Monday, April 28, 2008

Keep the lights on UMPP

Liquidity crisis, it seems has affected only undeserving projects.
The funding commitments which have been secured for the Rs 17,000 crore ($4.2 billion) "ultra mega" power project (or UMPP) at Mundra in Gujarat should silence the critics of the UMPP policy. When the idea was floated a couple of years ago, there were doubts about the ability and willingness of companies to come forward and build such large (4,000 Mw) projects. And even if there were some brave companies who were to step forth, they were expected to have trouble finding financiers.

Now the skeptics have been shot down. Not only has there has been a long list of bidders for these projects, now the first such project to get off the block — backed by Tata Power — has also managed to secure long-tenor funding of up to 20 years despite the sub-prime crisis.

A host of public sector banks, led by the State Bank of India, have committed Rs 5,550 crore to the project. About half of the non-rupee funding of $1.8 billion has been sourced from the IFC and the ADB for a 20-year period. There is also a funding commitment from the Export-Import Bank of Korea and the Korea Export Insurance Corporation, which can be linked to the fact that a Korean firm, Doosan Heavy Industries, has bagged the order for project equipment (boilers). Then there is the equity contribution of Rs 4,250 crore by the promoters of the project, which is to be based on imported coal.

The BS editorial says there are lessons. First, it helps to think big. The larger the project, the lower is the effort per Mw required to push it through. Secondly, the government needs to work on "pre-cooking" more infrastructure projects, so that some basic work on greenfield projects is done before they are offered to private investors. The UMPPs, for instance, were housed in shell companies floated under the public sector umbrella and they piloted the clearances and supply linkages, and also signed provisional power purchase agreements with the buyers of power.

Not all things Government does warrant criticism.

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