The UMPP at Mundra, situated in the western Indian state of Gujarat, was the first to be awarded to a developer and is expected to be India's largest imported coal based thermal power project with a capacity of 4,000MW (5 units x 800MW) and a project cost (debt as well as equity) of approximately $4.2 billion.

Mundra is also the first power project in India to use supercritical thermal technology. Higher energy efficiency of the super critical turbines saves fuel and reduces greenhouse gas emissions, and consequently helps generate additional revenues by way of sale of carbon credits pursuant to the Clean Development Mechanism under the Kyoto Protocol.

Tata Power, India's largest private sector utility, is developing the Mundra UMPP through Coastal Gujarat Power Limited – a 100% owned special purpose vehicle (SPV). The other UMPPs – at Sasan (captive coal) in Madhya Pradesh and Krishnapatnam (imported coal) in Andhra Pradesh – are being developed by Reliance Power Limited (which is part of the Reliance Anil Dhirubhai Ambani Group).

Tata Power was awarded the Mundra project and signed the power purchase agreement (PPA) in April 2007. Financing started in the last quarter of 2007 and the key agreements were signed in April 2008.

Financing

One of the key challenges for Tata Power, and developers of all the UMPPs, is financing. The total capital cost of each UMPP is estimated at $4 billion-plus. With at least five such UMPPs at various stages of implementation, debt in excess of $20 billion will have to be found in the next 12-24 months.

Given the global liquidity crisis this will be major challenge and one that is compounded by the low tariffs that were bid for the projects (Tata Power's winning bid for Mundra is Rs2.26/$0.055 per kWh). With high domestic interest rates in India, overseas financing (at least for the import component) will be very attractive, especially if it comes with export credit support.

Recognizing the unique financing requirements of the Mundra UMPP, the Reserve Bank of India (RBI) has allowed it offshore dollar external commercial borrowings (ECBs) of almost $2 billion to meet the overseas capital costs for equipment and technology.

That offshore debt component is being provided by a diverse set of lenders ranging from export credit agencies like Korea Export Insurance Corporation (KEIC), (which is providing credit insurance) and Export-Import Bank of Korea (Kexim) to multilateral agencies such as Asian Development Bank (ADB) and International Finance Corporation (IFC), while the domestic lenders consortium includes lenders like the State Bank of India.

Project challenges

Pre-cooked contracts

Under present policy, UMPPs are transferred to developers by the Power Finance Corporation (which has set up SPV's for the projects) and Ministry of Power (MoP) with an existing (and executed) 'package' of documents comprising several key projects contracts and clearances. Due to the "pre-negotiated" nature of these contract and clearances, any scope for further negotiations by the developer with the counterparties to the "package" of project contracts is limited and consequently the ability of lenders to allocate risk is reduced as well.

The PPA in Mundra provides for limited third-party sale rights in the event of a procurer default, no buy-out provisions upon termination and no foreign exchange pass through for debt. The payment security available to the seller (in this case Coastal Gujarat Power Limited) under the power purchase agreement is in the form of a letter of credit and a limited escrow that may not provide complete comfort to the lenders, as some of the procurers are government distribution companies which previously have been known to default on their payment obligations.
Also, the escrow has been created over each procurer's receivables in excess of those receivables that have already been secured under security arrangements for other transactions ("Incremental Amounts"). Coastal Gujarat Power Limited has been granted a pari passu first priority security interest on the Incremental Amounts of each of the procurers.

However, one area of concern is that these Incremental Receivables are also shared with the Sasan UMPP (and perhaps others in the future). Further, those arrangements may be more effective in ensuring prompt payment if a procurer is delayed in making payments under the power purchase agreement than in providing long-term performance security. For example, the letter of credit for each procurer covers approximately one month's average bill amount, and the amount of revenue that is to flow through each escrow account is a similar amount. However, while the credit worthiness of some procurers could be a cause of concern, sale of power from the Mundra UMPP is spread to multiple procurers from different states, thus limiting exposure to a sole entity.

The ability of lenders to enter into direct agreements with procurers (in the case of Mundra, the procurers have, after protracted negotiations, agreed to enter into a basic direct agreement with the lenders, acknowledging the rights of the lenders under the PPA etc.) and other contracting counter-parties may not be available in some cases (due to a lack of a specific obligation on the counterparties to enter into direct agreements with the lenders) and is a long lead item that the lenders must take into account.

Availability of fuel

While the UMPP in Sasan is a pit-head plant, the one in Mundra is reliant on imported coal. With regard to Sasan and other captive fuel UMPPs, as the mine is captive, there may be substantial fuel supply and offtake cost savings. Mundra and Krishnapatnam, however, would have to take such costs into account, including the risks that the coal supply agreements would contain. Further, such agreements or certain terms therein may also be relatively inelastic given the current situation in the coal supply market. Imported coal is required to be used in the Mundra UMPP due to the supercritical technology being used that supports only high grade coal (which presently is available only by way of imports). However, since global prices are at an all time high, such long term contracts would be procure though. In Mundra, the lenders are drawing comfort from the Sponsor support arrangements that seek to limit lender risk on account of coal supply and transportation costs not being firmed up.

Construction risks

Given the low price bids for tariff, the developers of the Mundra Project were constrained in reducing Project cost, a wrapped EPC contract was not be a feasible option. The lack of a wrapped EPC raised the issue of allocation of risk as well as the risk of co-ordination between the various contractors.

Also, many key contracts were entered into on a firm cost basis in 2007. However, since then there has been a substantial cost increase, and the developers were wary of approaching the contractors for any amendments to accommodate the usual lender concerns such as direct agreements and amendments to contractual terms to address lender concerns. Alternative mechanisms for addressing these risks were explored in the form of sponsor support and insurance. Also, innovative mechanisms to mitigate lenders' exposure in cases of default or suspension of the underlying contracts were adopted.

One other unique issue that arose was due to regulatory restrictions on use of ECB proceeds for project letters of credit (LCs) issued by Indian banks under the construction contracts. As a matter of Indian law, it is not possible to use proceeds from ECBs to fund LCs issued by Indian banks. Also, these LC banks were not part of the financing. An innovative disbursement mechanism was evolved by which funds were made available prior to drawing of the letters of credit, whilst maintaining the integrity of the financing package.

Intercreditor issues

Given the varied profile of lenders and the fact that the debt is being provided by way of separate facilities (and not a syndicated facility) which comprise loans availed from the varied lender group, any intercreditor arrangements amongst lenders needed to be sensitive to the peculiar circumstances that may arise therewith.

Under Indian law, certain recognised lenders have access to specialised debt recovery tribunals and/or securitisation processes (during an enforcement scenario) that certain lenders in the Mundra consortium did not have access to. The intercreditor arrangements therefore were required to provide for a situation these recognized lenders were available to exercise these remedies available to them under law (any restriction on the exercise of these rights would have been illegal under Indian law) and at the same time, the benefits from the exercise of these remedies could be shared amongst the larger lender group.

Also, given the fact that the disbursements and repayment schedules of the lenders were not matched, mechanisms for meeting lender expectations on sharing of funds and proceeds of enforcement was evolved.

Lessons from the UMPP experience

An observer of the Indian electricity sector may be tempted to compare the UMPPs with the situation in the 1990's where independent power producers had started operating in India (a comparison drawn between the UMPP model and the Dabhol experience seems fait accompli). Such comparisons are not warranted, particularly given the fact that a new, more robust legislation (The Electricity Act, 2003) has replaced old statutes, there has been corporatisation of several utilities, introduction of competition, and trading in electricity, and the development of Indian entrepreneurship. The creation of independent regulatory administration has resulted in a changed electricity regulation scenario.

In fact, various foreign lenders (although it has been multilateral participation here, and not commercial banks) are participating on a large scale in Indian power project transactions after a considerable period of time. Multilaterals like IFC and the ADB have agreed to provide $450 million each as debt to the Mundra UMPP. Due to the fact that Korean equipment is being used at Mundra, export credit agencies such as KEIC and Kexim have made commitments totalling nearly $1 billion to finance or support the financing of the UMPP at Mundra.

The project finance team of Amarchand Mangaldas in Mumbai, led by partners, L. Viswanathan, Amey Pathak and Santosh Janakiram as domestic legal counsel for the lenders, along with the international legal counsel, advised on structures that would result in acceptable risk mitigation measures and sponsor support which would take into account the concerns of lenders (especially as some of the lenders were new entrants to the Indian market) while also realising the limitations of the developer and limitations inherent in the project and the process of award. Working with various stakeholders in the project presented a unique opportunity to the firm to work towards understanding and addressing the varied interests of the parties and reconcile the same. Similar challenges would also arise in the other UMPPs and would need resolution again.

The Mundra UMPP is very close to availing disbursements. Financing for the other UMPPs – Sasan and Krishnapatnam – is underway. Price bids for the UMPP at Tilaiya in the State of Jharkhand are expected to be submitted soon. Amarchand Mangaldas is optimistic that the UMPP phenomenon is well on track, and believes that the experience gained in the Mundra UMPP project would enable it to deliver appropriate and useful legal strategies to clients in the future development of UMPPs and other power projects in India.