Elsevier Ltd. All rights reserved.

1. Introduction

Ultra Mega Power Projects (UMPPs) were expected to be thesolution to India’s burgeoning energy crisis. UMPP Policy was aresponse to the ineffective energy planning process that existed atboth the Central and the State levels in India. It was designed toeffectively tackle the issues faced by the power sector in the mid-2000s. However, almost six years after the policy was introduced,the outcomes have not met the expectations. Out of the originalplan to award nine UMPPs, only four have been awarded so far.Even out of these four, two are stuck due to various implementa-tion issues.

Our objective is to briefly introduce the concept of UMPP,highlight its importance as an energy planning tool and discuss indetail the implementation issues faced during the execution ofthe UMPP policy. UMPPs provide significant scale economies andeffective risk-distribution benefits which, if properly implemen-ted, could help developing countries to quickly reduce theirenergy deficit. Moreover, India’s experience in executing UMPPpolicy would provide important lessons to ensure success of suchinitiatives in other countries.

ll rights reserved.

yal),

ord.edu (S. Misra).

2. Why UMPPs

India’s GDP growth has faced a significant obstacle in the formof power shortages in the country with an average power deficitof greater than 7% and a peak deficit of 12% over the last decade.As a planning measure, the Indian Government comes out withfive-year plans, Power sector being an integral part of that. TheGovernment sets targets for new capacity addition across thesector. However, actual performance against these five-year plantargets has been extremely poor with less than 55% of thetargeted capacity being added over the three plan periods from1992 to 2007. The reasons identified for shortfall have primarilybeen attributed to pre-construction issues.

In light of poor performance in the past, the Government of India(GOI) recognized the need to address the inherent issues andaccomplish an ambitious target of adding 78,577 MW of new powergeneration capacity over the 11th Five year plan (2007–2012). Itrecognized the need to support mega projects, each of which wouldadd a significant capacity while at the same time utilize economies ofscale to lower power generation costs, ramp-up commercial use ofsupercritical technology and effectively re-distribute associated riskamongst different stakeholders. Thus, the idea of establishing UMPPscame to the forefront and government formulated the UMPP Policy,2006 (Ministry of Power; Ministry of Power, 2006). Through multiplerounds of discussion with financing agencies, nodal agencies (agen-cies responsible for Bid Process Coordination e.g., Power FinanceCorporation (PFC) in case of bidding coordination for UMPP projects),regulators and developers, the GOI formulated a framework tosupport the development of UMPPs.

M. Goyal et al. / Energy Policy 46 (2012) 427–433428

Within this framework, UMPPs are conceptualized as projectsdesigned to generate �4000 MW of power, while availing a tenyear tax holiday, zero customs duty on import of capital equip-ment and other duty related benefits. These incentives forms anintegral part of the UMPP policy in order to attract private sectorparticipation from both domestic and international firms. Projectswere to be awarded through a transparent competitive biddingprocess. The competitive bidding process was designed to ensurethat different types of risks were allocated to the institutionswhich were best equipped to manage them.

The framework proposes that the management of each projectshould be carried out through a Special Purpose Vehicle (SPV) setup by a Government owned institution called the Bid ProcessCoordinator (BPC). The SPV would take care of the process toobtain environmental clearances, forest clearances, establish coaland water linkages, sign power purchase agreements, undertakerehabilitation and resettlement of project affected people, initiateland acquisition exercise and ensure payment security mechan-ism. In summary, pre-construction activities were to be com-pleted by the SPV before commencing the competitive biddingprocess. Such a design was to ensure/ensured that the pre-construction risk was handled by a government owned institutionwhich is best equipped to handle such risks. After the completionof competitive bidding process, SPV was to be transferred to theselected bidder who was required to implement the project andhandle the construction risks.

The bidding framework for UMPP policy was touted as theperfect solution to India’s energy crisis in order to ensure timelyexecution of projects along with cheaper cost of generation. Thereasons are highlighted as follows:

�

Effective project risk distribution: Project risk can be segre-gated into pre-construction risk and project construction risk.While the pre-construction risk can be better handled by theGovernment owned institutions, project construction riskwould be more effectively managed by the generation com-panies. UMPP policy provided an effective solution to this asthe concept was to kick-start the process through a publicinstitution and ensure all statutory clearances are in placebefore inviting bids from generation companies. A Govern-ment institution is held responsible for managing the initialrisks, especially regarding clearances and land acquisition, andthe winning bidder is responsible for project commissioningand operations. By apportioning the relevant risks to thoseparticipants who are best placed to manage them, the overallrisk profile of the project is better managed. � Adoption of supercritical technology: Large projects were

required to support the setup of supercritical equipmentmanufacturing capacity in India. This was made possiblethrough the UMPP policy. UMPPs are required to operate onsupercritical technology i.e., a technology where the equip-ment is designed to operate above the critical pressure ofwater (221.5 bar). The adoption of this technology not onlyresults in higher efficiency but also reduces emission. UMPPswould also utilize washed coal and coal rejects from boilers toproduce additional power. Also, these projects are envisaged tohave 100% ash utilization from their inception. Since theseprojects would result in lower carbon emissions, additionalincome from accrued carbon credits would further lower thetariff.

� Off-take risk mitigation: UMPPs are designed to sell power to

multiple distribution companies, which lower the risk of pay-ment default by reducing dependency on a single distributioncompany. It also reduces the risk of creating pockets of powersurplus within the country which would happen if a singledistribution company has to purchase power from the UMPP.

�

Reduced fuel risk: The UMPP projects are equipped to useonly coal as a fuel for the power production. The projects drawcoal from various locations to reduce its dependency on aparticular source. The diversification in sourcing the fuelreduces the fuel risk for the entire scheme considerably.Moreover, since the projects are designed at national level,the planning agency has ensured an approximately equal splitbetween imported coals based power plant and power plantshaving domestic fuel linkages. � Lack of energy planning at the State level: Energy planning

at the State level had become dysfunctional and there washardly any effort to add new capacity. State utilities wereincurring huge losses and the State Governments were facingbudget constraints. Hence, large scale projects could not beundertaken at the State level to realize scale benefits, and largecapacity additions had to be planned at the Central level.

UMPP policy was touted as a thought-through energy planningtool, a policy which would help in quickly reducing the energydeficits. It had support from all the stakeholders; even the foreignutilities which had stayed away from the Indian power sector inthe past expressed their willingness to participate in the biddingprocess. Subsequently, a total of nine UMPPs were shortlisted bythe Government. The competitive bidding process for the first twoUMPPs awarded in the year 2007, was a raging success with morethan 10 bidders, both domestic and international, participating inthe bidding process. Even the tariff of these generation companieswas the among the lowest—while the spot power prices in themarket were INR 6–7 per kW h, tariff quoted in the competitivebidding process for pit-head coal based and imported coal basedplants were INR 1.19 per kW h and INR 2.26 per kW h, respectively.These bids were much lower than the bids submitted by NationalThermal Power Corporation (NTPC), the largest Indian state-ownedelectric utilities company based in New Delhi and widely regardedas the most efficient, power generation company in India. Hence,the UMPP policy was quickly hailed as a successful strategy for theIndian power sector. However, a few years after the introduction ofUMPP policy, issues emerged during its implementation and acase-based study provides key learning experiences which policy-makers across the world can leverage upon.

3. Indian UMPP implementation experience

This section highlights some of the ‘incidents’ or cases whichled to litigations and debate among the policy-makers in inter-pretation of the policy. Each case study provides a brief back-ground, analysis of the key issues, possible measures to resolvethem and key lessons that could be drawn from it. Hence, thissection would be of immense interest to policy-makers andregulators in other developing South Asian countries like Nepal,Bhutan, Bangladesh, Cambodia etc. Who might be looking atundertaking the competitive bidding approach for awarding bigticket projects.

3.1. Immediate change in ownership structure of the bidders post

project award Utpal (2008)

Nine bidders including two Indian corporate houses, JindalPower and Lanco Infratech, placed bids for Sasan UMPP. LancoInfratech submitted the bid with Globeleq Singapore in a con-sortium where it held a 30% stake. The consortium quoted a tariffof INR 1.19 per unit and was awarded the project. Jindal Powerwas placed 7th in the same bidding. After the completion ofbidding process, Globeleq UK decided to exit the power businessand put up Globeleq Singapore for sale. Subsequently, Lanco

M. Goyal et al. / Energy Policy 46 (2012) 427–433 429

Infratech and Jindal Power formed a joint venture and acquiredGlobeleq Singapore. This transaction raised issues about owner-ship transfer of Sasan UMPP immediately after it was awarded.Besides the concerns on change in ownership, the Lanco-Globeleqconsortium allegedly misrepresented facts during the biddingprocess. Following two issues were raised in this situation:

3.1.1. Issue 1: Change in ownership of lead member (Globeleq

Singapore) in the consortium

Globeleq Singapore sold its stake to companies which partici-pated in the bidding process, planning an exit before the projectwent under construction. Concerns were raised since the biddingconsortium used the financials of Globeleq Singapore to meet thefinancial and technical eligibility criterions set by the biddingdocuments. Additionally, the stake was sold to Jindal Power, a losingparty in the bidding process. Globeleq counter argued that biddingdocuments do not prescribe any restrictions on change in share-holding of the members of participating consortium. Accordingly achange in the shareholding structure of Globeleq Singapore does notviolate the terms prescribed under the bidding documents.

This situation provides a key learning for other developingcountries planning to undertake competitive bidding process notonly in the power sector but in the infrastructure sector ingeneral. On one hand it can be argued that in this economic erawith Mergers and Acquisitions (M&A) transactions in plenty,constraining the winner from bringing about immediate changesin its shareholding structure would hamper its ability to executeprojects. An example is Reliance Power, an Indian company whichwon three UMPPs, who has been diluting its stake to strategicpartners like equipment manufacturers, financing agencies andprivate equity companies to raise capital. Disallowing similartransactions would limit the ability of developers to executeprojects successfully.

On the other hand, if the developer is allowed to change theownership structure then it may even reduce the overall compe-tition in the process. For example, a new entrant in the industrymight bid lower tariff while the established players would quotehigher tariffs knowing that even if established players lose theproject then they can eventually buy out the new entrants. Itcreates an incentive for the new entrants to quote lower tariff,even if such tariffs are unviable, and then sell their stake in theproject to the established players, realizing a quick capital gain ontheir investment. This situation creates a moral hazard for boththe parties. Moreover, significant divestment from the leadmember or a majority shareholder raises doubts about thefinancial and technical capabilities of the new consortium tocomplete the project on time. Thus, it significantly increases therisk of the project.

Absence of any clauses in bidding guidelines to provide aframework for the sale of stake from one party to another can alsoresult in significant revenue loss for the Government as experi-enced by the GOI during its award of telecom license to UnitechIndia for INR16,510 million. Subsequently, Unitech sold 60% stakein the entity for INR61,200 million making a windfall profitwithout making a single rupee of investment in the business.Difference in the amount could have been collected by GOI aslicense fee but poor policy design resulted in a significant loss tothe GOI. Subsequently in 2009, the GOI amended its policy andadded a clause which imposed a three-year lock-in clause onequity dilution by telecom companies from the date they weregranted telecom licenses. It is a key learning for the developingcountries which are in the process of designing frameworks andpolicies to implement competitive bidding process for infrastruc-ture related projects.

Since, drawbacks in bidding documents often create problemsfor projects, the bidding documents should provide for a clearer

exit route and have clear provisions relating to mergers andacquisitions and change in membership of bidding consortiumsor provisions relating to equity lock-in requirement. UMPP policylater incorporated the equity lock-in concept to restrict immedi-ate change in ownership structure. The lock-in is also applicable ifthe selected bidder is a bidding consortium. The lead member ismandated to hold 26% of the total paid equity share capital forfive years after project award whereas other members areallowed to sell their stake provided that remaining members inthe consortium meet the minimum equity holding criteria. Thefollowing clauses have been added in the Standard biddingdocuments to implement this change:

The aggregate equity share holding of the Selected Bidder inthe issued and paid up equity share capital of the Seller shall notbe less than the following:

�

51% up to a period of two years after COD of the PowerStation; and � 26% for a period of three years thereafter.

Further, policy makers also incorporated clauses to ensure thatafter the change in ownership, the bidder shall be both technicallyand financially qualified as required by the provisions. In order tomake the process more transparent, the policy also restricts theplayers from selling the stake to any firm or its parents or affiliateswho participated in the bidding process. This mechanism makesthe bid evaluation process more objective and transparent.

3.1.2. Issue 2: Misrepresentations of facts

It was alleged that Globeleq Singapore had used the financialand technical strengths of its parent company, Globeleq UK, tomeet the criteria laid down in the Request For Qualification (RFQ)document. Moreover, the consortium did not provide a legallybinding resolution to associate Globeleq UK (parent company ofGlobeleq Singapore) with the project at the Request For Proposal(RFP) stage. This was overlooked while awarding the letter ofintent to the consortium.

Against the above allegation, Globeleq contended that the RFQdid not prescribe any separate format for providing information incase the bidders were relying on their parent companies. Hence,Globeleq Singapore provided the financial and technical informa-tion of its parent company Globeleq Limited, UK under its ownname in the formats already prescribed. Globeleq contended thatit had mentioned ‘‘Globeleq Singapore’’ as the lead member andhence no confusion should have been made that Globeleq UK wasinvolved in the bidding process.

Another issue was that it was later found out that LancoInfratech had drawn upon the credentials of Lanco KondapalliPrivate Ltd and Aban Power Company Ltd to meet the financialqualification requirement of the Sasan project, by submitting thatthese companies were its affiliates. However, no document/information was submitted by Lanco Infratech to establish thatthe said companies were its affiliates. Contrary to their submis-sion, the red herring prospectus of Lanco Infratech stated that thesaid companies were not its affiliates.

The relevant provisions which were incorporated later on totake care of these issues in the RFQ documents are:

The Bidding Company or a Consortium Member (includingLead Member) can take 100% benefit of the technical and financialcapability of a Parent and/or its Affiliates for the purpose of BidEvaluation. If a Bidding Company or a Member in the BiddingConsortium wishes to take benefit of the technical and financialcapability of its parent company and/or its Affiliates, it will haveto submit a legally binding undertaking supported by a boardresolution at the RFQ stage from its parent company and/or its

M. Goyal et al. / Energy Policy 46 (2012) 427–433430

Affiliates stating that all the equity investment obligations of theBidding Company or the Member of the Consortium shall bedeemed to be equity investment obligations of the parent com-pany and/or its Affiliates and in the event of any default the sameshall be met by the parent company and/or its Affiliates. More-over, the Bidding Company or the Consortium Member shall haveto provide a certificate stating the exact relationship with suchParent and/or Affiliate including exact details about the equityshareholding. Such certificate shall be certified by the CompanySecretary and one of the Directors of the Bidding Company/Consortium Member.

In lieu of above two issues, Lanco Infratech’s bid was rejectedand the project was awarded to the next bidder, Reliance Powerafter Reliance agreed to match the bid submitted by LancoInfratech.

3.2. Modifications in bidding guidelines after awarding the project

(The Rediff News, 2009)

Reliance Power was awarded the Sasan UMPP after LancoInfratech’s bid was cancelled. As per the terms of tender, threecoal blocks were allocated to Reliance Power for the exclusive useof Sasan UMPP. As per Reliance Power’s estimates, the allocatedcoal reserves are more than enough for Sasan and hence theysought permission from the Government to use excess coalreserve for another 4000 MW plant it was building in the samestate, Madhya Pradesh. The case was referred to the EmpoweredGroup of Ministers (EGoM), and with the support of the MadhyaPradesh State Government, Reliance power was allowed to divertthe extra coal reserves provided that the Sasan UMPP does notface coal shortages and that the power generated by the use ofextra coal at the other plant is sold through competitive bidding.

However, Tata Power filed a court case against the Govern-ment’s decision and claimed the decision to be arbitrary andillegal since it was against the terms laid down in the biddocument. Tata Power argued that other bidders who submittedbids for Sasan UMPP were not aware of the provision to use thesurplus coal and claimed that such information should have beenprovided to all the bidders upfront since it would have led tolower tariffs in the bidding process. Additionally, Tata’s case wasstrengthened by the fact that while power from Sasan UMPP wasto be sold at INR 1.19 per unit, the power from the second plant ofReliance Power was to be sold at much higher prices, despite thefact that the economics for the both plants were identical (similarcoal costs, incentives on duties, taxes, etc.). Reliance Powercommitted 1200 MW power from the second power plant unitto the State of Madhya Pradesh at a tariff of INR 2.45 per unitwhereas power from the Sasan UMPP was committed at INR 1.19per unit.

However, the Government insisted that Tata power had nolocus standi to file a petition since the bidders were required tomake independent assessments and their decision is in line withthe government’s policies. After a prolonged battle in the court,the Delhi High court ruled the decision in favor of GOI and legallyupheld its decision. Subsequently Tata Power has moved to theSupreme Court of India on this issue and the case is pendingbefore the court.

Another example of such a situation in India was when LancoInfratech was awarded a 1000 MW coal based project in UttarPradesh through the competitive bidding process. After awardingof project, Lanco Infratech requested the State Government toincrease the project capacity by 20% to 1200 MW. Their request toset up two 600 MW units instead of two 500 MW units wasallowed. Reliance Power, the unsuccessful bidder for the project,challenged the decision of the State Government requesting thatfresh bids should have been invited since the project economics

have changed. However, Reliance Power’s petition was dismissed.Allowing for change in unit configuration or allowing additionalunits on merchant basis are serious deviations and could beavoided altogether as they make the bidding process less trans-parent. The decision of the State Government is inconsistent withthe commonly accepted bidding principles and the sanctity of bidinvitation documents.

Experience from this case study indicates that any changes;whether relating to government policy, terms and condition orany other information which could materially change the eco-nomics of the project; should be brought to the notice of all thebidders prior to the bidding process. Otherwise, the situationwould lead to bidders quoting unviable tariffs and once theproject is awarded, bidders can lobby with the Government toget additional benefits. Revisions of guidelines after allotmentmay lead to speculation by the bidders and hinder efficientbidding mechanism.

3.3. Increased execution risk due to concentration of projects to a

few players (Utpal, 2007)

Reliance power has won three out of four UMPP, therebyraising concerns about excessive dependence on a few companiesto execute the flagship UMPP program. The risk is considerablyincreased since Reliance Power has no proven track record inconstructing and operating power plants of such scale. GOImulled various proposals/suggestions by different stakeholdersto address this issue.

3.3.1. Cap on number of projects that can be awarded to a single

player (Utpal, 2009a)

Even though GOI initially ruled out the possibility of imposinga cap on the number of projects to be awarded to a single player,they eventually placed a cap on the number of UMPPs that can beexecuted by a single player at three. However, it does limit theexposure of this flagship program to a single entity, eventuallymitigating the risk of non completion of projects in case of issueswith the chosen player.

3.3.2. Additional net worth requirements

The GOI imposed an additional net worth requirement oncompanies which have already been awarded a UMPP in bids heldearlier. This policy decision was welcomed by different stake-holders, as this clause would stop the bidders from using samebalance sheet for multiple projects. For example, if the olderfinancial criterion to become eligible for a UMPP was a net-worthof INR 20,000 million, the new clause required that if thecompany after winning first UMPP wants to bid for second UMPP,it would have to show additional net-worth of INR 20,000 i.e., atotal net-worth of INR 40,000 million or more.

3.3.3. Higher performance guarantee

UMPP policy mandates the bidder to furnish contract perfor-mance guarantee of INR 3000 million for the first project and anadditional INR 1500 million for every bid thereafter, i.e., for thirdUMPP the bidder would have to provide a performance guaranteeof INR 6000 million. The above measures adopted by the Govern-ment have led to a robust framework, since they require thebidders to showcase additional financial strength and commit-ment if they intend to pursue more than one project. The frame-work restricts over-dependence on a single bidder diversifies theportfolio suitably.

The three measures in unison provide an effective risk mitiga-tion mechanism. Increase in performance guarantee and addi-tional net worth requirements ensure that a player operating on

M. Goyal et al. / Energy Policy 46 (2012) 427–433 431

more than one project meets the credentials required for theimplementation of multiple projects. Cap on number of projectsto be awarded to a single player ensure that the flagship programof the GOI is adequately diversified and not overly dependent on asingle player for execution.

3.4. Failure to segregate pre-construction and project construction

risks (RelianceInsider.com, 2009)

In 2009, Reliance Power won its third UMPP, the Tilaiya UMPP.As per the bidding guidelines, Reliance Power was expected totake charge of the SPV under which the UMPP would be devel-oped within three months. However, Reliance Power refused todo so until the nodal agency acquired the requisite statutoryclearances.

As per the UMPP Policy 2006, the nodal agency was required toacquire all the statutory clearances before inviting bids. However,in certain cases the nodal agency carried out the bidding processwithout completing the pre-construction activities like forestclearance etc. Reliance Power already had a bad experience earlierwith the Sasan UMPP (The Hindu, 2008) where it could not goahead with project execution because the land acquisition processwas not completed by the nodal agency, potentially delaying thetimely commissioning of the project.

Hence, Reliance Power refused to take charge of the TilaiyaUMPP as the financial bid was based on the understanding thatthe SPV along with all the statutory clearance would be handedover to the winning bidder within three months. If the assump-tions behind the bid do not hold true, it could lead to unwantedconsequences including a failed project, negative investor senti-ments or low participation from international bidders in subse-quent projects. Situations like this should be avoided at all coststo maintain investor sentiments and international credibility.

3.5. Creation of level playing field for all players (LATHISH, 2009);

(Utpal, 2009b)

The developing countries often have dominance of the publicsector companies in the power and utilities sector. In a bid tointroduce private sector participation and make the sector com-petitive, ensuing policies often result in a non-level playing fieldfor the public and private sector firms. The public sector firms bythe nature of its existence cannot enjoy the level of confidentialitya private firm enjoys. Moreover, the flexibility and agility in thepublic sector firms is limited. Thus policies and competitivebidding guidelines must ensure a level playing field betweenpublic and private sector companies.

This section highlights one such situation faced by an Indianpublic sector company NTPC that had an installed generationcapacity of 30,644 MW in 2010. However, in the four UMPPswhich have been awarded so far, in spite of it being the largestand most experienced power generating company in India, NTPChas not been able to win any of them.

NTPC and the Ministry of Power have separately come outwith clarifications highlighting the issues faced by the publicsector companies while participating in the UMPP process. Thekey issue identified by them is the non confidentiality of theirpricing information. Since the CVC guidelines do not allowcommercial secrecy of the bidding offers submitted to NTPC bythe vendors, NTPC is unable to maintain the confidentiality ofcosts in arriving at the bid quotations. Before submitting UMPPbids, NTPC invites bids from its vendors and decides its bid on thebasis of lowest available price of power equipment supplied byvendors. According to the present CVC guidelines, this is an openand transparent process and no secrecy can be maintained by anypublic sector company in such matters. As a result the cost at

which NTPC buys the equipment goes into the public domain, notonly giving private parties information about NTPC’s cost struc-ture but also setting price benchmarks for them to negotiate withthe vendors. CVC guidelines are required to be followed strin-gently in order to ensure transparency and accountability. How-ever as seen above they are creating problems for the publicsector company while participating in the bidding process.

Suggestions have been made to deal with these guidelines.One such suggestions states that NTPC may enter into a ‘‘pre tie-up’’ with a manufacturer before bidding where it has no freedomto give a commitment to the pre tied-up party that the equipmentshall be sourced from it. However this may affect the seriousnessof the manufacturer as it is not assured of winning the supplycontract, which in turn would affect the competitiveness of theirprice quotation.

A modified version of the above suggestion is that NTPC shouldobtain tariff quotations from a set of empanelled equipmentvendors through the process of inviting ‘‘limited tenders’’ priorto the bidding process for any major project. This way, theconfidentiality of the quotes can be maintained since the quota-tions are not accepted in a bidding process and hence do not needto be released in the public domain. NTPC can maintain thesecrecy of the quotes as well as get estimates of the costs from theempanelled vendors in order to arrive at a bid. Empanelledvendors can be selected in a way to ensure the seriousness ofthe bidders. Another suggestion being made is the opening offuture tenders for various packages (boiler, turbine, auxiliaries)of its new projects by a high-level committee to maintain secrecy ofquotes. However such provisions can at best be exceptions to theCVC guidelines rather than becoming norms for future projects.

Inviting tenders through the empanelled set of vendors pro-vide a resolution to the situation faced by NTPC. The tenderdetails should however be shared with the empanelled group ofexecutives in the Ministry of Power. This would provide NTPC themuch needed secrecy in the implementation of these key projectsand also enable the Government to keep a tab on the entiretendering process. The public disclosure of the tender detailsshould be allowed after the bidding process has been completed.This framework does provide public players to maintain secrecyand also help the Government to keep track of the latest devel-opments in the bidding scenario.

3.6. Adverse impact of external regulations (Nikhil, 2011)

UMPP policy makers realized that increase in certain costitems is uncontrollable and the competitive bidding process wasdesigned in a fashion such that the project developers would becompensated for increase in such uncontrollable costs. Nominalincrease in coal costs of imported coal based power plants weretreated as being uncontrollable. In order to adjust the tariffquoted by the bidders for increase or decrease in imported coalcosts, the competitive bidding process had an in-built escalationrate which would be applied on the escalable costs quoted by thebidders. The escalation rate was dependent upon the value of anindex which was calculated based upon the coal prices in keygeographies like Australia, Indonesia, Africa etc. This mechanismwas inbuilt in order to compensate developers for increase in coalcosts, shipping rates, port charges, etc.

Concept of uncontrollable increase in cost of commodities isparticularly relevant for coastal based UMPPs. UMPPs conceptua-lized on coastal locations are designed to operate on importedcoal, and until 2011 a couple of such projects have already beenawarded. These projects are based out of Krishnapatnam andMundra, and would be developed by Reliance Power and TataPower, respectively.

M. Goyal et al. / Energy Policy 46 (2012) 427–433432

In order to manage the increase in price of imported coal,many Indian power project developers acquired coal mines inIndonesia and Australia and entered into long terms agreementswith their Indonesian subsidiaries to sell coal to the Indiansubsidiaries at marginal cost. Tata Power and Reliance Power alsoacquired coal mines in Indonesia in order to secure fuel for theirrespective UMPPs.

In mid-2011, Government of Indonesia enacted a law to link theprice of the coal exported from Indonesia to a benchmark priceindexed to Newcastle, Platt and Global coal. The law stated that anyIndonesian company which was exporting coal to other countrieswould have to revise their coal prices to the benchmark prices fixedby the Indonesian Government. As a result, Indian companies whichhad entered into long terms agreements with their Indonesiancounterparts to buy coal at marginal cost ($30–45 per tonne) wouldhave to buy coal at benchmark prices ($90–100 per tonne). Thisresulted in an increase in the coal price by USD 30–35 per tonne evenfor project developers who had acquired Indonesian coal mines asthe change in regulation increased royalties and corporate taxesapplicable on the export of coal.

Increase in the imported coal costs due to the change inIndonesian regulation severely dented the economic feasibilityof the coastal based UMPP. Reliance Power and Tata power haveappealed to the GOI to intervene in the matter and allow theincrease in cost to be a pass-through (i.e., allow an increase in theenergy tariff) in order to make the projects economically viable.However, the GOI argued that since the SPV has been transferredto the bidders, the risks of these projects were passed on to thedevelopers as well.

Change in external regulation also had an adverse impact onthe availability of funds for the UMPPs. Even though they hadachieved financial closure at the time of bidding, lenders havebecome worried about the economic viability of UMPPs and arereluctant to disburse funds to the developer.

The two developers in question, Reliance Power and TataPower, are finding it difficult to resolve the issue at hand. PowerPurchase Agreements (PPA) signed by them do not contain anyprovision under which any relief could be sought from theGovernment. Reliance and Tata are exploring the option to invoke‘‘Force Majeure’’ citing unforeseen developments to petition forhigher tariffs. However, every UMPP by design has multiplebuyers of electricity in order to reduce the risk of default bybuyers. Involvement of multiple buyers is further making theprocess complicated and a diverse set of responses was given topetitions filed by Reliance Power and Tata Power. As a result,Reliance Power has stopped development work, as of October2011, for its Krishnapatnam UMPP for an indefinite period. TataPower issued a media report stating that the Mundra UMPPwould be running at lower utilizations to cut losses.

At the core of this issue lies a key learning for all the partiesinvolved in the bidding process. Policies maker could incorporateprovisions in the bidding documents which can help to deal withextra-ordinary circumstances so that parties involved (buyers orsellers) do not end-up bearing excessive risk. In case of multiplestakeholders involved on the buying side, concept of lead pro-curer could be introduced. Buyers could elect a lead procurer whocould generate a consensus amongst buyers and interact with theproject developers as a single point of contact.

For the project developers, this case highlights the importanceof proper risk evaluation and risk management processes. Indo-nesian Government had been discussing the change in regulationfor quite some time and yet when the regulation was made law,project developers were caught off-guard. The agreements amongthe seller and procurers, PPA in the case of UMPP, should beflexible to resolve these extraordinary issues without jeopardizingthe prospects of the project.

4. Conclusion

UMPPs involve significantly high stakes for the Government asthey are an effective energy planning tool adopted to quicklybridge the demand-supply gap. On the other hand, for the projectdevelopers these projects form a significant part of their expan-sion plans with each project having a capital cost of more thanUSD 4 billion. Hence, it is of great importance that the biddingprocess is carried out successfully.

This paper has highlighted different policies of the GOI, theUMPP bidding process and the challenges/issues faced during thesame. It appears that the Government has taken a policy decisionto limit its role to handling the initial risks where it can leverageits strengths and allow the project developer selected through thebidding process to undertake take up any of the operational risks.This approach has not only reduced the cost of capital for theproject but also the time required for making the project com-mercially operational. Allowing the project developer to focusonly on the operational risks has also increased the chances ofhigher participation by leading global companies which haveearlier shied away from developing countries because of bureau-cratic and political risks.

Such a bidding process can be envisaged across other devel-oping countries like Nepal, where involvement of multiple gov-ernment agencies with over-lapping roles and responsibilities arecreating delays in identification/awarding of projects for/throughcompetitive bidding in the hydropower sector and subsequentdelays in commercial operation due to the multiple clearancesrequired from a number of Government agencies. In fact thelearning from this paper can be used in the bid process design ofother infrastructure sectors in India like roadways where landacquisition is a key risk for the project developer.

In the present environment of global M&A activities, increasedparticipation of global majors in developing countries, fiercelobbying efforts by business enterprises and increased depen-dence on a limited set of companies, it is important for thegovernment policies and bid process to address critical issuesincluding:

i.

Change in ownership structure of winning consortium. ii. Improving transparency and reducing information asymmetry

amongst all bidders.

iii. Resist changes in bidding guidelines after the award of

projects.

iv. Ensuring level playing field amongst public and private sector. v. Ensuring a mechanism to address change in external

environment.

Analysis presented in this paper is an attempt to help policymakers across the world, especially developing countries, to makebetter decisions and ensure success of mega projects undertakenin the infrastructure space.

Appendix A. Supporting materials

Supplementary data associated with this article can be foundin the online version at doi:10.1016/j.enpol.2012.04.005.

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