Even though the ´plug-and-play´ mode avoids clearance hiccups it doesn´t avoid all the risks, especially the risk of unviable or aggressive bidding.
In Union Budget 2015, the Government has announced five new Ultra Mega Power Projects (UMPPs), each of 4,000 MWs in plug-and-play mode. For projects in plug-and-play mode, all clearances and linkages will be in place before the project is awarded by a transparent auction system. The Government is also considering similar plug-and-play projects in other infrastructure projects such as roads, ports, rail lines, airports, etc.
Plug-and-play mode has been tried in power sector through UMPPs. Four UMPPs were awarded out of envisaged 12 UMPPs.
UMPPs, despite not being thumping successes, show the way ahead for mega projects. When average implementation period for smaller projects extend to over five years, these UMPPs with approximately 4,000 MW each, Sasan & Mundhra UMPPs have commissioned their entire capacity within five years from their respective financial closure.
UMPP award process witnessed aggressive bidding by the participants with winning bids for the four UMPPs ranging from Rs 1.196 per kWh to Rs 2.33 per kWh on levellised basis. Tariff revision petitions for Sasan UMPP and Mundhra UMPP have been filed under CERC citing changing in law, force majeure, etc. The bidders did not factor uncertainties in fuel cost and construction risks while bidding and viable operation of the plants now depend on award of compensatory tariff. Tariff for the UMPPs would remain highly competitive even in case of allowing compensatory tariff. For UMPPs, power sale is arranged by the government thus avoiding any offtake risks.
For road projects, hybrid model is under consideration where the National Highways Authority of India (NHAI) has responsibility for acquiring 90 per cent of land and obtaining of forest and environment clearances. In such projects, toll collection will be carried out by NHAI and bi-annual payments will be paid to developers. Developers have to bid for the projects by quoting the lowest annuity. Further, it is also proposed that NHAI would pay 40 per cent of project cost and developer has to bear 60 per cent of project cost, thus sharing the financing risks. This structure would enable smooth financial closure, since traffic risk and implementation risk on account of clearances and land acquisition are to be borne by NHAI. Developer has to bear the construction risks and operation and maintenance (O&M) risks. However, aggressive bidding may play dampener, since such projects would appear more lucrative than earlier projects where the developers faced majority of traffic risk, financing risk and regulatory risks.
Plug-and-play mode, though avoiding the clearance hiccups doesn´t avoid all the risks, especially the risk of unviable or aggressive bidding. Bidding mechanism may provide for contingency for common risks such that the projects go through less revenue uncertainty after award. Incentives for not availing such risk contingency may also be provided.
For power sector, terms of bidding have been changed such that actual fuel cost is passed through in the tariff and developers have to compete on capacity charges. Further, incentives are provided for efficient station heat rate and other operating parameters.
For ports, land acquisition, obtaining necessary clearances and availability of transportation linkages are major risk factors. Generally, bids are based on revenue sharing with the government, thus incentivising government for facilitating speedy construction and ramp up of volumes for the project. Re-gassification plants, gas pipelines and railway lines are related infrastructure that has to be planned by government to facilitate growth of ports.
According to Economic Survey 2014-15, value of stalled projects amounts to 8.3 per cent of GDP. Major reasons for stalled projects are uncertainty in linkages including land and fuel, unviability due to aggressive bidding, lack of revenue visibility due to traffic or freight growth risks and power sale arrangements. Risk sharing to ensure stable investment climate would prevent capital locking up in non-operating assets. Cascading effect of stalled projects in power sector is felt in lack of interest from major private power producers in bids floated for Cheyyur (TN) UMPP and Odisha UMPP.
Bidding mechanisms in power and road sector have evolved from structure of loading majority of risks on private players to a more practical solution of harnessing financing and execution capability of private sector. Balanced risk sharing mechanism will encourage more competition in the award process. Stability in terms of award would facilitate the participants to raise financing with lucrative terms.
Plug and Play model could well be effective since it allocates risk in a fair manner. Private sector lenders can only assume the risks that are associated with construction rather than assuming approval related risks. It is unfair to load the private sector promoters and lenders with risks that ought to be assumed by the government machinery. To that extent, we believe that the allocation of risks will be fairly addressed through the plug and play model. However, Plug and play model can be effective only if those are time sensitive. Anecdotal evidence suggests that several projects were stuck due to forest clearances, environmental clearances, land non-availability and other such factors. Plug and Play model could address these issues.
Savings on cost overruns, interest during construction could otherwise be effectively used to create newer assets if the new model is efficiently put to use.