acknowledgments - sandrp · dpc dabhol power corporation dsm demand side management dvc damodar...

Acknowledgments

Even if I eventually wrote the manuscript, this re-port is a joint effort in many ways. HimanshuThakkar (South Asia Network on Dams, Riversand People) originally encouraged me to write thereport, and sent me information, advice and feed-back on a daily basis. Himanshu and I attendedmost interviews with financial institutions as ateam. I greatly profited from SANDRP’s rich andmeticulous archives. And during my stay in Delhi,I also enjoyed the warm hospitality of Himanshu,Kakoli, and Hriday.

Heffa Schuecking (Urgewald) was an early source ofencouragement and support, too. During my stay inSassenberg, I also enjoyed the hospitality of Heffaand her colleagues.

Patrick McCully (International Rivers Network)supported this research project with loyal trust, andwith meticulous reviews. Chitaroopa Palit and AlokAgarwal (Narmada Bachao Andolan), Girish Santand Shantanu Dixit (Prayas Energy Group), andShripad Dharmadhikary (Manthan AdhyayanKendra) provided much valuable advice throughoutthe project. Julie Tanner (National WildlifeFederation), Navroz Dubash (World ResourcesInstitute), Kay Treakle and her colleagues (BankInformation Center), Ikuko Matsumoto (Friends ofthe Earth/Japan), Swathi Seshadri (ManthanAdhyayan Kendra), Bipin Chandra and GaneshGaud (SANDRP), Pervin Jehangir and Shashi Mehtaalso provided useful information and support.Evelyn Underwood helped prepare the table on hy-dropower projects in the annex. ChristophMeienberg (Berne Declaration) and Astrid Meierprovided technical support. Gila Neta(International Rivers Network) saw the manuscriptthrough the production process.

Many representatives of financial institutions andother experts took the time to share information and

discuss issues regarding power finance when I visit-ed India. In Mumbai, I had the chance to meet withP.H. Ravikumar, Vishakha Mulye, and Partha Dey(all ICICI), Anirudha Barwe, Mahendra Shah,Sadashiv Rao, and Khorezad Dordi (all IDFC),Sucheta Dalal, Pradyumna Kaul, and Abhay Mehta.In Delhi, Himanshu Thakkar and I met with PeterPattison (ADB), Rama Krishna Chavali (IFCI),Kazuto Tsuji and Jun Yotsu (JBIC), T.N.Gopalakrishna, R.N. Misra, and R.K. Taneja (allNHPC), Satnam Singh (PFC), Massimo Baggi(Swiss embassy and board, IDFC), Edwin Lim, KariNyman, Priya Basu, and Rajesh Sinha (all WorldBank), Kavaljit Singh, and Shekhar Singh.

Yolanda Banks (EDC), Vincent Gouarne, KariNyman and Mohinder Gulati (all World Bank),James Mahoney (US Exim Bank), Joseph O’Keefe(IFC), Dieter Schulze-Vornhagen (KfW), ChristineWallich (ADB) and Thomas Wohlwill (Hermes) tookthe time to respond to detailed questions in writing.

I very much appreciate the professional values ofthe people who made efforts to share informationand opinions with us even if they knew that theconcerns expressed by NGOs would not make thefunding of power projects easier. I am also thankfulto the various people who shared information withus under the condition of remaining anonymous.

Finally, I am thankful to the Charles Stewart MottFoundation and the Grassroots Foundation. Togetherwith other funders, the C.S. Mott Foundation hasconsistently supported the Berne Declaration’s workon financial institutions and sustainable energy de-velopment for many years, and has thus allowed meto gain experience on these issues. The GrassrootsFoundation and the C.S. Mott Foundation have alsomade this research project possible due to grantsmade through Urgewald and IRN.

As always, the responsibility for all errors rests withthe author.

Zurich, January 2002Peter Bosshard

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ii

Exchange rates

(as of 31 January, 2002):

1 US dollar = Rs. 48.424

Rs. 100 = 2.065 US dollars

As a matter of practice, financial values in domestic currency are expressed inrupees in this report. Financial values in foreign currency are expressed in dol-lars, or in other respective currencies.

Fiscal year

India’s fiscal year (FY) is from 1 April until 31 March.

Power Finance:Financial Institutions In India’s Hydropower SectorPublished by South Asia Network on Dams, Rivers and People (SANDRP), Urgewald, and International Rivers Network (IRN), March 2002Copyright © 2002 Peter Bosshard

ISBN 0-9718858-0-X

SANDRP; 53B, AD block, Shalimar Bagh; Delhi 110 088, India; phone: +91 11 747 9916; e-mail: [email protected]

Urgewald; Von-Galen Str. 2; 48336 Sassenberg, Germany; phone: +49 2583 1031; fax: +49 2583 4220; e-mail: [email protected], www.urgewald.de

IRN; 1847 Berkeley Way; Berkeley, CA 94703, USA; phone: +1 510 848 1155; fax: +1 510 848 1008; e-mail: [email protected], www.irn.org

Design by: Jeanette MaddenPrinting by: Krishna Copy Center

Printed in the United States of America using recycled paper

PART I INTRODUCTION AND OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

iii

TABLE OF CONTENTS

Acknowledgments ..............................................................................................................................................ii

Acronyms ............................................................................................................................................................v

1. Introduction and overview .............................................................................................................................1

1.1. The start of a new debate? ............................................................................................................................3

1.2. The Maheshwar experience ..........................................................................................................................7

1.3. Introduction into India’s power sector ......................................................................................................11

1.4. Introduction into India’s financial sector ...................................................................................................19

1.5. The Dabhol experience ...............................................................................................................................25

2. Indian financial Institutions in the hydropower sector ...............................................................................33

2.1. The National Hydroelectric Power Corporation ........................................................................................35

2.2. The Power Finance Corporation ................................................................................................................43

2.3. ICICI ...........................................................................................................................................................49

2.4. IDBI .............................................................................................................................................................53

2.5. IFCI .............................................................................................................................................................57

2.6. IDFC............................................................................................................................................................61

2.7. The State Bank of India...............................................................................................................................65

2.8. Other financial institutions and instruments .............................................................................................69

3. International financial institutions and hydropower in India......................................................................75

3.1. The World Bank..........................................................................................................................................77

3.2. IFC and MIGA ............................................................................................................................................83

3.3. The Asian Development Bank.....................................................................................................................89

3.4. Bilateral funders ..........................................................................................................................................95

3.5. Export credit agencies ................................................................................................................................99

3.6. International capital markets ....................................................................................................................103

4. Conclusion..................................................................................................................................................109

Bibliography....................................................................................................................................................117

Annex

Annex 1: Table of hydropower projects...........................................................................................................120

Annex 2: Chart on the financial flows into India’s power sector ....................................................................122

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ADB Asian Development Bank

AP Andhra Pradesh

Ar P Arunachal Pradesh

BBMB Bhakra Beas Management Board

BITS Swedish Agency for InternationalTechnical and Economic Cooperation

BJP Bharatiya Janta Party

CAO Compliance Advisor/Ombudsman

CBI Central Bureau of Investigation

CDC Commonwealth DevelopmentCorporation

CEA Central Electricity Authority

CIDA Canadian International DevelopmentAgency

CRISIL Credit Rating Information Services of India

CVC Central Vigilance Committee

DANIDA Danish International DevelopmentAgency

DFI Development finance institution

DFID Department for InternationalDevelopment

DM Deutschmark

DPC Dabhol Power Corporation

DSM Demand side management

DVC Damodar Valley Corporation

ECA Export credit agency

ECGD Export Credit Guarantee Department

EDC Export Development Corporation

EKN Exportkreditnaemnden

FY Fiscal year

GIC General Insurance Corporation ofIndia

GIEK Norwegian Institute for Export Credits

HEP Hydro-electric power project

HP Himachal Pradesh

HUDCO Housing and Urban DevelopmentCorporation

ICICI Industrial Credit and InvestmentCorporation of India

ICOLD International Commission on Large Dams

IDBI Industrial Development Bank of India

IDFC Infrastructure Development FinanceCorporation

IFC International Finance Corporation

IFCI Industrial Finance Corporation ofIndia

IFI International financial institution

IL&FS Infrastructure Leasing & FinancialServices Ltd.

IMF International Monetary Fund

IPP Independent power producer

IREDA Indian Renewable EnergyDevelopment Agency

ISO International Standard Organization

J&K Jammu & Kashmir

JBIC Japan Bank of InternationalCooperation

JEXIM Japan Export Import Bank

KCCB Kangra Central Cooperative Bank

KfW Kreditanstalt fuer Wiederaufbau

kWh Kilowatt hour

LIC Life Insurance Corporation of India

LNG Liquefied natural gas

LoC Line of credit

MDB Multilateral development bank

MIGA Multilateral Investment GuaranteeAgency


v

ACRONYMS

MoEF Ministry of Environment and Forests

MoU Memorandum of Understanding

MP Madhya Pradesh

MPEB Madhya Pradesh Electricity Board

MPSIDC Madhya Pradesh State IndustrialDevelopment Corporation

MSEB Maharashtra State Electricity Board

MW Megawatt

N&A Nicobar & Andaman Islands

NBA Narmada Bachao Andolan

NEEPCO North Eastern Electric PowerCorporation

NEXI Nippon Export and Credit Insurance

NGO Non-governmental organization

NHPC National Hydroelectric PowerCorporation

NIB Nordic Investment Bank

NJPC Nathpa Jhakri Power Corporation

NPA Non-performing asset

NPC Nuclear Power Corporation Ltd.

NRI Non-resident Indian

NTPC National Thermal Power Corporation

OECF Overseas Economic Cooperation Fund

OFAP Operational Financial Action Plan

PFC Power Finance Corporation

PPA Power purchase agreement

PSB Public sector bank

PSS Pumped storage scheme

RBI Reserve Bank of India

Ren. Renovation

SANDRP South Asia Network on Dams, Rivers and People

SBI State Bank of India

SEB State electricity board

SIDA Swedish International DevelopmentAgency

SMHPCL Shree Maheshwar Hydel PowerCorporation Ltd.

T&D Transmission & distribution

TEC Tata Electric Companies

THDC Tehri Hydro Development Corporation

U/C Under construction

U/O Under operation

UP Uttar Pradesh

USAID United States Agency for InternationalDevelopment

UTI Unit Trust of India

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1

PART 1

INTRODUCTION

AND OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

In ancient Greece, a nine-headed snake calledHydra lived in the marshes of Lerna. She was thedaughter of a giant and a nymph, and the sister ofSphynx, Cerberos, and Chimaera. Again and again,Hydra ravaged the fields, destroyed the crops anddevoured the cattle of the local farmers. At last,King Eurystheus asked the Greek hero Herakles tobring Hydra’s reign of terror to an end. A horriblebattle unfolded in the marshes of Lerna. Every timeHerakles cut off one of the serpent’s heads, two newones grew from the ghastly body. In the end, ofcourse, the courage of the hero prevailed over theserpent’s evil blood.

Hydra power?

The farmers of the fertile Nimad region in India’sNarmada valley are not concerned about mythicalsnakes and other beasts. Their economic and sociallivelihood is threatened by a string of hydropowerprojects on the Narmada river. The Maheshwardam, on which construction has already started,would (if completed) displace and negatively im-pact 50,000 people from 61 villages. Other damswould have social and environmental impacts on aneven more devastating scale.

The communities of the Nimad region have op-posed the Maheshwar dam and other projects formany years. Supported by movements and non-governmental organizations, they have taken onbanks, export credit agencies, and large corpora-tions. Yet like in the battle of Lerna, every time afunder or contractor withdrew from the project,new investors and equipment suppliers appearedon the scene.

So far, contractors Bechtel, PacGen, Siemens andOgden, power utilities Bayernwerk and VEW, andfinancial institutions Hermes, COSEC andHypovereinsbank have withdrawn from theMaheshwar project, or have refused to get involved

in it. In their stead, a series of Indian developmentfinance institutions, banks and companies steppedin to fill the gap and fund the project. “Lending byIndian banks and institutions is at the heart of allmega independent power and greenfield projects,”an Indian journalist comments on the Maheshwarexperience.1

Intermediary lending

Several international financial institutions havewithdrawn from lending for the dams on theNarmada river directly. As the NGOs and move-ments involved in the Maheshwar struggle foundout, the same institutions may still support the pro-jects indirectly. To mention a few examples:

• The World Bank was forced to withdraw from theSardar Sarovar project in the Narmada valley inMarch 1993, and has stopped funding individualpower projects in India altogether. Yet the Bankstill approved support for India’s Power FinanceCorporation (PFC), which is the most importantfunder of the Maheshwar dam.

• The Asian Development Bank has never directlyfunded any hydropower projects in India.“MDBs, including ourselves, are almost ‘gun-shy’of dams now,” says one ADB official: “The risksare great, the visibility is high, and the vulnera-bility is a constant concern.”2 In spite of suchconcerns, ADB funds the state power utilitywhich facilitates the Maheshwar project. It alsofinances hydropower projects through its loansto other financial institutions.

• Through some strange karma, Herakles’ brotherHermes in the 20th century was reincarnated inGermany’s official export credit agency. After se-rious consideration, Hermes decided not to getinvolved in the Maheshwar project. Still, Germangovernment agencies support financial institu-


3

1.1. THE START OF A NEW DEBATE?

tions in India which in turn fund several hy-dropower projects, including Maheshwar.

• Hypovereinsbank, a commercial German bank,also planned to extend a loan to the sponsors ofthe Maheshwar project. After astrong NGO campaign, it decid-ed not to do so. The bank doeshowever participate in threegeneral purpose loans for Indianinstitutions which in turn fundMaheshwar.

A global trend

The Maheshwar experience illus-trates an international trend. Manycountries, including India, haveliberalized their economic policiessince the 1980s or 1990s. Govern-ments are successively withdraw-ing from funding infrastructure,including power projects. They instead look towardsprivate investors and financial institutions to mobi-lize resources for these sectors.

Globally, multilateral and bilateral financial institu-tions have steadily reduced their direct funding fornew hydropower projects. Commercial banks arebecoming wary of the risks of such projects too.Even export credit agencies have begun to taketheir responsibilities – and possibly, the risks totheir reputation – more seriously when consideringcontroversial infrastructure projects. At the sametime, official funders increasingly lend support tointermediary financial institutions, or extend pro-gram loans to public utilities which promote hy-dropower projects.

As a consequence, the financial flows for infrastruc-ture, and for hydropower and other energy projectsmore particularly, have turned into a maze. An at-tempt to illustrate all financial flows in India’spower sector resulted in a chart with 17 groups offunders and power operators, and almost 90 typesof financial flows between them. Many internation-al and domestic financial institutions interact, usinga variety of different financial instruments, and inmany cases lending through intermediaries ratherthan directly. It has becomes unclear to what extentsuch resources are public or private, and who is re-sponsible for how they are invested. (A simplifiedchart illustrating the financial flows into India’spower sector is now found in Annex 2.)

In some cases, this fuzziness is clearly intentional,for example when commercial banks funded thegiant Three Gorges dam on China’s Yangtze riverthrough a state development bank rather than di-rectly. In other cases, the blurring of responsibilities

is probably a welcome by-productof a trend which exists for otherreasons.

The questions on the table

This report tries to shed some lighton the fuzziness of intermediarylending. It addresses the followingquestions:

• Which domestic institutions fundpower, and particularly hydro-power projects in India, either di-rectly or indirectly? Where dothey mobilize resources? Whatare the emerging trends, and what

are the prolems? Which policies do such financialinstitutions apply, and how can NGOs and socialmovements influence them?

• What is the role of international financial institu-tions within this picture? How do they work withdomestic financial institutions and power utili-ties? Which policies do they apply when theyfund projects through financial intermediaries?To what extent are they still accountable for theimpacts on the ground when they invest fundsthrough other institutions? And again, how canNGO networks influence the policies and deci-sions of international financial institutions whenit comes to intermediary lending? These ques-tions are relevant not only for India’s power sec-tor, but for international infrastructure fundingmore generally.

In a first part, this report provides some backgroundon India’s power and financial sectors, and illus-trates the issues at stake with two prominent exam-ples of power projects in India. The second part pre-sents the main institutions which are involved infunding and promoting infrastructure, and particu-larly hydropower projects in India. A third part ex-amines the role of international financial institu-tions in working with these agencies. The conclud-ing chapter summarizes the main evidence and ar-guments of the report, and presents some thoughtsfor further action.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

The financial flows forhydropower projects haveturned into a maze. Manyinternational and domestic

financial institutions interact, using a variety

of different financialinstruments, and in many

cases lending throughintermediaries rather

than directly.

Invitation to a debate

The publishers and the author of this book have beeninvolved in many international campaigns on finan-cial institutions and power projects. It is not the pur-pose of this report however to look at the economic,environmental, social and political impacts of hy-dropower projects in depth. The report does not takea position on specific projects either, except in thecase of a few illustrative examples. The focus on hy-dropower is explained by the mandate of the pub-lishing organisations, and does not imply any com-ment on, or preference for, thermal power projects.

In the same vein, the report does not attempt to putforward a comprehensive list of recommendationsfor policy change. It rather tries to present facts andopinions as a starting point for a wider debate, in India and internationally. Hopefully, an agendafor specific policy changes will emerge from such adebate.

In this sense, the report is an invitation to socialmovements and NGOs, financial institutions andbanks, government officials and politicians, plan-ners and academics, the media and other interestedcitizens to participate in this debate.


5

The Maheshwar Hydro-Electric Project is part of thehighly controversial Narmada Valley DevelopmentProject. Intermittently under construction nearMandleshwar in Madhya Pradesh (MP), it is sup-posed to produce power with a capacity of 400 MW.The Maheshwar HEP is one of the earliest indepen-dent power producers (or IPPs) inIndia. In 1993, the state sector pro-ject was privatised and awarded tothe Shree Maheshwar Hydel PowerCorporation Ltd. (SMHPCL). Thiscorporation was set up by the S.Kumars Group, a textile companywith no previous experience in thepower sector. The Maheshwar pro-ject exemplifies the lack of socialresponsibility, financial prudenceand democratic accountability inIndia’s power and financial sectors.

The problems of the Maheshwar project

The main problems of the Maheshwar HEP are:

• The project will displace, or otherwise negativelyimpact, more than 50,000 people from 61 vil-lages. The government of Madhya Pradesh hasadmitted that there is no land available for reha-bilitating the affected people.

• The Maheshwar HEP is justified as being a peak-ing power project. Yet with an installed capacityof 400 MW, it will have a firm power productionof only 92 MW initially (and 49 MW finally).During the non-monsoon months, the projectwill produce electricity for a maximum of twohours per day.

• At approximately Rs. 5.82/kWh on average andRs. 7.82/kWh for peaking power, electricity fromMaheshwar would be exceptionally expensive.This problem is compounded by the fact that thedepreciation rate of the rupee against the dollar

has been strongly underestimated in the projectcalculations. In comparison, India’s PowerMinister and the National Thermal Power Cor-poration had offered Madhya Pradesh power forRs. 2/kWh at various instances, and withoutbuilding any new capacity.

• The MP State Electricity Boardhas promised to provide escrowcover to the Maheshwar HEP.(Through so-called escrow ac-counts, power suppliers get priv-ileged access to the revenues ofthe state electricity boards.) Thegovernment of Madhya Pradeshis prepared to provide a guaran-tee for Maheshwar’s escrow ac-count. Authoritative sources

such as the rating agency CRISIL argue that theSEB does not have sufficient financial capacity toprovide escrow accounts, so that the financial bur-den might indeed end up with the state. TheMPEB has only promised to provide escrow coveronce the project reaches financial closure. So cred-itors which invest in the Mahehswar HEP at thispoint also face evident financial risks.

Opposition against the Maheshwar dam

The Narmada Bachao Andolan (NBA) and the inhab-itants of the affected area have opposed the Mahesh-war HEP for many years. After the affected people oc-cupied the project site several times, the governmentof Madhya Pradesh agreed to set up a Task Force toreview the project in January 1998. In October of thatyear, the Task Force, which consisted of senior gov-ernment officials and NBA representatives, recom-mended that the cost-benefit analysis be reviewed,and that project-related work be stopped in themeantime. The government disregarded these recom-mendations, and work continued. Due to the resis-tance by the affected people, only a minor portion ofthe project has been constructed to date.


7

The Maheshwar experienceexemplifies the problems ofsocial responsibility, financialprudence and democratic

accountability in India’spower and financial sectors.

1.2. THE MAHESHWAR EXPERIENCE

Since 1998, the struggle against the MaheshwarHEP has gained wide support from social move-ments, trade unions and political parties fromMadhya Pradesh and all over India. Internationally,Urgewald, the International Rivers Network andother NGOs persuaded a variety of foreign lendersand investors not to support the project. Since late2000, the NBA has increasingly focused its attentionon Indian financial institutions which have com-mitted support to the Maheshwar HEP. On behalf ofthe Andolan, Supreme Court lawyer PrashantBhushan served such institutions a legal notice for“complete and flagrant violations of public interest”in May 2001.

Foreign funders and contractors

Since 1997, a series of international equipment sup-pliers, power utilities, banks and export credit agen-cies have become involved in the Maheshwar HEP.After they were persuaded of the problems and thepublic opposition against the dam, all of them with-drew their support. In 1997, Bechtel Enterprisesfrom the US linked up and then withdrew from theproject. PacGen, another US power company, fol-lowed and dropped out in 1998. Bayernwerk andVEW, two power utilities from Germany, agreed topick up 49% of the project’s equity, and withdrew inApril 1999. Ogden, another power company fromthe US, filled the gap – and withdrew in turn inDecember 2000.

According to information received from the AsianDevelopment Bank, the Industrial FinanceCorporation of India (IFCI) submitted theMaheshwar HEP to ADB for funding under thePrivate Sector Infrastructure Facility which theBank had approved in November 1996. When ADBraised the issue of resettlement, the proponents didnot pursue the proposal further. ADB may howeverend up financing the Maheshwar HEP indirectly,through its loans to the Madhya Pradesh ElectricityBoard (MPEB) and the Power Finance Corporation(see chapter 3.3.).

International equipment suppliers faced similarproblems. Siemens had received contracts worth$134.2 million for electro-mechanical equipment.ABB received contracts worth $55.7 million forhydro-mechanical supplies. Both contracts werecontingent on the companies organizing respectiveforeign currency funding. When the GermanGovernment refused to provide export credit guar-antees for Maheshwar through its official agency,

Hermes, Siemens had to withdraw its applicationfor a guarantee in August 2000. A few months later,the Portuguese export credit agency COSEC also re-fused to guarantee ABB/Alstom’s contracts for theproject. As a consequence, loans from Hypoverein-bank, which had been tied to the export guarantees,also fell through. The withdrawal of the contractorswas particularly serious since they had also com-mitted 21% of the project’s equity. So by 2001, atleast ten foreign partners had abandoned the pro-ject, and SMHPCL was left without any foreign con-tractors or investors.

The role of Indian financial institutions

The Maheshwar HEP received the required techno-economic clearance from the Central ElectricityAuthority for a cost of Rs. 15.69 billion. Accordingto the reappraisal document prepared by IFCI inMarch 2000, the cost had by then increased to Rs.22.54 billion. Of the total cost, 30% (or Rs. 6.76 bil-lion) is to be raised as equity, and 70% (or Rs. 15.78billion), as debt.

In October 1991, the Ministry of Power ruled that“to ensure that the investor brings in additionalityof resources to the power sector, not less than 60%of the total outlay for the Project must come fromsources other than Indian financial institutions.”3

The Ministry qualified this rule in October 1998,but still stressed “the need of maximising financingfrom external sources.”4 In the case of Maheshwar,no foreign funding has so far been secured. In spiteof the massive financial risks of the project, Indianfinancial institutions have not hesitated to fill thegap. At the time of writing, the funding situation isas follows:

Equity:The S. Kumars Group as the project sponsor hascommitted 20% of the equity (or Rs. 1.364 billion).The Industrial Development Bank of India (IDBI),the Life Insurance Corporation (LIC) and theGeneral Insurance Corporation of India (GIC) haveagreed to take over the 15% share which wasdropped by Siemens in 2000. IDBI may have feltcompelled to take an equity stake in order to rescuea loan which it had prematurely disbursed for theproject. The Indian heavy electrical company BHEL,which stepped in as an equipment supplier afterSiemens dropped out, expressed an interest in con-tributing another Rs. 600-700 million.

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8

This leaves SMHPCL with an equity gap of about60%. It now appears that the government mightpartially bail out the supposedly private project.According to the NBA, the Madhya Pradesh gov-ernment in December 2001 decided to turn debt ofRs. 260 million, which the company had owedMPEB since it took over the project in 1993, intoshare capital.

Rupee loans:The lenders’ consortium is coordinated by IFCI.Rupee loans have so far been committed by IDBIand PFC (1 billion each), IFCI and the State Bank ofIndia (500 million each), and the Dena Bank andPunjab National Bank (250 million each). The S.Kumars Group also received Rs. 450 million in so-called inter-corporate deposits from the MadhyaPradesh State Industrial Development Corporation(MPSIDC).

Two Indian financial institutions, the InfrastructureDevelopment Finance Corporation (IDFC) and theIndustrial Credit and Investment Corporation of India(ICICI), declined to lend to the Maheshwar HEP.

Foreign currency loans:On top of its rupee loan, the Power FinanceCorporation had originally committed a foreigncurrency loan of $53 million for the MaheshwarHEP. After the foreign funding fell through, itchipped in another loan of $132.6 million. The StateBank of India (Frankfurt) committed a further $22million, and the Bank of India, $12 million. TheUnit Trust of India (UTI) is being discussed as thesource of another loan of $46.28 million to make upfor the shortfall caused by the withdrawal of foreignexport credits.

Premature disbursals

In its re-appraisal report of March 2001, IFCI pro-posed a series of preconditions for the disbursal ofloans to the Maheshwar HEP. These conditions in-cluded the following:5

• SMHPCL needs to obtain the necessary clearancefor the revised project cost, and needs to obtainfinancial closure by tying up the entire lendingfor the project.

• SMHPCL needs to enter into a shareholdingagreement with the strategic investor at this time,Ogden.

• The National Hydroelectric Power Corporation,the lenders’ engineer, needs to submit its reporton the project.

• SMHPCL needs to enter into an escrow agree-ment with MPEB.

• SMHPCL needs to return capital advances of Rs.1,064 million which it had given to other compa-nies of the S. Kumars Group which were not re-lated to the project.

So far, none of these conditions have been fulfilled.One of the S. Kumars companies for which fundsfrom the Maheshwar HEP were fraudulently trans-ferred has in the meantime gone bankrupt. Ratherthan signing an agreement, the strategic investor,Ogden, has withdrawn from the project. Given therisks of the venture, the lenders took comfort in thefact that SMHPCL had contracted the services ofHarza International, an established US engineeringcompany. Harza has now also withdrawn from theMaheshwar HEP.

In spite of these glaring shortcomings, IDBI andPFC have disbursed considerable amounts of fundsto the Maheshwar HEP. According to internalsources, the Power Finance Corporation has alreadydisbursed Rs. 1 billion. In a short period, SMHPCLhas defaulted on interest payments to PFC of Rs.260 million, and has become the Corporation’s thirdlargest defaulter. It seems that SMHPCL has neverpaid any interest on its loans.

In 2001, the S. Kumars Group also defaulted on pay-ments of Rs. 190 million of the Rs. 450 million inter-corporate deposits which the Madhya Pradesh StateIndustrial Development Corporation had extended.MPSIDC in turn pursued to recover the defaultedsum from the properties of the Maheshwar project.

Other forces at work?

“The irony is that the private sector was broughtinto the power sector because there was a paucity offunds with the government,” Olga Tellis commentson the Maheshwar experience in Asian Age. “Andnow a whopping 1,577 crores [Rs. 15.77 billion] isgoing from public funds.”6 As Prashant Bhushanconcluded in his legal notice to PFC, “there is no


9

doubt that the investment in Maheshwar will be-come converted into a non-performing asset.”

In the case of Maheshwar, Indian financial institu-tions are bending all rules to invest in a project whichis clearly not an economic proposition. “The mootquestions is,” columnist Sucheta Dalal concludes,“are Indian [financial institutions]incapable of proper project ap-praisal, or are there other forces atwork behind their support toMaheshwar?”7

Which future for theMaheshwar project?

In late 2001, IDBI stopped loan dis-bursements to the Maheshwar HEPand agreed to review the project. InDecember 2001, an anonymoussource within the Power Finance Corporation made itvery clear that “PFC has lost faith in the S. KumarsGroup.” Since they have already disbursed largeamounts of money, the lenders cannot however affordto let the unviable project sink. PFC would like theNational Hydroelectric Power Corporation (NHPC)to take over the private venture. LIC, another creditor,

has formally approached NHPC in this regard. NHPChas already taken over two other controversial damson the Narmada river in a joint-venture with MPEB.

Being the lenders’ engineer, NHPC is familiar withthe problems of the Maheshwar HEP. An anonymoussource at the Corporation clarifies that NHPC is not

interested in taking over the sink-ing ship. “We would first be con-cerned about our own well-being,”he says. Yogendra Prasad, NHPC’sambitious chairman, seems to beless doubtful. If asked to do so,NHPC would “complete the pro-ject in two-and-a-half years,”Prasad commented in early 2002.8

NHPC might indeed be sufficient-ly ambitious – or indebted to LIC,its most important creditor – tobail out the Maheshwar project. Or

the well-connected owners of the S. Kumars Groupmay try to muster sufficient political support at thecentral or the state level to force the MP governmentor NHPC to bail them out. Otherwise, the lendersmay well end up having to count their losses anddrop the Maheshwar project.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

“The moot questions is, areIndian financial institutionsincapable of proper projectappraisal, or are there otherforces at work behind theirsupport to Maheshwar?”

Sucheta Dalal, columnist, June 2001

India’s power sector has been in constant crisis formore than ten years. Since the early 1990s, the sec-tor has undergone sweeping reforms. But funda-mental issues – such as corruption, theft and theinefficient use of power – have not been addressed,and the problems of unreliable supply and lackingaccess to electricity for large num-bers of people remain unresolved.Hydropower projects are an im-portant element in the govern-ment’s future strategy to close thecountry’s power gap – even if theyhave so far failed to deliver ontheir promises.

Some basic data on India’spower sector

Between independence and May2001, India’s power generating ca-pacity grew from 1,362 MW to101,866 MW. As of May 2001,thermal capacity stood at 72,464MW, hydropower at 25,202 MW,nuclear capacity at 2,860 MW, andwind energy at 1,340 MW.

The increase in production since independence hasnot been able to keep up with demand. India has apower shortage of about 8% on average, and about11% at peaking time. The production, transmissionand consumption of power in India are very ineffi-cient. Transmission and distribution losses are esti-mated at 21.4% by the government, and at 30-40%by independent observers.9 A large part of theselosses are referred to as “non-technical,” which is aeuphemism for theft.

In 1999, 30% of the electricity produced was con-sumed by the agricultural sector, 16% by domesticusers, and 38%, by industry. Consumption is heavi-ly subsidized in the agricultural and domestic sec-tors. According to the WCD’s India country study,

electricity in 1999 was produced at Rs. 1.86/kWh.In the same year, agricultural consumers paid an av-erage rate of Rs. 0.21, domestic consumers, of Rs.0.91, and industry, of more than Rs. 3.50 in moststates. For FY 2000/01, the Power Ministry indi-cates an average cost of power of Rs. 3.04/kWh, and

an average tariff of Rs. 2.12/kWh.Power subsidies for farmers are animportant political issue. The sub-sidies have greatly increased thedeficits of the power utilities. Theyhave also helped to depletegroundwater, by encouraging un-restrained use of electric pump-sets by farmers.

Hydropower in India

According to India’s CentralElectricity Authority (CEA), Indiahas a hypothetical hydropower po-tential of 148,700 MW. Actual ca-pacity stood at 508 MW at inde-pendence, and at 25,202 MW inMay 2001. At times, hydro had ashare of more than 50% both ingenerating capacity and actual

generation. This has since gone down to less than25%. As India’s main problem is a lack in peakingpower, the authorities would like to increase thehydro share within the power mix to 40%.

India’s Northern region accounts for 36% of existinghydropower capacity, and the Southern region, for34%. Expansion is primarily planned in the North-Eastern region (the Brahmaputra-Barak basin, with48% of the country’s hypothetical hydropower po-tential), and the Northern region (the Ganga basin,with 36% of the undeveloped potential). Of the 98projects which CEA identified as the first priorityfor further development in 2001, 52 are located inthe Brahmaputra and 20 in the Ganga basin.


11

“India’s power sector is aleaking bucket; the holes

deliberately crafted and theleaks carefully collected aseconomic rents by various

stakeholders that control thesystem. (...) Most initiatives

in the power sector arenothing but ways of

pouring more water into thebucket so that the

consistency and quantity ofleaks are assured.”

Deepak Parekh, IDFC, 2001

1.3. AN INTRODUCTION INTO INDIA’S POWER SECTOR

According to the Central Water Commission andbased on the generally accepted ICOLD definition,4,291 large dams were in place or under construc-tion in India in 1994. Almost three-quarters ofthem were situated in Maharashtra, MadhyaPradesh and Gujarat. According to a rough esti-mate in the India country study for the WorldCommission on Dams, large dams have submergeda land area of about 37,500 square kilometers inIndia, and have displaced at least 56 million peo-ple.10 Adivasi people and members of the lowercastes make up a highly disproportionate percent-age of those displaced by dams.

Dams in India primarily serve irrigation purposes.Only 4.2% of the country’s large dams are hydropow-er projects.11 Yet hydropower often accounts for thelargest dam projects. (See Annex 1 for a list of all hy-dropower projects mentioned in this report.)

The planning of hydropower projects

Under India’s constitution, the central governmentand states share responsibility for the provision ofinfrastructure services, including electricity. Powerprojects are thus developed both by the states andthe central government. All projects of more than Rs.10 billion require a techno-economic clearance bythe Central Electricity Authority to go ahead.Projects also need to be cleared by the PublicInvestment Board, and by the Ministry ofEnvironment and Forests (MoEF). Often, environ-mental and forestry clearances are only given withconditions attached, but the MoEF in practice has noauthority to ensure compliance with its conditions.

The states have considerable authority in India, butmost revenues accrue at the central level. The cen-tral government redistributes parts of the tax rev-enue to the states through grants – in the form of di-rect attributions (40%) or through the PlanningCommission, which defines the country’s annualand five-year development plans (60%). All projectexpenditure in India is approved by the PlanningCommission. Based on the requests from the vari-ous authorities on the central and state levels, theCommission prepares notional five-year plans, andoperational annual plans for the respective bud-getary appropriations. On the state level, the bodyapproves investment programs, and leaves it to thestate authorities to invest the respective resources inspecific projects.

The Planning Commission prepares appraisals ofthe various sectors and projects as a basis of its de-cision-making. According to inside sources, theCommission’s appraisal process is quite objectiveand comprehensive, but the actual sanctioning of fi-nancial resources is politicised. Often, the PlanningCommission stipulates conditions for the release ofresources for certain projects, but then does notmonitor compliance.

Historically, most power plants in India were devel-oped by the state electricity boards (SEBs). Someprojects were developed by multipurpose develop-ment agencies or by smaller utilities serving certainmunicipalities. In the 1970s, the central govern-ment also started to create national institutions topromote power generation in India. These institu-tions primarily included the National ThermalPower Corporation (NTPC), the NationalHydroelectric Power Corporation (NHPC, see chap-ter 2.1.), and the Nuclear Power Corporation(NPC). Other agencies were created to develop par-ticular hydropower schemes for example in theNorth East.

The central government hoped that efficiently runcentral institutions would set a model of how to bestdevelop power projects in India. The central institu-tions were also mandated to implement projects inunstable areas (such as Jammu & Kashmir or theNorth Eastern states), and projects which were po-litically important (such as the Tehri, Nathpa Jhakrior Indira Sagar hydropower projects). In 1986, thegovernment also created the Power FinanceCorporation (PFC, see chapter 2.2.) as a means tochannel government funds into the power sector.

The entry of the IPPs

By the early 1990s, India’s power sector was solidlyon the wrong path. Bureaucratic incentives, bud-getary mechanisms, support from multilateral andbilateral institutions, and the spoils of corruptionand political control all favoured the rapid expan-sion of generating capacity. At the same time, ener-gy consumption in the country was wasteful. Themaintenance and modernization of power plants,transmission and distribution were neglected. Billcollection by the SEBs was low, and a large part ofthe electricity produced was simply stolen. Theft,inefficiencies and power subsidies caused the SEBsto run up large deficits.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

Compared with setting up new capacity, fighting thetheft of power by industrial and middle class con-sumers was not politically attractive. Expenditure forthe maintenance of power facilities could not be re-covered from the central government’s plan re-sources, and demand side management programs didnot deliver financial or political spoils. As analystsfrom the energy research NGO Prayas point out,India’s power sector had been “hijacked” by a smallgroup of politicians, bureaucrats and consumers that“exploited the sector to further their narrow individ-ual goals at the cost of the long-term health of thesector and that of the larger public interest.”12

While the financial problems of India’s power sectorescalated, the country also faced a severe balance-of-payments crisis in 1991. The government set ona course of fundamentally liberalizing the economy,and, as the researchers Navroz Dubash and SudhirChella Rajan observe, “the power sector was chosento be at the forefront of the new liberalizing India.”13

Private companies were allowed to develop and op-erate power plants and to sell their power to theSEBs. Independent power producers (IPPs) were of-fered concessions such as full foreign ownership,guaranteed minimum profits before tax of 16%, taxholidays, and long-term power purchase agree-ments. Before 1995, the investors did not have to gothrough a process of competitive bidding. When theprojects still failed to reach financial closure, thecentral government even offered counter-guaranteesand a so-called fast-track status to eight particularlyfavoured projects.

The government’s rules and incentives were clearlytargeted at foreign private investors. Domestic fi-nancial institutions were not supposed to providemore than 40% of a project’s cost. The responsefrom foreign investors was overwhelming.Especially after Enron’s high-profile Dabhol projecthad been offered extravagant concessions, the coun-try was swamped with investment proposals. By theend of 1994, the SEBs had signed 243 Memorandaof Understanding (MoUs) for a capacity addition of90,000 MW – or 90 MW for every working day.14 Inthe process, all principles of rational power sectorplanning and financial prudence went overboard.No demand forecasts, options assessments or least-cost plans were carried out. Anybody who was boldenough to impress or bribe the authorities seemedto have a good chance of bagging an MoU.

A few brief examples may give an impression of theIPP frenzy which the unregulated privatisation ofIndia’s power sector created in the early 1990s. In

the case of the Spectrum power project, the owner ofa Rs. 20 million vermicelli company was able to takeover a 200 MW, Rs. 4 billion power project fromNTPC’s pipeline in 1992. Considerable funds weresiphoned off, the cost of the project went up to Rs.11 billion, and all funds were either lent or guaran-teed by Indian financial institutions. Also in 1992,Cogentrix Energy – a company with an equity capi-tal of a meagre Rs. 4.5 million – managed to get anMoU for a 1,000 MW coal-fired power plant inKarnataka, and a power purchase agreement worthRs. 20 billion a year. The project has meanwhilebeen cancelled.15 The experience with the Dabholpower project is presented in chapter 1.5. In all threecases, there is strong evidence of corruption.

While the pipeline of IPPs was swelling, the financialsituation of the SEBs continued to deteriorate. Theutilities were not in a position to buy the expensivepower which most private projects were going toproduce. Even when securities in the form of so-called escrow accounts or state guarantees were of-fered, they could in many cases not be considered re-liable. Under these circumstances, most IPPs did notcommit sufficient equity capital, and did not reachfinancial closure. By 2001, only 3,200 MW of privatecapacity were under operation, or 3% of that envis-aged under the MoUs signed by 1994.

Expanding electricity generation by inviting IPPsseemed to provide an easy way around tackling thepolitically difficult problems of power subsidies andtheft. As it turned out, most of the private projectsnever materialized. Still, the Memoranda ofUnderstanding locked the state utilities into a longpipeline of projects based not on rational energyplanning, but on free-market dogmas and corrup-tion. As Navroz Dubash and Sudhir Chella Rajancomment, the IPP approach produced a “wasteddecade” for India’s power policy.16

The restructuring of the power sector

The role of the states in the power sector wasstrengthened after 1991, but their financial situa-tion deteriorated further. Bill collection by state util-ities continued to be low, and many well-paying in-dustrial consumers started to develop their owncaptive plants, in order to avoid the high industrialtariffs of the SEBs. Many state governments were nolonger able to cover the deficits of their electricityboards. The next phase of India’s power sector re-form was not initiated by the country’s own powerapparatus, but by the World Bank.


13

In India, the World Bank had traditionally financedmany thermal and hydro power projects both of thecentral government institutions and the states. After1991, it encouraged the opening of the power sectorfor IPPs. It offered assistance to rationalize the ne-gotiations with private investors, and abstainedfrom supporting the corrupt Dabhol project on eco-nomic grounds. The Bank, however, failed to everpublicly criticize the irrational course of Indianpower sector privatisation.

After 1992, the World Bank stopped funding furthergenerating plants and closed several ongoing pro-jects. The financial institution decided that hence-forth, it would only support restructuring pro-grammes in the power sector. Based on the experi-ence in Great Britain, the Bank put forward a com-prehensive package of reforms. According to its newpolicy, the SEBs should be unbundled into separategeneration, transmission and distribution corpora-tions. The whole sector should be opened for pri-vate investment, and distribution should be fullyprivatised. Power subsidies should be reduced, tar-iff setting should be shielded from political influ-ence, and delegated to newly created state electrici-ty regulatory commissions. The Asian DevelopmentBank and bilateral donors soon adopted this model.In 1996, Orissa was the first state to embark on apower restructuring programme under World Bankconditionality. Other states, including Haryana,Andhra, Madhya and Uttar Pradesh, Gujarat,Rajasthan and Karnataka, followed suit.

The central government by and large embraced theWorld Bank’s approach. It stipulated that all statesshould set up independent regulatory commissions,that agricultural tariffs should be increased, andthat SEBs should achieve a minimal rate of return of3%. The Power Finance Corporation started to pro-vide funds to reforming states at favourable condi-tions, and totally halted funding for projects insome non-reforming states.

Six years into the restructuring of Orissa’s powersector, it is time to take stock. The World Bank be-lieves that while mistakes have been made, themodel is a “tremendous success” in that it has cre-ated a general consensus about the necessary re-forms within the country’s power apparatus.Looking at the realities on the ground, Prof. AmulyaReddy, one of India’s leading power experts, believesthat the Orissa model is a “debacle.” To borrow fromProf. Reddy’s critique, “transmission and distribu-tion losses have not been brought down; theft hasnot been reduced; costs have not been contained;

performance has not improved; the private distribu-tion companies have not shown superior manage-ment skills; they have not been more successfulthan their predecessor public-sector organisationsin collecting revenues; they have defaulted in theirpayments to the grid” and “above all, rural electrifi-cation has been the worst casualty of reform.”17

For Power Minister Suresh Prabhu, the restructur-ing program in Orissa is “not a success or a failure,”but “a test case about what needs to be done.”According to the Minister, mistakes were made be-cause the necessary “spadework” had not beendone. In the future, the emphasis should not simplyrest on privatising public utilities, but on increasingtheir transparency and accountability.18 (See below,and see chapter 3.1. for a further critique of theWorld Bank’s role in India’s power sector reform.)

Funding power projects in India

At present, power projects (including hydropowerschemes) in India are supposed to be funded fromthe following sources:

• Through NHPC and other central utilities, thegovernment provides the equity capital of centralsector power projects. The government also of-fers a range of other incentives to promote thedevelopment of power projects (see below).

• State governments and utilities contribute theequity capital of state sector projects. They con-clude power purchase agreements with IPPs, andoffer escrow accounts and other guarantees assecurities.

• Investors from India and abroad are supposed toprovide the equity of private sector projects. Incentral, state sector or private projects, equityusually needs to cover 30% of project costs.

• Once the equity has been secured, PFC andIndian development finance institutions extendrupee loans for the debt-financing of central,state sector and private power projects.Increasingly, Indian commercial banks and otherfinancial institutions also provide debt funding topower utilities and individual projects. Domesticlenders usually cover about 40% of the projectcost. In some cases, they also extend foreign cur-rency loans.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

• Export credit agencies, some bilateral institutionsand numerous international commercial banksextend loans (or guarantees) to cover the foreigncurrency debt of power projects, which usuallyamounts to about 30% of project cost.

Apart from direct funding, the central governmenthas started to offer a series of incentives to encour-age the development of power projects:

• The government exempts bonds for the infrastruc-ture sector, particularly PFC bonds, from taxes.

• In 1995, the government granted tax holidays often years and an exemption from import tariffsfor so-called mega-projects of more than 1,000MW (in the thermal sector) or 500 MW (in thehydro sector). It also extended guarantees toseven private hydropower projects.

• In 1997, the government started to provide an in-terest subsidy of 4% for PFC loans for priorityprojects (including the completion of power pro-jects, missing transmission links etc.) under theAccelerated Generation & Supply Programme.The Power Ministry believes that this programmehas been effective in helping states to completeprojects, and would like it to be funded alsounder the Tenth Plan.

• Under the Accelerated Power DevelopmentProgramme, the government contributes grantsand loans for the renovation and modernization ofexisting power plants and distribution networks.

• Host state governments receive a free share of12% of the power produced by central hy-dropower projects in their territory.

Financial institutions stand ready to extend loans,and the government is prepared to sweeten invest-ments with a variety of incentives. In spite of this,investment is not forthcoming. The main reason isthe bankrupt status of many state electricity boards.Most state utilities are not able to commit the equi-ty capital of new power projects, or to reliably guar-antee the purchase of power from private projects.As long as equity capital does not come forward,lenders will usually not disburse their loans. “Todaythere is no dearth of funds,” says Deepak Parekh,chair of the Infrastructure Development FinanceCorporation. “We lack bankable projects.”19

Adding to the financial problems of the system,many state utilities default on their payments to thecentral power institutions. By 2001, the outstandingdues of the SEBs to central power utilities such asNTPC, NHPC, Power Grid Corporation, coal sup-pliers etc. amounted to Rs. 415 billion. The huge ar-rears weaken the financial state of the main devel-opers of power projects. Running up arrears also al-lows the state governments to avoid politically moredifficult choices like tackling the theft of power.

Since the mid-1990s, India’s development financialinstitutions have rapidly increased their loan com-mitments for infrastructure and particularly powerprojects. Yet for financial, bureaucratic and techni-cal reasons, many power projects do not moveahead. As a consequence, financial institutions havecommitted expensive long-term funds, but are notable to actually invest them. Since the end of 2000,funders have grown increasingly wary of power pro-jects. In December 2001, a group of financial insti-tutions decided to review their commitments to 19power projects, after they had already suspended fi-nancial assistance to 14 other projects. The list ofprojects under review include three hydropowerprojects Baghliar (450 MW, Jammu & Kashmir),Maheshwar (400 MW, Madhya Pradesh), andVishnuprayag (400 MW, Uttaranchal).

Hydropower in trouble

During the Ninth Plan period (1997-2002), Plancontributions to the power sector were reduced, asmuch of the investment in new projects was ex-pected to come from the private sector. Yet the nu-merous risks and high up-front costs of hydropow-er projects meant that private investors shied awayfrom hydropower projects – and those who intend-ed to invest, often did not succeed in implementingtheir projects. So since the early 1990s, the con-struction of new hydropower capacity hasslumped. The Ninth Plan’s target for new hy-dropower capacity was 9,818 MW. If the tentativeprogramme for FY 2001/02 materializes, only 4,968MW of new capacity will come onstream: 790 MWfrom central projects (compared with a target of3,455 MW); 4,092 MW from state projects (target5,808 MW); and a mere 86 MW from private pro-jects (target 555 MW).20

Many power projects do not go ahead because theirprospective customers – the SEBs – are bankrupt.Unlike thermal power plants, hydro schemes faceserious geological, hydrological and social prob-


15

lems. The long delays in developing hydropowerprojects cannot therefore simply be explained away by the financial problems of the sector. (Seethe brief overview of the projects in NHPC’spipeline in chapter 2.1.) In April 2001, theParliamentary Standing Committee on Energycommented in a critique of India’shydropower development “thathuge time and cost over run ofpower projects have become a rou-tine affair and the Plan targets forthe year have never been achievedin respect of majority of the pro-jects under implementation.”21

The hopes of India’s hydropowerindustry presently rest on Malana,a private hydropower scheme of 86MW in Himachal Pradesh. After apower purchase agreement with the state had notcome through in several years, the private develop-er decided to turn the project into a captive plant fora spinning and weaving plant in Rajasthan. Oncethe financial problems were resolved, constructionwas completed in 2001 within less than three years.The developers explain their rapid progress by hav-ing tightly controlled the contractors, and claimthey have amicably resolved all resettlement prob-lems, and have employed a large number of localworkers.22 Even this supposed model project had topay a fine of Rs. 12 million for having illegallycleared 61 hectares of forest. The Indian developersand their Canadian consultant have meanwhile cre-ated a new consultancy service, and already adviseabout 14 other hydropower projects in India.

Current initiatives in the power sector

Consumers, parliamentarians, trade unions andpopular movements still resist the privatisation ofstate power utilities and the sharp increase in powertariffs under the restructuring model of the interna-tional financial institutions. With some modifica-tions, there is however a general consensus in sup-port of this model within the country’s power sectorapparatus. A new Electricity Bill pending inParliament will, if passed, further simplify the clear-ance process for generation projects. The Bill willallow producers open access to transmission anddistribution networks, will make it mandatory forstates to set up independent Electricity RegulatoryCommissions, and will discourage cross-subsidiesin tariffs.

Some relevant trends in India’s power sector poli-cies are:

Increase in resource allocations:Since private investment for power projects has notmaterialized in sizable amounts, the Planning

Commission is expected to in-crease the share of the power sec-tor in its allocations under theTenth Plan (2002-2007). Evenunder the present Ninth Plan, allo-cations for the sector in the annu-al budgets have markedly in-creased from 1998 (7.2% of totalallocations) to 2000 (12.8%).

The increase in public resources forthe power sector will not onlycome from the budget. Part of it

will also be mobilized from the market through pub-lic institutions, including the planned new IndiaPower Fund (see chapter 2.2.).

Strengthened focus on distribution and theft:The glaring problems of theft and ineffective dis-tribution have gained prominence in the policy de-bates within India’s power establishment and theWorld Bank. “There is no point investing in gener-ation if the power does not reach the consumer,”IFC’s Bernard Pasquier commented in December2000.23 “Unless we fix distribution, no other prob-lem in the power sector can be solved,” PowerMinister Suresh Prabhu said in September 2001.“If we fix distribution, there is nothing else weneed to do.”24

Theft of power is currently estimated at Rs. 210 bil-lion per year. A variety of measures to improve me-tering and accounting at the level of the distributioncircles are supposed to strengthen control and ac-countability, and to bring down the “non-technicallosses.” Annual Plan allocations for the AcceleratedPower Development Programme, which covers distribution projects, have increased from Rs. 10 to 15 billion, and the Power Minister has appealedfor a further increase to Rs. 50 billion under theTenth Plan.

Strengthened focus on hydropower:The long-term goal of the government is to increasethe share of hydropower capacity within the coun-try’s overall power mix from the present 25% to40%. After hydropower has taken a further slump inthe era of IPPs, its share within the future Plan allo-cations for the power sector will probably increase.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

“There is no point investingin generation if the power

does not reach theconsumer.”

Bernard Pasquier, International Finance Corporation,

December 2000

According to media reports, the Ministry of Poweris considering levying a cess of 5 paisa on everykWh of power generated by the central power utili-ties to be paid into a new Hydro Development Fund.

In November 2001, Suresh Prabhu announced thatthe government would publish guidelines of aNational Hydro Power Policy within two months.The Minister said these guidelineswould “detail the ecological and so-cietal issues to be addressed whilecoming up with hydro power pro-jects,” since “we also have to en-sure ecological security, apart fromenergy security.”25

Encouraged by the experience ofthe Malana project, some voicescall for a focus on small and medi-um-sized hydropower schemes.According to the head of theMalana power company, projects ofless than 500 MW should be al-lowed to go forward without com-petitive bidding, while the numberof large-scale projects should belimited.26 The Indian industry jour-nal, Power Line, also argues that“smaller hydro projects are emi-nently do-able while big hydel pro-jects present innumerable hurdles.”27 However,since mega power projects offer major political andfinancial spoils, an official focus on smaller hydroprojects would come as a surprise.

Stronger role for central power utilities:Development finance institutions have becomewary of power projects, and of hydropower schemesmore particularly. “Bitter experiences with the ShreeMaheshwar and Sardar Sarovar projects have madethe lenders overly cautious,” regrets Power Line.28

Financial institutions and other actors thus arguethat the central hydropower institutions and partic-ularly NHPC should have a stronger role in devel-oping or completing hydropower projects. Theseagencies were after all created to rescue ailing pro-jects. According to one idea, institutions like NHPCcould guide new projects through their technicaland economic clearance processes, and then handthem over to private developers. Already, theMinistry of Power has strongly increased the budgetallocations for NHPC and other central hydropowerdevelopers for FY 2001/02.

The overall strategy:In January 2002, Power Minister Suresh Prabhu out-lined his overall strategy for tackling the problems ofthe power sector in a two-part interview withBusiness Line. Looking back at the 1990s, theMinister stressed that the aim should not be “to getmore Fortune 500 companies to start visiting Indiamore often,” but “to bring commercial viability to

the power sector, improve quality,reduce tariffs, improve availabilityand improve accessibility as 80,000villages do not have electricity.”According to Prabhu, the mainproblem is not that the utilities areunder state control. “Nowhere inthe world has any country achievedself-sufficiency in power throughprivate money,” he says, and “wecannot dump the SEBs now just be-cause this is the age of privatisa-tion.” The main problem is the lackof accounting and transparency inthe system, which results in theftand inefficiency.

As indicated above, the new strate-gy attempts to tackle theft and in-efficiency on the distribution level,and its pivot is the distributionfeeder. Technical measures such as

a switch to high voltage transmission and remotemetering, energy accounting, and incentive mea-sures should help to localize losses, “nail responsi-bility” and reduce theft. If losses can be checked,the power tariffs can be reduced, the quality of sup-ply can be improved and eventually, the “ability ofthe institutions to add capacity” will be expanded.29

Open questions and limitations

Since the early 1990s, Dabhol has been widely prop-agated as a model of the new era of private powerprojects. Maheshwar has been upheld as the modelof private hydropower, and Orissa, as the model ofpower sector restructuring programs. In the mean-time, these model projects and programs have allfailed. Given this history, it is surprising to see thatthe country’s power sector strategies of the 1990shave never been evaluated in a comprehensive way,and that since the adoption of the World Bankmodel, official power sector policy has been re-stricted to incremental changes and patchwork so-lutions. The reasons why hydropower projects, andthe central hydropower developers more particular-


17

“Nowhere in the world hasany country achieved self-

sufficiency in power throughprivate money. (…) Wecannot dump the state

electricity boards now justbecause it is the age of

privatisation. What is wrongis that there is no auditing

there, no transparency, andthey are not functioning theway they are required to.”

Suresh Prabhu, Power Minister,January 2002

ly, have failed in the past have for example neverbeen analysed. India, incidentally, is one of the fewcountries which is fundamentally opposed to con-sidering the conclusions of the independent evalua-tion by the World Commission on Dams.

Suresh Prabhu‘s strategy is more consistent thanwhat other Power Ministers or financial institutionshave proposed since the early 1990s. It is not pri-marily based on foreign capital or imported ideolo-gies, but on the experiences of the Indian powersector. Several problems persist. Checking theft andcorruption will not simply take technical innova-tion, but public involvement and political change.This has so far not happened.

In the same vein, the Power Minister has so far notclarified how he intends to deal with the large,wasteful generation projects which are in thepipeline of public and private developers but do notfit into a rational sector strategy. He has not comeout on the guidelines of the WCD yet, or on projectssuch as Mahewshwar and Nathpa Jhakri. In the caseof the Tehri dam, Suresh Prabhu has rather made it

clear that he is not prepared to tinker with a projectwhich is corrupt and destructive, but enjoys thesupport of the Prime Minister. Given this record,confidence is limited that once the creation of ca-pacity picks up again, a new generation of projectswill be more economic and less destructive thanwhat India has experienced so far.

Finally, the huge potential for efficiency improve-ments in the way power is produced and consumedis not an essential part of the new strategy. Programsto improve demand-side management and the per-formance of existing power plants are still neglectedwithin budgetary allocations. Experts estimate thatthe energy intensity of India’s economy is about50% higher than the world average (which has a bigpotential for efficiency gains in itself). As Prof.Amulya Reddy points out, “compared to increasingcapacity by building new power plants, energy con-servation measures provide the quickest way out ofa supply-demand gap.”30 They would offer large eco-nomic gains, and would also be more compatiblewith a democratic and equitable society.

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18

The state has traditionally played an active role inregulating and directing financial institutions inIndia. This has allowed the promotion of socialgoals within the financial sector, but has also givenvested interests a prominent place. Since 1991, thefinancial sector has been gradually liberalized, andthe government is slowly withdrawing from it as anactive player. Liberalization presents new challengesfor the financial institutions, and for attempts tomake these institutions more accountable.

The spectre of financial institutions

Most Indian financial institutions were either creat-ed by the government, or were nationalized be-tween the 1950s and 1970s. Broadly, the country’sfinancial sector consists of the following groups ofinstitutions:

Commercial banks:India’s commercial banks mobilize short-term de-posits from retail savers, and focus on meeting theshort-term financial needs of industry, trade andagriculture. About 40% of bank deposits are invest-ed in government debt, which restricts lending tothe other sectors. Among the commercial banks, thefollowing subgroups can be distinguished:

• Public sector banks: With more than 60,000branches and about four-fifths of total depositsand bank credit, the government-owned publicsector banks are the largest category in the Indianbanking system. They consist of the State Bank ofIndia and its associate banks, 19 nationalizedbanks, and 196 regional rural banks. (See chap-ters 2.7. and 2.8.)

• Private sector banks: After most banks were na-tionalized in 1969, some private banks continuedto exist, and a few more were created after 1993.The 23 private sector banks operate a network ofsome 5,000 branches, and account for about one-eighth of aggregate deposits and bank credit.

• Foreign banks: Some foreign banks have operat-ed in India for decades, and others were allowedto enter as part of the liberalization process. In2001, 42 foreign banks accounted for 5% of ag-gregate deposits and 8% of bank credit.

Development finance and other financial institutions:Development finance and similar institutions providea channel for the flow of long-terms funds from thepublic and from government to industry and infras-tructure. The following groups can be distinguished:

• Development finance institutions (or All-Indiadevelopment banks): The so-called DFIs werecreated by the government to provide long-termloans, equity investment and other forms offunding to industry and the infrastructure sec-tors. They have so far not been allowed to acceptshort-term deposits from household savers. (Seechapter 2).

• Investment institutions: The Unit Trust of India(UTI, a mutual fund), the Life InsuranceCorporation of India (LIC) and the GeneralInsurance Corporation of India (GIC) also pro-vide long-term funding to industry. Until recent-ly, they enjoyed monopolies in their respectivebusiness sectors. (See chapter 2.8.)

• Specialized financial institutions: Institutionslike PFC, IDFC and others were created to pro-vide long term funding for specific sectors suchas electricity generation or transport. (See chap-ters 2.2. and 2.6.)

• Other financial institutions: This sub-sector in-cludes co-operative banks, non-bank financecompanies and state-level financial institutions.Except for institutions such as housing financecompanies or mutual funds, they do not play arole in funding infrastructure projects.


19

1.4. AN INTRODUCTION INTO INDIA’S FINANCIAL SECTOR

Political influence

Traditionally, the Indian government has influ-enced financial institutions both through directownership and through regulation. More than 90%of the banking sector is under state control, and thegovernment appoints the top management of allstate-controlled institutions. It also exercises influ-ence on “significant corporate actions” even whenit is a minority shareholder, as ICICI points out inits 2001 annual report.31

Until the early 1990s, the government used to regu-late all aspects of banking, including the setting upor closing of branch offices, the level of interestrates, and the mobilization of foreign capital. An im-portant policy tool is the system of so-called direct-ed lending. The Reserve Bank of India requires allcommercial banks in India to lend 40% of theircredit to priority sectors such as agriculture, small-scale industry, small businesses and export compa-nies. Loans to the priority sectors are subsidized,and as a consequence must be sanctioned by thegovernment. In a less direct manner, the govern-ment influences lending policies through tax con-cessions, for example for infrastructure bonds.

The government’s active role in the financial sectorhas allowed large parts of the population and disad-vantaged sectors access to credit and investmentwhich would not be served if banking were left to themarket. One illustration of this is that half of India’s66,000 bank branch offices today are in rural areas.

India’s society, however, also pays a high price forthe politicisation of the financial sector. The ap-pointment of top management, for example, isoften based more on bureaucratic criteria than oncompetence. And the collusion of vested interestsfrom the state and the private sectors has oftenforced financial institutions to fund projects whichwere not economic, and which did not serve thepublic good. This assertion will be elaborated in thefollowing chapters.

Credit culture and portfolio quality

India’s financial institutions have traditionally suf-fered from a high degree of so-called non-perform-ing assets (NPAs). During the late 1990s, the prob-lems escalated. After the government opened mostindustrial sectors to competition from the worldmarket, many companies ran into problems. As aconsequence, bank clients particularly in the textile,

iron and steel, food and chemical sectors were nolonger able to service their debts. In March 2001,the country’s public sector banks had a staggeringRs. 644 billion of non-performing assets on theirbooks. The NPAs of the development finance insti-tutions amounted to another 153 billion.(According to current RBI guidelines, assets areclassified as non-performing if interest is overduefor more than 180 days, and/or if principal is over-due for more than 365 days.)

The government influences the operations of finan-cial institutions through a variety of means. Whenperceived as necessary, it supports them through theinfusion of new capital. This dependency upon thestate does not encourage a risk-conscious credit cul-ture within financial institutions. “The Indianbanks’ credit risk management practices remainlargely deficient,” the rating agency Moody’s re-marked in September 2000. And further: “Duringthe long period of nationalisation and before the in-troduction of asset classification and provisioningnorms, bank management had little incentive tofocus on asset quality.”32

This traditional explanation for the high degree ofnon-performing assets does not tell the full story.The problems of India’s financial institution cannotprimarily be explained by incompetence. In fact, thestaff of banks and DFIs are generally considered tobe highly professional. In spite of their profession-alism, a variety of factors both on the borrowers’and the lenders’ side allow vested interests to so-cialize private risks and losses in the form of NPAs.

A report of the Reserve Bank of India concluded in1999 that borrowers often divert loans into newprojects or affiliated companies.33 The original pro-ject or company suffers, and the debt is not servicedor repaid. Financial institutions are active accom-plices in this game. They have repeatedly approvedlarge loans for companies even when the respectiveborrowers had stopped servicing their existing debt.Financial columnist Sucheta Dalal has documentedthis practice for steel companies like Essar. Onecompany of the Essar group defaulted on its loanseven while it was still making profits. Financial in-stitutions declared the company a wilful defaulter inFebruary 2001. But this did not prevent them fromapproving a new loan of Rs. 25 billion to the samecompany for a refinery project.34 In the case of theSpectrum power project mentioned in chapter 1.3,the corrupt developer defaulted on the loans fromIDBI and other Indian institutions, but the creditorsdid not take any action.

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20

Negligent and irresponsible loan approvals are en-couraged by various factors. In some cases, corrup-tion in the form of bribes or other benefits helps tooverrule professional prudence. Since 1990, theCentral Vigilance Committee haslaunched 65 criminal proceedingsagainst members of the staff ormanagement of public sectorbanks.35 In other cases, politicallyinfluential companies can use theirclout to pressurize managers intoapproving a particular loan, for ex-ample by threatening to get themfired if they resist. Politicians orgovernment bureaucrats can di-rectly use their influence to makesure that a project which is impor-tant to them gets funded. (“Someof these people have long hands,and you will always listen to yourowner,” remarks one manager of afinancial institution in a personalconversation.) Finally, prudent bank staff can alsobe overruled by factors such as institutional ego,prestige, and the ambitions of senior management.

As a consequence of negligent lending, the capitaladequacy of many financial institutions fell danger-ously in recent years. By the end of FY 2000/01,21.0% of all assets of IFCI for example were non-performing, and the institution had a capital ade-quacy ratio of only 6.2%. In line with internationalstandards, RBI requires financial institutions toreach a minimal capital adequacy of 9%, and of 10%from 2002 onwards. The government has repeated-ly had to rescue financial institutions when mount-ing NPAs threatened their capital base. Until March1999, the state had spent Rs. 205 billion on bailingout public sector banks. In 2000, it had to spend afurther billions of rupees on an investment fund ofUTI, which had incurred huge losses due to fraudu-lent practices of its management. And in 2001, anew series of mega-bailouts for ailing financial in-stitutions was in the pipeline (see chapter 2).

Given the background of negligent (and sometimescriminal) collusion between powerful companiesand financial institutions, the bailouts constitute alarge-scale socialization of private risks and losses.Like the power sector, the Indian financial sector in-volves huge transfers of wealth from society at largeto a privileged elite. Strangely enough, the Indianpublic has so far not discussed the political implica-tions of the regular bailouts of financial institutions.

With the liberalization of the financial sector, thegovernment is gradually reducing its support for fi-nancial institutions. It has announced that after aseries of recapitalisations which are currently being

prepared, the financial institutionswill have to fend for themselves.Whether this indeed happens re-mains to be seen. Rating agenciesstill believe that India’s public sec-tor banks and development financeinstitutions enjoy an implicit guar-antee from the state.

Lacking checks and balances

The Central Vigilance Committee(CVC) is in charge of investigatingcases of corruption in state institu-tions, including the public finan-cial institutions. The Reserve Bankof India (RBI), which is also the

monetary authority of the country, regulates and su-pervises the financial sector. The RBI issues guide-lines on aspects such as sectoral exposure, non-per-forming assets etc., and is supposed to monitor theirimplementation.

S.S. Tarapore, a former deputy governor of RBI, ishighly critical of the institution he once served. “Welived in an innocent world,” Tarapore says, “wherewe believed that regulation was so rigorous thatbanks dared not violate the regulatory frameworkand thus, supervision was redundant.” As a conse-quence of the traditional focus on regulation, “thepractice of supervision being a step child continueseven today.”36 Sucheta Dalal points out that RBIsometimes issues forceful inspection reports on par-ticular financial institutions, but is very weak onfollow-up action. The Reserve Bank’s record is “pa-thetically poor,” the columnist says. “Rather thanmerely writing letters of displeasure to bank chair-men, a decisive small fine which is publicised wouldensure that banks do not violate the regulatoryframework,” suggests Tarapore.37

Many observers agree that the Indian media – withsome notable exceptions – do not effectively moni-tor the activities of financial institutions. The coun-try’s rating agencies are no effective check againstpoliticised business practices either. All major rat-ing agencies are affiliated with financial institutions.They sell advisory services to corporate clients, andcan thus face conflicts of interest when they ratecompanies. In the case of Dabhol, for example, the


21

Like the power sector, theIndian financial sector

involves huge transfers ofwealth from society at large

to a privileged elite.Strangely enough, the

Indian public has so far notdiscussed the political

implications of the regularbailouts of financial

institutions.

country’s most respected rating agency, CRISIL,agreed to prepare a report which disregarded all theuntenable assumptions on which the financial cal-culations for the project were based.38

The liberalization of the financial sector

Partly on its own initiative, partly under guidancefrom international financial institutions, the Indiangovernment has liberalized the financial sectorsince 1991. It allowed new privatebanks and insurance companies toenter the market. Most interestrates were deregulated, and so wereforeign exchange operations.Directed credit, which had benefit-ed agriculture and small-scale in-dustry, was scaled down. Bankswere allowed to open or closebranches. A private capital marketwas created. Banks and develop-ment finance institutions were al-lowed to raise private equity capi-tal. The government announced itwould stop bailing out financial in-stitutions in times of crisis. InDecember 2000 a bill was tabled in parliamentwhich would reduce government ownership in pub-lic sector banks to 33%.

The policies of liberalization have blurred the dis-tinctions between different groups of financial insti-tutions, and have increased competition betweenthese groups. Life insurers and commercial bankstake up long-term project finance, and developmentfinance institutions enter the life insurance or con-sumer credit markets. Liberalization has put theDFIs under particular stress. They struggle withproblems of portfolio quality, and are required tostrengthen their capital base. They face competitionfrom commercial banks and insurance companieswhich have started to provide long-term loans.These competitors have cheaper access to funds inthe form of household savings, and put pressure onthe margins and profit rates of the development fi-nance institutions.

The prospect of so-called disintermediation adds tothe problems of the DFIs. With the strengthening ofcapital markets, the most creditworthy companiesand institutions can raise equity or place bonds onthe market directly, and do no longer need to takeup expensive loans from financial institutions. TheDFIs and other lenders are thus losing their most at-

tractive customers, and are left with the medium orlower rated projects, companies and institutions –including those in the power sector.

Which way out for development finance institutions?

Development finance institutions use a variety ofstrategies to respond to the pressures of liberaliza-tion and added competition. They have increased

project financing for private infras-tructure in order to move awayfrom the suffering industrial sec-tors. Some financial institutionshave started new business activi-ties, including advisory services,mutual funds or insurance compa-nies. They have raised equity fromprivate shareholders to make upfor the dwindling government sup-port for their capital base. Andthey consider turning themselvesinto universal banks, so that in thefuture they can also mobilizecheap, private short-term deposits.

In April 2001 the Reserve Bank of India requestedthe development finance institutions to prepareplans for their transition to universal banks. Asuniversal banks, the DFIs will have to further in-crease the provisions against their assets, in orderto provide more security to private savers. At thesame time, they will have to follow the rules on di-rected lending to the so-called priority sectors.Lending to agriculture and the social sectors couldthus to some extent crowd out other sectors, in-cluding power projects. The official Udesh Kohlicommittee recommended in January 2002 that in-frastructure should in this case also be considered apriority sector.

As the financial sector is being liberalized, it be-comes more difficult for the state to pursue positivedevelopmental goals through direct control or theregulation of financial institutions. On the otherhand, in a corrupted system liberalization also of-fers perspectives for progressive action. Marketforces can be used to discourage the funding of un-economic projects, which benefit vested interestsbut not the retail customers, the majority of share-holders, or society at large. Especially in the case ofhydropower projects, economic rationality can sup-port environmental and social concerns. For suchnew checks and balances to work, the financial sys-

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22

“We lived in an innocentworld, where we believed

that regulation was sorigorous that banks darednot violate the regulatory

framework and thus,supervision was redundant.”

S.S. Tarapore, ex-deputy governor,Reserve Bank of India, October 2001

tem needs to be made accountable and transparent.Civil society movements need to understand themechanisms of capital markets, consumers need torecognize their rights and interests in the financialsector, and independent media and rating agenciesneed to monitor the sector in a rigorous and unbi-ased manner.

So far, such a process does not seem to have takenplace. RBI’s former deputy governor S.S. Taraporepoints out that the supervision of India’s financialsector is still marked by “traditional norms of una-nimity and opaqueness.”39 The established interest

groups have so far managed to allow and promote aprocess of liberalization only where it suits theirown interests.

During Asia’s financial crisis of 1997/98, India prof-ited from not having been more strongly integratedinto the international capital markets. The liberal-ization of the financial sector attracted a largeamount of foreign portfolio investment in recentyears. Such investment is volatile. It has helped toease India’s foreign currency situation since 2000. Itwill also make the country more susceptible to fu-ture crises in the international financial system.


23

The Dabhol power plant in Maharashtra is thelargest foreign investment in India. It once stood forthe promises of economic liberalization and privateforeign investment. Today it more appropriatelysymbolizes the opportunities which privatisationoffers for corruption and private enrichment. TheDabhol project illustrates the lack of due diligencewhich Indian and international fi-nancial institutions apply whenthey appraise projects.

The project

Dabhol is a liquefied natural gaspower plant in Maharashtra’sRatnagiri district, about 300 kmsouth of Mumbai. The project con-sists of two phases. Phase I has acapacity of 740 MW. Phase II willhave a capacity of 1,444 MW, andwill add a liquefied natural gas ter-minal to the complex. Dabhol isone of eight fast-track power projects which werestarted with great fanfare when India’s electricitysector was opened up for private investment in1991. It is also the first foreign investment to havebenefited from an Indian government guarantee.

The funders

The Dabhol Power Corporation (DPC) is a jointventure of the US power and construction compa-nies Enron (65% of the equity), General Electric(10%), and Bechtel (10%), with the MaharashtraState Electricity Board holding 15% of the share cap-ital. The equity for the whole project amounts to$887 million. More than 20 international banks par-ticipated in the lending, with ANZ Investment Bankand Citicorp International being the LeadArrangers. The loans amounted to $643 million forphase I, and $1,444 million for phase II. The USExim Bank, the Japan Export Import Bank,

Belgium’s Office National Ducroire and the USOverseas Private Investment Corporation providedofficial export credits and guarantees, or investmentguarantees.

Indian financial institutions counter-guaranteed theforeign loans and guarantees for phases I and II to

the tune of $1,102 million. The re-spective guarantees came fromIDBI ($483 million), ICICI ($275million), the State Bank of India($224 million), IFCI ($99 mil-lion), and the Canara Bank ($21million). On top of this, the Indianfinancial institutions providedrupee loans of $192 million equiv-alent, and non-convertible deben-tures of $235 million.

The Indian government providedthe foreign investors and lenders(but not the Indian financial insti-tutions) with a counter-guarantee

for phase I of the project. This guarantee did notonly cover the loans extended, but all future pay-ments to DPC under the power purchase agreement.

The opposition against the project

Right from the start, the project was opposed by theaffected people, by Indian power sector experts andby a growing popular movement. The main reasonsfor this resistance were:

Haste and lack of transparency:On 20 June, 1993, the Maharashtra SEB signed amemorandum of understanding for the Dabholplant with a delegation from Enron and GeneralElectric. The signing occurred three days after theteam had arrived in India, without any competitivebidding, and for a contract which during its lifetimewould commit India to pay about $35 billion.40 Thisundue haste continued throughout the history of


25

The Dabhol project oncestood for the promises of

economic liberalization andprivate foreign investment.Today it more appropriatelysymbolizes the opportunitieswhich privatisation offers for

corruption and privateenrichment.

1.5. THE DABHOL EXPERIENCE

the project. In February 1995, Maharasthra’sCongress government finalized the power purchaseagreement with Enron – after it had lost the elec-tions and just before a new BJP/Shiv Sena govern-ment took office. As the new government later de-clared in court, this “unholy haste (…) was clearlyin order to reap the benefit” of the bribes whichEnron spent on the project.41 In the same vein, ashort-lived BJP central government ratified thecounter-guarantee for the Dabhol project on its lastday in office in May 1996.

“From the very beginning,” writes researcher AbhayMehta, “Enron’s attitude was one of arrogance andan open disdain for the law.”42 The company re-quested and got exemptions from most laws appli-cable for power projects in India. The power pur-chase agreement – which defined the obligations ofMaharashtra and the Indian government – was keptsecret (but later leaked to the public). As the headof the MSEB wrote to the Indian government in1992, “public and judicial scrutiny of business pol-icy and decisions (…) will not be acceptable by acompany like DPC.”43

Corruption:In January 1995, Linda Powers, vice president forglobal finance at Enron, volunteered in a hearing inthe US House of Representatives that in the case ofthe Dabhol project, “our company spent an enor-mous amount of its own money – approximately$20 million – on [the] education and project devel-opment process alone, not including any projectcosts.”44 Indeed, IDBI in its appraisal report notedthat “the promoters have included a developmentfee of US $27 million in the project cost.”45 DPClater claimed that this fee covered engineering,legal, administrative and travel costs. The appraisalreport clarifies that all these costs were howevercovered separately by “preliminary expenses” of Rs.672 million.

The Maharashtran government confirmed in theMumbai High Court in September 1995 that thepower purchase agreement was procured “by fraudand misrepresentation.”46 The court directed DPC toplace on record audited accounts of the $20 millionwhich the company had spent on educating Indianofficials. DPC never followed this order.

In December 2001, in a strange afterthought of his-tory, 29 executives of Enron were charged in the USwith pocketing a full $1.1 billion in insider trades.“There was fraud at the top, fraud by the board,”

said one of the lawyers for a plaintiff. “It’s worsethan any civil fraud case we’ve ever seen.”47

Not economic and not needed:Depending on various assumptions, the annual re-turn on equity of the investors in Dabhol can be es-timated at 32-40% before taxes. Sales taxes and du-ties were waived, and DPC also received conces-sions on income taxes. Even before the full cost ofDabhol became apparent, the Central ElectricityAuthority in 1993 calculated the reasonable cost ofa combined cycle power plant to be between Rs.18.1 and 19.1 million/MW, and the cost of Dabhol,to be Rs. 44.9 million/MW.48 By all accounts, Enron’sproject did not make economic sense.

In March 1993, the Ministry of Finance asked theWorld Bank to consider funding Dabhol, and theBank duly analysed the economics of the project. Itsconclusion was unambiguous. In its response to theFinance Ministry, the World Bank pointed out thatthe project was “not part of the least Cost sequencefor Maharashtra power development,” that it would“place a heavy financial burden on the MSEB,” andthat “prices for industrial consumers would at theminimum have to be doubled in nominal terms torecover the cost of LNG power.” The project as itwas then formulated was “not economically viable,”the Bank concluded.49

In its analysis, the World Bank also found that “theproject would add more capacity than needed,” and“would displace lower cost coal-fired generation inoff-peak periods.”50 A few months later, the CEAcalculated that MSEB would need to back down 408MW of capacity producing power at 50-80paisa/kWh in order to buy power from Dabhol at Rs.3.47/kWh.51 In spite of all this evidence, DPC man-aged to procure the power purchase agreement onthe terms that it wanted. The PPA included a so-called take-or-pay clause, according to whichMaharashtra’s SEB was forced to pay for Dabhol’spower even if the electricity was not needed.

The project takes its course

Enron resorted to violence against protestors, anddirectly paid the police to suppress popular resis-tance. Amnesty International in 1997 found evi-dence of harassment, arbitrary arrest, preventive de-tention and ill-treatment by the company.52

In 1995, the nationalist BJP and Shiv Sena partieswon the state elections in Maharashtra on an anti-

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26

Dabhol platform. In early August 1995, the new gov-ernment cancelled the project. As BJP leader L.K.Advani announced in a public statement, the deci-sion to scrap Dabhol was “a political decision against the political corruption” and “a protestagainst the Swiss bank account culture of Bofors andthe suitcase practices of Bombaybrokers, which have brought Indianpolitics disrepute.”53

Soon enough, the cancellation onlyproved to be another twist of the“Swiss bank account culture” bythe new government. On 3November, 1995, a delegation ofEnron met with Shiv Sena leaderBal Thackeray in Mumbai. Fivedays later, the government consti-tuted a committee to renegotiatethe project with DPC. On 19November, the committee conclud-ed its “renegotiations” and submit-ted its report. The Dabhol project was approved onterms which were even more unfavourable for Indiathan under the original agreement.

As was elaborated in chapter 1.3, the Enron dealhad serious side effects on the Indian power sector.Comments researcher Abhay Mehta: “The entry ofEnron, on the terms that it received, led to thebreakdown of nearly all systems across the board.All sorts of companies, both local and obscure onesfrom the USA in particular, jumped into thearena.”54 In Andhra Pradesh alone, the governmentsigned 64 memoranda of understanding for newpower plants in a single day.

The system collapses

Phase I of the project started commercial operationin May 1999. Just as independent observers hadwarned, the power from Dabhol turned out to be ex-cessively expensive. Instead of less than Rs. 2/kWhas originally promised, it amounted to about Rs.7.80/kWh. The Maharashtra Electricity RegulatoryCommission ordered MSEB to buy electricity fromthe cheapest possible source. But even as Dabholproduced at only 40% of its capacity, the SEB wasforced to pay the DPC a capital servicing cost of Rs.950 million each month.

In December 2000, the electricity board stoppedpayments for the power from Dabhol. Four monthslater, DPC stopped paying the contractors of the

second phase, and so construction on this nearlycompleted power plant came to a halt. In August2001, DPC defaulted on its interest payments to for-eign lenders, and one month later, on its paymentsto the Indian creditors.

Just as it had done when the pro-ject was temporarily cancelled in1995, Enron put the Indian au-thorities under strong pressure.“Our experience would indicatethat contracts (...) are broken byIndian governmental authoritieswhenever and as often as theyprove inconvenient or burden-some,” the company’s chairmanKen Lay argued in a letter to India’sPrime Minister.55 And US AssistantSecretary of State Christina Roccatold the Confederation of IndianIndustries in July 2001: “From anAmerican perspective, as I am sure

you have all heard before, many of India’s problems[regarding the investment climate] can be summedup in the five-letter word Enron.”56 Meanwhile, theproject sponsors were trying to sell their investmentin Dabhol to the government, the financial institu-tions, or to other companies.

The foreign lenders to DPC are protected by Indianguarantees. They would like the project to be termi-nated, and have threatened to invoke the guaran-tees. The Indian financial institutions enjoy no suchcomfort and want the project to survive. They havethreatened that they would stop issuing furthercounter-guarantees for foreign loans if the Dabholguarantee were indeed invoked. In September 2001,IDBI called for a massive capital infusion of Rs. 25billion from the Indian government to prepare forthis case. Whether or not the counter-guarantee isindeed called in is ultimately a political question.

The findings of the Godbole Committee

In February 2001, the Maharashtra government cre-ated a committee under Mhadav Godbole, an ex-chairman of MSEB, in order to look into the deci-sion-making process for the Dabhol project. In April2001, the Godbole Committee came out with ascathing critique of the project and the process onwhich it was based. Some of its findings were:


27

“The entry of Enron, on theterms that it received, led tothe breakdown of nearly allsystems across the board. All

sorts of companies, bothlocal and obscure ones from

the USA in particular,jumped into the arena.”

Abhay Mehta, researcher, 2000

• Instead of exclusively negotiating with one com-pany, the government should have opted for acompetitive bidding process.

• Neither phases of the project were appropriatelydesigned or least-cost.

• The calculation of demand for the power pro-duced was “based on extremely over-optimisticassumptions.”

• The calculation of the power tariff was “at best,another example of systemic failure and at worstsomething much more worrisome.”57

The Committee concluded that Dabhol constitutedan “inexcusable failure of governance,” and that thedecision-making process had been “neither reason-able nor rational.” All assumptions for both phaseswere “in each and every instance (...) untenable.”58

Two of the five committee members, including thechair, saw indications for a “concerted effort to ex-ercise undue influence at every stage of this pro-ject,” and recommended the establishment of a for-mal Commission of Inquiry.59 The whole committeerecommended that the power purchase agreementbe restructured and the power tariff reduced.

The role of the financial institutions

Independent analysts from the Prayas energy grouphad shown Dabhol’s lack of economic and financialviability years before the plant was built. The WorldBank declined to fund the project because its analy-sis clearly showed that it was not economically vi-able. Yet a host of foreign and Indian financial insti-tutions still did not hesitate to provide loans andcounter-guarantees for the project.

The Godbole Committee found that “the financialinstitutions showed poor judgment and lack of duediligence in accepting these projections withoutdemur.” And: “The decision of the financial institu-tions to fund this project seems to have been basedprimarily on escrow account given by MSEB, guar-antee by the state government and the counter guar-antee by the central government (for Phase I),rather than an independent and meticulous ap-praisal of the project.”60

After the project collapsed, representatives of IDBIclaimed that the financial institutions had beenforced to approve the project, and should not beblamed for it. So who shares the responsibility for the

decisions of financial institutions which, in the formof expensive power and bailouts for investors andlenders, will cost the Indian public billions of rupees?

Certainly, Enron knew how to use the instruments ofUS diplomacy to promote its interests. The companylavishly funded both the Republican and theDemocratic Parties in the US throughout its history.Frank Wisner, the long-time ambassador of the USto India, joined Enron the day after he completed hisassignment in Delhi. Thomas McLarty, an ex-fundraiser for the Democratic Party and BillClinton’s chief of staff, personally ensured that thePresident was aware of Enron’s interests inMaharashtra.61 In India, forces within the FinanceMinistry and in other institutions meanwhile madesure that all rules were bent so that Enron could bagan excessively favourable contract, as Abhay Mehta’svivid account of the Dabhol saga documents.

At the same time, the Indian financial institutionswere clearly aware of the problems of the project,but did not ring any alarm bells. On 10 May 1994,IDBI’s advisory committee met in Mumbai to dis-cuss the proposed loan to DPC. The members of thecommittee pointed out that many items in the pro-ject budget were “on the high side,” were “not apractice in India,” and had “no justification.”62 IDBIcould have leaked this information to the public, asfinancial institutions in India often do when they donot want to fund a particular venture. Yet the insti-tution chose to ignore the critical voices, and wentahead to fund the project.

Before the loans turned sour, IDBI was paid well forits commitment. As the appraisal report documents,the institution was able to charge an interest rate of17.5% for its loan, an upfront fee of 1.05% for its ar-ranging role, and a commission of 2.4% for theguarantee which it extended. It is easy to imaginethat the management of financial institutions mayalso have profited from the “educational expenses”which Enron lavished on the project.

After the World Bank declined to fund Dabhol, thegovernment of Maharashtra in a note to the centralgovernment expressed a concern that the “com-ments may create a problem for the developers toraise commercial and institutional borrowings.”63 Asit turned out, the note overestimated the appraisalcapacity or the integrity of the international finan-cial institutions. A group of prominent commercialbanks and official export credit agencies did nothesitate to fund a project which obviously made noeconomic sense. They are equal partners in the

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28

“poor judgment” and “lack of due diligence” whichthe Godbole Committee denoted for the Indian fi-nancial institutions.

A symbol of globalisation

On 2 December, 2001, Enron – the “world’s leadingcompany” as it had called itself – filed for bankrupt-cy procedures in the United States. The event wassymbolic. Enron “espoused competition, the freemarket, world trade, globalisation and deregula-tion,” as the Guardian wrote in an epitaph on thecompany.64 Or, as the Bloomberg wire service put it,“Enron was the perfect expression of the global eraand the neoliberal, West-knows-best thinking un-derlying it.”65

The cynical arrogance with which Enron showeredthe Indian public and the world at large may be bestcaptured in Linda Powers’ statement in the US par-liament. In the Congressional hearing of January1995, Enron’s Vice President said the following on

the Dabhol project: “Working through this processhas given the Indian authorities a real and concreteunderstanding of sound project lending practices.(…) Through our project, [Indian financial institu-tions] have developed a thorough understanding ofproject finance, international lending practices,project credit and security requirements, and thelike – something that no amount of technical assis-tance could have achieved as effectively as a reallive project.”66

The sad truth is that Western governments and theinternational financial press throughout the processsupported the view that the Dabhol project symbol-ized the benefits of globalisation. Comments jour-nalist Patrick Smith: “Developing nations such asIndia have a long way to go, but genuine trans-parency in matters of policy and commercial con-duct will prove of vital advantage to them once theyachieve it. With emissaries such as Enron, the ad-vanced industrial nations have nothing to teachthem on the subject.”67


29

Notes

1 Sucheta Dalal in rediff.com, 20 June 2001.

2 Preben Nielsen as quoted in World Commission onDams, Third WCD Forum Meeting, Cape Town, 2001, p. 64.

3 Gazette of India No. 237, New Delhi, 22 October 1991,as quoted in Prashant Bhushan, Legal Notice to PFC, 10 May 2001, p. 4.

4 Quoted in Prashant Bhushan, ibid., p. 4.

5 IFCI Limited, Re-Appraisal Note on the Project of ShreeMaheshwar Hydel Power Corporation Ltd., pp. 35ff., 42.

6 Asian Age, 27 June 2001.

7 Rediff.com, 20 June 2001.

8 As quoted in Business Standard, 1 January 2002.

9 R. Rangachari, N. Sengupta, R.R. Iyer, P. Banerjee and S.Singh, Large Dams: India’s Experience, a WCD Case Studyprepared for the World Commission on Dams, Cape Town,2000, p. 175.

10 Ibid., p. 116.

11 Ibid., Annex, p. 67.

12 Shantanu Dixit, Girish Sant, Subodh Wagle, ‘Regulationin the WB-Orissa Model: Cure Worse Than Disease,’Economic and Political Weekly, 25 April 1998, p. 2.

13 Navroz K. Dubash and Sudhir Chella Rajan, PowerPolitics: The Process of Power Sector Reform in India, Draft, 3 August 2001, p. 7.

14 Figures from Prayas/Public Sector International, IndiaPower Sector Reform Update, Issue 1, October 2001, p. 6.

15 For an account of the Cogentrix project see AbhayMehta, Power Play: A Study of the Enron Project, OrientLongman, Hyderabad, 2000, pp. 127ff..

16 Dubash and Rajan, Power Politics, p. 15.

17 Amulya Reddy, ‘Need for Rethink of Karnataka PowerReforms,’ Deccan Herald, 4/5 January 2002.

18 See interview with Suresh Prabhu, Business Line, 23 January 2002.

19 Quoted in IDFC, Annual Report 2001, p. 7.

20 Central Electricity Authority, ‘Hydro Capacity Additionduring 9th Plan – Overall Scenario.’

21 Lok Sabha Secretariat, Standing Committee on Energy,‘Report on Demands for Grants (2001-2002),’ Ministry ofPower, April 2001, paragraph 2.167.

22 See Shubhra Wadhawan, ‘Going Onstream,’ Power Line,March 2001.

23 Power Line, December 2000.

24 Power Line, September 2001.

25 Deccan Herald, 5 November 2001.

26 See Awadh Giri, ‘Escalating Cost of Electricity,’ PowerLine, May 2001.

27 Power Line, September 2001.

28 Power Line, January 2001.

29 All quotes from interview with Suresh Prabhu, BusinessLine, 22 January and 23 January 2002.


31 United States Securities and Exchange Commission,Form 20-F, Annual Report 2001, ICICI Limited, p. 19.

32 Moody’s Investors Service, ‘India Banking SystemOutlook,’ September 2000.

33 See Indian Express, 31 July 2001; Indian Express, 28 November 2001.

34 See Sucheta Dalal, ‘FIs should desist from makingcounter-offers,’ Indian Express, 10 June 2001.

35 See www.bankersindia.com or G.H. Deolalkar, TheIndian Banking Sector: On the Road to Progress, undated, p. 97.

36 S.S. Tarapore, ‘Supervision is where the action really is,’Financial Express, 10 October 2001.

37 Quoted from ibid.

38 See The Hindu, 21 June 2001.

39 S.S. Tarapore, ‘RBI cautiously opens up on its working,’Financial Express, 12 September 2001.

40 See Abhya Mehta, Power Play: A Study of the EnronProject, Orient Longman, Hyderabad, 2000, pp. 20ff.

41 Civil Suit No. 3392 of 1995, filed by the State ofMaharashtra Versus DPC and the MSEB in the High Court ofJudicature at Bombay, p. 5.

42 Mehta, Power Play, p. 34.

43As quoted in ibid., p. 34

44 Testimony by Linda F. Powers before the Committee onAppropriations, Subcommittee on Foreign Operations, U.S.House of Representatives, 31 January 1995, p. 470.

45 IDBI Appraisal Report, p. 31.

46 Civil Suit No. 3392 of 1995, p. 15.

47 Attorney Bill Lerach quoted in Economic Times, 9 December 2001.

48 See Mehta, Power Play, p. 52.

49 Heinz Vergin, Director, India Country Department,World Bank, letter to Mr. M.S. Ahluwalia, Secretary,Department of Economic Affairs, Ministry of Finance, 30 April 1993.

50 Quoted from ibid.

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30

51 See Mehta, Power Play, p. 60.

52 The Amnesty International report is reproduced inMehta, Power Play, pp. 192ff.

53 As quoted in Mehta, Power Politics, p. 221.

54 Mehta, Power Politics, p. 127.

55 As quoted in the Wall Street Journal, 20 September 2001.

56 As quoted in Times of India, 25 July 2001.

57 Quotes from the Report of the Energy ReviewCommittee, April 2001, chapters 6.3.2.1 and 6.4.

58 Quotes from the Report of the Energy ReviewCommittee, introduction to chapter 6 and chapter 6.4.4.

59 Quoted from the Report of the Energy ReviewCommittee, introduction to chapter 6.

60 Quotes from the Report of the Energy ReviewCommittee, chapter 6.3.3.

61 See Abhay Mehta’s account of research by Timemagazine in Power Play, pp. 144ff.

62 See the summary record of the meeting in IDBI’sAppraisal Report, Annexure XXVI.

63 As quoted in Mehta, Power Politics, p. 45.

64 John Vidal, ‘A giant bully,’ Guardian, 30 November 2001.

65 Patrick Smith, ‘There’s an Eyeful for India in Enron,’Bloomberg, 14 November 2001.

66 Testimony by Linda F. Powers, pp. 470.

67 Patrick Smith, Bloomberg.


31

33

PART 2

INDIAN FINANCIAL

INSTITUTIONS IN THE

HYDROPOWER SECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The National Hydroelectric Power Corporation isthe largest central government institution which de-velops and operates hydropower projects. Likeother central institutions, it focuses on projectswhich are difficult to develop, or politically sensi-tive. Although NHPC’s past recordis not impressive, the difficulties ofimplementing private or state-levelhydro projects indicate the institu-tion may play a more active role inthe future.

NHPC invests the funds, which itraises directly, and is thus not atypical financial intermediary.

Ownership

India’s central government has created several insti-tutions to promote hydropower projects which arelocated in sensitive areas, or which are difficult todevelop for other reasons. NHPC was set up in 1975to take over three projects which had run into prob-lems, the Salal I, Baira Siul and Loktak I hydropow-er schemes. Beyond these specific projects, NHPC’smandate is to develop India’s hydropower potentialin general. The government also hoped that a well-managed central institution could serve as a modeland catalyst in the sector. The Corporation’s portfo-lio is concentrated in Jammu & Kashmir, HimachalPradesh, Uttaranchal, Sikkim and Manipur. It alsoincludes projects in Nepal and Bhutan.

NHPC is a public limited company. After a series ofcapital increases, it presently has a share capital ofRs. 70 billion, which is exclusively held by theIndian government.

The largest share of electricity in India is producedby thermal power plants, and NHPC has been called“the poor cousin of the more high-profile NTPC.”1

In late 1999, India’s then power minister P.R.Kumaramangalam launched an idea to merge, orsell off the National Hydroelectric to the NationalThermal Power Corporation. The plan was stronglyopposed by NHPC, and soon scrapped.

Activities

NHPC develops hydropower pro-jects from their conception tocommissioning, and then operatesthem. By 2001, NHPC owned andoperated nine hydropower pro-jects, and sold power to 20 states.Its operational portfolio consists ofthe following plants:

• Chamera I (540 MW, Himachal Pradesh);

• Uri I (480 MW, Jammu & Kashmir);

• Salal I (345 MW, Jammu & Kashmir);

• Salal II (345 MW, Jammu & Kashmir);

• Baira Siul (180 MW, Himachal Pradesh);

• Tanakpur (120 MW, Uttaranchal);

• Loktak I (105 MW, Manipur);

• Rangit (60 MW, Sikkim); and

• Kalpong (5 MW, Andaman & Nicobar Islands).

Given its wide-ranging mandate, NHPC’s portfoliois modest. (It is actually smaller than the portfolioof one of the other central government institutionsdiscussed below.) The Corporation operates a com-bined capacity of 2,180 MW, of which only 80 MWwere brought onstream since 1996. In its long-term

PART 2 INDIAN FINANCIAL INSTITUTIONS IN THE HYDROPOWER SECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

NHPC is the largest centralgovernment institutionwhich develops andoperates hydropower

projects. Given its grandmandate, the Corporation’s

portfolio is very modest.

2.1. THE NATIONAL HYDROELECTRIC POWER CORPORATION

development plan for 1985-2000, NHPC had envis-aged building a total capacity of 7,945 MW by theend of the century.

Since 1998, NHPC has included the development ofwind and tidal power in its objectives. It is current-ly exploring the installation of a pilot geo-thermalpower plant in Chattisgarh. NHPC is also part of acommittee formed by the Power Ministry in July1999 to explore the feasibility of a huge 900 MWtidal power project in the Gulf of Kutch. NHPC’smain focus, however, continues to be on big hydroprojects, and the Corporation clearly is not verycommitted to non-conventional energy sources.NHPC shelved a wind project in Tamil Nadu in2001, much to the regret of the ParliamentaryStanding Committee on Energy.2

NHPC also provides engineering services to otherproject sponsors. It serves as the lenders’ engineerfor IFCI on Maheshwar, and for ICICI on the BaspaII HEP. The Corporation recently signed a Memo-randum of Understanding with Harza EngineeringCompany from the US to jointly provide consultingservices in India and abroad.

Hydropower projects in the pipeline

Compared with its modest existing portfolio,NHPC’s expansion plans are highly ambitious. TheCorporation presently has the following projectsunder construction:

• Teesta V (510 MW, Sikkim);

• Dulhasti (390 MW, Jammu & Kashmir);

• Chamera II (300 MW, Himachal Pradesh);

• Dhauliganga (280 MW, Uttaranchal);

• Loktak Downstream (90 MW, Manipur); and

• Kurichu (60 MW, Bhutan);

Preliminary work has started on the following projects:

• Subansiri (Lower) (2000 MW, Arunachal Pradesh);

• Parbati II (800 MW, Himachal Pradesh);

• Koel Karo (710 MW, Jharkhand – see below); and

• Kishenganga (330 MW, Jammu & Kashmir).

A large number of projects are at various stages ofpreparation in NHPC’s pipeline. They include

• Siang (Upper, Middle and Lower) (11,000, 700and 1,700 MW, Arunachal Pradesh);

• Subansiri (Upper and Middle) (2,500 and 2,000MW, Arunachal Pradesh);

• Parbati I and III (750 and 501 MW, HimachalPradesh);

• Bursur (1,020 MW, Jammu & Kashmir);

• Pakal Dul (1,000 MW, Jammu & Kashmir);

• Upper Krishna I-IV (810 MW, Karnataka);

• Uri II (280 MW, Jammu & Kashmir);

• Chamera III (231 MW, Himachal Pradesh);

• Teesta Low Dam III and IV (100 and 132 MW,West Bengal); and

• Sewa II (120 MW, Jammu & Kashmir).

NHPC presented 12 projects for joint-ventures withinternational investors at an international confer-ence in Delhi in February 2002. The road show in-cluded the six large projects in the Siang andSubansiri basins, Chamera III and Parbati III inHimachal Pradesh, and Uri II, Pakal Dul, Bursar andSewa II in Jammu & Kashmir.

NHPC has entered into joint ventures with stateutilities to promote projects which are facing prob-lems finding financing. In 2000, NHPC formed ajoint-venture with the government of MadhyaPradesh called the Narmada Hydro ElectricDevelopment Corporation. This vehicle is supposedto develop

• the Indira Sagar project (1,000 MW) and

• the Omkareshwar project (520 MW).

Like Sardar Sarovar and Maheshwar, Indira Sagarand Omkareshwar are part of the huge dam-buildingprogram on the Narmada river. Indira Sagar, whichwas originally funded by the World Bank, wouldalone submerge 254 villages.

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36

In a joint venture with the West Bengal state utility,NHPC plans to build the following two pumpedstorage projects:

• Purulia (900 MW); and

• Turga (600 MW).

Problem projects

NHPC is confronted with the technical and finan-cial problems typical for large hydropower schemes.Projects such as Baira Siul, Loktak I, Chamera I andDulhasti have experienced serious geological prob-lems. Salal I, Tanakpur and Dulhasti suffer frompoor contractor performance, and have required de-sign changes. Dulhasti and Loktak Downstream arebeing stalled by the activities of militants.

NHPC officials claim that Dhauliganga is being con-structed on time, and that Chamera II, Kurichu andKalpong were and are ahead of schedule. Yet many ifnot most NHPC projects suffer from massive timeand cost overruns. Loktak I was delayed by morethan nine years; Baira Siul suffered time overruns ofalmost six years; Rangit, of more than four years; andTanakpur, of more than three years. Dhauliganga,which is now being quoted as a positive case, was infact delayed by more than six years because the re-quired land could not be acquired. Dulhasti hasturned into a permanent headache for NHPC, withprospective power prices having reached a toweringRs. 11/kWh.3 Salal I and Chamera I have also expe-rienced time and cost overruns.

Most NHPC projects are situated in the valleys andfoothills of the Himalayas. Dams and reservoirs inthis area often face difficult geological problems, butdo not normally displace as many people as projectselsewhere. NHPC officials claim that most of theCorporation’s projects have so far been run-of-theriver (although they appear to use a very loose def-inition of the term). Even so, resettlement is creat-ing problems. In December 1999, people affected bythe Chamera I project went on an 18-day hungerstrike, protesting against the lack of compensationfor their losses.

The one project which NHPC is supposed to devel-op outside the Northern and North-Eastern regionsis Koel Karo in Jharkhand. Here, the Corporationhas encountered strong resistance from the affectedpopulation. The Koel Karo reservoir would sub-merge 264 square kilometres of land and 256 vil-

lages, and would affect an estimated 20,000 fami-lies. Local opposition has forced the project to beput on hold since 1982. Its cost has meanwhile ex-ploded from an original Rs. 3.9 billion to a stagger-ing Rs. 236.8 billion (in nominal terms). The costof its electricity is tentatively set at Rs. 7.13/kWh,and several state governments have already refusedto buy the expensive power. In February 2001, thepolice killed ten peaceful protesters. In December2001, NHPC announced that it would withdrawfrom Koel Karo unless the Jharkhand governmentauthorizes the execution of the project and signsthe power purchase agreement before the end ofMarch 2002.4

NHPC’s finances

Equity capital:NHPC pays only a nominal dividend on the equitycapital which the government holds. It receivesconsiderable, and increasing, grant support fromthe Ministry of Power for tasks such as the investi-gation of new projects. The Corporation derives itsmain income from the sale of electricity and fromconsultancy services. Its main clients, the stateelectricity boards, are in bad financial shape how-ever, and regularly default on their payments. Bythe end of FY 2000/01, NHPC had outstandingdues of Rs. 26.2 billion. And of the Rs. 19.1 billionwhich it did receive in payments, one third was inthe form of bonds.

NHPC has to put up 30% of the cost of every pro-ject which it develops as share capital. It cannotgenerate this equity from the limited revenues of itsown projects. So in order for the Corporation to ex-pand its portfolio, the government needs to regular-ly increase its share capital. In FY 2000/01, NHPC’sequity reached Rs. 70 billion.

Domestic debt:NHPC finances 70% of the cost of its projectsthrough debt. These loans had originally come fromthe central government. Since the mid-1980s, how-ever, the Corporation has raised debt through com-mercial loans and bonds, both in the form of privateplacements and public issues. By the end of FY2000/01, NHPC’s domestic debt consisted of Rs.32.7 billion in loans from Indian financial institu-tions (including ICICI, LIC, IDBI, and SBI), Rs. 4.4billion in loans from the government, and Rs. 5.3billion in bonds.


37

NHPC also managed to arrange lines of credit(LoCs) from Indian financial institutions. ICICI ap-proved an LoC of Rs. 15 billion in 1998, and (ac-cording to media reports) is likely to sanction an-other line of Rs. 10 billion. LIC approved an LoC ofRs. 25 billion for the Corporation in FY 2000/01.ICICI agreed to fund the Teesta V and Parbati II pro-jects under its line of credit. LIC’s credit can be usedwithout the individual projects being sanctioned bythe creditor.

Through the Narmada Hydro Electric DevelopmentCorporation, NHPC is also trying to raise funds fromPFC for the Indira Sagar and Omkareshwar projects.

Since NHPC has problems recovering dues from itsclients, and since progress on projects is slow, theCorporation may in the coming years experienceproblems servicing the debt which it has taken onfor its previous and ongoing investments.5

Foreign private debt:In some cases, NHPC attempts to tap the interna-tional capital markets to fund its projects. At thetime of writing, the Corporation was tendering aloan of $350 million for its overall program. ANZ,Sumitomo and Natwest were among the banks mak-ing presentations for this loan. NHPC is also ten-dering on the international markets contracts andfinancial packages for the Teesta V project (Rs. 26billion) and the Kishenganga HEP ($1 billion). InMay 2001, its director of finance claimed that theCorporation had been offered $300 million byGerman bank BHF, $500 million by SociétéGénérale, and $150 million jointly by DeutscheBank and Crédit Lyonnais.

Reports about foreign funding cannot necessarily betaken at face value. In February 2001, the PowerMinistry announced in India’s parliament that “aGerman bank for export credit” had offered NHPCa line of credit of $399 million.6 This funding nevermaterialized, and both German export credit agen-cies have denied making any such offer.

Foreign official debt:NHPC has attracted funds from official export cred-it agencies and – until recent years – bilateraldonors for its projects. Sweden’s SIDA and EKN andGreat Britain’s ODA funded the Uri project.Canada’s EDC and CIDA funded Chamera I, andEDC is financing Chamera II. The French COFACEfunded the Dulhasti project, which due to massivetime and cost overruns resulted in a diplomaticscuffle between India and France. Japan’s JBIC is

supporting the Dhauliganga project. And theNippon Export and Credit Insurance NEXI consid-ers reinsuring loans for stages II and IV of the Teestaproject (1,200 and 495 MW, Sikkim). (See chapters3.4 and 3.5.)

Indian government bodies have on several occa-sions tried to mobilize World Bank support forNHPC. In November 1998, the government ofHimachal Pradesh announced that it intended toraise a Bank loan for NHPC’s Parbati project. At theend of 2000, India’s Power Ministry announced thatit would request $1.3 billion from the World Bank,of which $100 million would be earmarked forNHPC. Part of this loan was supposed to fund thepreliminary investigation of projects in the Dehangand Subansiri basins.

The World Bank has not heeded requests for sup-port for NHPC, and neither have other multilateraldevelopment banks come forward. Since NTPC, theCorporation’s rich cousin in the thermal sector, wasfor a long time the world’s largest recipient of WorldBank funds, this lack of support is somewhat sur-prising especially for the 1980s and early 1990s.The World Bank has since made it clear that it willno longer support power generation projects inIndia. NHPC representatives put on a brave facewhen reacting to this lack of support. “Except forKoyna, the World Bank has never completed a hy-dropower project in India,” says one official.“Where ever they came in, they left.”

Institutional culture

NHPC is still a fully-owned government enterprise,and as such is obviously susceptible to guidancefrom the political authorities. The Corporation ap-praises prospective projects on technical, environ-mental and financial grounds. Although it is thelargest central institution in India’s hydropower sec-tor, it does not carry out any comprehensive assess-ment of power generation. NHPC officials explainthis lack of perspective by referring to the fact thatwater is a state matter in India.

NHPC’s management was happy to share informa-tion about its operations for this research project,and its officials expressed strong convictions re-garding their mandate. At the same time, officialNHPC publications exude a certain bureaucraticflavour and grandiloquence.

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38

Asked about NHPC’s performance in June 2000,Rajendra Singh, the chief managing director ofNTPC, commented as follows: “There are culturalissues. We have been pursuing a culture of perfor-mance. A culture of a commercial house. A cultureof delivering. I don’t want to comment more thanthat on what others are doing.”7

The strong rivalry between NHPCand NTPC is obviously reflected inthis statement. Already in 1994,India’s Comptroller and AuditorGeneral had criticized NHPC forbeing overstaffed and not deploy-ing its surplus manpower.

Environmental concerns

NHPC, which is predominantly adeveloper and not a financial insti-tution, has some very general envi-ronmental management principles.The Corporation is committed tocomplying with legal environmen-tal requirements, and says it“leaves no stone unturned toachieve sustainable development.”8

It has an environment core group and carries outenvironmental impact assessments, public hearings,catchment area treatment measures, and compen-satory afforestation programs for its projects as it islegally required. Officials confirm that when devel-oping a project, NHPC is “concerned with the envi-ronment from day one.” In early 2000, NHPC’s chiefmanaging director Yogendra Prasad announced thatthe Corporation planned to certify its operations ac-cording to the ISO 14,000 standards for environ-mental management systems.

NHPC’s head has repeatedly criticized India’s licens-ing systems, and particularly the MoEF, for beingtoo cumbersome in clearing the construction of hy-dropower projects. “The clearance system continuesto be a major culprit in the development of the hy-droelectric power sector in the country,” YogendraPrasad said in early 2002.9 Prasad is also known asa staunch opponent of the recommendations whichthe independent World Commission on Dams pub-lished in November 2000.

In January 2000, Yogendra Prasad commentedabout the environmental movement: “The most tir-ing and trying ordeal awaiting NHPC would be tomeet the challenges of anti-development anachro-nistic obscurantism obstructing the attempts to

reap benefits from bounties of Nature and to keepthe poor tribals always in loin cloths, fig leaves andbare tops. NHPC is endowed with talented enthusi-asts to counter the anti-hydro lobby with an arsenalof appropriate compensating actions and convinc-ing answers.”10

In practice, NHPC does not seemto follow any social or environ-mental policy principles of its own,but promotes the implementationof projects whenever the country’slegal or political framework allow.In the case of Koel Karo, NHPC ispushing for the speedy implemen-tation of a project which is strong-ly opposed by the affected Adivasicommunities (or the “poor trib-als,” as Prasad calls them). TheChamera I project has contributedto deforestation and other environ-mental problems, and has evenbeen criticized on ecologicalgrounds by CIDA, one of its fun-ders.11 According to its funderSIDA, the Uri I dam will seriouslyimpact fisheries in the Jhelum

river.12 In May 1999, 10 square kilometres of theGreat Himalayan National Park – part of an impor-tant endemic bird area – had to be denotified for theconstruction of the Parbati project. In November2001, the Ministry of Environment and Forestswithdrew the site clearance for NHPC’s Subansiri(Lower) project since the reservoir would submerge42 hectares of a wildlife sanctuary.

Other central hydropower institutions

As elaborated in chapter 1.2, the government creat-ed three further institutions - the North EasternElectric Power Corporation, the Tehri HydroDevelopment Corporation, and the Nathpa JhakriPower Corporation - to develop and operate centralhydropower projects. These institutions have beenmandated to develop the following projects:

NEEPCO: • Ranganadi (405 MW, Arunachal Pradesh, under

construction);

• Tuirial (60 MW, Mizoram, under construction);

• Lower Kopili (150 MW, Assam);


39

“The most tiring and tryingordeal awaiting NHPC willbe to meet the challenges

of anti-developmentanachronistic obscurantismobstructing the attempts toreap benefits from bounties

of Nature and to keep the poor tribals always in loin cloths, fig leaves

and bare tops.”

Yogendra Prasad, NHPC, January 2000

• Kopili II (25 MW, Assam);

• Tuivai (210 MW, Mizoram);

• Doyang (75 MW, Nagaland);

• Tipaimukh (1,500 MW, Manipur);

• Kameng (600 MW, Arunachal Pradesh); and

• Ranganadi II (160 MW, Arunachal Pradesh).

THDC: • Tehri I (1,000 MW, Uttaranchal, under construc-

tion);

• Tehri II (1,000 MW, Uttaranchal); and

• Koteshwar (400 MW, Uttar Pradesh).

Since the 1970s, the Tehri project has gained noto-riety for its high seismic risks, its disregard for thefate of more than 100,000 affected people, and forits corruption.

NJPC: • Nathpa Jhakri (1,000 MW, Himachal Pradesh, see

below); and

• Rampur (535 MW, Himachal Pradesh).

Multipurpose institutions:The central government created two institutions forthe integrated management of river basins whichoperate hydropower projects. The Damodar ValleyCorporation (DVC) was created in 1948 based uponthe model of the Tennessee Valley Authority in theUS. The DVC manages a large flood control, irriga-tion, water supply and power generation scheme inWest Bengal and Jharkhand, and operates the fol-lowing hydropower projects in Jharkhand state:

• Panchet (80 MW);

• Maithon (60 MW); and

• Tilaiya (4 MW).

The DVC also intends to build the 340 MWBalpahari multipurpose project, of which 320 MWwould be operated as a pumped storage scheme.

The Bhakra Beas Management Board (BBMB) wascreated in 1966. It manages the supply of waterfrom the Sutlej and Ravi-Beas rivers to the Punjab,

Haryana, Rajasthan and Delhi, and operates the fol-lowing hydropower schemes:

• Bhakra Right Bank (760 MW);

• Bhakra Left Bank (540 MW);

• Ganguwal (84 MW);

• Kotla (82 MW);

• Dehar (990 MW); and

• Pong (360 MW).

All of these projects are located in HimachalPradesh. With a combined capacity of 2,827 MW,the BBMB today still has a larger hydropower port-folio than the ambitious NHPC.

NTPC:To complicate matters further, the National ThermalPower Corporation is also entering the hydropowermarket. In 2000, NTPC signed a Memorandum ofUnderstanding with the government of HimachalPradesh to develop the Koldam HEP (800 MW).Since 1998, NTPC has proposed entering a jointventure with the Uttar Pradesh SEB to develop theailing Lakhwar Vyasi, Srinagar and Maneri Bhali IIHEPs, and had offered the Power Ministry to takeover the Nathpa Jhakri project. These advanceswere not met with success.

Nathpa Jhakri – a “first-rate scandal”

Nathpa Jhakri is one of the most prominent recipi-ents of official funding in India’s power sector – anda project which exemplifies many of the seriousproblems of large dams. The World Bank approveda loan of $485 million for the project in February1989. Further funding came from Germany’s KfW,Britain’s ECGD (guaranteeing a Barclay’s Bankloan), Norway’s Eksportfinans, and the Swiss BankCorporation (now, part of UBS).

Construction began in 1993, and was supposed tobe completed in 1998. The original design of theproject was faulty. The planned dam height soonhad to be reduced, in order to avoid the reservoirsubmerging the headrace tunnel of an existing dam.Due to the change in design, production of peakingpower will be reduced to 1.5 hours per day. Duringdam construction, fly-ash was used instead of ce-ment, resulting in the project being investigated for

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40

corruption by the Central Bureau of Investigation.In July 2000, the construction site was affected byserious flooding. And in 2001, the MoEF twice sus-pended work at the site for “serious and continuousviolations of both the Forest Conservation Act andthe Environment Act.”13 Completion is now plannedfor 2004, and project cost has meanwhile increasedfrom Rs.16 to 100 billion (in nominal terms).

After it had extended the originalclosing date by four years, theWorld Bank in December 2001 an-nounced it would close its loan inMarch 2002, and would cancel theundisbursed portion. YogendraPrasad, who heads not only NHPCbut also NJPC, announced that thefunding gap could be filled with aloan from PFC, and also from theline of credit which LIC had ex-tended to NHPC.

“As far as mega hydroelectric projects are con-cerned, words like ‘tomorrow’ are just not applica-ble,” The Tribune of Chandigarh editorialised afterthe World Bank announced its decision. “One has tothink in terms of eternity.” For the editor, the timeand cost overruns constituted “a first-rate scandal.”“However, since such ‘minor troubles’ are encoun-tered at almost every project, no heads ever turn, letalone roll.”14

Perspectives

There is a strong consensus within India’s powersector apparatus that the share of hydropower with-in the country’s hydro-thermal mix needs to be in-creased in the future. Since the private sector willnot take care of this, budgetary contributions fromthe central government for hydropower projects can

be expected to increase further.NHPC and the other central hy-dropower developers are the obvi-ous targets for such support.

Apart from promoting new pro-jects, central institutions have along history of taking over failedstate-sector projects. This is whatNHPC and THDC were originallycreated for. More recently, NHPChas entered into joint ventures withstate governments to develop diffi-cult projects in Madhya Pradesh

and West Bengal. One can well imagine that suchsupport will increasingly be called for when otherprojects run into trouble. After the World Bank can-celled its loan, the government of Himachal Pradeshrequested that NHPC take over the Nathpa JhakriHEP. And LIC – which, apart from the government,is NHPC’s most important creditor – has asked theCorporation to salvage the Maheshwar hydroelectricproject. As was elaborated in chapter 1.2, insiderswithin NHPC have in this case anonymously ex-pressed strong reservations about rescuing an unvi-able project, while chairperson Yogendra Prasad hasbeen more positive in public.


41

“As far as megahydroelectric projects are

concerned, words like‘tomorrow’ are just not

applicable. One has to thinkin terms of eternity.”

The Tribune, 21 December 2001

The Power Finance Corporation is India’s primaryinstitution for funding power generation, transmis-sion and distribution projects. While other financialinstitutions are about to reduce their exposure tothe power sector, PFC may well play an even moreprominent role in the future. It isalso an important intermediary forgovernment programs in thepower sector, and for financialtransfers from foreign funders.

Ownership

PFC was set up in 1986 and iswholly owned by the Indian gov-ernment. In case its share capitalneeds to be increased, the Corpora-tion envisages diversifying its equi-ty base by bringing in institutionalinvestors. Unlike most other finan-cial institutions, PFC is not admin-istered by the Ministry of Finance,but by the Ministry of Power.

Activities

The Power Finance Corporation is the primary in-stitution of the Indian government for funding gen-eration, transmission and distribution projects ofthe state electricity boards and other institutions inthe power sector. PFC finances all kind of projectsexcept for small hydro projects and rural electrifica-tion. (Hydro projects of up to 25 MW are funded byIndia’s Rural Electrification Corporation. As the listbelow indicates, there are exceptions to this rule.)PFC also provides technical assistance and advisoryservices to its clients.

PFC has a relatively small workforce and low over-head costs. Being a governmental institution, it is

able to access capital at low cost from the Indiangovernment, from private, bilateral and multilateralsources. The Corporation can therefore offer financ-ing for power projects at lower rates than other fi-nancial institutions in India.

Like international financial institu-tions, PFC has started to attach apolicy conditionality to its loans.Borrowers need to carry out so-called Operational FinancialAction Plans (OFAPs) as a precon-dition for taking up loans. Stateswhich restructure their power sec-tors receive funds at lower rates,while states which have not initiat-ed any such reforms have lost theiraccess to PFC funds. According tothe Corporation’s own counting,thirteen states have so far commit-ted to restructuring their powersectors under its initiative, and atthe end of FY 2000/01, 26 institu-tions were carrying out OFAPs.

In the form of interest subsidies and outright grants,PFC disburses the funds which the Ministry ofPower has approved under various incentive pro-grams such as the Accelerated Generation andSupply Program, or the Accelerated PowerDevelopment Program (AGSP and APDP, see chap-ter 1.3.). In late 2001, the Ministry of Power dis-cussed the creation of a new Development FinanceCorporation to fund distribution projects under theAPDP. The plan would add to the multiplicity of in-stitutions, and indicates doubts within the govern-ment about the capacity of the PFC to effectivelypromote reforms in the states.

The Corporation has also been mandated to drawup plans for creating a new India Power Fund of $1billion. According to current plans, PFC will con-


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2.2. THE POWER FINANCE CORPORATION

The Power FinanceCorporation is India’sprimary institution for

funding power generation,transmission and distribution

projects. While otherfinancial institutions areabout to reduce their

exposure to the powersector, PFC may well play an even more prominent

role in the future.

tribute seed capital of $50 million, and the rest is tobe mobilized from bonds for non-resident Indiansand from institutions such as IDBI, GIC, LIC, theWorld Bank, and ADB. The Fund will be adminis-tered by PFC, and will consist of three windows forthe provision of equity, domestic and external debt.PFC has proposed that contributions to the Fundreceive tax concessions.15

PFC provides up to 40% of the total cost of thermalpower projects, up to 50% of the cost of mediumand large hydropower projects, and up to 60% of thecost of small hydropower plants. The Corporationdoes not have targets for the regional distribution orthe thermal-hydro mix of its projects. Almost all ofits clients are SEBs and other state utilities. In orderto diversify its risks, PFC also lends to privatepower projects, including IPPs in the hydropowersector. In an effort to further widen its portfolio, italso plans to fund suppliers to power projects andfacilities related to power plants such as LNG ter-minals in future.

PFC does not take up equity in the projects it funds.When the Dabhol project came up in the mid-1990s, PFC’s mandate did not yet include lending toprivate sector projects. This restriction, and not fi-nancial prudence, saved it from major financial lossand embarrassment.

PFC’s disbursements have grown rapidly, from Rs.7.9 billion in FY 1994/95 to Rs. 32.3 billion in FY2000/01. In FY 2001/02, the Corporation expectsthem to reach Rs. 40 billion. By the end of FY2000/01, PFC had approved 1,163 loans and threeguarantees for a total amount of Rs. 334.9 billion.Thermal projects (including upgrading and mod-ernization) accounted for 47% of approvals and44% of disbursements, transmission and distribu-tion projects for 28 and 32% respectively, and hydroprojects, for 18% of approvals and 14% of disburse-ments. Loans and guarantees for private projects ac-counted for Rs. 56.8 billion.

PFC also offers consultancy services, and acts as alenders’ engineer for various power projects, in-cluding hydropower schemes such as Nathpa Jhakri(a project which it also funds).

Hydropower projects

By the end of FY 2000/01, PFC had approved 78loans and guarantees for hydropower projects.Approvals amounted to Rs. 51.6 billion, and dis-

bursements to Rs. 25.3 billion. The hydro projectsfunded by PFC include the following:

• Nathpa Jhakri (1,500 MW, Himachal Pradesh, seechapter 2.1.);

• Upper Indravati (600 MW, Orissa, like NathpaJhakri partly funded by the World Bank);

• Baghliar (450 MW, Jammu & Kashmir);

• Maheshwar (400 MW, Madhya Pradesh);

• Vishnuprayag (400 MW, Uttaranchal);

• Dulhasti (390 MW, Jammu & Kashmir);

• Srinagar (330 MW, Uttaranchal);

• Maneri Bhali II (304 MW, Uttar Pradesh);

• Baspa II (300 MW, Himachal Pradesh);

• Almatti (297 MW, Karnataka);

• Larji (126 MW, Himachal Pradesh);

• Balimela (phases 7 and 8, 120 MW, Orissa);

• Malana (86 MW, Himachal Pradesh);

• Ghanvi (22 MW, Himachal Pradesh); and

• the Western Yamuna Canal II project (14 MW,Haryana).

Funding for the following hydropower projects(probably among others) is currently under consid-eration by PFC:

• Indira Sagar (1,000 MW, Madhya Pradesh);

• Omkareshwar (520 MW, Madhya Pradesh); and

• Priyadarshini Jurala (239 MW, Andhra Pradesh).

Sources of funding

PFC extends both rupee and foreign currency loans,and thus needs to raise funds on the domestic andinternational capital markets. Its share of foreigncurrency borrowing increased from 22.9% in FY1992/93 to 28.5% in the 1998-2000 period. Being agovernmental organization, PFC enjoys good rat-

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44

ings in India and internationally. As the industryjournal Power Line points out, “raising funds is ob-viously not a constraint for PFC.”16 The Corporationmobilizes resources from the following sources:

Domestic sources of funding:The government supports PFC’s resource mobiliza-tion in that the Corporation is attributed a large (ifdecreasing) share of tax-free bonds on the Indiancapital market. In FY 1997/98-1999/00, the latterborrowed 51.5% of its domestic resources throughrupee bonds, 32.2% through loans from the Indiangovernment, and 16.3% through loans from Indianbanks and other investors.

Many of PFC’s creditors are public sector banks. InDecember 2000, the Corporation agreed with theState Bank of India to take up a loan of Rs.5 billionfrom the so-called Millenium Deposits programme,a large NRI bond. In 2000 and 2001, PFC also re-ceived large lines of credits from LIC (amounting toa total of Rs. 30 billion) and ICICI (with a total ofRs 25 billion).

Multilateral sources of foreign support:PFC is in a healthy financial state, and it focuses itslending on states which are committed to restruc-turing their power sectors. This makes PFC an at-tractive partner for multilateral and bilateral devel-opment agencies which aim to fund power projectsin India. The Corporation has received supportfrom the following public financial institutions:

• In January 1992, the World Bank approved aloan of $265 million to strengthen the institu-tional capacities of PFC and to fund a slice of itsinvestment program. The subprojects consistedalmost exclusively of transmission and distribu-tion projects. The World Bank approved each in-dividual subproject, and in some cases declinedapproval because of insufficient policy reformsin specific states.

• In March 1992, ADB approved a loan of $250million for PFC. This loan, too, was used pre-dominantly for subprojects to upgrade transmis-sion and distribution systems. Both the WorldBank and the ADB projects were targeted at re-form-minded states.

• In 1993, PFC received $20 million in technicalassistance from the World Bank. The purposewas to educate state authorities about how to ne-gotiate with IPPs, including how to introducecompetitive bidding procedures.

Both the ADB and World Bank loans were closedwith 21-25% of the approved amounts remainingundisbursed. The World Bank attributed this to anunexpected depreciation of the rupee, and the non-funding of individual subprojects. Still the PowerMinistry reprimanded PFC for the incomplete usewhich it had made of the foreign funds. Of the $20million technical assistance loan, only $1.2 millionwere disbursed. In this case, PFC was even criti-cized by India’s Comptroller and Auditor Generalfor having taken up a loan without first identifyingthe demand for it. The responsibility for this is ofcourse shared by the World Bank.

As will be elaborated below, ADB’s ex-post assess-ment of its PFC project is quite critical. In spite ofthis, the Bank intends to approve a new $250 mil-lion loan for PFC by the end of March 2002. Theproject has been pre-appraised, but not yet ap-praised. In January 2002, PFC announced that alarge part of the funds would be used to finance pro-jects involving the renovation and modernisation ofpower plants.

PFC has repeatedly expressed its interest in arrang-ing a further $500 million loan from the WorldBank. In November 2000, Power Minister SureshPrabhu even announced that India would channelall future support from the Bank for SEBs throughPFC. The World Bank does not believe that it cansuccessfully promote a restructuring of state powersectors through this institution however, and in-tends to focus its future projects in India’s powersector on a few reform-oriented states directly (seebelow and chapter 3.1.). “Just as earlier condi-tioned Bank assistance to SEBs failed to improvethe SEB’s operational and financial performance,Bank lending through PFC did not result in sus-tainable improvements and commercialisation ofthe SEB’s operations,” the Bank concludes in an in-ternal document.17

Since interest rates in India are presently quite low,PFC decided to prepay the outstanding amounts ofthe 1992 ADB and World Bank loans in October 2001.

Bilateral sources of foreign support:PFC has received support from a series of bilateraldonors, and also works with export credit agenciesto finance particular projects.

• Bilateral donors: In September 1993, Britain’sDFID approved a loan of $23.5 million for PFCfor the renovation of the Hirakud HEP in Orissa(stages I and II). In June 1995, Germany’s KfW


45

approved a mixed credit of DM 46.5 million forPFC for the rehabilitation of the Koyna HEP inMaharashtra (stages I and II). The Corporationintends to spend the balance of the credit on therehabilitation of the Hirakud HEP, but accordingto KfW, this has not yet been approved. USAIDcontributed $14 million in technical assistance tothe World Bank’s 1992 PFC loan.

• Export credit agencies: In June 2001, PFC ar-ranged a line of credit of $75 million withCanada’s export credit agency EDC. In February2000, the Corporation signed a Memorandum ofUnderstanding with the US Exim Bank regardingthe exchange of information on power projects.In February 2001, PFC and the Japanese StudyGroup on Electric Power Development for Indiaagreed to elaborate a master plan for the devel-opment of hydropower projects of up to 5,000MW, with a perspective of Japan financing the re-spective projects.

In January 2002, PFC announced it had in principleagreed to take up lines of credit from a series of ex-port credit and bilateral agencies. According to themedia report, the US Exim Bank had agreed to anLoC of $500 million to support transmission anddistribution projects and the environmental upgrad-ing of thermal power plants. KfW and EDC were toextend lines of credit of $100 and $75 million re-spectively for the renovation and modernization ofpower plants, and a similar LoC from JBIC of $100million – or, according to other sources, of $250 mil-lion – was also being finalized.

Private sources of foreign currency:PFC is an attractive borrower on the internationalcapital markets. It has a strong capital base and isprofitable. Apart from central utilities, theCorporation is the only Indian borrower which isfully owned by the government, so it is considereda “quasi-sovereign risk.”18 So far, PFC has arrangedthe following bonds and loans on the internationalcapital markets:

• In January 1997, PFC signed a five-year $75 mil-lion loan which was arranged by a variety ofEuropean and Japanese banks.

• In July 1997, the Corporation issued twelve-yearEuronotes of $100 million.

• In July 1997, PFC received a DM 100 millioncredit for the import of German goods fromDeutsche Industriebank.

• In July 1998, PFC signed a seven-year $100 mil-lion loan with Australia’s ANZ Investment Bankas the lead arranger, and Bank of India as one ofthe arrangers.

• In August 1999, PFC issued seven-year floatingrate notes of $100 million.

• According to media reports, ANZ InvestmentBank, Credit Suisse First Boston, LehmanBrothers and Holland’s ABN Amro Bank agreed tolead-arrange a $150 million loan for PFC in July2000. According to PFC’s annual report 2000/01,the loan amounted to $100 million, and was usedto prepay the more expensive loan of 1998.

• In January 2001, PFC floated the idea of raisingno less than $5 billion in bonds for a SpecialPower Fund for the reform of the Indian powersector. This idea had been encouraged by the bigsuccess of the Millenium Deposits programmewhich the State Bank of India had floated in theNRI community in fall 2000 (see chapter 3.6.). Ina smaller format, it may be implemented throughthe planned India Power Fund (see above).

• In November 2001, PFC received two interestrate swaps to the tune of $50 million in total fromCrédit Lyonnais.

• In December 2001, PFC invited banks to makepresentations for a new $50 million loan. PFCalso plans to take up a ¥10 billion loan. Due to thesteady depreciation of the yen, the Corporationpostponed this issue in January 2002.

For several projects - including the Larji, Srinagarand Almatti HEPs - PFC is trying to arrange syndi-cated loans on the international capital markets.

Portfolio quality and internal culture

“PFC has so much money that it is called the miniWorld Bank,” a PFC official reports proudly. TheWorld Bank is more circumspect. “We hoped thatPFC would become a mini World Bank,” says one ofits representatives. Bank officials believe that PFChas set a model for financial discipline, but that ithas not managed to effectively push for a restruc-turing of the state power utilities it lends to. Whenthe Maharashtran authorities appointed theCorporation as a consultant for its power sector re-form, the World Bank’s India coordinator even

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46

quipped that this was “like blind people trying toguide blind people.”19

PFC plays a central role as a funder of state electric-ity boards and other power utilities. The respectiveclients have a strong interest in servicing their debtsto the Corporation. The Indian government furthergrants PFC direct access to the appropriations forSEBs under the central Plan if the respective elec-tricity boards default on their payments to theCorporation. With such incentives, it is no surprisethat PFC can boast a recovery rate on its loans of99.5% – an extraordinarily high score in India’s ail-ing power sector.

PFC claims to adhere to strictlending criteria, including a mini-mum financial or economic rate ofreturn of 12%, and compliancewith environmental guidelines,standards and conditions.20 Inpractice, the Corporation does notseem to live up to these principles.Most of its lending is still to public institutions, inwhich case it can rely on strong guarantees and se-curities. In practice, PFC primarily appraises pro-jects regarding the ability of the developers to repay.It does not have an environmental policy, but dele-gates environmental concerns to the government’sMoEF, which is utterly powerless in enforcing mostof its policies and conditions. One of the rare loanswhich the Corporation has so far cancelled was forNHPC’s Rangit HEP – because Sikkim could notprovide reliable escrow cover.

In its Implementation Completion Report, theWorld Bank believes that PFC’s compliance with in-ternal guidelines is “generally satisfactory,” with afew exceptions such as exceeding the exposure lim-its to important borrowers.21 The ADB points outthat PFC does not evaluate projects ex-post. Thecompletion report for the ADB project concludesthat the Corporation “should apply more due dili-gence in evaluating loan proposals” and “strictly en-force its policies on exposure limits.”22

So while PFC enjoys a high recovery rate, many ofthe hydropower projects it funds are financial disas-ters. Nathpa Jhakri, Dulhasti, Maneri Bhali andBaghliar are just a few examples of projects whichhave run up massive time and cost overruns. UpperKrishna is considered “an extraordinary failure” bythe World Bank’s evaluation department (see chap-ter 3.1.). Yet when the World Bank announced theclosure of its loan for the Nathpa Jhakri project in

December 2001, the developer could quickly an-nounce that PFC would provide additional lendingto make up the gap (see chapter 2.1.).

Both ADB and the World Bank say that “PFC’s port-folio quality (...) continues to be a matter of con-cern.” Using a broader set of criteria which includestandards of financial auditing and reporting, thetwo Banks only rate 17.2% of PFC’s portfolio as nor-mal at the end of 1998. If the guidelines of theReserve Bank of India were applied, the World Bankpoints out, PFC’s non-performing assets wouldamount to 20.3%.23

PFC has reasons to be more pru-dent in the case of IPPs, whereloans must be repaid on the basis ofa project’s financial viability (and,it is true, public guarantees for pro-ject revenues). Yet the MaheshwarHEP indicates that PFC’s lendingpolicies can be extremely carelesseven in the case of IPPs. The

Corporation pledged a long-term loan of Rs. 1 bil-lion, and two foreign currency loans of $179 millionand $53 million to this project. With a total com-mitment of Rs. 11.08 billion, PFC is by far the mostimportant creditor of the project developer. TheNarmada Bachao Andolan points out that theCorporation’s commitments thus exceeded internalnorms, and has served PFC a legal notice for the vi-olation of the public interest. As was elaborated inchapter 1.2, PFC has already disbursed a consider-able amount of its loans for the Mahehswar HEP,even when the conditions for disbursement haveclearly not been fulfilled.

PFC is wholly owned by the Indian government. Asfar as politically sensitive and well-connected pro-jects (such as Nathpa Jhakri and Maheshwar) areconcerned, PFC has no choice but to follow gov-ernment instructions. “Some of these developershave long hands,” comments one anonymoussource from within PFC, “and you will always listento your owner.” An external observer commentsthat PFC is actually an attractive institution for po-litical power brokers because its lending decisionscan be more easily influenced than the deliberationsof the Planning Commission.

Perspectives

Given its central role within the country’s powersector, PFC will remain an important channel for


47

“PFC’s portfolio qualitycontinues to be a matter

of concern.”

The World Bank, May 1999

funding power projects in India. Even if supportfrom multilateral development banks may decrease,the Corporation, as a quasi-sovereign risk, is still ina strong position to borrow on the internationalcapital markets. And with many hydropower pro-jects facing problems of time and cost overruns,

other financial institutions may prefer to lend viaPFC, which has a strong clout as a creditor, ratherthan to fund such projects directly. The large lines ofcredit which LIC and ICICI recently extended toPFC might be early examples of such a trend.

Overall, funding thermal power plants will contin-ue to be PFC’s main business. The future role of hy-dropower within PFC’s portfolio will depend on thepower policies of the Indian government.

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48

The Industrial Credit and Investment Corporationof India is, according to one observer, “the most as-sertive of the Indian banks.”24 ICICI has becomeIndia’s largest development finance institution, anda market leader in project finance. In recent years, itmoved rapidly into new business areas. ICICI is in-volved in many hydropower projects, and is an im-portant funding partner of international financialinstitutions.

Ownership

ICICI was created in 1955. Unlike the other DFIs,it was incorporated as a company with limited lia-bility and had private sector shareholders rightfrom the beginning. In 1998, ICICI failed to attractsufficient interest for a large increase of its sharecapital in India. Boldly, the Corporation decided tolist its shares on the New York Stock Exchange –the first Indian company (and only the secondAsian bank) to do so. Its share issue of $275 mil-lion was oversubscribed six-fold.

At the end of FY 2000/01, ownership of ICICI wasspread widely. Institutions under government con-trol such as LIC or GIC held 33.6% of the shares.Other Indian investors, including individuals andcompanies, held 18.5%. Foreign investors, includ-ing non-resident Indians, held 47.8%. Individualforeign investors do not have voting rights however.In total, ICICI has more than 550,000 shareholders.

Activities

In recent years, ICICI has pursued a strategy ofrapid expansion. Since 1992, its loan approvals havegrown 14-fold, and have overtaken those of IDBI.They reached Rs. 560.9 billion in 2001, with dis-bursements totalling Rs. 319.7 billion. At the end ofFY 2000/01, ICICI’s portfolio was still dominated by

the manufacturing industry, with iron and steel top-ping the sectoral list with 11.4%.

For several years, the Corporation has diversifiedinto other sectors and lending activities in order tospread its risks. In the period FY 1996/97-2000/01,infrastructure project finance accounted for 19.4%of cumulative approvals. Since many projects haverun into problems and disbursement is lagging, in-frastructure still only made up 13.5% of ICICI’sportfolio at the end of FY 2000/01. So-called corpo-rate lending (short and medium term balance-sheetlending to all sectors) increased from 9.1% of theportfolio in 1997 to 39.8% at the end of FY 2000/01.

ICICI considers itself the market leader in project fi-nance, and is the lead arranger or project adviser inmost of the deals in which it is involved. In FY2000/01, project finance (not only in the infrastruc-ture, but also the manufacturing and oil and gas sec-tors) accounted for 57% of the Corporation’s port-folio, and contributed 87% of its net income. Thisindicates that project finance, especially when it in-volves deal-making tasks, is a very attractive sectorfor financial institutions.

During the 1990s, ICICI moved aggressively intonew business activities. It created a housing financeinstitution, a life insurance, a consumer credit and aretail bank, a venture capital and an asset manage-ment company, and the rating agency, CRISIL. TheCorporation is also active in the business of policyadvice, and acts as a consultant for example onpower purchase agreements and on the power re-structuring programs of state governments.

ICICI’s longer-term strategy is to turn into a univer-sal bank by merging with ICICI Bank, in which itholds 46% equity. In January 2002, the shareholdersof ICICI and ICICI Bank agreed to the merger. Thenew structure still needs to be approved by RBI.


49

2.3. ICICI

Hydropower projects

Like the other DFIs, ICICI has moved more strong-ly into the power sector with the appearance of pri-vate infrastructure projects. In FY 1998/99-2000/01,power projects accounted for an average of 13.3% ofall approvals, with disbursements lagging markedlybehind. In 2001, ICICI was involved in the follow-ing hydropower projects:

• Vishnuprayag (400 MW, Utta-ranchal, with ICICI as lead ar-ranger);

• Baspa II (300 MW, HimachalPradesh, with ICICI as lead ar-ranger);

• Baghliar (450 MW, Jammu &Kashmir);

• Srinagar (330 MW, Uttaranchal);and

• Malana (86 MW, Himachal Pradesh).

In 1998, ICICI also extended a line of credit of Rs. 15billion to NHPC. Under this arrangement, the finan-cial institution agreed to fund

• Teesta V (510 MW, Sikkim); and

• Parbati II (800 MW, Himachal Pradesh).

NHPC is also interested in funding the LowerSubansiri HEP (2,000 MW, Arunachal Pradesh)under ICICI’s line of credit. Finally, the private de-velopers of the Malana HEP have approached ICICIand other institutions for the funding of the AllainDuhangan HEP (192 MW, Himachal Pradesh). Therespective loans are still under consideration.

ICICI is India’s only major development finance in-stitution which declined to fund the MaheshwarHEP. As part of its consulting services, theCorporation advises the Sardar Sarovar NarmadaNigam on the involvement of the private sector inthe Sardar Sarovar dam scheme.

Like other funders, ICICI is experiencing problemswith its hydropower portfolio. After being delayedfor several years, the private Malana project was im-plemented smoothly. All other projects suffer fromtime and/or cost overruns. According to media re-ports, ICICI agreed to provide funding for the

Vishnuprayag HEP only under pressure from thePower Ministry’s Crisis Resolution Group.Vishnuprayag and Baghliar are two of three hy-dropower projects among the 19 IPPs which finan-cial institutions agreed to review in December 2001due to their failure to make progress. (The third isMaheshwar.)

The Baspa HEP is also creatingproblems. According to one ob-server, ICICI disbursed its loan forthis project prematurely. When theproject was subsequently affectedby time and cost overruns due toflooding, the Corporation wasforced to chip in equity in order torescue its loan exposure. ICICIfunded its loan for either theVishnuprayag or the Baspa projectunder ADB’s Private Sector Infra-structure Facility.

The 27.5% share in the Baspa HEPis ICICI’s first equity participation

in a hydropower project. According to the EconomicTimes, an unnamed company executive maintainedthat “hydro power projects are the only projects inthe power sector which are getting implementedand their economic viability factor is also satisfacto-ry.”25 This explanation may be interpreted as wishfulthinking, meant to cover up forced participation inan ailing project.

In spite of these problems, a senior company repre-sentative says that ICICI has “a positive outlook onhydropower,” and a long-term commitment to thepower sector. Unlike other financial institutions, andat least officially, the Corporation has so far not puta brake on its lending for electricity generation. Timewill tell whether it will indeed continue to lend di-rectly for new projects, or whether it will increasing-ly lend through other institutions such as NHPC.

Sources of funds

Like other financial institutions, ICICI extendsrupee and foreign currency loans, and needs to raisecapital internally and externally. In FY 2000/01,83% of its assets and liabilities were denominated in rupees.

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During the 1990s, ICICImoved aggressively into

new business activities. TheCorporation considers itselfthe market leader in project

finance, and is the leadarranger or project adviser

in most of the deals it isinvolved in.

Domestic sources:Like other financial institutions, ICICI had cheap ac-cess to domestic funds until 1993 through conces-sional bonds from RBI, the so-called StatutoryLiquidity Ratio bonds. After this avenue was closed,ICICI had to diversify its funding sources, and nowborrows from various institutional and individual in-vestors in India. At the end of FY 2000/01, pensionfunds (with 22.6% of all outstanding borrowing),banks (16.7%) and retail investors(15.3%) were its most importantcreditors. In order to reach out toretail investors, ICICI offered sevenbond issues for Rs. 29 billion in FY2000/01 alone. The Corporationhas about 3.5 million individualbond holders.

Foreign commercial sources:At the end of FY 2000/01, 77.6% of ICICI’s foreigncurrency borrowing was made up of commercial,and 22.4% of public borrowing. The Corporationtook up its first syndicated loan in 1973. More re-cently, ICICI took up a loan of $200 million syndi-cated by the Australian bank ANZ in May 1998. Theoriginal amount of $120 million had been oversub-scribed. In FY 2000/01, ICICI took up another syn-dicated loan of $100 million, the lead arranger ofwhich could not be identified.

As the over-subscription of the 1998 loan and theshare issue in New York suggests, ICICI could cer-tainly raise more debt on the international capitalmarkets if it wished to do so. Given the low interestrates in India, the demand of its corporate clientsfor foreign currency borrowing is currently limited.Also, the rating of ICICI (as of other Indian finan-cial institutions) on the international capital mar-kets is closely linked to India’s sovereign rating (seechapter 3.6.). In January 2002, the Corporation wasthe first Indian financial institution to be rated high-er than the country ceiling by the rating agencyMoody’s. ICICI officials believe that once theCorporation is analysed on its own merits, its rat-ings will further improve and consequently, the costof lending will be reduced.

Foreign public sources:Loans and credits from multilateral and bilateral fi-nancial institutions are cheaper and have a longermaturity than commercial loans. ICICI has close re-lations with multilateral and bilateral funders, andraises funds from them for a variety of project typesand sectors. Currently ICICI is involved in the fol-lowing MDB projects:

• ADB’s Private Sector Infrastructure Facility. ICICIreceived one half of this $300 million facilitywhich ADB approved in November 1996. The loanis to be lent on to private infrastructure projects.

• IFC’s TCW/ICICI India Private Equity Fund, a$125 million venture capital fund. IFC approvedits contribution of $10 million in equity capital inAugust 1997.

• IFC’s ICICI Guarantee Facility, ascheme which will partly guaran-tee ICICI loans to private sectorclients and projects. IFC ap-proved an exposure of up to $40million in May 2001, but as ofDecember 2001, the contractwith ICICI had not yet beensigned.

• ICICI was supposed to be one of the executingagencies of a new Private Sector InfrastructureFacility at the State Level which ADB approved inDecember 2001. At the last moment, ICICI decid-ed not to avail of its $100 million loan compo-nent, and the Facility was reduced from $300 to$200 million. ICICI has not responded to an in-quiry as to why it withdrew from the ADB project.

• In January 2002, IFC’s board was supposed toapprove a contribution of $15 million for the cre-ation of a new financial instrument by ICICI,which is intended to encourage the trading ofcorporate bonds in India.

(For further information on these projects, seechapters 3.2. and 3.3.)

ICICI also has bilateral lines of credit fromGermany’s KfW, Japan’s JBIC, Britain’sCommonwealth Development Corporation andOverseas Development Administration (since trans-formed into the Department for InternationalDevelopment), and from export credit agencies.

Quality of assets

Given its high professional reputation, ICICI can af-ford to be selective when extending credit. In FY2000/01, the debtors of 92% of its loan approvalshad an A credit rating. At the end of the same year,only 5.2% of ICICI’s assets were non-performing,and its capital adequacy ratio was a high 14.6%.


51

“ICICI has a positive outlookon hydropower. “

Senior ICICI official, December 2001

ICICI enjoys the most comfortable non-performingassets and capital adequacy rates among all Indiandevelopment finance institutions. The good ratesshould however be put into the context of a rapidexpansion strategy. A large share of ICICI’s lendinghas not yet reached the maturity were loans couldturn into NPAs, so the portfolio might actually beriskier than pure numbers indicate.

Internal culture

Throughout its history, ICICI has acted more like aprivate bank than the other DFIs. Since it was incor-porated and is not a government subsidiary, the Cor-poration can afford to pay the highest salaries in thesector and to attract some of the best talents. The au-thor of an IFC publication calls ICICI “a world-classbank.”26 And the Corporation’s Managing Directorconsiders his institution to be “the most exciting fi-nancial services company in India.”27 The massiveover-subscription of a loan and a share offering inNew York demonstrates that investors share thisconfidence. It may be an expression of this business-minded culture that ICICI refrained from getting in-volved in the Maheshwar HEP.

ICICI also symbolizes the risks of an aggressive,profit-oriented business culture. Unlike other DFIs,the Corporation offers high bonuses to its top-man-agement which are linked to short-term profits.This encourages an aggressive pursuit of new busi-ness opportunities, and particularly of risky deals

which offer up-front fees. By providing guaranteesfor foreign currency loans to questionable projects,ICICI managers could for example make short-termprofits – even if the projects soon turned out to beunviable and the guarantees were invoked.

ICICI is still close to the government, and is not freefrom political influence. As the Corporation re-marks in its annual report for US investors, theIndian government has the “ability to exercise in-fluence” through the state-controlled shareholders,including on “significant corporate actions.”28 Thequest for rapid expansion and the close relationshipwith government may explain why ICICI got in-volved in Dabhol and other doubtful projects.

In its annual report, ICICI emphasizes “the impor-tance for ensuring fairness, transparency, account-ability and responsibility to all stakeholders.”29

Compared with other financial institutions, theCorporation has a good record in terms of trans-parency. Yet while ICICI tries to measure up to in-ternational standards in financial matters, it doesnot have any binding, codified policies on social orenvironmental impacts. And overall, its portfolio inthe power sector does not suggest any particular at-tention to social or environmental concerns. Amongall Indian DFIs, ICICI is probably the institutionwhich is most concerned about its public reputa-tion. So NGOs and social movements should testthe Corporation’s rhetorical commitment to fairnessand accountability in the case of specific projects.

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Along with PFC and ICICI, the Industrial Develop-ment Bank of India is one of the most important fi-nancial institutions in India’s power sector. IDBI hasbeen struggling with problems of asset quality sincethe mid-1990s. It recently announced a reconsider-ation of its large involvement in power projects.

Ownership

IDBI was created in 1964 – decadesafter IFCI and ICICI – as a sub-sidiary of the Reserve Bank of India.In 1995, the institution made itsfirst public offering in equityshares. By the end of FY 2000/01,the share of the government in itsequity had decreased to 58.5%. Thepublic – including more than300,000 individual shareholders –held 15.0%, and other institutionssuch as LIC, most of the rest. NRIsheld 0.9% of the shares.

Activities

For several decades, IDBI was India’s largest devel-opment finance institution. It has recently beenovertaken in this role by ICICI. In FY 2000/01,IDBI’s approvals reached a volume of Rs. 287.1 bil-lion, twice as much as in 1997.

IDBI’s traditional role was to extend long-term loansto industry. By the end of FY 2000/01, industrialsectors accounted for more than 75% of its out-standing commitments, with iron and steel toppingthe list with a share of 13.3%. Given the financialproblems of its traditional clients, IDBI, like otherfinancial institutions, tried to diversify its businessduring the 1990s. Project finance, underwriting anddirect equity investments in infrastructure projects(power and telecoms) gained in importance. Like itsmain competitor ICICI, IDBI regularly (lead-)ar-

ranges financing packages for such projects, attimes also on the international capital markets. Theinstitution, for example, arranged the domestic debtpackages and provided guarantees for both phasesof the Dabhol thermal power plant in Maharashtra.

While ICICI has ventured into completely newbusiness areas such as consumer finance, IDBImainly diversifies its activities within the infras-

tructure sector. It chairs theStanding Coordination Commit-tee of financial institutions onlarge projects, which was createdin August 1999. IDBI is also the fi-nancial agent for the World Bankin a series of environmental pro-tection schemes in India.

In October 2001, IDBI’s boardagreed on a strategy to turn the in-stitution into a universal bank.The preferred option will be a re-

verse merger with a commercial bank from the pri-vate or public sector.

Hydropower projects

Unlike ICICI and IFCI, IDBI has been a primarysource of funding for power projects for many years.In 1985-1994, such projects already accounted for11.4% of the institution’s disbursements. IDBI’spower portfolio grew rapidly in line with the gener-al trend for project financing in the sector. In FY2000/01, electricity generation made up 21.4% ofIBDI’s approvals, more than any other sector. At theend of FY 2000/01, power represented 10.9% ofIDBI’s outstanding commitments, making it the in-stitution’s second-most important sector.


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While ICICI has venturedinto completely newbusiness areas such

as consumer finance, IDBI mainly diversifies its activities within theinfrastructure sector.

2.4. IDBI

IDBI has extended loans to the following private hy-dropower projects:

• Baghliar (450 MW, Jammu & Kashmir, with IDBIbeing the lead arranger);


• Vishnuprayag (400 MW, Uttaranchal); and

• Srinagar (300 MW, Uttar Pradesh).

Sources of funding

IDBI extends loans and other assistance in rupeesand in foreign currency, and thus needs to raise cap-ital both on the domestic and external markets. Atthe end of FY 2000/01, 86.3% of all borrowingswere in rupees. IDBI is a pioneer in issuing bonds inIndia, and raises a large portion of its domestic bor-rowing through a variety of bond instruments.

IDBI borrows foreign currency resources on the in-ternational capital markets, or from export creditagencies. In January 1995, the institution receivedan overseas investment loan of $300 million fromJapan’s JEXIM Bank. It raised $100 million in afloating rate note issue in May 2000, and $100 mil-lion in a syndicated loan mainly from Japanesebanks in January 2001. During FY 2000/01, IDBIalso signed a Memorandum of Understanding withthe US Exim Bank for setting up a so-called MasterGuarantee Agreement of $150 million. This wouldmake the handling of US export credits for projectsin India easier, yet all projects would still need to beapproved by Exim Bank. So far, no projects havematerialized under the MoU with Exim Bank.

During the 1970s, IDBI received a series of loansfrom the World Bank. Since then, it has not been anactive funding partner of international financial in-stitutions. Recently, IDBI received $100 millionunder a new Private Infrastructure Facility at theState Level which ADB approved in December 2001(see chapter 3.3.).

Quality of assets

Due to economic liberalization, many of IDBI’s tra-ditional industrial clients encountered increasingdifficulties during the 1990s. Imprudent lending bythe financial institution added to the problem.IDBI’s non-performing assets grew, and its capital

adequacy ratio dropped. At the end of FY 2000/01,the institution’s non-performing assets amounted to14.8%. As the Reserve Bank of India found out, IDBIhad only set aside 23% of this amount in provisions,instead of 40-50% as required.

IDBI’s NPAs are concentrated in the iron and steel,and textile sectors. Within electricity generation,many projects are still young or have not yetreached the stage of disbursement. So at the end ofFY 2000/01, IDBI’s power portfolio had a low shareof NPAs of only 2.6%. Yet during the same year, thepower sector accounted for more than 80% of theincrease in NPAs in IDBI’s books.

IDBI has a strong capitalization, and so high NPAshave until recently not posed an immediate threat toits financial health. With the risk looming that for-eign lenders might invoke IDBI’s guarantee for theDabhol project, the situation has deterioratedsharply. In December 2001, the institution had tocall for a huge bailout package from the governmentin order to shore up its capital adequacy (see below).

Internal culture

IDBI tends to be more cautious in its overall busi-ness strategy than its expansionist competitor,ICICI. Yet the investment in dubious IPPs indicatesthat IDBI’s high rate of non-performing assets can-not simply be explained by the problems of indus-trial clients. IDBI was instrumental in arranging thedomestic debt for both phases of the Dabhol project.In doing so, the institution acted against the betterjudgment of the World Bank and its own advisorycommittee. The Godbole Committee confirmed thatthe financial package for Dabhol had been arrangedwithout due diligence.

When Dabhol ran into trouble, IDBI had an expo-sure to the project in guarantees and long-termloans of no less than Rs. 21.58 billion. Leading rep-resentatives later claimed that the institution hadbeen forced to engage in Dabhol, and should not beblamed. Yet as columnist Sucheta Dalal observes,neither IDBI nor any other funders have ever triedto make public their supposed concerns over thepower plant.

IDBI is also heavily exposed to the Maheshwar HEP.The institution has committed a loan of Rs. 1 bil-lion, and equity of Rs. 500 million. Although theconditions put forward in IFCI’s appraisal reporthave not yet been met, IDBI has already disbursed

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54

part of the loan. After the Narmada Bachao Andolantook this matter up with top management, the insti-tution agreed to reconsider its involvement in theproject. With Maheshwar, Baghliar andVishnuprayag, IDBI is involved in all three hy-dropower projects which financial institutions de-cided to review in December 2001 due to their fail-ure to move forward.

Unlike all other development finance institutions,IDBI did not agree to a personal meeting in the con-text of this research project.

Perspectives

In September 2001, IDBI’s new chairman P.P. Voraannounced that he was going to focus on reducingthe non-performing assets, and on improving thetransparency of his institution. Electricity genera-tion was conspicuously absent among the focal sec-tors of the new chair. One month later, IDBI andother financial institutions announced that theywould not fund new power projects, and wouldcancel some of their loans for projects which werenot moving ahead. Specifically, IDBI announcedthat it would review its approvals for seven powerprojects (which included, as the only hydropowerproject, Maheshwar). An IDBI official justified thisnew “cautious approach” by referring to the institu-tion’s large exposure in the Dabhol project.30

After the review had been completed, IDBI an-nounced in January 2002 that it would only startdisbursement for approved projects if escrow coverwas in place. If IDBI sticks to this principle it couldmean an end to its funding of further power pro-jects. As a consequence of a stronger emphasis onprudence, approvals for project finance fell by 44%in the first nine months of FY 2001/02, and dis-bursements by 31%.

Even if IDBI can improve its prudence on the lend-ing side, it will urgently need to strengthen its cap-ital base. According to media reports, the institutionis attempting to increase its capital by selling a 20%share to Muscat Bank. And in December 2001, IDBIcalled for an infusion of no less than Rs. 56 billionfrom the government. Rs. 15 billion are required towrite off bad loans, and the same amount to in-crease provisioning for NPAs. A further Rs. 22 bil-lion are needed to buy back expensive bonds whichIDBI had earlier issued. The rest was supposed tofund IDBI’s contribution to a bailout package forIFCI, in which IBDI is the largest shareholder.


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The Industrial Finance Corporation of India is theoldest but smallest development finance institutionin India. Until recently, it focused its activities al-most exclusively on long-term project financing,and has run into severe asset quality problems. Forthe time being, IFCI is not in a position to financeany further major power projects.

Ownership

IFCI was created in 1948 as India’s first develop-ment finance institution. Its business policies wereclosely coordinated with the development policiesof the government which owned it. TheCorporation is the only major DFI which has itsheadquarters in Delhi.

IFCI was listed on the stock exchange in 1993, whena minority of its shares were offered to the public. InMarch 2001, 31.7% of the shares were held by IDBI.22.0 % were held by government-owned insuranceand investment companies, 9.2%, by public sectorbanks, and 26.1%, by the general public.

Activities

In FY 2000/01, IFCI’s new approvals reached Rs.18.6 billion. This was only 4.1% of the total lendingof the three Indian DFIs (ICICI, IDBI, and IFCI).This compares with IFCI’s share of 12.5% of com-bined development finance institution lending in1999 and shows the relative decline of IFCI. At theend of FY 2000/01, the iron and steel sector ac-counted for 19.6% of IFCI’s portfolio; the textile in-dustry, 11.4%; and power generation, 8.3%. If guar-antees are included, the power sector accounted for14.1% of the portfolio.

In response to the economic problems of the 1990s,most Indian DFIs have diversified their business ac-tivities. IFCI has however remained a single-prod-uct company, in that long-term project finance

makes up 94% of its portfolio. This strategy provedto be extremely risky, and in FY 2000/01 IFCIbooked a loss of Rs. 2.7 billion. Income is still on adownward trend, and losses increased in the firstnine months of FY 2001/02. The company’s ratingsare in steady fall, and IFCI faces an uncertain future(see below).

Hydropower projects

Most of IFCI’s involvement in power generation iswithin the thermal sector. The Corporation extend-ed guarantees of $99 million for the Dabhol project.Hydropower projects account for less than 1% of itsportfolio, and IFCI has not sanctioned any newsuch projects since 1998.

IFCI is involved in the following hydropower pro-jects:


• Baspa II (300 MW, Himachal Pradesh); and

• Malana (86 MW, Himachal Pradesh).

IFCI is also funding several small hydro projects inKarnataka.

The Corporation acted as the lead arranger for allthree hydroelectric IPPs which it funds, althoughin the case of Baspa II, it was later replaced in thisfunction by ICICI. Both Baspa and Maheshwar facelarge time and cost overruns. Having been the leadarranger, IFCI shares a responsibility for theseproblems. Unlike IDBI, IFCI is not formally re-viewing its involvement in Maheshwar. A represen-tative of the institution believes that the govern-ment of Madhya Pradesh should step in with equi-ty to salvage the project.

In October 2000, IFCI decided not to provide anyfurther lending to power projects. Although its ex-


57

2.5. IFCI

posure in the sector was less than 15% (the maxi-mum exposure which RBI allows for financial insti-tutions in any sector), the Corporation decided toforego further lending due to risk considerations. InFY 2000/01, power generation stillaccounted for 27.4% of IFCI’s dis-bursements, but only 0.9% of newapprovals.

The moratorium for new lendingdoes not seem to be absolute. IFCIis currently considering fundingthe private Allain Duhangan HEP(192 MW, Himachal Pradesh). TheCorporation would also consideradditional support for small hydroschemes.

Sources of funds

IFCI raises its domestic resources through bondsand similar instruments on India’s capital market. Itonly places its bonds privately. Foreign currencyloans amounted to only 7.8% of IFCI’s total lending(or Rs. 1.46 billion) in FY 2000/01, and to 13.5%(Rs. or 58.54 billion) in cumulative terms.

Unlike ICICI, IFCI has never received support fromthe World Bank or IFC. The Corporation was ap-propriated $100 million of a $300 million PrivateSector Infrastructure Facility by the AsianDevelopment Bank in 1996. ADB has to sanctionthe individual subprojects funded under thisFacility, and has so far approved five IFCI loans fora total of $62 million, including for the Baspa II orVishnuprayag HEPs, and for Malana (see chapter3.3.). IFCI has also received a loan from Germany’sbilateral financing agency KfW.

Other than ADB and KfW, no official sources of for-eign currency funding for IFCI are documented.The so-called Basu committee suggested inFebruary 2001 that international financial institu-tions like ADB or IFC be invited to become strategicinvestors in the Corporation. This has so far nothappened. IFCI is not included among the recipi-ents of a new loan for Indian financial institutionswhich was recently approved by the Asian Develop-ment Bank.

IFCI taps international capital markets to a limitedextent. In FY 2000/01, it raised $20 million fromDubai’s Mashreq Bank. The loan has a maturity ofonly three years, and does not appear to be suitable

for onlending to long-term infrastructure projects.According to media reports, IFCI has earlier takenup foreign currency loans of $450 million. The loansbecome due in 2001 and 2002, and the Corporation

has already defaulted on some ofthe repayment obligations.31

Quality of assets

Among all Indian DFIs, IFCI hasthe highest share of non-perform-ing assets in its books. At the endof FY 2000/01, its NPA ratio stoodat 21.0%. At the same time, theCorporation’s capital adequacy

ratio fell to a thin 6.2%, considerably less than theminimal threshold of 9% required by RBI.According to media reports, the Reserve Bank con-cluded in its inspection report for FY 1999/00 thatIFCI had underreported the real amount of NPAs byaround 10%

Internal culture

IFCI explains the low quality of its assets by the factthat it is a single-product institution in a risky mar-ket. This does not tell the full story. IFCI appears tobe a rather bureaucratic institution which has notdeveloped a risk-based credit culture. In its officialannouncements, the Corporation says it “adopts aflexible and pragmatic approach in applying thenorms [on project financing], where-ever a justifi-cation exists.”32

In August 2001, IFCI’s management had to admitthat it had “exceeded the prudential norms in case ofa few group companies and individual borrowers.”33

Specific cases of such imprudent lending werebrought forward, interestingly, by the institution’semployees’ association. The association indicatedcases of several steel companies which IFCI hadfunded much beyond its exposure limits. In the caseof the Usha Group’s Malvika Steel Ltd., IFCI had ap-proved new loans to the tune of Rs. 3.2 billion eventhough the company had already defaulted on inter-est payments to the Corporation of Rs. 1 billion.34

External observers support the view of a lax busi-ness culture. The Basu Committee, which the gov-ernment instituted in 2000 in order to analyseIFCI’s problems and formulate a strategy to over-come them, pointed out in its report: “Despite cor-poratisation in 1993, changes in its shareholding

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“IFCI adopts a flexible andpragmatic approach inapplying the norms on

project financing, where-ever a justification exists.”

IFCI Lending Policies

pattern and induction of non-government directorsin its boards, the organisation still functions moreor less like a government owned entity.”35 TheCommittee recommended that IFCI “first build upa strong market-oriented business culture.”36 In itssupervision report, RBI also criticized IFCI’s weakappraisal and monitoring system. In August 2001,the rating agency Moody’s even referred to the fi-nancial and governance problems of IFCI (and UTI)as a reason for its decision to downgrade India’scountry rating.

Like other development finance institutions, IFCIdoes not have social or environmental policies whichguide its lending. The institution delegates the re-sponsibility for the respective impacts of its projectsto the sponsors and the government authorities.

Perspectives

In February 2001, the Basu Committee proposedfar-reaching changes for IFCI. As mentioned above,it suggested that institutions like ADB or IFC be in-vited to take up equity (and in fact, take over IDBI’sshare in the Corporation). According to media re-ports, IFCI discussed approaching ADB, GreatBritain’s CDC or Germany’s KfW as strategic part-ners in December 2001.

The Basu Committee also recommended that IFCIreduce the share of project finance from 94% to 50-60% of its total lending, that the Corporation diver-sify into short-term and fee-based lending activities,that it focus foreign-currency lending on export-oriented companies, and that the Indian govern-ment inject new capital to the tune of Rs. 4 billionin order to put the institution’s capital adequacyratio on a more sustainable basis. As a response tothe report, IFCI’s management decided to reduceproject finance to 50% of all lending immediately.

To resolve the legacy of earlier mistakes, the Indiangovernment in August 2001 put forward a bail-outpackage of Rs. 10 billion for IFCI. The governmentwill itself provide Rs. 4 billion in the form of 20-yearbonds, and the shareholders will have to contribute6 billion. The Finance Minister announced that thiswould be the last bailout package for theCorporation. By the end of 2001, IDBI and LIC hadin principle agreed to their contribution, while SBIhad yet not taken a decision on the bail-out.

The government also seems to be floating the ideaof merging IFCI with another financial institution.According to media reports, IDBI is strongly op-posed to a merger with its weaker competitor.


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The Infrastructure Development Finance Corpora-tion was created in 1997, with a mandate to pro-mote private participation in the infrastructure sec-tor by developing creative financing models. “Ourprimary role is not to provide funds, but to conceiveideas,” says one IDFC representative. So far, IDFChas only been partially able to fulfil this mandate.

Ownership

In 1996, the government-appoint-ed Rakesh Mohan Committee pro-posed a sweeping series of liberal-izations in order to promote infras-tructure development in India. Asone consequence, the government,with support from foreign funders,created IDFC in 1997 in order toprovide additional financing par-ticularly for private infrastructureprojects. Indian institutions control 60% of IDFC’sshare capital, with the government holding 20%,RBI 15%, ICICI and SBI 6% each, IDBI 5%, and UTI,HDFC and IFCI a total of 8%. 40% is held by foreigninstitutions. ADB, IFC and Britain’s CommonwealthDevelopment Corporation hold 6.1% each, andSwitzerland’s State Secretariat for Economic Affairs,3.8%. The rest is held by various banks and otherprivate institutions.

IFC has one seat on IDFC’s board. After consider-able debate, the board decided to grant this foreignminority shareholder a veto right. As will be elabo-rated below, this had considerable consequences inat least one important case. In spite of the foreignveto position, IDFC seems to have close links toIndia’s Finance Ministry. Rakesh Mohan plays an in-fluential role both as IDFC’s vice chairman and as anadvisor to the Finance Minister.

Activities

The new institution has had a slow start. By the endof FY 2001, IDFC had approved loans of Rs. 63.1billion for 60 projects. Of this amount it had dis-bursed Rs. 17.8 billion for 27 projects. In FY 2001,the loan approvals of the Corporation reached Rs.24.7 billion, and were thus slightly higher thanIFCI’s. At the same time, they amounted to less than9% of IDBI’s new allocations, and less than 5% ofICICI’s approvals.

Until 2001, the power sector wasthe focus of IDFC’s activities. TheCorporation started its business byproviding guarantees for two pri-vate thermal power plants, and hasso far approved loans of Rs. 36.6billion for 30 power projects. Mostof these projects are thermal powerstations, such as Samayanallur

(Tamil Nadu), Mangalore and Raichur (both inKarnataka). IDFC also considered extending a loanof Rs. 3 billion for phase II of the Dabhol powerplant. The approval of the project was only prevent-ed by IFC’s veto power. The World Bank institutionopposed the loan – not for economic reasons, butbecause of the unresolved resettlement problems.“The NGOs saved us from a major embarrassment,”remarks one IDFC representative in hindsight.

IDFC is focusing its activities on states which havebegun liberalization, such as Karnataka andUttaranchal. It is also looking for new mechanismsto speed up the slow movement of power and otherinfrastructure projects. In 2000, it arranged a loanfor the expansion of the Raichur thermal powerplant in Karnataka not in exchange for escrow cover,but for a commitment of the state government to-wards restructuring the power sector. In December2000, the government failed to fulfil its first agreedcondition, the unbundling of distribution from thestate-owned transmission corporation.


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“Our primary role is not toprovide funds, but to

conceive ideas.”

Senior IDFC official, December 2001

2.6. IDFC

IDFC’s annual report for 2001 contains a remark-ably clear assessment of the country’s power sector.“India’s power sector,” it points out, “is a leakingbucket; the holes deliberately crafted and the leakscarefully collected as economic rents by variousstakeholders that control the system. (...) Most ini-tiatives in the power sector (IPPs and Mega PowerProjects) are nothing but ways of pouring morewater into the bucket so that the consistency andquantity of leaks are assured.”37 Given this analysis,it is surprising to find that at the end of FY 2001,half of IDFC’s portfolio was in power generation.Only one out of every six rupees which theCorporation approved for the power sector has sofar been disbursed. (In the non-power sectors, al-most one out of two rupees has been disbursed.)IDFC representatives argue, not quite convincingly,that many power projects were approved in FYs1998 and 1999, and that the problems of the sectorwere not as apparent then as they are now.

During the last two years, IDFC has increasinglyshifted its focus from electricity generation to thetelecom and transport sectors. In May 2001, it can-celled ten IPPs, and decided to switch from funding500-800 MW projects to non-conventional and co-generation projects in the 5-40 MW range.

Given the wide gap between approvals and dis-bursements, IDFC has parked parts of its capital ininvestment funds and bonds. With an amount of Rs.9 billion, these investments were at the end of FY2001 almost as large as IDFC’s loan portfolio. Bondsof power sector institutions – PFC, NTPC and eventhe Nuclear Power Corporation – accounted for Rs.738 million or 8% of the investment. On paper, IFChas a strict environmental policy covering the fi-nancial intermediaries it invests in, and so it is sur-prising to see IDFC’s resources being invested in anuclear power utility.

IDFC also provides input into many policy formu-lation processes at the centre and the state level.

Hydropower projects

Within its focus on electricity generation, IDFC hasso far approved loans for the following two hy-dropower projects:

• Vishnuprayag (400 MW, Uttaranchal); and

• Srinagar (330 MW, Uttar Pradesh).

Both the Vishnuprayag and Srinagar projects areIPPs. In the case of Srinagar, the Corporationstepped in when the project was privatised after theWorld Bank stopped its support for UPSEB due totime and cost overruns. In the case of Vishnuprayag,the cost has (in nominal terms) increased no lessthan 20-fold since its inception.

IDFC also approved a loan for Tata Hydro ElectricPower Supply Company, now part of Tata ElectricCompanies (TEC). TEC services the Mumbai area,and operates three hydropower projects inMaharashtra, viz. the Bhira (150 MW), Bhivpuri (72MW) and Khopoli (72 MW) HEPs. IDFC’s loan waspresumably used to fund the replacement of a unitof the Khopoli HEP.

IDFC was also approached to provide funding forthe Maheshwar HEP, but management declined todo so. This is encouraging. At the same time, one isleft to wonder why a supposedly innovative institu-tion chose to finance the Vishnuprayag HEP. Afterlong delays, this project only moved forward underpressure from the Indian government, and ispresently being reviewed by financial institutions. Ifbuilt, it will produce expensive power, and will havenegative impacts on the Valley of Flowers, an areawith many endangered plants. Vishnuprayag isbeing promoted by Jai Prakash Ltd., a company witha long record of political patronage, corruption, andanti-union violence. IDFC representatives argue indefence that projects are often presented to theCorporation at a late stage, when their design can-not be changed. IDFC does however have thechoice of not supporting a project.

Given the problems of India’s energy sector, there isa need to develop innovative projects to increase en-ergy efficiency and other demand-side managementmeasures. IDFC has so far not taken up such pro-jects. It is generally interested in funding smallhydro projects, but will find it difficult to appraisethem in an affordable manner.

Sources of funds

Apart from its share capital, IDFC has raised all itsresources from bonds sold in India’s capital market.The institutions which created IDFC intended theCorporation also to tap international capital mar-kets. Given its backers, IDFC could certainly raiseforeign currency funds on the capital markets, buthas so far not done so. Since interest rates are

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presently low in India, its officials say that there isno demand for foreign currency loans.

According to media reports, the World Bank at somepoint considered routing future support for thepower sector through IDFC rather than throughPFC. Both the World Bank and IDFC say that theyhave not discussed this.

Asset Quality

By the end of 2001, IDFC did nothave any non-performing assets.This can be attributed to the youngage of the Corporation’s portfolio,and to the discipline of not dis-bursing loans for questionable pro-jects even if they were approved. IDFC was suffi-ciently prudent not to support the Dabhol and theMaheshwar projects. It does have other power pro-jects of dubious value in its portfolio however.

IDFC is probably India’s only financial institutionwhich has some kind of environmental policy. In anenvironmental management statement, it commitsto “identifying and addressing all short, mediumand long-term environmental risks associated withits activities through environmental management,management of its project portfolio as well asthrough policy initiatives.”38 No explanation isgiven as what this might mean on the project level.The experience of this research project suggests thatIDFC functions in an unbureaucratic fashion, and isopen to discussing NGO concerns.

Perspectives

The Indian government has many ways to force fi-nancial institutions into funding projects which rep-resent important vested interests or are in someother form politically sensitive. The rejection of aloan for Dabhol indicates that IFC’s veto powershields IDFC from such political arm-twisting. TheCorporation has so far also shown prudence by notpursuing a more rapid expansion than it can digest.

One observer (and competitor) from a rival financialinstitution goes as far as to say that “IDFC does notfund anything.” On the downside, the Corporationhas so far not made use of its privileged situation bysupporting truly innovative energy projects.

While IDFC seems to be shielded from politicalpressure, it will at some point be under commercial

pressure to expand its operationsmore rapidly. In FY 2001, theCorporation for the first time paiddividends, of an amount of 7%.This is less than commercial in-vestors like ICICI or SBI pay forthe capital which they have invest-ed in IDFC. The new institutioncannot afford to count on its in-vestments in bonds and mutual

funds for its revenues, but needs to develop an ac-tive portfolio of productive investments. It will be amajor challenge for the Corporation to fulfil thistask while at the same time strengthening its inno-vative capacities.

IDFC’s Chief Executive Officer Nasser Munjee pre-sented a longer-term strategy for his institution in amajor interview in the Business Standard of 22February 2002. According to Munjee, IDFC willcontinue to create frameworks for privatising andcommercialising India’s infrastructure. The Corpo-ration will draw on experiences with privatisationin Great Britain in particular, and plans to move intonew sectors such as tourism, health and education.“Once the framework is well-understood”, the CEOhopes, “I get the projects.”

Unlike the traditional development finance institu-tions, IDFC will continue not to provide the capitalfor infrastructure schemes, but to “take a project,make it bankable and take it to the market.” TheCorporation will pursue a strategy of merchant andinvestment banking, and Nasser Munjee hopes thatin five years from now, it will “harness a lot of in-ternational capital.” The risk is that rather than cre-ating truly new ideas for India’s infrastructureneeds, IDFC’s CEO may bank on models which arelosing their credibility internationally.


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IDFC has so far not madeuse of its privileged situation

by supporting trulyinnovative energy projects.

The State Bank of India is the largest commercialbank in the country. Since the financial sector hasbeen liberalized, it has started to engage in long-term project finance in the infrastructure sector.With its worldwide branch network, SBI has astrong capacity to raise foreign currency funds.

Ownership

After independence, state controlover the banking sector was seenas essential. The State Bank ofIndia was created in 1955 by thegovernment in order particularlyto speed up the process of mon-etising India’s rural economy. Evenas a public sector bank, SBI alwayshad private minority shareholders.At the end of FY 2000/01, the bankhad 737,000 shareholders. TheReserve Bank of India held 59.7%of the equity, Indian financial insti-tutions and companies, 19,1%, for-eign financial institutions andNRIs, 18.3%, and others (including individuals inIndia), 2.8%. SBI is associated with seven regionalState Banks.

As part of its diversification drive, SBI has createdseveral affiliate institutions. The Asian DevelopmentBank holds a share of 13.8% in the capital of SBI’s in-vestment bank, SBI Capital Markets.

Activities

The traditional role of commercial banks in India isto mobilize short-term deposits, and to meet theshort-term financial needs of industry, trade andagriculture (and to cover government debt). With9,000 branches and total (domestic) deposits of Rs.2,438 billion at the end of FY 2000/01, SBI is in astrong position to mobilize household savings in

India. The bank also maintains 52 offices in 31 for-eign countries, and thus caters to the financialneeds of the NRI community. The large branch net-work is expensive though, and observers considerSBI to be “overstaffed.”39

In the era of liberalization, SBI is trying to optimiseits large outreach by turning into a universal bank.In a drive to diversify its business, SBI has created an

investment bank (organizing di-vestments and public offerings,mergers and acquisitions etc.), amerchant bank, a fund manage-ment company (offering 19 domes-tic mutual funds and one offshorefund), a life insurance company, arating agency and other new busi-ness units. Within the power sector,SBI has played an advisory role onthe proposed merger of NHPC withNTPC, and in assessing the escrowcapacities of state electricity boardsfor IPPs. The bank is also a majorshareholder in other financial insti-tutions such as IFCI and IDFC.

SBI has ventured into long-term infrastructure fi-nancing, and particularly project finance in recentyears. By the end of FY 2000/01, the bank had ap-proved loans of Rs. 185.6 billion for 112 infrastruc-ture projects, of which Rs. 79.8 billion for 43 pro-jects was in the form of project finance. At thispoint, infrastructure project finance accounted foronly 7% of SBI’s total loan portfolio, but almostequalled ICICI’s project finance portfolio for infras-tructure. SBI’s rapid foray into long-term financinghas resulted in a maturity mismatch. According torecent media reports, the bank has approved loanswith a maturity of more than five years to the tuneof Rs. 126 billion, but can only match this commit-ment with deposits and other borrowing of an equalmaturity of Rs. 54 billion.40


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In the era of liberalization,SBI tries to optimise its

large outreach by turninginto a universal bank.

The State Bank has venturedinto long-term infrastructurefinancing, and particularly

project finance in recent years.

2.7. THE STATE BANK OF INDIA

Hydropower projects

As part of its project finance activities, SBI approvedloans for several hydropower plants, including thefollowing projects:

• Baghliar (450 MW, Jammu & Kashmir);


• Baspa II (300 MW, Himachal Pradesh); and

• Chamera II (300 MW, Himachal Pradesh).

The bank has also extended funds for financial in-stitutions and operators in the power sector. In May1997, it provided a foreign currency loan of $25million to the Orissa Hydropower Corporation. InDecember 1998, it participated in a syndicated loanof $100 million for PFC. And in December 2000,SBI was announced to be the lead manager for asyndicated loan of ¥7.5 billion for the PowerFinance Corporation (which at the time of writinghad however not yet materialized).

Sources of funding

Since SBI is a commercial bank, its primary source offunding are retail deposits. In order to raise funds forlonger-term lending, it also regularly issues bonds.

SBI is able to mobilize foreign currency fundsthrough its international branch network. Its 52overseas offices hold deposits of $1.702 billion.Given its strong position within the NRI communi-ty, SBI has also raised large amounts of foreign cur-rency through bond issues and similar instrumentswhen India faced balance of payment problems. In1998, it raised $4.2 billion through the ResurgentIndia Bond, and in 2000, $5.5 billion through theMillenium Deposits Programme (see chapter 3.6.).

In the case of the Resurgent India Bond, SBI set upa chain of brokers, including banks and other enti-ties, to market the instrument in the United States.This indicates that selling the NRI bonds must offerattractive commissions to the State Bank. In the caseof the Resurgent India Bond, an aggressive market-ing campaign included road shows in NRI centres,television and newspaper advertisements, and massmailings and unsolicited phone calls to about100,000 non-resident Indians in the US alone.41

While the bulk of the large NRI bonds which SBIadministers are meant to strengthen the foreign cur-rency reserves of the Reserve Bank of India, SBI re-tains some of the funds raised. In the case of the1998 Resurgent India Bond, the bank intended touse about $1 billion for its own infrastructure lend-ing and for onlending to other institutions involvedin project finance. According to media reports, therest was destined to go into RBI’s reserves.42 SBI usedproceeds from the Millenium Deposits Programmeto extend a loan of Rs. 5 billion to PFC.

Its strong international position enables SBI to ex-tend foreign currency loans or bonds directly fromits foreign deposits, and to arrange internationalloan syndications. The bank provided a loan to theMaheshwar HEP from its Frankfurt branch. Its par-ticipation in the 1998 loan to PFC was raisedthrough SBI European Ltd. (in London), and theloan to the Orissa Hydropower Corporation,through SBI’s Manama office. One may assume thatthe yen loan to PFC will be raised from the depositsof the bank’s Japan office.

SBI also offers its services as a conduit for officialexport credits. In September 2000, the US EximBank signed a Memorandum of Understanding withthe State Bank for the provision of export credits of$500 million. In addition, many ECAs accept SBIguarantees as the host country counter-guaranteewhich they request as a security for their own fund-ing. In its 2001 annual report, the bank claims that“most export credit agencies of the world preferguarantees from the SBI in case of an Indian clientor project.”

Asset quality

At the end of FY 2000/01, the share of SBI’s assetswhich was non-performing was 6.0%, and thebank’s capital adequacy ratio stood at 12.8%. WhileSBI’s NPA rate is considerably lower than those ofdevelopment finance institutions, this is probablyexplained by the fact that commercial banks are lessengaged in long-term lending than DFIs. SBI’s assetquality broadly corresponds with other commercialbanks in India (which had an average NPA rate of6.7% at the end of FY 2000/01).

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Internal culture

G.H. Deolalkar, formerly a managing director ofSBI, claims that the partly private ownership of thebank was a positive factor in that SBI “benefitedfrom the systems of checks and balances, disclosuredisciplines, and dividend expectations of sharehold-ers.”43 And an independent observer comments thatsince liberalization started, SBI has so far been for-tunate in that the bank had a string of cautious, pru-dent chairmen.

A financial analyst points out that the skills of com-mercial banks in India “have traditionally beenstrongest in the appraisal of short-term workingcapital lines, and we expect it will take time for sys-tems to be developed to effectively analyse projectfinance risks.”44 This may well be true for SBI also.Like some of the DFIs, SBI has played a prominentrole in financing the economically disastrousDabhol and Maheshwar power projects.

SBI was one of the very few financial institutionswhich refused to meet with the Narmada BachaoAndolan in order to discuss the Maheshwar project.The bank did not agree to a meeting to discuss thisresearch project either.


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The liberalization of India’s financial sector hasblurred the distinctions between the different rolesof financial institutions. While SBI has taken upproject finance, other commercial banks and invest-ment institutions provide a growing amount offunds to power sector institutions such as NHPCand the state utilities.

LIC

The Life Insurance Corporation ofIndia is India’s traditional life insurer.As a nationalized company, it for along time enjoyed a monopoly in thisbusiness sector. At the end of FY2000/01, LIC had about 100 millioncustomers, more than 2,000 branchoffices, and funds of Rs. 1,950 billion.In terms of the size of its funds, theinsurer is second only to SBI in India.LIC intends to increase its funds by18% in FY 2001/02. This rapid ex-pansion may reflect the westernisation of Indian so-ciety, in that social security is more and more dele-gated from the family or the state to commercial in-surers.

Insurance companies – and particularly life insurers– manage funds on very long terms. They are there-fore well placed to invest in infrastructure projects.LIC has been active in this sector for more than 40years. In 2001, its investments in infrastructureamounted to Rs. 286 billion (or 14.7% of its totalfunds). Rs. 102 billion were invested in the powersector. A new law of March 2000 stipulates that in-surance companies must invest 15% of their fundsin the infrastructure and social sectors. Accordingto Power Line, LIC plans to invest one quarter of itsavailable infrastructure funds in FY 2001/02.45

Within the power sector, LIC has traditionally takenup bonds from, and extended loans to, the stateelectricity boards and central institutions such as

NTPC, NHPC, PFC, REC, NPC, and the Power GridCorporation. In March 2001, LIC’s outstandingloans to NHPC amounted to Rs. 4 billion, and toPFC, to Rs. 3 billion. While this already made theinsurer one of the largest creditors of these institu-tions, the Corporation has rapidly increased its en-gagement in recent months. For example, LIC has

offered a line of credit of Rs. 25billion to NHPC for projectsunder the Tenth Plan. Accordingto media reports, theCorporation also extended anew loan of Rs. 5 billion to PFC,and is discussing to increase thisby a further Rs. 12.5 billion.This rapid expansion confirmsthe stated interest of LIC tostrengthen its involvement inthe infrastructure sector.

NHPC intends to invest thefunds under LIC’s line of credit,and a similar line from ICICI, in

the Teesta V, Parbati and Subansiri Lower HEPs (seechapter 2.1.). While ICICI sanctions the individualprojects funded under its line of credit, LIC has notrequired a right to do so. DFIs like ICICI are used toappraising individual investment projects, but LICis not, and this may explain why the insurer has del-egated the authority to approve funds for specificprojects to NHPC. When the World Bank decided itwould close its loan for the Nathpa Jhakri project inDecember 2001, Yogendra Prasad, the head of bothNJPC and NHPC, immediately informed the publicthat LIC’s LoC to NHPC could be redirected to fillthe gap at the Nathpa Jhakri Power Corporation.

As of now, development finance institutions do notperceive LIC as a competitor. Yet, the insurer startedto fund individual projects in the power sector in1994, with a loan to the GVK Jegurupadu project, acombined cycle IPP. LIC has funded several otherthermal power projects since then. It also approvedloans for the Maheshwar HEP and, according to

Insurance companies – andparticularly life insurers –

manage funds on very longterms. They are thereforewell placed to invest in

infrastructure projects. LICplans to invest one fourth of

its available funds ininfrastructure in 2001/02.

2.8. OTHER FINANCIAL INSTITUTIONS AND INSTRUMENTS

media reports, the Baghliar HEP in Jammu &Kashmir. Both projects have experienced major prob-lems, and LIC has asked NHPC to replace the privatesponsor of the Maheshwar HEP (see chapter 1.2.).

LIC is an important investor in other financial insti-tutions. At the end of FY 2000/01, it held 12.3% ofthe shares of ICICI, and 5.1% of the shares of IDBI.It is also a major shareholder in IFCI (where insur-ance companies collectively held 17.5% of the equi-ty in 2001).

LIC also does business with theNRI community. In FY 2000/01,only 1% of the Corporation’srevenues came from outsideIndia. LIC intends to rapidly in-crease this share, and to earn 5%of its revenue from internation-al business activities within fiveyears. Since housing or the so-cial sectors do not require for-eign currency funding, it is like-ly that a major part of the re-spective revenue will be invest-ed in infrastructure.

Other investment institutions

The General Insurance Corporation of India (GIC)and the Unit Trust of India (UTI, an investmentfund) are the other state-owned investment institu-tions in India. They have so far not become as activein the power sector as LIC, possibly because theirfunds do not have the same extended maturity asthe funds of a life insurer.

UTI is a creditor to NHPC, with a loan amountingto Rs. 500 million at the end of FY 2000/01. TheTrust is also in a good position to place bonds,which are often acquired by provident or pensionfunds. In 2000, UTI privately placed a Rs. 1 billionbond of the Nuclear Power Corporation, and in2001, so-called non-convertible debentures of PFCto the tune of Rs. 4 billion.

UTI and GIC have invested funds in a few hy-dropower projects. GIC agreed to take up equity inthe Maheshwar HEP. UTI approved a loan for theBaspa II HEP, and is being discussed as the source ofa foreign currency loan for the Maheshwar HEP. InJanuary 2002, the government’s Udesh KohliCommittee on the funding needs of power projectsproposed that LIC, GIC and UTI invest more funds

in the power sector to make up for the growing re-straint of development finance institutions.

To a limited extent, housing finance institutionshave also become engaged in India’s power sector.The Housing Development Finance Corporation(HDFC), a traditional funding partner of IFC, ap-proved a loan of Rs. 1 billion for the Chamera IIHEP, and has also lent to NHPC (with an outstand-ing loan amount of only Rs. 52 million at the end ofFY 2000/01). The Housing and Urban Development

Corporation (HUDCO) consideredextending a loan for the Maheshwarproject, but eventually did not do so.

Commercial banks

Commercial banks have traditionallymobilized India’s household savings,and have met the short-term financialneeds of industry, trade and agricul-ture. In March 2001, 296 commercialbanks held Rs. 9,500 billion in de-posits, and had a combined networkof 65,900 branches all over the coun-try. The SBI group alone accountedfor 24% of total deposits, and one

fifth of the branches. 19 nationalized banks, whichwere taken over by the state in 1969 and 1980, ac-counted for 54% of the deposits and half of thebranch network. (Regional rural banks, privatebanks, foreign banks and cooperative banks ac-counted for the rest.)

Due to their extensive branch network, the majornationalized banks have access to large funds at lowcost. Now that legal restrictions have been eased,many of them would also like to invest funds inlong-term lending at higher rates. The nationalizedbanks have however not yet developed the capaci-ties to appraise projects, and have only limited ac-cess to foreign currency funds. For these reasons,and unlike SBI, they have so far only taken up asmall number of hydropower projects. The follow-ing projects have managed to attract funds from na-tionalized banks:

• Baghliar (450 MW, Jammu & Kashmir), with aloan from the Jammu & Kashmir Bank;

• Maheshwar (400 MW, Madhya Pradesh), withrupee loans from the Dena Bank and the PunjabNational Bank (Rs. 250 million each), and a

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Due to their extensivebranch network, the major

nationalized banks haveaccess to large funds at low

cost. Now that the legalrestrictions have been

eased, many of them wouldalso like to invest funds in long-term lending at

higher rates.

foreign currency loan from the Bank of India($12 million);

• Baspa II (300 MW, Himachal Pradesh), withloans from the Central Bank of India (at least Rs.500 million), the State Bank of Patiala and theState Bank of Indore (with at least Rs. 250 mil-lion each);

• Chamera II (300 MW, Himachal Pradesh), withloans from the Punjab National Bank (Rs. 1.5 bil-lion), the Central Bank of India, the Bank ofIndia, and Punjab & Sind Bank (Rs. 1 billioneach);

• Malana (86 MW, Himachal Pradesh), with theBank of Baroda, the Oriental Bank of Commerce,the Punjab & Sind Bank and the State Bank ofPatiala contributing a total of Rs. 750 million inloans; and

• Daulasidh (80 MW, Himachal Pradesh), with theKangra Central Cooperative Bank offering a loanof Rs. 1 billion.

In cases such as Baghliar or Daulasidh, the banksfrom the respective states may well have offeredfunding under pressure from their state govern-ments.

While project finance remains the realm of the de-velopment finance institutions, PFC and SBI, othercommercial banks have become major lenders tocentral power sector institutions such as PFC,NHPC, and NTPC. At the end of FY 2000/01, eightnationalized banks had loans of Rs. 8.5 billion out-standing at PFC. This amounted to 25% of therupee loan debt of PFC. At the same time, seven na-tionalized banks and one private bank held Rs. 7.7billion in outstanding loans at NHPC, or 35% of theinstitution’s rupee loan debt. Even without SBI, thecommercial banks were thus the most importantgroup of lenders to PFC and NHPC. As was de-scribed above, they have since been overtaken inthis role by LIC.

The following nationalized banks have so far becomeparticularly active in India’s hydropower sector:

• the Punjab National Bank (with loans to PFC,Chamera II, and Maheshwar);

• the Oriental Bank of Commerce (with loans toNHPC and PFC, and for Malana);

• the Canara Bank (with large loans to NHPC andPFC);

• the Bank of India (with loans for Chamera II andMaheshwar);

• the Jammu & Kashmir Bank (with loans to PFCand for Baghliar); and

• the Corporation Bank (with loans to NHPC andPFC).

The Canara Bank recently decided to greatly in-crease its exposure in the infrastructure sector, hop-ing to reap higher interest rates. The bank plans toapprove Rs. 18 billion in loans for the power sectorin FY 2001/02. Of this, Rs. 15 billion should go intoprivate, and Rs. 3 billion into state sector projects.The Canara Bank has already extended several loansfor thermal power plants since 1996. It also ap-proved a guarantee of $21 million for the Dabholproject, which did not turn out to be a particularlyprofitable investment.46

Bonds of power sector institutions

For many years, central power utilities and stateelectricity boards have taken up debt in the form ofbonds. The use of this instrument has markedly in-creased in recent years. According to Power Line,power sector institutions issued bonds for a total ofRs. 60 billion in FY 2000/01.47 Major issuers includ-ed NTPC, NHPC, NPC, the Power GridCorporation and PFC, but also the power utilities ofstates like Andhra Pradesh, Maharashtra, andRajasthan. At the end of FY 2000/01, 51% of PFC’sdomestic debt and 17% of NHPC’s domestic debtconsisted of bonds.

Debtors have a choice of issuing bonds publicly, orplacing them privately. If they opt for public issues,they enjoy lower interest costs, but have to disclosemore information, and must get the respective in-struments rated. In spite of higher interest rates,most power utilities in India prefer to go the privateplacement route.

Given their precarious financial health, the statepower utilities use most of the funds raised by bondissues for current expenditures, and not for produc-tive investments. The only exceptions which couldbe identified in 2001 were the Gujarat SEB, whichissued bonds for the financial closure of a thermalpower plant, and the Kerala SEB, which issued


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bonds for the expansion of its transmission and dis-tribution network. Earlier, the Sardar SarovarNarmada Nigam Ltd. had issued bonds of at leastRs. 2.815 billion for the Sardar Sarovar projectunder guarantees from the government of Gujarat.

Many state governments are encouraging theirpower utilities to take up debt, and guarantee therespective bonds, because they are no longer able tobalance the budget deficits of their utilities.Carrying government guarantees, such bonds areconsidered to be risk-free by RBI. The respective in-vestors do not need to make expensive provisionsfor them, and so the bonds help financial institu-tions to maintain better capital adequacy ratios. It ismainly cooperative banks and provident fundswhich invest in state government bonds in India.

As Power Line elaborates, the bonds of the statepower utilities in reality still carry considerablerisks. Since the instruments are not invested pro-ductively, the utilities – and the respective state gov-ernments – will find it difficult to repay them oncethe mounting number of bonds matures. And withescrow cover and other securities stretched thinnerand thinner, investors may not find much comfortin state guarantees. Given this risk, the large finan-cial institutions avoid buying bonds from statepower utilities. Institutions like ICICI and SBI stillplay an active role in arranging the public issues andprivate placement of the utility bonds.

Even if state power utilities increasingly turn tobond issues, the risk is small that such instrumentswill fund uneconomic or destructive projects.Within the financial system at large, bonds presenta problem, and as one observer says, it may be “justa long wait for the financial bubble to burst.”48

Notes

1 Economic Times, 3 August 2001.

2 Lok Sabha, Standing Committee on Energy, ‘Report onDemands for Grants (2001-2002),’ Ministry of Power, April2001, paragraph 2.6.

3 According to Indian Express, 25 April 2001.

4 Data on Koel Karo from Frontline, 16 March 2001; Indian Express, 15 December 2001; Times of India, 20 July2001; Hindustan Times, 25 December 2001; StandingCommittee on Energy, April 2001, paragraph 2.151-2.153.

5 See Curt Voxby, India Uri Hydroelectric Power Project,Monitoring Summary Report, February 1998, p. 25.

6 Business Line, 23 February 2001.

7 Power Line, June 2000.

8 NHPC Website, Environment Management.

9 Business Standard, 1 January 2002.

10 Yogendra Prasad, ‘The Future of Hydro Power is Bright,’Indian Express, 1 January 2000.

11 See The Working Group on the Export DevelopmentCorporation, Reckless Lending, May 2001, Volume II, pp. 7f.

12 See Lynnart Nyman (ed.), River Jhelum, Kashmir Valley:Impacts on the Aquatic Environment, 1999.

13 The Tribune, 20 December 2001.

14 The Tribune, 21 December 2001.

15 According to Hindustan Times, 21 November 2001, andBusiness Line, 31 December 2001.

16 Power Line, July 2001.

17 World Bank, Implementation Completion Report, IndiaPower Utilities Efficiency Improvement Project, May 20,1999, p. 3.

18 ING Barings, Corporate Debt Research, Power FinanceCorporation, 4 September 2000, p. 60.

19 The Tribune, 23 June 2000.

20 See Lending Criteria on PFC’s website.

21 World Bank, Implementation Completion Report, pp. iii, 21.

22 Asian Development Bank, Project Completion Reporton the Power Efficiency (Sector) Project in India, August2001, pp. 16f.

23 Asian Development Bank, Project Completion Report,p. 11, and World Bank, Implementation Completion Report,p. 28.

24 International Projects 500, Local Banks – India.

25 Quoted in Economic Times, 26 September 2001.

26 Rob Wright, On the Edge: Driving into Daring Deals.

27 ICICI, 46th annual report and accounts, 2000-2001, p. 8.

28 United States Securities and Exchange Commission,Form 20-F, Annual Report 2001, ICICI Limited, p. 19.

29 ICICI, 46th annual report and accounts, p. 21.

30 Times of India, 17 October 2001.

31 See, e.g., Business Line, 2 August 2001.

32 Quoted from IFCI’s website on Lending Policies.

33 IFCI, Note – in Clarification, 31 August 2001.

34 See Indian Express, 19 December 2001.

35 Basu report quoted in Indian Express, 7 February 2001.

36 Basu report quoted in IFCI’s annual report for 2001, p. 12.

37 IDFC, Fourth Annual Report 2000-2001, p. 4.

38 IDFC, Environmental Management.

39 Jan Peter Wogart, ‘Industrial and FinancialRestructuring of India’s Development Finance Institutions,’IFC-Asia Department Economic Paper No. 9, July 1999, p. 5.

40 Figures according to The Hindu, 29 November 2001.

41 See U.S. Securities and Exchange Commission,Securities Act of 1933, Release No. 8036/November 19,2001, pp. 3, 5.

42 According to Financial Times, 26 August 1998.

43 G.H. Deolalkar, The Indian Banking Sector, p. 101.

44 Merrill Lynch, Asian Fixed Income Monthly, IDBI, 3January 1997, p. 39.

45 See Shubhra Wadhawan, Life Insurance Corporation,Power Line, June 2001.

46 See Sonali Dutta, ‘Canara Bank,’ Power Line, April 2001.

47 See Sunil Puri, ‘Tapping the Bond Market,’ Power Line,February 2001.

48 Ibid.


73

75

PART 3

INTERNATIONAL

FINANCIAL INSTITUTIONS

AND HYDROPOWER IN INDIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART 3 INTERNATIONAL FINANCIAL INSTITUTIONS AND HYDROPOWER IN INDIA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The World Bank is an important source of foreigncapital for India, particularly in the power sector. Itplays a crucial role by shaping the restructuring ofthe sector on the state level through its programloans. The Bank no longer funds specific powergeneration projects in India, which is a major breakfrom the past. Unlike its sibling IFC, it does notplan to provide further funds to financial intermedi-ary institutions either.

Overall relations with India

Between 1950 and 2000, the WorldBank approved $53.8 billion for412 projects in India. In February2001, its country portfolio consist-ed of 73 projects and a committedamount of $12.1 billion. TheWorld Bank is India’s most impor-tant source of foreign capital, andprojects in India in turn constitutethe Bank’s largest portfolio.

As a reaction to India’s nuclear tests, the World Banksharply reduced loan approvals between May 1998and April 2000. During the current country assis-tance strategy period (2002-2004), the Bank plans tolend about $3 billion a year to India. The govern-ment had proposed yearly borrowings of $4 billion.

The first strategic principle of the World Bank’sIndia strategy is selectivity. The Bank will no longerfund projects in sectors such as thermal power,telecommunications and ports where private invest-ment can be facilitated through the private sectorarms of the Bank Group, the International FinanceCorporation (IFC) and the Multilateral InvestmentGuarantee Agency (MIGA). At the central level, itwill only support projects in a small number of sec-tors – including highways and combating infectiousdiseases, but not power (or railroads). The Bankwill concentrate the bulk of its funding on stateswhich support its reform agenda, and which are rel-

atively poor. At the same time, it argues that ratherthan funding, “in some of the poorest but non-re-forming states, policy dialogue and capacity build-ing may well be the most effective interventions.”1

After a break of almost seven years, the World Bankin April 2000 approved a structural adjustment pro-gram in India (for the state of Uttar Pradesh). The

current country assistance strategysets aside about one quarter of allresources for India for structuraladjustment operations. The insti-tution is aware that “even if the re-form programs continue, theremay be political opposition to theBank’s involvement.”2

The World Bank acknowledgesthat compliance with social andenvironmental safeguard policiesis “a critical, and often controver-sial, issue in India.”3 DestructiveBank projects have triggered mas-

sive public opposition in India and abroad. The im-plementation of safeguard policies is at the sametime “contentious” within agencies such as NTPC.4

When the Bank reviewed the effectiveness of itsown environmental impact assessments in Indiafrom 1991 to 1997, it claims it found overall im-provements, but also continuing weaknesses regard-ing “identification of issues and scoping, analysis ofalternatives, prediction and assessment of impactsand public involvement and consultation.”5

The Bank’s legacy in the power sector

For a long time, the power sector was the WorldBank’s top priority in India. From 1986 to 1990, thesector accounted for 28% of all commitments. As aninternal evaluation points out for the period until1993, “Bank energy sector lending largely followedthe government’s lead, focusing on expanding pro-ductive capacity through large-scale projects, imple-

The World Bank plays acrucial role by shaping therestructuring of the power

sector on the state levelthrough its program loans. It does not finance specificpower generation projects

anymore in India.

3.1. THE WORLD BANK

mented by central or state monopolies.”6 The mainrecipients of this lending were NTPC and, since the1980s, the state electricity boards.

From 1980 onwards, the World Bank funded tenhydropower schemes in India, either as stand-aloneprojects or as parts of larger power sector loans.The following projects were funded on a stand-alone basis:

• Upper Indravati (600 MW,Orissa) with a $324 million loanin 1983;

• Indira Sarovar (500 MW, MadhyaPradesh, better known as IndiraSagar) with a $300 million loanin 1984;

• Sardar Sarovar (1,450 MW,Gujarat, primarily an irrigationproject) with loans of $450 mil-lion in 1985; and

• Nathpa Jhakri (1,500 MW, Himachal Pradesh)with a $485 million loan in 1989.

During the same period, the Bank funded severalhydropower schemes as the principal componentsof larger projects, which included other elementssuch as the construction of transmission lines or therehabilitation of thermal power plants. The follow-ing projects were funded in this way:

• Lower Periyar (180 MW) as part of the $176 mil-lion Kerala power project in 1985;

• Kalinadi River (270 MW) as part of the $330 mil-lion Karnataka power project in 1987;

• Gerusoppa (240 MW) as part of the $260 millionsecond Karnataka power project in 1988;

• Srinagar (330 MW) as part of the $350 millionUttar Pradesh power project in 1988;

• Koyna IV (1,000 MW) as part of the $400 millionMaharashtra power project in 1989; and

• a 150 MW pumped storage unit at the existingBhira hydropower project in Maharashtra as partof the $98 million Private Power Utilities (TEC)project in 1990.

The Srinagar HEP, now in the new state ofUttaranchal, was privatised when the World Bankclosed the project. The Bank also approved severalsingle-purpose irrigation dam projects, includingUpper Krishna II (Karnataka) in 1989. Transmissionlines related to hydropower schemes were fundedunder the Bank’s transmission projects (see below).

The World Bank classified all butone of the hydropower projectslisted above in the environmentalcategory “C,” suggesting that envi-ronmental impacts were negligibleand no environmental impact as-sessments were needed. The oneexception was the Private PowerUtilities project which was ap-proved last in 1990, and was cate-gorized as “B.” Interestingly, allpackage loans which included hy-dropower schemes were approvedduring the final weeks of the re-spective financial years. During

these so-called “bunching seasons,” the Bank’s oper-ational departments need to rapidly allocate theirremaining budgets. Possibly, package loans servethe purpose of appropriating money quickly well.

Many of the World Bank’s dam projects in India havecreated huge social, environmental and economicproblems. The fundamental problems of the SardarSarovar project on the Narmada river triggered amassive campaign by social movements and NGOsin India and internationally. The Nathpa Jhakri pro-ject also turned into a long-term headache, and withits flawed design cast serious doubts on the Bank’scapacity to appraise the technical viability of pro-jects. (See chapter 2.1.) For economic, social and en-vironmental reasons, Upper Krishna II is considered“an extraordinary failure” by the Bank’s ownOperations Evaluation Department.7

In funding large hydropower and – at times equallydestructive – thermal power projects, the WorldBank uncritically followed the lead of India’s powersector bureaucracy. The WCD country study onIndia states that “the primary responsibility of mak-ing choices in favour of large dams as against otherindigenous water resource development techniques,lies with the Indian planners and designers,” andnot the World Bank.8 At the same time, the WCD’sfinal report stresses that multilateral and bilateral fi-nancial institutions “have played a key strategic rolein spreading the technology to developing coun-tries, lending legitimacy to emerging dam projects,

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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“Bank energy sector lendinglargely followed the

government’s lead, focusingon expanding productive

capacity through large-scaleprojects, implemented by

central or state monopolies.”

The World Bank, June 2001

and fostering the technological and human re-sources required to build and maintain dams.”9 Incases such as Sardar Sarovar, the hasty involvementof the Bank certainly helped to overrule the con-cerns of India’s environment ministry.

An internal evaluation of the World Bank’s energyportfolio in India recommends that “for environ-mentally sensitive energy projects, the Bank shouldcontinue to review the performance of the state en-vironmental institutions until the loan is repaid.”10

Bank officials maintain that they do monitor closedprojects such as Sardar Sarovar and Upper Indravatias long as the respective loans have not been repaid.The Bank has however so far not heeded the call ofsocial movements like the Narmada BachaoAndolan to accept its responsibility and address theproblems of these projects in public.

The Bank’s new power sector strategy

After an international NGO campaign and a squab-ble with the Indian government, the World Bankwas forced to withdraw from the Sardar Sarovar pro-ject in March 1993. At the same time, the Bank re-alized that its support for individual power plantswas not improving India’s inefficient power system,and particularly the performance of the state elec-tricity boards. So between 1992 and 1995, the Bankcancelled over $2 billion in non-performing powersector loans to India.

During the same period, the World Bank declinedgetting involved in the Dabhol power plant. Its anal-ysis clearly showed that the project was not eco-nomically viable (see chapter 1.5.). In his accountof the Dabhol saga, Abhay Mehta notes that theBank’s analysis “was and is to date, the most coher-ent critique of the project and its consequences.”11

In a letter to the Ministry of Finance, however,World Bank director Heinz Vergin pointed out “thatthe bank strongly supports your government’s pri-vate power initiatives and is keen to consider otherprivate power project proposals, including a re-shaped Dabhol project.”12

In June 1993, a few weeks after this letter was writ-ten, the World Bank approved the Private PowerDevelopment Technical Assistance Project. The pur-pose was to advise the Indian authorities on howbest to negotiate contracts for private power pro-jects, and to introduce competitive bidding for theselection of project sponsors. Demand for the assis-tance offered was weak, and the project was can-

celled after four years, with only $1.2 million of the$20 million loan disbursed. “Most IPPs did not takeoff,” says a power sector specialist of the Bank inhindsight, “which for India was a good outcome.”At the height of the IPP frenzy, however, the Bankhad not expressed any such critique.

As the World Bank ceased to support individualpower generation projects in India, it decided tofocus its lending exclusively on programs to re-structure the power sector on the state level. In1996, a power sector reform program in Orissa be-came the first test case and model of this new typeof lending. Modelled after the privatisation of thepower sector in Great Britain, the program consist-ed of the following measures:

• Unbundling of power generation, transmissionand distribution;

• privatisation of power distribution;

• private participation in generation and trans-mission;

• creation of an autonomous electricity regulatorycommission;

• increase of electricity tariffs for agricultural anddomestic consumers, and thus reduction incross-subsidization.

Observers believe that the World Bank consciouslychose the small, poor and powerless state of Orissato first implement this new approach, so that delaysand political compromises could be avoided. Exceptfor Orissa, the Bank did not fund any other powerprojects in India between 1993 and 1998. Since1998, the states of Haryana, Andhra Pradesh, UttarPradesh, Rajasthan and Karnataka have followedthe path of the Orissa model and received WorldBank support. In all affected states, the reform pro-grams evoked strong public protests. In Hyderabad,Andhra Pradesh, three people were killed in August2000 at a protest rally against the Bank-sponsoredrestructuring program. In 2001, the Bank cancelledthe Haryana program because the government wasnot prepared to privatise power distribution. TheOrissa government instituted an official committeeto evaluate the impacts of the power restructuringprogram, which submitted a critical report inOctober 2001.


79

Power sector reforms – five years after

The empirical evidence collected and the recom-mendations published by the World Commissionon Dams indicate that the planning process forwater and energy projects must be made fundamen-tally more democratic and accountable to achievethe goals of social equity and environmental sus-tainability. The work of energy ex-perts like the Prayas group con-firms this view for India. Prayasand other analysts have document-ed how the lack of transparencyand accountability has allowedvested interests to “hijack” thecountry’s power sector.

The World Bank’s restructuringpolicies in India have not helped todemocratise power sector policies.The Bank’s model has created regu-latory commissions which are independent from thestate governments. Yet their enormous authority isnot matched by mandatory mechanisms for ensuringtransparency and accountability. According to Prayas,this “enormous authority without corresponding ac-countability is a sure recipe for disaster.”13

The World Bank’s recognition that the fundamentalproblem of India’s power sector was not simply agap in generation was positive. Yet in its zeal to pri-vatise distribution and raise electricity tariffs, theBank neglected other structural measures needed torationalize the sector and to check the powers ofvested interests. It did not deal with the problems ofpower theft and corruption, did not promote a com-prehensive assessment of all available options, andparticularly neglected the potential of demand sidemanagement (DSM). DSM measures were includedin the Orissa program, but as the researchers NavrozDubash and Sudhir Chella Rajan observe, were onlysupported half-heartedly at best.14

The newly created electricity regulatory commis-sions have no mandate to promote developmentalgoals such as rural electrification. The World Bankargues that increasing electricity tariffs frees upbudgetary resources to promote such goals, or forother developmental purposes such as health or ed-ucation. While this is theoretically true, no mecha-nisms are in place to ensure that such transfers ofresources indeed take place, and that the potentialsavings will not again be pocketed by vested inter-ests.

As was elaborated in chapter 1.3., Prof. AmulyaReddy believes that on the ground, the reforms inOrissa have “failed in many ways.” The WorldBank model “involves major surgery with littlerecord of proven success particularly under short-age conditions,” the power sector expert pointsout. “Despite this, the World Bank approach isbeing forced on the various states in India. The ob-jections and opposition are being steam-rolled and

brushed aside with the leverage ofconditionalities imposed by thelending agencies.”15

Overall, World Bank country di-rector Edwin Lim believes that thereform programs have resulted in“tremendous progress” within acomplex sector.16 Within India’spower sector apparatus there istoday a general consensus on theneed for reform. The privatisation

of distribution has become national policy, and nu-merous independent electricity regulatory commis-sions are being set up. At the same time, the Bank’scountry director says that “we certainly recognizethat we have made a lot of mistakes in the past.”Particularly, the Bank now emphasizes the need tocombat theft and corruption within the power sec-tor, and agrees that “privatisation by itself is notenough as we have seen in Orissa.”17 The Bank’scountry assistance strategy further admits thatpower reforms may “require much longer than theBank had earlier anticipated.”18

In spite of the questionable success of the Indianmodel, the restriction of support to reform-orientedstates is becoming World Bank policy elsewhere. In asector evaluation report, the Bank’s OperationsEvaluation Department calls the Indian reform ap-proach “a best practice model that should be emulat-ed throughout the Bank’s energy sector portfolio.”19

Another report suggests that “perhaps the most effec-tive, cross-cutting reform [to reduce poverty in India]would be cuts in the explicit and implicit subsidiestogether with privatisation in power.”20

The volume of Bank lending decreased as a conse-quence of the new power sector strategy. After 1998,the institution suspended most new energy lendingas part of the international sanctions against India.In the 1996-2000 period, power only ranked fifthamong the Bank’s lending sectors in the country,with 10% of new commitments – down from 28%ten years earlier. This trend reflects a worldwide shiftaway from the power sector by the World Bank.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80

“The World Bank modelinvolves major surgery with

little record of provensuccess particularly under

shortage conditions.”

Prof. Amulya Reddy, January 2002

Support for institutions in the central power sector

Even when the World Bank phased out support forNTPC and for specific power plant projects, it stillextended funds for central institutions in India’spower sector, primarily PFC and the Power GridCorporation.

Support for transmission projects:In June 1990, March 1993 and March 2001, theWorld Bank approved three projects designed tostrengthen India’s regional transmission systemsand assist the creation of a functional national grid.The loans amounted to $485 million, $350 millionand $450 million respectively. All of them includedinvestments in the coordination and control of re-gional transmission systems, and were thus aimed atmaking the management of India’s power systemmore efficient.

The projects of 1990 and 1993 also funded the con-struction of transmission lines to evacuate powerfrom new power plants. The 1990 project financedthe transmission of power from various hydropow-er schemes in Jammu & Kashmir, and from theNathpa Jhakri project in Himachal Pradesh. The1993 project funded a number of transmission linesfrom NTPC thermal power plants. These subpro-jects should have been appraised as elements of therespective generation projects, rather than as im-provements of the country’s transmission system.The 2001 Powergrid project exclusively comprisedinvestments to facilitate the management and inter-connection of transmission in various regions.

Support for PFC:In January 1992, the Bank approved the PowerUtilities Efficiency Improvement Project, a loan of$265 million for the Power Finance Corporation.The loan financed 52 subprojects in three reform-minded states, primarily in transmission and urbandistribution. The project was closed in 1998, with$57 million remaining undisbursed.

The Power Finance Corporation has made it clearthat it wants further support from the World Bank.According to India’s Power Ministry, PFC is explor-ing a further World Bank project of $500 million.And in November 2000, Power Minister SureshPrabhu announced that India would soon requestWorld Bank assistance of up to $4 billion for thepower sector. “All the funding would be chan-nelised through Power Finance Corporation,” theMinister added.21

In January 2001 the industry journal, IndiaPoweronline, reasoned that for the World Bank,PFC was too lax in supporting states which do notrestructure their power sectors, and that the Bankwas considering turning to the IDFC for future sup-port for power sector reforms. The project pipelinein the World Bank’s country assistance strategy doesnot foresee any support for PFC or for IDFC duringthe 2002-2004 period (nor for any other centralpower sector institution).

World Bank officials confirm that in the comingyears, the institution wants to be directly involvedin the power sector reforms which it supports onthe state level, rather than routing support throughintermediaries like PFC. A power sector specialist ofthe Bank elaborates that PFC is “financially well dis-ciplined,” but has not been able effectively to pro-mote a restructuring process in the states to whichit lends.

Support for renewable energy: In December 1992 and June 2000, the Bank ap-proved projects of $190 million and $130 millionrespectively for the promotion of private renewableenergy resources in India. The second project in-cluded support for small and micro hydro projectson canals etc., for wind farms, for efficiency in-creases and demand-side management programs.

Projects in the Bank’s lending pipeline:The Bank’s country assistance strategy for 2002-2004 focuses exclusively on sector restructuringprograms in Andhra Pradesh (two projects totalling$500 million), Uttar Pradesh (two projects totalling$400 million), and Rajasthan (one new project of$200 million).22 Funds will be extended in so-calledadaptable program loans, which consist of smalltranches closely linked to the implementation ofspecific policy conditions. The loans will cover ad-justment costs and investment programs in thetransmission and distribution sectors.

The World Bank does not plan to fund any furtherpower generation projects in India, either directlyor as part of restructuring programs. Since allmoney is fungible, Bank loans still free up resourceswhich can be used for other purposes, including thedevelopment of thermal or hydro power plants.Given this fungibility, the investment programs ofstates which receive World Bank funding still needto be monitored. (This problem is further discussedin chapter 3.3.)


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The World Bank’s role in the financial sector

The financial sector is not a focus area of the WorldBank in India. From the 1950s to 1980s, the Bankextended support to financial institutions such asIDBI, and helped to set up ICICI. In the early 1990s,it exerted strong influence on the liberalization ofthe financial sector through a structural adjustmentprogram in 1991, and an external sector and invest-ment loan in 1993. The Bank believes that its poli-cy advice – for example through a report and a sem-inar on the banking system in 1990 and 1997 –“played an important role in financial reform as itset out all issues involved and indicated the policychoices to the borrower.” This advice, according toan evaluation report, had a “large impact on the de-velopment of the financial sector.”23

Since 1991, only the Bank’s Financial SectorDevelopment Project provided direct support toIndian financial institutions. This $700 million pro-ject was approved by the Executive Board in March1995. Its purpose was

• to recapitalise six public sector banks (of whichone bank was subsequently excluded);

• to modernize the technology base of the partici-pating banks; and

• to fund a so-called backstop facility of $200 mil-lion which was meant to facilitate long-termlending by the participating banks.

The backstop facility was badly designed, and wascancelled on request from the Indian authorities im-mediately after the loan was approved. One is left towonder how this project was appraised in the firstplace, especially given the fact that India’s publicsector banks do not specialize in long-term lending.

According to the Bank’s evaluation report, theFinancial Sector Development Project was not par-ticularly successful: “All the banks reached targetedprofits. (...) However, the impact of the project onthe management development of the targeted bankswas imperceptible. There was a doubt whetherthose banks would not lose capital again.” The Bankreport also acknowledges that “NPAs are growing asfast as fresh lending because of poor lending prac-tices and the flawed legal framework.”24

No new financial sector projects are included in theWorld Bank’s India pipeline for 2002-2004. The in-stitution will restrict its role to offering “analyticaladvice and possibly technical assistance to govern-ment and regulatory institutions as needed.”25 A fi-nancial sector specialist of the Bank confirms thatthe institution “does not find it very effective towork through financial institutions.” TheInternational Finance Corporation – another orga-nization of the World Bank Group – will play a moreactive role in India’s financial sector.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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83


The International Finance Corporation is an activeplayer in India’s power and particularly financialsectors. It has never funded a large dam in India, butrather supports what it believes to be innovativetechnologies and projects. IFC has environmentalpolicies in place, but implements them in a narrow,non-transparent and unaccountable way.

IFC’s sister institution, MIGA, has not yet becomeactive in India. It is however inter-ested in supporting large-scale pri-vate investments in a liberalizedinfrastructure sector in the nearfuture.

IFC’s overall relations with India

By early 2000, IFC had approved158 projects in India for a totalamount of $1.8 billion. In January2001, its active portfolio includedengagements of $668 million in 68companies. While India is the mostimportant client of the World Bank, it only ranksfifth in IFC’s portfolio. The reason may be that inmany areas, India’s private sector plays a rather lim-ited role. IFC’s exposure is strongest in the financialsector and in private infrastructure. TheCorporation is an attractive funding partner forIndian institutions in that it does not only provideforeign currency loans, but depending on the cir-cumstances, also equity.

IFC participated in the international sanctions afterIndia’s nuclear tests, so in the 1998-2000 period, itapproved new funding for India of only about $300million. However, according to the Corporation’s re-gional staff, a “substantial pipeline has been builtup, and IFC investments can be expected to riserapidly, if the current favourable economic and po-litical situation can be maintained.”26 IFC expects toapprove $1-1.5 billion over the 2002-2004 period.

Investments will continue to focus on private in-frastructure, the financial sector, and mid-size man-ufacturing and service companies.

IFC’s role in the power sector

Among the international financial institutions, it isclearly the World Bank which sets or influences the

policy agenda in India’s power sec-tor. IFC backs up the role of itslarge sibling by providing funds towhat it believes to be pioneeringprivate companies. The Corpora-tion supports the following Indianpower projects:

• In 1989, IFC approved $20.83million for the AhmedabadElectricity Company and be-tween 1990 and 1994, a total of$130.64 million for Tata ElectricCompanies. Ahmedabad andTata are two of India’s tradition-al private power utilities. IFC

does not provide any substantive information onprojects approved before 1995.

• In 1991 and 1993, IFC approved $54.75 millionfor the Budge Budge project, a 500 MW thermalpower plant in West Bengal. Budge Budge wasIndia’s earliest IPP. It is being developed byCESC, one of the oldest private power utilities inKolkata (Calcutta). The project suffers from poormanagement, and time and cost overruns. A firstunit of 250 MW was commissioned in 1999.

• In 1992 and 1996, IFC approved loans and equi-ty for a total of $37.45 million for GVK’sJegurupadu project, a 235 MW combined cycleplant in Andhra Pradesh. In 1996, Jegurupaduwas the first Indian fast-track power projectwhich became operational.

3.2. THE IFC AND MIGA

“A substantial pipeline has been built up, and IFC investments can beexpected to rise rapidly, if the current favourableeconomic and political

situation can bemaintained.”

The World Bank, June 2001

• In the mid-1990s, IFC considered extending aloan of $180 million and equity of $18 millionfor the ST-CMS Neyveli project in Tamil Nadu.Neyveli is a 250 MW lignite-fired plant. Thefunding was never approved, and the project hasbeen dropped from IFC’s pipeline.

• In October 1999, IFC approved a loan and equi-ty of $9 million for the Astha power project, aprivate 26 MW captive thermal power plant in anindustrial park in Andhra Pradesh.

• In June 2000, IFC approved two credit guaran-tees for a total of $39 million for two privatisedpower distribution companies in Orissa.

• In May 2001, the Corporation approved guaran-tees of Rs. 490 million for GI Windfarms Ltd.This private company is developing two windfarms totalling 21 MW in Maharashtra.

• After 1997, IFC was in negotiations about equityand debt support for the Balagarh project duringseveral years. Balagarh is a 500 MW coal-firedpower plant in West Bengal. Because CESC, thesole customer, did not manage to sufficientlyraise the tariffs of the electricity it sells, IFC neverapproved the project, and has dropped it from itspipeline.

• IFC plans to provide debt and equity of $4 mil-lion for the retail marketing of photovoltaic sys-tems in South India. This project is part of theCorporation’s finance/insurance pipeline.

Unlike in countries such as Chile or Uganda, IFChas never directly funded hydropower projects inIndia. As the above list indicates, its understandingof innovative approaches to India’s energy sector formany years consisted of supporting large-scale IPPs.

In December 2000, Bernard Pasquier, then the di-rector of IFC’s South Asia Department, concludedthat “there is no point investing in generation if thepower does not reach the consumer.”27 In the future,and according to the Bank Group’s India country as-sistance strategy, IFC plans to keep its focus onnewly privatised distribution companies, and oncaptive, co-generation and renewable energy pro-jects. Given its enlarged pipeline, funding for suchprojects may well increase in the next few years.

IFC’s role in the financial sector

While World Bank involvement in India’s financialsector is limited, the sector has in recent years be-come IFC’s focus area in the country. When lendingto financial institutions, the Corporation attemptsnot simply to transfer resources, but to strengthenthe risk management and technology base of its pro-ject partners, and to support the development ofnew financial instruments. According to the coun-try assistance strategy of the World Bank Group, thefinancial sector will remain a focus area of IFC inthe medium-term future.

For the purpose of this paper, IFC’s involvement inthe sector can be categorized as follows:

Support for development finance institutions:Since 1995, IFC has approved, or is about to ap-prove, $75 million in loans and equity for three pro-jects with Indian development finance institutions.

• In October 1997, IFC provided $20 million of eq-uity capital to the newly created IDFC. InFebruary 2001, the so-called Basu committee rec-ommended that IFC and other international fi-nancial institutions also be invited to becomestrategic investors in IFCI. IFCI has so far notfollowed up on this recommendation.

• In 2001, IFC approved an ICICI guarantee facili-ty of up to $40 million. The facility is supposedto guarantee up to 50% of ICICI’s rupee loans tomedium-sized companies and projects. ByDecember 2001, the respective contract had notyet been signed.

• In September 2000 and May 2001, IFC set uprisk management facilities of $50 million eachwith ICICI and the State Bank of India respec-tively. Such facilities allow IFC to exchange for-eign currency in rupees for use in other projects,and do not constitute a net transfer of resourcesto the financial institutions.

• In January 2002, IFC’s board was supposed to ap-prove a contribution of $15 million for the cre-ation of a new financial instrument, a so-calledcollateralised debt obligation vehicle, by ICICI.The new instrument is supposed to encourage thetrading of corporate bonds in India. At the time ofwriting, the project had not been approved yet.

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Support to commercial banks:Since 1995, IFC has provided $40 million in equityand loans to two commercial banks in India.

• In May 1998, IFC approved a loan of $10 millionto the private Global Trust Bank, in which it thenheld an equity stake of 9.6% (and now, of 11.5%).The new private bank will lend the funds on tosmall and medium sized companies particularlyin the export sector.

• In July 2000, the Corporation approved an in-vestment of $20 million in Global Trust Bank inorder to allow the bank to take up long-termlending to small and medium-sized enterprises.IFC will support the training of project financeskills, and participate in the initial loans.

• In March 2001, IFC approved an equity partici-pation of up to $10 million (or 10%) in the VysyaBank. The participation is supposed to strength-en the technology base and risk managementmechanisms of the private bank.

Support to housing finance institutions:Since 1995, IFC has approved at least four loans tohousing finance institutions, including HDFC. Totalsupport during this period amounted to $150 mil-lion. HDFC, which has recently started to provideproject finance to hydropower projects, has receivedat least five loans from IFC since 1978. (One ofthese loans was supposed to be approved in October2001. At the time of writing, this project had not yetbeen approved.)

Participation in investment funds:Since 1995, IFC has approved investments for atotal of $42.5 million in five different collective in-vestment vehicles targeting companies in India. Twoof these vehicles are venture capital funds, and oneexclusively targets companies in the auto ancillaryindustry. In August 1997, IFC also approved its par-ticipation with $10 million in a $125 venture capi-tal fund of ICICI and the Trust Company of theWest. The fund invests in medium-sized Indiancompanies in a wide range of industries.

Support for leasing companies:Since 1995, IFC has approved (or is about to ap-prove) eight different projects with a total volume of$150 million for the support of leasing companies.Most of the projects encouraged the leasing ofequipment for the construction of infrastructureschemes, including roads, irrigation canals, anddams. Three of the projects assisted two leasing

companies, SREI and Infrastructure Leasing &Financial Services Ltd. (IL&FS), in providing long-term loans for the development of infrastructureprojects. IL&FS is a senior project partner of IFC.The Corporation had invested in the leasing com-pany in 1991, and has a representative on its board.

Other financial sector projects:With a small number of projects, IFC has support-ed the creation of other new financial service insti-tutions in India, including a small private micro-finance company and a factoring company whichservices the export industry.

IFC’s social and environmental policies

As a public international financial institution, IFC issupposed to follow a set of social and environmen-tal policies to ensure that the projects it funds donot have negative social or environmental impacts.What is IFC’s responsibility when it extends re-sources through financial intermediaries such as de-velopment finance institutions or investment funds,which lend the respective resources on to their ownsubprojects, or invest them in separate companies?

According to IFC’s environmental procedures, finan-cial intermediaries which receive IFC funds need toput in place management systems to screen subpro-jects for environmental and social problems. Theyneed to provide IFC with annual reports on their en-vironmental performance, and may normally pro-vide finance only to subprojects which comply withIFC/World Bank policies and guidelines. Concretely,financial intermediaries must require that any sub-projects of $500,000 or more comply with IFC’s poli-cies, and IFC must clear all subprojects of the (mostsensitive) environmental assessment category A. If acompany in which an IFC-supported fund has in-vested undertakes a category A subproject, the fundmanager must again try to ensure that the subprojectcomplies with IFC’s policies.

If IFC is represented on the board of a financial in-termediary, it tries directly to ensure that all sub-projects funded by the institution meet IFC require-ments. The Corporation has veto power on theboard of IDFC, and possibly other financial institu-tions, for this purpose. As was elaborated in chapter2.6, IFC used this position to prevent IDFC fundingfor the Dabhol project.


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In principle, it is positive that IFC accepts responsi-bility for the impacts of the subprojects of the fi-nancial intermediaries which it supports. TheIndian experience demonstrates that in practice,there are two major problems with IFC’s approach.

First, the Corporation at best considers the socialand environmental impacts of subprojects within avery narrow perspective. For example, it did not op-pose the fundamentally flawed Dabhol projectbased on a more sustainable per-spective of India’s power sector, butbased on the resettlement whichthe plant would have caused. Andalthough IFC says that one of itsobjectives is to strengthen the riskmanagement capacities of the fi-nancial institutions it supports, itdid not discuss with ICICI, one ofits traditional partners in India, itslarge and imprudent involvementin the Dabhol project.28

IFC’s loan and equity investment of $10 million inleasing company Indian Infrastructure EquipmentLtd. provides another example of an extremely nar-row approach to social and environmental con-cerns. In this case, the Corporation requested thecompany to set up an environmental advisory boardto ensure that it does not lease equipment for pro-jects which do not meet minimum environmentalcriteria. The project’s environmental review summa-ry suggests that the reason for creating this mecha-nism was to screen out any involvement in subpro-jects with “unacceptable reputational risks” for thecompany and IFC.29 At the same time, one of theproject’s purposes for IFC is “to further acceleratethe process of mechanisation in the Indian infras-tructure sector.” Nowhere does the Corporationconsider the social impacts which this mechaniza-tion of a highly labour-intensive sector will have onIndia’s poor.30

Secondly, the extent to which IFC deals with socialand environmental issues in financial sector pro-jects is shrouded in a high degree of secrecy. TheCorporation for example does not make publiclyavailable the list of subprojects it funds through fi-nancial intermediaries like ICICI “for reasons ofclient confidentiality.”31 This gap is critical, and thereason given for it is spurious. Upon an identical re-quest, ADB had no problems providing the list ofsubprojects which it funds in a similar projectthrough ICICI. IFC also refuses to make publiclyavailable the annual environmental performance re-

ports which its financial intermediaries are sup-posed to submit, as if environmental or social issuescould still be considered a matter of legitimate com-mercial secrecy. Finally, IFC responded to questionsin the context of this research project in writing, butwas the only international financial institutionwhich did not accommodate a personal meeting todiscuss its policies and projects.

In June 2001, Environmental Rights Action, aNigerian NGO, filed a complaintwith IFC’s ComplianceAdvisor/Ombudsman (CAO) on anIFC financial intermediary projectin Nigeria. The complaint relatedto the design of the project, and notto individual subprojects. Even so,the CAO’s report criticized theIFC’s lack of transparency, and rec-ommended participatory design,monitoring and evaluation pro-cesses for the project.32 Filing a

complaint regarding a specific subproject funded byIFC through an intermediary institution could helpclarify the responsibilities of the Corporation in suchprojects. However, access to the accountabilitymechanism of IFC is prevented or made very diffi-cult if the people affected by a subproject of theCorporation do not even have the right to know whofunds the project which affects them.

MIGA in India

The Multilateral Investment Guarantee Agency, theyoungest member of the World Bank Group, wascreated in 1985. Its role is to guarantee the politicalrisks of private foreign investment in its membercountries, and thus to encourage such investment.Like Brazil and Mexico, India originally opposedthe creation of MIGA. After the policy shift of theearly 1990s, India joined the new agency as a mem-ber in 1993.

According to a MIGA press release, the Agency ap-proved a guarantee of $9.6 million for a Motorolacorporation project to set up cellular networks inKarnataka and the Punjab in the winter of 1997/98.This was supposed to be MIGA’s first project inIndia. Yet the World Bank Group’s country assis-tance strategy of June 2001 states that “at present,MIGA has no exposure in India.”33 This indicatesthat the Motorola project likely did not materialize,even after a public guarantee was approved.

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The extent to which IFCactually deals with socialand environmental issues in financial sector projects

is shrouded in a highdegree of secrecy.

The Bank Group expects MIGA to play a more ac-tive role in India in the future. Its country assistancestrategy states: “MIGA expects high demand for itsguarantee activities once infrastructure sectors,such as energy, telecommunication, transportationand water, have been restructured. MIGA’s per-pro-ject limit of up to $200 million, its ability to syndi-cate additional insurance on the private market, aswell as providing guarantees against Breach ofContract, position the Agency very well to facilitateinfrastructure investments into India.”34

The tough stance which export credit agencies arepresently taking in seeking to protect the sanctity ofthe corrupted contracts of the Dabhol power projectmight make India’s government hesitant to invite apowerful multilateral guarantee agency to back upfuture foreign investments. In the medium-term fu-ture, MIGA may still be an agency to watch inIndia’s power sector.


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After the World Bank and Japan’s JBIC, the AsianDevelopment Bank is India’s third largest officialdonor. The power sector is one of the Bank’s focusareas in the country, and the institution is also ac-tive in the financial sector. ADB follows the samepower sector strategy as the World Bank. Some of itspartner institutions, including the Madhya Pradeshgovernment, have highly questionable investmentprograms in the power sector. This raises questionsabout ADB’s responsibility for the investment prior-ities of its major borrowers.

Overall relations with India

ADB only started lending to India in 1986. BetweenMay 1998 and September 2000, it cut down its pro-gram due to the country’s nuclear tests. By the endof 1999, ADB had approved 47 public sector loansfor 40 projects totalling $7.7 billion. Within theBank’s India portfolio, energy is the most importantsector with 36% of approved loans. The social in-frastructure, transport and communication sectorsare further priority areas. With 21 loans and equityinvestments for a total of $271 million, India alsohas the largest private sector portfolio of ADB.35

Two major dimensions of ADB’s overall countrystrategy for India are the promotion of efficient andtransparent governance (“an important buildingblock”) and private sector development (“an inte-gral part of ADB’s operational strategy in India”).36

Both dimensions are also elements of the Bank’spower sector strategy. Like the World Bank, ADBhas shifted the focus of its sector restructuring op-erations from the central to the state level.

Financial sector operations

The financial sector is not a focus area of ADB inIndia. So far, three projects have been particularlyimportant for financial institutions.

In December 1992, the Bank approved $300 millionfor an India Financial Sector Program Loan. Theproceeds were used to strengthen the capital ade-quacy of several public sector banks, to enable themto attract private shareholders. The banks in ques-tion were selected by the government, and not byADB. On the policy level, the program contained 58measures which aimed at, among other things, in-creasing competition in the sector, and developing“autonomous, financially sound banks and DFIs.”Overall, ADB rated the program “generally success-ful.” The Bank considered liberalized interest rates,the entry of private banks into the sector and en-hanced competition to be “major achievements” ofthe project. At the same time, it acknowledged thatimportant problems, including the “nonperformingassets of financial institutions,” needed continuedclose monitoring.37

In November 1996, ADB approved $300 million fora Private Sector Infrastructure Facility. The projectconsisted of loans to ICICI ($150 million), IFCI($100 million), and the Shipping Credit andInvestment Corporation of India ($50 million - can-celled when this institution was merged withICICI). The three financial intermediaries were tolend the loans on to small and medium scale privateprojects in the power, telecommunications, roadsand ports sectors.

ADB has to approve all subprojects funded underthe facility. Subprojects must be assessed regardingtheir environmental impacts, and must comply withthe Bank’s resettlement and other relevant policies.By November 2001, ADB had approved eight sub-projects of $108 million under the ICICI loan, andfive subprojects of $62 million under the IFCI loan.The list includes two private hydropower projects,Jai Prakash (ICICI and IFCI loans), and Malana inHimachal Pradesh (IFCI loan).38 Jai Prakash is thedeveloper of the Baspa II and Vishnuprayag HEPs.Upon request, ADB did not clarify which of the twoprojects it had funded. The closing date of theFacility is September 2002.


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3.3. THE ASIAN DEVELOPMENT BANK

In March 1998, the ADB took up $15 million in eq-uity of the newly founded IDFC. Unlike IFC, it isnot represented on the Corporation’s board. IDFChas a large portfolio of power projects, including theVishnuprayag and Srinagar HEPs. According to in-formation from the US Securities and ExchangeCommission, ADB also holds a share of 13.8% inSBI Capital Markets, the investment bank sub-sidiary of the State Bank of India. In February 2001,the Basu report recommended that institutions likeADB become strategic investors in the crisis-riddenIFCI. ADB has not yet been approached.

In December 2001, ADB approved a new PrivateSector Infrastructure Facility at the State Level of$200 million. IDBI and Infrastructure Leasing &Financial Services Ltd will each receive $100 mil-lion. The new facility will support private projectsin the power, road, urban mass-transit, water sup-ply, sanitation and other sectors in Andhra Pradesh,Gujarat, Karnataka, and Madhya Pradesh. Withinpower, no new private generation projects, but onlythe upgrading of existing plants and private distri-bution projects will be considered. ICICI was alsosupposed to receive a loan of $100 million underthe new facility, but at the last minute withdrewfrom the project.

Power sector operations

At least in theory, ADB’s energy policy is progres-sive. Its sector policy initiatives stipulate that capac-ity additions should only be funded if efficiency im-provements and demand-side management optionshave received adequate attention, and that powerutilities should be encouraged to prepare and im-plement demand-side management master plans.Further, private projects should only be supported ifthey are part of least-cost power development plans,if they leverage additional financial resources, andare based on competitive bidding.39

In India, energy is ADB’s most important lendingand policy focus. Within the power sector, the Bankhas concentrated on strengthening the country’stransmission and distribution network, and on sec-toral restructuring programs at the state level. In acertain division of labour with the World Bank, ADBis focusing its restructuring programs on Gujarat,Madhya Pradesh, and Kerala. The Bank also sup-ports PFC and the Power Grid Corporation in orderto leverage restructuring efforts in states where it isnot directly active.

ADB sanctioned projects for the Power Grid Corora-tion in 1995, 1999, and 2000. The loans funded sub-projects which help facilitate the transmission ofpower between different regions and states. This con-tributes to the better management of India’s powersystem. The loans also funded transmission lines toevacuate power from various new power plants, in-cluding a line from the Kopili hydropower project inSouthern Assam. As in the case of the World Bank,such subprojects should be considered extensions ofthe associated generation projects rather than im-provements of the transmission network.

ADB has financed a few private thermal powerplants in order to catalyse private sector participa-tion in the sector. Except through financial inter-mediaries (see above), it has not funded any hy-dropower projects in India.40 A technical assistancestudy for assessing and prioritising hydropowerprojects in India is presently in ADB’s pipeline. Itmight be approved in 2002, or later. It is not clearwhether ADB will in this study follow the guidelineson options assessment established by the WorldCommission on Dams.

ADB’s response to the WCD report is guardedly pos-itive. ADB has not made compliance with the WCD’srecommendations a condition of its lending to insti-tutions like the PFC, but plans to carry out a work-shop on the WCD report in India in April 2002.

In March 1992, the Bank approved a first project of$250 million for the Power Finance Corporation.The loan was used to fund 123 subprojects, primar-ily for upgrading transmission and distribution sys-tems, in five states. Even after the closing date hadbeen extended by 18 months until June 1998, $61million were not disbursed.

ADB’s assessment of PFC is telling. According tothe Bank’s project completion report, the Corpora-tion “normally” supports projects which are “tech-no-economically sound,” with economic or finan-cial rates of return of not less than 12%. However,PFC does not prepare project completion reports –even if this was required under ADB’s loan agree-ment –, and its portfolio quality “continues to be amatter of concern.”41 The Bank also recommendsthat “PFC should apply more due diligence in eval-uating loan proposals.”42

A new loan of $250 million for PFC is in ADB’spipeline, and is expected to move to the Bank’sExecutive Board for approval by the end of March2002. The loan is again expected to finance trans-

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mission and distribution subprojects in selected re-form-oriented states like Assam and West Bengal.The completion report of the 1992 project recom-mends that ADB should only approve future lendingthrough PFC under certain conditions. These in-clude the ADB needing to “conduct a detailed eval-uation of PFC’s (...) capacity to maintain prudent fi-nancial and operational norms, and independencein decision-making.”43 According to information re-ceived from the Bank’s management, ADB will as-sess PFC’s institutional capacities during fact-find-ing and appraisal for this new loan. One may as-sume that the management would not have startedproject preparation so quickly if it were not primafacie satisfied with the Corporation’s performance.

ADB in Madhya Pradesh’s power sector

Once ADB had shifted the focus of its adjustmentoperations from the central to the state level, it se-lected Madhya Pradesh as the second recipient stateafter Gujarat. The Bank initiated a first restructuringprogram in MP in 1999, and approved another inDecember 2001.

The $250 million Madhya Pradesh Public ResourceManagement Program was approved in December1999. The program aims at making government op-erations in Madhya Pradesh more efficient, at re-ducing the deficits of public enterprises (for exam-ple by dismissing employees and raising tariffs), andopening public sectors for private investment. Theprogram advocates that public expenditure shouldbe prioritised, and the health and education budgetsshielded from cuts. Two years after the program wasstarted, ADB views the state government’s progressin implementing it as satisfactory.

Madhya Pradesh’s power sector exemplifies theproblems of public management. Transmission loss-es are rampant, and according to ADB data, MPEBincurs annual losses of more than Rs. 15 billion byproviding subsidized electricity to agricultural con-sumers. As the Bank points out, the state govern-ment actively seeks “private sector participation ininfrastructure development, but needs to redirect itsfocus from case-by-case interventions to evolving apolicy, institutional, and regulatory environmentcharacterized by transparency, legal assurance, andpolitical noninterference.”44

In December 2001, ADB approved a MadhyaPradesh Power Sector Development Program. Themain goals of the restructuring program are to re-

duce the drain of public resources into the powersector, and to open the sector for private invest-ment. A $100 million policy loan will cushion theadjustment costs, and a project loan of $200 millionwill fund measures to reduce transmission losses,rehabilitate and modernize distribution systems,and install meters.

The policy measures on which the program is con-tingent are typical for ADB’s restructuring agenda inIndia’s power sector: The MPEB will be unbundled;near-commercial tariffs introduced for all con-sumers; an independent electricity regulatory com-mission with tariff-setting powers is to be created;and private sector participation in transmission anddistribution encouraged. The new program is sup-posed to be fully implemented by 2005.

In November 2001, mass movements and tradeunions held a workshop in Bhopal on the powersector restructuring program. Referring to the expe-riences with the Dabhol and Maheshwar projects,they denounced the ADB program as an attempt to“deliberately dismantle and destroy the Indianpower sector by a set of unworkable prescriptionsthat have failed disastrously in some states.” Themovements expressed their opposition to the ADBproject, and called on the MP government to for-mulate its power policies in discussion with thepublic rather than with international funders.45 Inpreparing for the program, ADB considered provid-ing grant funds to the state government for the “so-cial marketing of power sector reform.”46

ADB and the Maheshwar project

The Maheshwar project in Madhya Pradesh is notbased on competition or market considerations, buton political protection. If built, it will constitute alarge drain on public resources for several decades.On all accounts, the project runs counter to thetenets of “transparency, legal assurance and politicalnoninterference” which ADB upholds. It is interest-ing to see how the ADB restructuring programs re-late to this private and clearly corrupted project.

In a letter dated 7 November, 2001, ADB manage-ment clarified that the Bank “did not discuss themerits of specific individual private sector invest-ments” such as Maheshwar with the state govern-ment as part of its public resource management pro-gram. “ADB has never assisted hydropower projectsin India,” the letter added, “and so our ability to pro-vide guidance to government in this respect is some-


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what limited.” And since “work on this project is re-ported to be at a stand still,” ADB – at least officially– has not discussed the Maheshwar HEP in the con-text of its power sector development program.47

According to a draft Aide Memoireof April 2001, ADB intended to in-clude up to Rs. 3.58 billion to “set-tle IPP related issues” under the ad-justment costs of the planned re-form programme.48 Upon request,ADB did not clarify under whichlegal title IPP issues needed to besettled, and if such a settlementwould include payments to the pro-moters of the Maheshwar project.As was elaborated in chapter 1.2.,SMHPCL has itself owed the MPstate utility Rs. 260 million since1993, and it would be disturbing ifany ADB resources should flow intothe corrupt venture.

While ADB’s management in its communicationtries to keep a cautious distance from the corrupteddam on the Narmada river, it seems to be well-in-formed about the state of the project. As ADB man-agement informed the author, Maheshwar was alsosubmitted to the Bank under its first Private SectorInfrastructure Facility. Yet after “the issue of reset-tlement was raised, (...) the proponents never cameback to pursue the proposal.”49

The problem of fungibility

ADB has selected Gujarat, Madhya Pradesh andKerala as the partners of its power sector restructur-ing programs. The loans which the Bank has ex-tended included both policy and investment com-ponents . The investment components funded sub-projects mainly targeted at modernizing distribu-tion. In Gujarat, ADB is also financing under itspower sector loan a pilot scheme for energy andwater conservation through drip irrigation.

The ADB loans to the utilities of Gujarat, MadhyaPradesh and Kerala raise a difficult issue. The pro-motion of drip irrigation is certainly a positive thing.Yet money is fungible. ADB’s large-scale support fordistribution and other subprojects frees up foreigncurrency resources for other purposes, including forpower generation. And the investment priorities ofthe power utilities which ADB has selected for sup-port are highly questionable. Madhya Pradesh has in-

vested equity and promised escrow coverage for theMaheshwar HEP, and is a major funder of the powercomponent of the Sardar Sarovar project. The stategovernment also plans to take up the giant IndiraSagar and Omkareshwar projects on the Narmada

river in a joint-venture with NHPC.Gujarat spends large amounts of re-sources on the wasteful and de-structive Sardar Sarovar project.And Kerala has announced plans torevive the ominous Silent Valleyproject. Silent Valley is a 240 MWhydropower scheme which wouldflood a national park in the uniqueNilgiri Biosphere Reserve. The pro-ject was shelved in the early 1980sby Indira Gandhi after a campaignby Indian and international envi-ronmental organizations.

Even if money is fungible, funderscan realistically not be made re-

sponsible for any minor project which their bor-rowers implement. If they extend large loans, theydo share a responsibility for the major investmentsof their borrowers in the respective sectors. This iscertainly the case with ADB, which is (or will be) amajor funder of the Gujarat, MP and Kerala SEBs. Itis probably for this reason that ADB has formulatedgeneral governance principles for the partners of itsprojects, including transparency and accountability.These principles square badly with the investmentprograms of its major partners in the power sector.

Conclusion

The overall approach and the restructuring pro-grams of the Asian Development Bank and theWorld Bank in India’s power sector are very similar.Like its global competitor, ADB has in its programsso far focused on privatisation, and has not promot-ed a fundamental shift towards a more balancedstrategy addressing the inefficiencies in producingand consuming power.

Unlike the World Bank, ADB does not have to dealwith a legacy of failed generation projects. Its poli-cy documents stress the importance of principleslike transparency and the rule of law as key ingredi-ents of sectoral reform. In the context of this re-search project, the Bank’s own record regardingtransparency was mixed.

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ADB’s large-scale support for distribution and other

subprojects frees up foreigncurrency resources for other

purposes, including forpower generation. And theinvestment priorities of thepower utilities which ADBhas selected for support are highly questionable.

In the larger context, there is a question mark re-garding the relation between the Bank’s rhetoricalcommitments and actual reality. ADB has prepared(and published) a very critical evaluation of PFC’slending policies. It remains to be seen whether thenew loan for the Corporation which is in itspipeline will indeed address the problems of pru-dent and independent decision-making. The Bankhas also put forward useful principles of trans-

parency and accountability for the borrowers of itspower sector loans. Yet the partners which it haschosen so far do not adhere to these principles intheir investment programs. This creates an impres-sion that ADB simply selects partner governmentson the basis of their willingness to accept its policyconditionality, rather than based on institutionalcriteria like accountability and the rule of law.


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India’s power sector receives a variety of forms of sup-port from bilateral funders. Some bilaterals providedirect support for specific thermal, hydro or transmis-sion projects on soft terms. Others co-finance thepower sector restructuring programs of the WorldBank and ADB in various states, particularly by ex-tending technical assistance to state electricity boards.Several agencies have also funded Indian develop-ment finance institutions through lines of credit and,occasionally, by taking up equity.

One agency stands out among all bilateral institu-tions. Japan’s JBIC plays a prominent role in India’spower sector even in comparison with multilateralfinancial institutions. (The following list of agenciesand projects is not exhaustive.)

Japan’s JBIC

The Japan Bank for International Cooperation(JBIC) is the world’s largest bilateral financial insti-tution, and together with its predecessor agencieshas for more than ten years been the most importantbilateral funder in India. JBIC was created inOctober 1999 in a merger between Japan’s exportcredit agency JEXIM and soft loan agency OECF.The new institution extends both official exportcredits (or so-called international financial opera-tions, see chapter 3.5.) and soft loans (or overseaseconomic cooperation operations).

In FY 1999/00, JBIC’s export credits amounted to¥1,086 billion ($8.8 billion), and its soft loan com-mitments, to ¥672 million ($5.4 billion). By ex-tending loans on extremely concessional terms,JBIC accounts for about 40% of Japan’s official de-velopment assistance. The institution supports spe-cific projects as well as structural adjustment pro-grams. Although in principle its soft loans are un-tied, in FY 1999/00 Japanese companies accountedfor 58% of all soft loan contracts funded by JBIC.

After the 1998 nuclear tests, Japan stopped mostnew commitments of development assistance forIndia. By March 2001, JBIC (and before, OECF) hadapproved 154 projects in the country for a total of¥1,663 billion. With a value of $13.4 billion (at thecurrent exchange rate), this was considerably morethan ADB’s cumulative commitments of $7.7 bil-lion. By March 2000, the energy sector accountedfor 46.5% of all commitments, and for 56 of the 143economic cooperation projects of JBIC in India. Thebulk of energy sector lending consisted of thermaland hydropower projects. Sector restructuring pro-grams and transmission projects made up the rest.

Since 1978, OECF/JBIC have approved at least 28 softloans for hydropower projects in India (with severalprojects receiving more than one loan). The largestsupport was committed for the following projects:

• Srisailam Left Bank (900 MW, Andhra Pradesh),with five loans totalling ¥76.5 billion between1988 and 1997;

• Dhauliganga (280 MW, Uttaranchal), with twoloans and ¥22.0 billion in 1996 and 1997;

• Purulia (a 900 MW pumped storage project inWest Bengal), with two loans and ¥21.1 billion in1988 and 1995;

• Nagarjunasagar (960 MW, Andhra Pradesh), withtwo loans and ¥15.4 billion already in 1978 and1981;

• Teesta Canal (67.5 MW, West Bengal), with twoloans and ¥14.2 billion in 1986 and 1991;

• Tuirial (60 MW, Mizoram), with a loan of ¥11.7billion in 1997; and

• Ghatghar (a 250 MW pumped storage project inMaharashtra), with a loan of ¥11.4 billion in 1988.


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3.4. BILATERAL INSTITUTIONS

Other projects with significant or recently approvedOECF loans include:

• Sardar Sarovar (1450 MW, Gujarat), with a loanof ¥2.85 billion in 1985 to support a contract bySumitomo;

• Upper Indravati (600 MW,Orissa), with a loan of ¥3.7 bil-lion in 1988; and

• Umiam I (36 MW, Meghalaya),with a loan of ¥1.7 billion forthe rehabilitation of this existingproject in 1997.

According to media reports, an un-named Japanese agency is also in-terested in funding thePriyadarshini Jurala HEP (239MW, Andhra Pradesh) along withPFC. And in February 2001, aJapanese Study Group on ElectricPower Development for India and PFC announcedthat they would elaborate a master plan for the de-velopment of hydropower projects with a total ca-pacity of 5,000 MW in India. The resulting projectswould then be considered for support by Japan.

The state has always played an important role inJapan’s economic development. The Japanese gov-ernment has therefore traditionally been sceptical ofthe structural adjustment policies applied by theWorld Bank and the IMF, and particularly of privati-sation. In India’s power sector, JBIC has not sup-ported any private hydropower projects, and doesnot co-finance any power sector restructuring pro-grams funded by the World Bank or ADB. The insti-tution is funding reform programs of the SEBs inHaryana and West Bengal.

In 1991, OECF approved a large loan of ¥24.4 bil-lion for India’s Rural Electrification Corporation forthe development of small hydro schemes and othermeasures. According to JBIC officials, a line of cred-it for PFC is also currently in the pipeline. It is un-clear whether this instrument would constitute partof JBIC’s overseas economic cooperation or ratherinternational financial operations. JBIC would needto approve the individual projects under this LoC.And while JBIC says it does not co-finance multilat-eral projects, ADB states that the agency is current-ly co-financing its Private Sector InfrastructureFacility in India.50

JBIC maintains that its soft loans are meant to pro-mote social and economic development and pover-ty reduction. It has in the past, however, supportedextremely destructive dams in India such as SardarSarovar. The funding for the dam on the Narmada

river was stopped by the Japaneseparliament, the result of an effec-tive lobbying campaign byJapanese NGOs working withIndian colleagues.

JBIC’s current environmentalguidelines are extremely vague.New draft environmental guide-lines were released for public com-ment in January 2002. Comparedwith existing policy, the draftguidelines put forward some im-provements regarding the assess-ment of environmental impacts,but fall short of the recommenda-tions which an official independentcommittee had prepared. They are

particularly vague on access to information.

JBIC has a portfolio roughly equal in size to that ofthe World Bank. Its staff however numbers onlyabout 800, less than one tenth of the World Bank’spersonnel. JBIC officials say they want to concen-trate on investing a maximum amount of publicmoney in concrete projects, and not on public rela-tions, and that for this reason JBIC cannot presentlyafford to be accountable to the public. JBIC repre-sentatives make it clear that they believe the WorldBank to be overstaffed. Even at international finan-cial institutions, not all staff are of course absorbedby public relations, and one wonders how JBIC canadequately appraise its large number of projects withits comparatively minimal number of staff.

Other bilateral agencies

Germany’s KfW:Like JBIC, Germany’s Kreditanstalt fuer Wiederaufbauextends financial assistance on soft terms as well asexport and project financing. So-called compositeloans – soft official credits complemented with com-mercial bank loans – constitute a third form of KfWlending. By 1998, the Kreditanstalt had approvedmore than DM 18 billion for projects and programs inIndia. Financial assistance amounted to some DM 12billion, export and project finance to DM 4.4 billion,and composite loans to some DM 2 billion.

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JBIC has a portfolio which roughly equals the

one of the World Bank. Yetits staff numbers less thanone tenth of the personnelof the international financial

institution. One wondershow JBIC can adequatelyappraise its large number

of projects with its minimal staff.

Since 1990, KfW has extended nine mixed andcomposite loans for projects in the Indian powersector. A majority of them supported thermal powerplants of NTPC and other public utilities. In 1999,KfW extended a line of credit to the IndianRenewable Energy Development Agency (IREDA)for the funding of renewable energy projects. In2001, the Kreditanstalt approved a loan for the de-velopment of the Mathania powerplant in Rajasthan, a combinedsolar (35 MW) and naphta (105MW) project co-financed with theGlobal Environment Facility.

In 1995, KfW approved a mixedcredit for PFC for the rehabilita-tion of the Koyna HEP (600 MW,Maharashtra). PFC would like tospend the balance of this credit onthe rehabilitation of the HirakudHEP (208 MW, Orissa), but thishas not yet been sanctioned byKfW. Since 1990, KfW has not approved any bilat-eral aid for the development of new hydropowerprojects. Such projects have however been fundedby the Kreditanstalt through export credits (seechapter 3.5.).

In the past, KfW has approved bilateral lines of cred-it for ICICI and IFCI. According to media reports,KfW has in principle agreed to extend a new line of$100 million for PFC for the renovation and mod-ernization of power plants. Under lines of credit, theagency approves the individual projects to be fund-ed. IFCI is currently considering invitingKreditanstalt to take up equity as a strategic investor.

British bilateral cooperation:British bilateral assistance to India’s power and fi-nancial sectors is extended by the Department forInternational Development (DFID) and theCommonwealth Development Corporation (CDC).The World Bank’s power restructuring policies inIndia were initially based on the experience ofpower sector privatisation in the UK, and DFID hasextensively co-financed the Bank’s restructuringprograms in the country. In 1996, the Departmentcontributed $110 million to the controversial sectorrestructuring program in Orissa. It also extendedtechnical assistance in the form of grants for similarprograms in Haryana, Andhra Pradesh and WestBengal.

On the project level, DFID’s predecessor, theOverseas Development Administration (ODA),

funded the Uri I HEP (480 MW, Jammu &Kashmir). DFID funded the renovation of two unitsof the Hirakud HEP, and facilitated an assessment ofthe micro-hydro potential of the Himalayan region.

ODA and the CDC extended lines of credit to ICICI.CDC holds a share of 6.1% in IDFC. IFCI is cur-rently discussing inviting CDC to become one of its

strategic investors.

Canada’s CIDA:The Canadian InternationalDevelopment Agency has extendedloans and grants for at least threehydropower projects in Kerala:Idukki (780 MW), Lower Periyar(182 MW), and Kuttiyadi (75MW). In 1984, CIDA provided alarge loan of C$245.5 for theChamera I HEP(540 MW,Himachal Pradesh). After ChameraI was completed, CIDA offered

support for Chamera II, but the Indian governmentdid not take the agency up on the offer. Both pro-jects were built by Canadian companies. CIDA isalso extending technical assistance for power re-structuring programs in states such as Kerala,Andhra Pradesh and Madhya Pradesh.

In hindsight, the head of CIDA’s program in Indiacommented on Chamera I that “we could spend themoney better elsewhere (…) such as on poverty al-leviation.” “Energy projects were part of the 80s,”the Canadian official said in 1992. “India neededthe power and we had the experience but now Iwould have to say in terms of development, it’s notvery good.”51

USAID:In 1992, the US Agency for InternationalDevelopment approved technical assistance of $14million for PFC. In March 2000, the agency signedan agreement with the Indian government to carryout a $25 million energy conservation program.USAID also extends technical assistance to preparepower sector restructuring programs in Indianstates.

Sweden’s SIDAThe Swedish International Development Agencyfunded the construction of NHPC’s Uri I HEP, alongwith the Swedish Agency for InternationalTechnical and Economic Cooperation (BITS),Sweden’s export credit agency EKN, the NordicInvestment Bank, and the British ODA. The project


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“Energy projects were part of the 80s. India

needed the power and wehad the experience but nowI would have to say in terms

of development, it’s not very good.”

André Gingras, CIDA, 1992

was built by a Scandinavian consortium led bySkanska. SIDA has since then withdrawn fromfunding large dams.

Denmark’s DANIDA:The Danish International Development Agencyprovides bilateral support for IREDA. It is also list-ed by the World Bank as a potential partner for theco-financing of its future operations in India’s ener-gy sector. Danish power sector aid priorities willpresumably be influenced by the country’s strongwind power industry.

Swiss bilateral cooperation:The Swiss State Secretariat for Economic Affairsholds 3.8% of IDFC’s equity. Like DANIDA, theSwiss Agency for Development and Cooperation islisted by the World Bank as a potential partner forits future power sector operations in India.

French bilateral cooperation:The French government is paying for French con-sultants to work on the Tehri pumped storage pro-ject (1,000 MW, Uttaranchal). This is done underthe so-called FASEP program, which funds invest-ments by French small and medium-sized compa-nies in Southern countries.

Dutch bilateral cooperation:The Netherlands provide bilateral support to IREDA.

Bilateral cooperation with China:The China National Water Resource Hydro PowerEngineering Corporation is currently negotiatingwith the government of Himachal Pradesh to takeup 49% of the equity in the 16 MW Patikari project.Earlier, the state government of Kerala had askedChina to provide technical and financial assistanceto develop 18 small hydropower projects. A newstate government which came to power in late 2001announced that it would review this request.

Cooperation with Kuwait and OPEC:In February 2001, the government of HimachalPradesh sought assistance from the Kuwait OilFund to finance the Larji HEP (126 MW), and fromOPEC to fund the Khauli HEP (12 MW). TheHimachal Pradesh government seems to be particu-larly creative in dreaming up new foreign fundingpartners. In November 1998, it had announced thatit would seek assistance from the World Bank forthe Parbati HEP, and as mentioned, it is also in ne-gotiations with a Chinese hydropower corporation.

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Official export credit agencies are an importantsource (or guarantor) of foreign currency for projectswhich are not funded by multilateral institutions.Given the withdrawal of the World Bank from direct-ly funding large dams, the role of ECAs in fundingsuch projects has increased over time. The environ-mental, social and governance policies of such agen-cies lag behind internationally accepted standards.

The role of foreign contractors

Apart from the civil works for a dam, the most im-portant components of a hydropower project are theturbines and generators. Civil works on Indian pro-jects are usually carried out by domestic companies.After independence, the country also developed aheavy electrical engineering industry. Still, the tur-bines and generators of many Indian hydropowerprojects are imported. Almost all hydro- and elec-tro-mechanical equipment was supplied fromabroad before 1970. Imported turbines and genera-tors accounted for 43% of new hydropower capaci-ty created between 1990 and 1997. The foreignshare continued to be high for turbines and genera-tors of less than 50 MW, and of more than 200 MW.

According to research done by the South AsiaNetwork on Dams, Rivers and People (SANDRP),the most important foreign supplier of hydropowerequipment up to 1997 was Japan (with 9.2% of totalturbine capacity, and 11.3% of generator capacity).Next in importance were Canada (with 9.6% ofeach); the former USSR (with 7.1% of each); theUnited Kingdom (with 4.6% of turbine and 8.1% ofgenerator capacity); France (with 8.1 and 0.6% re-spectively); and Germany (with 2.4 and 5.2%).Other sizable imports came from the US, Sweden,and Switzerland. Interestingly, Japan’s share of con-tracts is smaller than the amount of hydropowergenerating capacity supported in India by soft loansfrom OECF (see chapter 3.4.).52

In September 2001, Power Minister Suresh Prabhuindicated that Austria, Canada, Norway, Spain,Sweden and Russia were particularly interested inparticipating in India’s future plans to promote hy-dropower. The Minister is considering cooperationwith foreign governments not only in the funding ofequipment supplies, but also in the operation ofpower plants. In January 2002, he raised the possi-bility of creating joint ventures with governmentsfrom countries such as France, where power com-panies are fully state owned. According to media re-ports, at a seminar in Delhi in February 2002 com-panies from Sweden, France, Germany, Canada,Austria, Switzerland, the Netherlands and Norwayexpressed interest in participating in future NHPCprojects.

The policies of ECAs

Hydropower projects have a long gestation period,meaning that it takes many years for their prospect-ed revenues to materialize. Large dams are thus thetypical kind of projects which are funded by officialexport credit agencies (ECAs). This is particularlytrue for IPPs, where the foreign currency portion ofthe debt is normally split between export creditagencies and commercial banks. “It would havebeen impossible to get a single IPP off the drawingboard without their assistance,” India Poweronlinecomments on the role of these agencies.53 Given thefailure of many hydro projects to reach financial clo-sure, ECAs have become much more involved inIndia’s thermal than in the hydro sector.

Export credit agencies normally request a counter-guarantee from a host country institution whenthey fund a project. With a few important excep-tions, India’s central government does not provideguarantees for power projects, so ECAs have to op-erate with counter-guarantees from public financialinstitutions. The Swiss Export Risk Guarantee, forexample, accepts counter-guarantees from IDBI,RBI, SBI, and the Union Bank of India. As the


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3.5. EXPORT CREDIT AGENCIES

Dabhol project demonstrates, counter-guaranteesfor uneconomic projects can turn into huge liabili-ties for Indian financial institutions, and for thepublic purse.

Several export credit agencies ex-tend lines of credit (LoCs), or en-gage in other forms of cooperationwith Indian financial institutions.Lines of credit are pre-packagedloans for which the interest ratesand repayment terms have alreadybeen arranged. They speed up theadministrative procedures once anexporter applies for ECA coverage.Normally, the individual projectloans or guarantees under an LoChave to be approved separately bythe ECAs, so that the respectiveagencies can still be held account-able for the projects they support.

Export credit agencies are a tradi-tional instrument of trade diploma-cy. Visiting presidents or trade min-isters frequently sign Memorandaof Understanding (MoUs) withhost country governments with a view to expandthe use of official export credits. Such MoUs do notentail any binding commitments however, and oftenseem to be more form than substance.

“Unlike the major development financing agen-cies,” the World Commission on Dams commentedin its final report in November 2000, “ECAs gener-ally lack policies on environmental and social issuesand do not necessarily adhere to internationally ac-cepted standards and guidelines. (…) The absenceof common standards among ECAs leads to ad hoccompetitive decision-making.”54 The experiencewith export credit agencies in India’s hydropowersector confirms this observation by the WCD.Unlike most multilateral and bilateral institutions,many ECAs are still prepared to fund large dams in-discriminately.

The provision of official exports and guaranteesusually leverages additional funding from commer-cial banks. Often private banks will rely on the ap-praisal of respective projects by the ECAs. Thismakes the failure by such agencies to apply appro-priate social and environmental standards all themore disturbing.

In 2000, the German and Portuguese export creditagencies decided against funding the MaheshwarHEP on social and environmental grounds. In 2001,ECAs from various countries decided against fund-

ing the Ilisu dam in Turkey. NGOsand social movements need to en-sure that these decisions do not re-main isolated incidents, but markthe beginning of a strengthenedawareness among export creditagencies of the social and environ-mental impacts of the projects theyconsider.

ECAs in India’s hydropowersector

Most export credit agencies areless transparent and accountablethan development finance institu-tions. Some, for example the USExim Bank, KfW and the SwissExport Risk Guarantee (ERG),provide information about the pro-jects they have funded in the past.Others, such as Canada’s EDC, do

not. The following list of ECAs in India’s hy-dropower sector is therefore not exhaustive.

Germany’s KfW and Hermes:As was elaborated in chapter 3.4, Kreditanstalt fuerWiederaufbau not only extends soft and compositeloans, but also export credits. Since 1990, KfW hasapproved export credits for the Nathpa Jhakri HEP(1,500 MW, Himachal Pradesh, in 1994) and for theTehri HEP (1,000 MW, Uttaranchal, with two cred-its in 1997 and 2001). The credit of October 2001for the notorious Tehri dam was ostensibly meant asa political gesture to prepare the ground for a visitto India of Chancellor Gerhard Schroeder and alarge German private sector delegation.

Hermes, Germany’s official export guarantee agency,covered the contracts of a Siemens consortium forthe Baspa II HEP (300 MW, Himachal Pradesh) in1999, and guaranteed KfW’s export credit for theTehri project. As was elaborated in chapter 1.2, asimilar guarantee for the Maheshwar HEP was re-fused in August 2000 after a campaign by Indian andGerman NGOs. Hermes or KfW may in future be ap-proached to fund the Sawalkot HEP (see below).

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“Unlike the majordevelopment financing

agencies, ECAs generallylack policies on

environmental and socialissues and do not necessarily

adhere to internationallyaccepted standards and

guidelines. (…) The absenceof common standardsamong ECAs leads to ad hoc competitive decision-making.”

World Commission on Dams,November 2000

Canada’s EDC:A prominent if controversial showcase of Canada’sExport Development Corporation in India are theChamera I and II projects (540 MW and 300 MWrespectively) in Himachal Pradesh. As was men-tioned in chapter 3.4, the Canadian contracts forChamera I were sweetened by a soft loan fromCIDA. According to media reports, Canada alsofunded the Idukki (780 MW), Lower Periyar (182MW), and Kuttiyadi (75 MW) HEPs in Keralathrough loans and grants. EDC declined to clarifywhether it had been involved in these projects.

In June 2001, EDC extended a line of credit of $75million to the Power Finance Corporation. Theagency will sanction the funding of individual pro-jects from this instrument. In January 2002, PFCannounced it was in discussions to set up anotherLoC with EDC of $75 million for the renovation andmodernization of power plants.

By the year 2000, EDC had funded power projectsworth more than $800 million in India. It is notclear how much of this amount accrued to thehydro sector.

Norway’s GIEK and Eksportfinans:Norway’s government is particularly active in pro-moting the interests of the country’s hydropower in-dustry. In 2000 and 2001, both the NorwegianForeign and Prime Ministers visited India with adelegation of hydropower lobbyists. In February2002, Norway co-hosted a conference on non-fossilfuels in Delhi with the Ministry of Power, theCentral Electricity Authority, and Austria.

Norway’s Eksportfinans is involved in funding theNathpa Jhakri project. Exportfinans is 85% privatelyand 15% state owned; frequently it funds projectsjointly with the official Norwegian Institute forExport Credits (GIEK). NCC International, aNorwegian company, holds equity in the proposedSawalkot HEP (600 MW, Jammu & Kashmir). Theconsortium developing the project hopes to mobilizefunding from the Norwegian and German ECAs.

France’s COFACE:In the early 1990s, the French COFACE providedfunding for the Dulhasti HEP (390 MW, Jammu &Kashmir). As was mentioned in chapter 2.1., thisproject incurred huge time and cost overruns, andresulted in a diplomatic conflict between India andFrance over the responsibility for the delays and thecost escalation.

In summer 2001, Alstom applied for funding fromCOFACE for contracts in the Vishnuprayag project(400 MW, Uttaranchal). By the end of 2001, no de-cision had yet been taken.

Japan’s JBIC and NEXI:Since World War II, one quarter of all Japanese ex-ports have been supported by official export creditsor guarantees. While JBIC extends direct exportloans (through so-called international financial op-erations), a separate institution, the Nippon Exportand Credit Insurance (NEXI), reinsures exportloans by private banks, and foreign private invest-ment by Japanese companies.

As was explained in chapter 3.4., the Japan Bank forInternational Cooperation (or its predecessorOECF) has extended no less than 28 soft loans forhydropower projects in India since 1978. The insti-tution provides a full list of soft loan projects, but isless transparent when it comes to the commitmentof official export credits.

In 2001, Mitsui applied for JBIC funding, presum-ably in the form of export credits, for its contract inthe Teesta V project (510 MW, Sikkim). Outside thehydropower sector, JBIC provides a lot of fundingfor thermal power plants, including a large exportcredit for the Dabhol project.

In January 1995 and December 1997 respectively,JBIC’s predecessor JEXIM granted so-called overseasinvestment loans of $300 million to IDBI and of $50million to ICICI. According to media reports, JBICis presently finalizing a line of credit of $100 million(or according to other sources, $250 million) forPFC. The LoC would consist of export credits forthe renovation and modernization of power pro-jects. Unlike other ECAs, JBIC does not in all casesexpect to sanction the individual projects fundedunder its lines of credit. As a JBIC official explained,this depends on the appraisal capabilities of the bor-rowing institution. In the case of PFC, the institu-tion will reserve the authority to sanction individu-al projects.

By far the largest part of NEXI’s business is the rein-surance of short-term trade credit. In FY 2000/01,middle- and long-term loan and investment reinsur-ance amounted to ¥578 billion, or roughly half ofJBIC’s export credits. Power projects accounted for22% of the middle- and long-term coverage. InDecember 2001, NHPC announced that it hopedNEXI would reinsure export credits for the Teesta IIand IV power projects in Sikkim.


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Great Britain’s ECGD:In 1996, the British Export Credit GuaranteeDepartment approved a guarantee of £ 23 millionfor the Nathpa Jhakri project in Himachal Pradesh.In May 2000, ECGD signed Memoranda ofUnderstanding with ICICI and IDFC. TheDepartment did not respond to questions about theexact amounts and modalities of the MoUs.

Sweden’s EKN:Sweden’s Exportkreditnaemnden (EKN) funded theUri I HEP (480 MW, Jammu & Kashmir) alongwith the Nordic Investment Bank, SIDA and otherinstitutions.

The US Exim Bank:The US Export Import Bank has funded thermalpower plants including the Dabhol project, but hasso far not been a major player in India’s hydropow-er sector. In February 2000, Exim signed aMemorandum of Understanding on the exchange ofinformation on power projects with PFC. InSeptember of the same year, Exim signed an MoUfor $500 million with the State Bank of India. Twofurther so-called Master Credit Facilities of $150million each were also meant to encourage importsfrom the US, with the State Bank of India acting asa financial clearing house.

In January 2002, the Power Finance Corporationannounced it was again in talks to raise a line ofcredit of $500 million from the US Exim Bank. Ifthis materializes, it will fund transmission and dis-tribution projects and the environmental upgradingof thermal power plants.

Exim’s multi-million MoUs with Indian financial in-stitutions were announced when Prime MinisterAtal Bihari Vajpayee visited the United States inSeptember 2000. By November 2001, no specificcontracts had been signed under them, and nonewere in the pipeline.

Portugal’s COSEC:In 2000, ABB/Alstom applied for funding fromPortugal’s COSEC for their contract in theMaheshwar HEP. Like Hermes, the Portuguese ECAdenied funding for the destructive project on theNarmada river.

Austrian interests:So far, no Austrian ECA coverage for Indian hy-dropower projects has been recorded. With the ac-quisition of Sulzer Hydro in 2000, the Austriancompany VA Tech strengthened its position in theinternational hydro equipment market. In August2001, the Austrian government announced its in-tention to share its expertise in hydropower projectswith India through a working group of the Indo-Austrian joint economic commission. In February2002, Austria co-hosted an international conferenceon non-fossil fuels in Delhi.

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Compared with other major industrializing coun-tries such as China, India attracts very little privateinvestment capital. This is partly a matter of politicalchoice, partly a consequence of a lack of infrastruc-ture, and partly one of bureaucratic red tape. Morerecently, the Dabhol fiasco hasscared away foreign investors bydemonstrating that privatisationmay not always be an opportunityfor quick profits, and by creating animpression that contracts will notnecessarily be honoured in India.So the primary sources of privateforeign capital for the country aredebt, both through loans andbonds, and the bank deposits andtransfers of the NRI community.

Project finance

All public institutions in India’s power sector – andmost of all, the state electricity boards – are short offunds. In private projects, equity capital is expen-sive, and the investors will cover at most 30% of thecapital cost. So no matter whether a project is pub-lic or private, a large part of the cost will need to befinanced through debt. Even if the civil works arecarried out by Indian companies, the debt portionusually includes loans from international banks.Private power projects were meant to attract foreigncapital, and so Indian financial institutions are notallowed to provide more than 40% of the cost ofIPPs.

During the 1990s, project finance has become thefocus of private international lending to Southerncountries. Project finance is done on a so-callednon-recourse basis, in that debt needs to be servicedand repaid from the revenues generated by the pro-ject, and creditors do not have recourse to the capi-tal of the project sponsors as a security.

To avoid or pass on the risk of default of a hy-dropower project, lenders look for a legally enforce-able power purchase agreement, and for the cover-age of their risks by official export credits or guar-antees. Export credit agencies in turn insist on

counter-guarantees from the hostgovernment or a state institution.In India, such guarantees are nolonger provided by the centralgovernment, but by DFIs and pub-lic sector banks. (See chapter 3.5.)So even when a project is private,most of the risk is still borne bypublic institutions.

Project finance loans involve largeamounts of funds, and have longmaturities of between 10 and 30years. Export credit agencies willtypically cover around 85%, butnot the full amount of foreign cur-

rency loans. Most ECAs exclude certain featuressuch as construction risk from their coverage. Andonce problems arise, they will only allow banks tocall on their guarantees if the latter have exerciseddue diligence in appraising the project.

As a consequence, private banks still face consider-able risk when they become involved in project fi-nance. They usually share this risk by syndicatingproject finance loans among several banks, with oneor a small number of banks playing the role of leadarrangers. For a commission, lead arrangers ap-praise the different risks of a project. This is done bycredit officers and the bank’s credit committee.Technical services and legal counsel – either fromwithin the bank or from external consultants – pro-vide advice on the physical features (including en-vironmental problems) and the regulatory require-ments of a project.

According to project finance specialists fromDresdner Kleinwort Benson, banks typically analyse


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3.6. INTERNATIONAL CAPITAL MARKETS

India attracts very littleprivate investment capital.

The primary sources ofprivate foreign capital for

the country are debt, boththrough loans and bonds,

and the bank deposits and transfers of the

NRI community.

the following risks when appraising a hydropowerproject:55

• Environmental and social impacts (compliancewith local and World Bank standards);

• economic feasibility;

• construction risk (non-completion, delays, costoverruns);

• operational risk (for example the experience ofthe operator);

• market risk (in particular the ability of the cos-tumer to pay); and

• country risk (including the risk of legal changes).

Bonds of Indian financial institutions

The Indian government does not issue foreign cur-rency bonds. Yet many institutions such as the de-velopment finance institutions and PFC do. Theircapacity to borrow is quite narrowly determined byIndia’s perceived country risk. On the positive side,rating agencies and investors have commonly as-sumed that the government will bail out public fi-nancial institutions if the need arises – as it hasoften done in the past. On the negative side, eco-nomic problems will directly influence the assetquality of financial institutions in India.

The large and prosperous NRI community creates asteady and reliable demand for the bonds of Indianinstitutions. Furthermore, there are many fundmanagers of international banks with an Indianbackground. They are familiar with India’s financialsector and often quite willing to consider an invest-ment in Indian bonds. Citibank for example oper-ates its own NRI Services division, with offices inNew York, Chicago, Houston and California. Forthese reasons, Indian institutions can usually raisecapital at lower cost than other so-called emergingmarkets with a similar country risk.

The creditors

Generally, Japanese banks tend to be more active inlending to Southern countries than European or USbanks. Looking at project finance in the Indianpower sector, it is striking to see how many bankshave become involved in this area. While the lead

arrangers are usually large international banks orIndian financial institutions, even small banks be-come involved in loan syndicates as so-called par-ticipants or providers, typically contributingamounts of less than $10 million each.

Scores of banks have become involved in lending toIndia’s power sector in some form. They include in-stitutes such as Baden-Wuertembergische, Berliner,Fuji, Hypovereinsbank, Natexis, NatWest,Norinchukin, Skandinaviska Enskilda, Tokai,Tokyo-Mitsubishi, Tokyo Trust and Banking, andUnited Taiwan Banks. Some of the most active leadarrangers of loans to India’s power sector are ANZBanking Group from Australia, Bank of Americafrom the US, HSBC from the United Kingdom andABN AMRO Bank from the Netherlands. ANZ, forexample, was the lead arranger of high-profile loansto thermal power projects such as Dabhol phase IIand Neyveli (in Tamil Nadu), and 1998 alone ar-ranged foreign currency loans for PFC, ICICI andIDBI. The bank is also one of the candidates for ar-ranging a pending loan to NHPC.

Indian financial institutions also play an active rolein arranging international lending for power pro-jects in India. IDBI, ICICI and IFCI have arranged aseries of loans for thermal power projects. IDBI ar-ranges the financial package for the Baghliar HEP,and PFC, for the Larji HEP. Indian financial institu-tions pay higher rates than international bankswhen they raise foreign capital. So in terms of for-eign currency loans, one can assume that they areusually not the first choice of Indian borrowers.

NRI bonds

A particular source of foreign currency funding forIndian infrastructure projects is the community ofnon-resident Indians. Indian financial institutionsregularly tap this source through special bond issueswhen the country’s foreign currency reserves reacha dangerous low. The so-called India DevelopmentBond was launched in October 1991 as a responseto the country’s balance of payment crisis. TheResurgent India Bond followed in August 1998, as aresponse to the economic sanctions after India’s nu-clear tests. The India Development Bond fetched$1.6 billion, and the Resurgent India Bond, $4.2 bil-lion. In the latter case, 50% of the applicants werebased in the Middle East, 20% in South East Asia,and only 30% in all other regions, including NorthAmerica and Europe.

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When foreign exchange reserves dwindled again inthe second half of 2000 due to rising oil prices, theReserve Bank of India encouraged the State Bank ofIndia to launch the so-called Millenium Depositsprogramme. This issue achieved a subscription of$5.5 billion from almost 73,000 applicants. As inthe case of the Resurgent India Bond, SBI an-nounced that the instrument would primarily coverthe financial needs of infrastructure projects. Thebank invests some of the funds directly, lends someof them on to other financial institutions, and for-wards the rest to the Reserve Bank of India, whichadministers the country’s foreign currency reserves.

Impressed by the success of the Millenium Deposits,the Power Finance Corporation in January 2001floated the idea of an NRI bond of $5 billion for thefinancing of power projects. Yet foreign exchange is-sues need to be sanctioned by RBI, and there isprobably stiff competition among different institu-tions regarding the issuance of attractive bonds. Asmall element of NRI bonds will possibly be includ-ed in the new India Power Fund, which PFC isplanning to set up on behalf of the Power Ministry.


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Notes

1 World Bank, Country Assistance Strategy for India, June27, 2001, p. 16.

2 Ibid., p. 39.

3 Ibid., p. 21.

4 World Bank, India Country Assistance Evaluation, June4, 2001, p. 35.

5 World Bank representative Carter J. Brandon quoted inThe Hindu, 30 September 2001.

6 India Country Assistance Evaluation, p. 127.

7 Ibid., p. 29.

8 R. Rangachari, N. Sengupta, R.R. Iyer, P. Banerjee and S.Singh, Large Dams: India’s Experience, a WCD Case Studyprepared for the World Commission on Dams, Cape Town,2000, p. 171.

9 World Commission on Dams, Dams and Development: ANew Framework for Decision-Making, Earthscan, London,November 2000, p. 191.


11 Abhay Mehta, Power Play: A Study of the Enron Project,Orient Longman, Hyderabad, 2000, p. 48.

12 Heinz Vergin, Director, India Country Department,World Bank, letter to Mr. M.S. Ahluwalia, Secretary,Department of Economic Affairs, Ministry of Finance, 30 April 1993.

13 Shantanu Dixit, Girish Sant, Subodh Wagle, ‘Regulationin the WB-Orissa Model: Cure Worse Than Disease,’Economic and Political Weekly, 25 April 1998, p. 1.

14 Navroz K. Dubash and Sudhir Chella Rajan, PowerPolitics: The Process of Power Sector Reform in India, Draft, 3August 2001, pp. 26f.


16 Edwin Lim, pers. com., 13 December 2001.

17 Address by Edwin R. Lim, Country Director, WorldBank, at Conference on Distribution Reforms, October 12-13, 2001, pp. 8, 3.

18 World Bank, Country Assistance Strategy for India, p.15.


20 World Bank, India: Reducing Poverty, AcceleratingDevelopment, 2000, p. 7.

21 The Observer, 16 November 2000 (web edition).

22 Country Assistance Strategy for India, Annex B3.


24 All quotes from ibid., p. 110.

25 Country Assistance Strategy for India, p. 28.


27 Power Line, December 2000.

28 Letter from IFC, 12 December 2001.

29 IFC, Indian Infrastructure Equipment Limited project,Environmental Review Summary.

30 IFC, Indian Infrastructure Equipment Limited project,Summary of Project Information.

31 Letter from IFC, 12 December 2001.

32 See IFC and MIGA, Compliance Advisor/Ombudsman,Assessment Report, Complaint filed to the CAO regardingthe Nigeria Delta Contractor Revolving Credit Facility,August 2001.

33 Country Assistance Strategy for India, p. 38.

34 Ibid.

35 All figures from ADB, Country Assistance Plan India(2001-2003), p. 8.

36 Ibid., pp. 26ff.

37 Quotes from ADB, Program Performance Audit Reporton the Financial Sector Program Loan in India, December1999, pp. 1ff., 6.

38 Christine Wallich, ADB, pers. com., 7 November 2001.

39 Bank Policy Initiatives for the Energy Sector, paragraph85.

40 Christine Wallich, ADB, pers. com., 7 November 2001

41 Quotes from Asian Development Bank, ProjectCompletion Report on the Power Efficiency (Sector) Projectin India, August 2001, pp. 10ff.

42 Ibid., p. 17.

43 Ibid., pp. 17ff.

44 Press note of Jan Sangharsh Morcha, AITUC MadhyaPradesh and Vidyut Karamchari Janata Union, 25 November2001.

45 Data and quote from ADB, Report andRecommendation of the President, Madhya Pradesh PublicResource Management Program, p. 8.

46 ADB, ‘India: Madhya Pradesh Power SectorDevelopment Program and Fact Finding Mission, AideMemoire – Draft for Discussion,’ paragraph 34.


48 ADB Aide Memoire, paragraph 37.


50 See ADB, Country Assistance Plan India (2001-2003),p. 30.

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106

51 André Gingras of CIDA quoted in Working Group onthe Export Development Corporation, ‘Reckless Lending,’May 2001, Volume II, p. 8.

52 Data on equipment supplies from South Asia Networkon Dams, Rivers and People, ‘Hydropower Turbines andGenerators: An Analysis of Sources,’ January 2002.

53 India Poweronline, January 1999.

54 See World Commission on Dams, Dams andDevelopment, November 2000, pp. 188ff.

55 Tyll Pahl and Sonja Köberle, ‘The Evolution ofFinancing Structures for Large Dams,’ in ICOLD – 69thAnnual Meeting Dresden, Proceedings, pp. 405-409.


107

109

PART 4

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

India’s power sector in crisis

India’s power generation capacity has expandedrapidly since independence. Even so, the growth ofgeneration could not keep up with demand. Thecountry has a power shortage of 8% on average, andof 11% at peak times. Power supply is unreliableand of poor quality, and many rural communitieshave no access to electricity.

India’s per capita electricity consumption of 350kWh per year is very low by international standards.Even at this level, the lack of generating capacity isnot the main problem. Power in India is produced,transmitted, distributed and consumed inefficiently.A large part of what is produced is simply stolen,predominantly by middle class and industrial con-sumers. So far, India’s power sector strategies havebarely touched upon these inefficiencies and gaps.They have not been based on a balanced assessmentof all options and comprehensive least-cost plans,but have aimed – and failed – at creating a maxi-mum amount of new generating capacity.

For a variety of reasons, India’s power sector isunder great financial stress. The combined losses ofthe state power utilities are estimated at Rs. 260 bil-lion a year (or twice the amount which the statesspend on health care).1 The state governments donot have the means to cover the deficits of their util-ities. Many state utilities can therefore not invest innew generating capacity, or enter into long-termpower purchase agreements with independentpower producers. This is the main reason why pri-vate investment in power projects, and particularlyin risky hydropower schemes, is not coming for-ward, and why many state sector projects have beenstalled. Social and environmental problems havefurther contributed to the logjam. But the slump ininvestment is not a matter of policy choice. Neitheris it caused by a lack of funds for lending. If theclients of prospective power plants were in better fi-nancial shape, equity capital would be invested, andloans would be extended.

Even now, new power plants, both thermal and hy-dropower, are being built, based primarily on thelimited public capital which is available for invest-ment. Government expenditure in the power sectoris increasing, and all indicators suggest that it willcontinue to do so over the next few years. The fi-nancial crisis of the state power utilities needs to beresolved. Once it is, there is a risk that resources willagain flow into a rapid expansion of generating ca-pacity, rather than into a rational power develop-ment strategy based on a balanced options assess-ment. The risk exists that in such a situation, Indiansociety will be faced with even more economicallyunviable, socially and environmentally destructivepower projects than it is today.

Indian and international financial institutions al-ready play an important role in supporting and in-fluencing the country’s power sector strategy. If in-vestment in power projects picks up again, they willbecome critical arbiters of the future course ofIndia’s power sector development.

The role of Indian financial institutions

A large amount of investment capital is created inIndia. Traditionally, it has been the role of the coun-try’s development finance institutions to make suchcapital available to industry and infrastructure util-ities in the form of long-term loans. During the1990s, the government to some extent withdrewfrom funding infrastructure projects. Economic lib-eralization pushed some of the traditional industri-al clients of DFIs into financial distress, while themost credit-worthy clients started to raise debt onthe capital market directly, and no longer needed togo through lending institutions. It is no surprisethat in this situation, the development finance insti-tutions turned towards infrastructure, and particu-larly the power sector, where so much demand forfunding seemed to exist. Since the mid-1990s,power has been one of the most important, if not

PART 4 CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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4. CONCLUSIONS

the single most important, sector for loan approvalsof all Indian DFIs.

Liberalization has blurred the distinctions betweendifferent groups of financial institutions.Particularly since the late 1990s, India’s commercialbanks (such as SBI and other public sector banks)and investment institutions (such as LIC or UTI)have taken up long-term lending for infrastructure,and have also become involved in the power sector.The State Bank of India in particular has stronglinks with the non-resident Indian community, andthrough its NRI bonds is an important potentialsource of foreign currency lendingfor power projects.

As mentioned above, India’s powersector is beset by fundamentalproblems. Even if projects are ap-proved, they often do not move for-ward because power purchaseagreements cannot be concluded,or because investment capital iscommitted but does not material-ize. In the case of hydropower pro-jects, geological and hydrological difficulties andthe opposition of affected people add to the prob-lems. In many cases, the appraisal and decision-making systems of the financial institutions are notup to this challenge. DFIs have committed largeamounts of long-term resources for power schemes,but have been unable to release their costly loansbecause the projects did not move forward. Or theyreleased loans prematurely, and saw them turninginto non-performing assets because the developersdid not service the debt. It is an open question towhat extent inappropriate lending decisions werecaused by bad luck, by incompetence, or by “otherforces at work,” as one experienced observer of thefinancial sector put it.2

Due to such problems, financial institutions seem togo through a certain cycle of hope and disillusion-ment regarding power, and particularly hydropower,projects in India. The World Bank approved ten hy-dropower projects in the country between 1983 and1990. It cancelled several of the loans in 1992 be-cause the projects did not move forward, and sincethen has not approved any new generating projects.DFIs moved into the sector in the 1990s, and startedto limit their exposure and to cancel loans in late2000. Commercial banks and investment institu-tions are the latest entrants into the sector, even if ona lower level of commitments. In cases such as the

Maheshwar or Baghliar projects, these newcomershave already run into serious problems.

In response to these problems, lenders and other ac-tors are turning to the institutions of the centralgovernment. In the case of hydropower, NHPC andother central agencies are expected to expand theirportfolio, and to take over ailing private or state sec-tor projects. The Power Finance Corporation andother financing schemes under the Power Ministryare expected to play an even more prominent role infunding such projects. Only since late 2001, NHPChas been called upon to take over the Nathpa Jhakri

and the private Maheshwar pro-jects. LIC and ICICI have extend-ed large loans or lines of credit toboth NHPC and PFC, and such in-stitutional loans may well turn outto be an alternative to direct lend-ing for power projects.

Unlike most financial institutions,NHPC and PFC have for a longtime specialized in appraisingpower projects. Since they are the

pivotal agencies of the central government withintheir sectors, they are in a strong position as devel-opers or creditors of power projects. Financial insti-tutions may hope that loans for NHPC and PFC aresafer assets than direct project financing. However,being close to the government, both agencies areparticularly exposed to political influence, and canbe bullied into taking up politically well-connected,but uneconomic projects. And if PFC to some ex-tent substitutes other lenders in the power sector, itwill be in a less privileged creditor position than itis today because some borrowers will have nochoice but to default on their debt to PFC. Eitherway, the Power Finance Corporation and NHPC arecertainly institutions to watch in the next few years.

The role of international financial institutions

The multilateral development banks have complete-ly withdrawn from directly funding hydropowerprojects in India. With the prominent exception ofJapan’s JBIC, the bilateral funders have also done so.But the international development banks still fundsuch projects through Indian financial institutionsacting as their intermediaries. ADB for example isfunding the Malana and the Vishnuprayag or Baspaprojects through a loan to IFCI and ICICI. BothADB and IFC are investors in IDFC, which in turn

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112

Financial institutions seem togo through a certain cycle

of hope and disillusionmentregarding power, and

particularly hydropower,projects in India.

has funded hydropower projects. The InternationalFinance Corporation does not inform the publicabout which subprojects it supports through finan-cial intermediaries. This demonstrates that at leastin the case of IFC, accountability suffers whenfunds are lent indirectly.

Most official export credit agencies still seem to beinterested in supporting any kind of power projectregardless of their viability or social and environ-mental impacts. Under strong public pressure,Germany’s Hermes and Portugal’s COSEC declinedto get involved in the Maheshwar project at the costof export contracts for their national industries. Infuture, export credit agencies will have to live withconstant public scrutiny if they take up controver-sial projects. Yet the recent decision by Germany toback the Tehri project, the active interest of theCanadian, Norwegian and other agencies in the sec-tor, and the lack of a critical assessment of their ownrecord by such institutions suggest that official ex-port credits and guarantees may still come forwardeven for clearly unviable and destructive projects.

Even when export credit agencies extend officialguarantees, international commercial banks oftenhave to shoulder part of the credit risk when theyfund power projects. Internationally, banks seem tohave become more sceptical about the economicand financial viability of hydropower projects in re-cent years. Institutions like NHPC, PFC and mostdevelopment finance institutions are perceived toenjoy quasi-sovereign guarantees in that they wouldbe bailed out by the government in times of crisis.So while many commercial banks have become re-luctant to extend project finance for hydropowerprojects, they are still an important source of insti-tutional foreign currency funds for the DFIs and thecentral power sector agencies, or for projects whichare almost fully covered by official guarantees.

The problem of fungibility

Multilateral development banks have withdrawnfrom directly funding power projects in India.Globally, World Bank lending to infrastructure hasdeclined by 30% from FY 1995 to FY 2001. The en-ergy sector has seen a decline by 65% during thesame period. A Bank task force concluded that “animportant part” of this decline “is attributable toclient perceptions of the Bank’s application of safe-guard policies” regarding procurement and the envi-ronment. According to the task force, borrowers ex-pressed the following “explicit hierarchy of prefer-

ence” for infrastructure borrowing from officialsources: domestic resources, bilateral donors, region-al development banks and lastly, the World Bank.3

Even if they have stricter safeguard policies thanother funders, and have stopped funding powerprojects directly, multilateral development banksstill have a strong presence in India’s power sector.For the reasons described below, they share a re-sponsibility for the type of power projects which arebeing developed.

ADB and IFC have in the past funded hydropowerprojects through intermediary institutions likeICICI, IFCI and IDFC. Experience demonstratesthat when doing so, they cannot simply rely on thelending policies and appraisal capacities of theirpartner institutions. When IFC opposed a loan tothe Dabhol project within IDFC, when ADB raisedthe unresolved resettlement problems ofMaheshwar vis-à-vis IFCI, the institutions acceptedtheir responsibility as lenders through intermedi-aries. In other cases, they have not. ADB for exam-ple approved a subproject of Jai Prakash Ltd. – a hy-dropower developer which, as one official of a fi-nancial institution puts it, is known for his „longhands” into politics. The subproject has since runinto problems.

Since the early 1990s, the World Bank and ADBhave shifted their focus from power generation totransmission and distribution, for example throughloans to the Power Grid Corporation and to PFC. Inprinciple, this is positive, because an efficient trans-mission and distribution network facilitates an im-proved management of the country’s power system.Even lending for transmission projects can be trickyhowever. Both the World Bank and the AsianDevelopment Bank have funded the evacuation ofpower from thermal and hydro power plants undersuch schemes, and ADB has done so as late as 1999.Such schemes should really be considered and ap-praised as part of the respective generation projects,rather than as general improvements of the coun-try’s transmission system.

Extending large loans to the Power FinanceCorporation for transmission and distribution alsofrees up other resources for power generation. Themore PFC can cover its T&D portfolio from officialfunds, the more it can invest the foreign currencyfunds it raises from other sources in generation pro-jects. In this sense, multilateral development banksneed to assess the full investment portfolio of an in-

PART 4 CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

113

stitution like PFC before they approve large-scalelending for them.

Finally, multilateral development banks have be-come a major source of foreign currency borrowingfor the power utilities of Indian states like AndhraPradesh, Gujarat, Madhya Pradesh, and Orissa. Thebanks have linked the respective restructuring pro-grams to strict, detailed and painfulpolicy conditionalities. Carryingout effective demand-side manage-ment programs or comprehensiveoptions assessments has never beena priority of these policy loans.

The investment portions of sectorrestructuring loans are usually tar-geted at improvements in the dis-tribution system as a preconditionfor privatisation. Yet as in the caseof transmission projects, sincemoney is fungible, covering thecost of distribution frees up resources for other pur-poses, including generation projects. This criterionof fungibility should not be applied too rigidly, sinceit would otherwise preclude any financial transfers.Yet when financial institutions are major lenders tocertain utilities, and the borrowers invest largeamounts of resources in highly questionable pro-jects, the lenders share responsibility and need to beconcerned about such questionable investments.

For these reasons, ADB should be concerned aboutthe investment of the MP electricity board in theMaheshwar, Sardar Sarovar and Indira Sagar pro-jects, and Gujarat’s investment in Sardar Sarovar.The Bank seems to recognize its responsibility forthe overall investment portfolio of major lenders, inthat it expresses concerns about their governanceand policy frameworks. Yet, looking at ADB’s strongsupport for Madhya Pradesh’s power sector devel-opment, one wonders how this concern is translat-ed into actual practice. The impression arises thatADB – and possibly other official funders – do notjudge borrowers by the rationality and sustainabili-ty of their investment portfolios, but simply by theirwillingness to accept the policy conditionalities ofpower sector restructuring.

Challenges for India’s civil society

Public institutions like the Power Ministry, thePlanning Commission and the state governmentsstill shape the course of the country’s power sector

development. Civil society movements need tomonitor and to remain involved in this political pro-cess. Analysing options and potential alternatives,exposing vested interests, doing research on partic-ular investments, and opposing projects which onlyadd to the country’s debt burden, or which destroythe livelihoods of affected communities and the en-vironment continue to be important tasks.

Internationally, Indian socialmovements and NGOs havegained a reputation for using suchapproaches well and vigorously.

With the liberalisation of the fi-nancial and the power sectors, fi-nancial institutions have gained amore influential role in India’spower sector development. As therole of government shrinks, finan-cial institutions need to accept thatthey have a social and environ-mental responsibility and a need

for accountability to the public of their own. In ac-cordance with international standards, Indian finan-cial institutions should codify their social, environ-mental and information policies. Within the waterand power development sectors, the WorldCommission on Dams has prepared a useful set ofprinciples and guidelines, including recommenda-tions for follow-up action by private financiers andfinancial institutions.4

In this perspective, it is important for Indian NGOsand movements to strengthen their knowledge abouthow such institutions work, and about how civil so-ciety can monitor and engage them. Movements andNGOs should think about creating networks andbuilding professional knowledge on the role of fi-nancial institutions. They should start to exchangeinformation and cooperate with interested partieswithin these institutions, with financial journalists,analysts, and rating agencies. They should explorepossibilities of cooperation with the supervisory di-visions of RBI, with consumer unions, with sociallyresponsible investors, provident funds and other in-vestors who share a long-term horizon. Interna-tionally, NGOs have started to gain experience inhow to campaign within the financial sector, andIndian civil society can profit from this.5

The community of non-resident Indians is an im-portant source of foreign currency for India, partic-ularly for the infrastructure sector. The PowerMinistry and PFC might soon look to NRI investorsagain to contribute to the new India Power Fund. In

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114

As the role of government shrinks,

financial institutions need to accept that they have asocial and environmental

responsibility and a need foraccountability to the public

of their own.

principle, the solidarity of the NRI communityneeds to be maintained. At the same time, investorsin NRI bonds should be sensitised about the im-pacts of certain investments, and should be encour-aged to invest selectively rather than for indiscrimi-nate instruments.

Challenges for international civil society

Internationally, NGO networks should continue tomonitor export credit agencies,commercial banks, and bilateral in-stitutions, and should press forthese institutions to abide by inter-nationally accepted standards whenthey fund particular projects, in-cluding power plants. One particu-lar institution merits more scrutiny.JBIC has funded more hydropowerprojects in India than any other for-eign institution (including theWorld Bank). It is a silent giant, anddeserves more attention.

For a long time, NGO networkshave worked to strengthen the oper-ational policies of international fi-nancial institutions, and to opposeor influence specific projects. India’s experiencedemonstrates that as far as direct lending is con-cerned, their campaigns have had some success.NGO networks have so far neglected the indirectfunding of projects through financial intermedi-aries, and the issues which arise when official fun-ders (both multilateral and bilateral) support finan-cial intermediaries, and power plant developers andoperators such as the SEBs.

As a first step, NGOs should strengthen theirknowledge about the extent of intermediary lendingfor infrastructure development by different public

financial institutions, and about the policies whichthey apply. Already, some issues are emerging.Financial institutions must be accountable for thefunds which they invest through intermediaries,and the lack of transparency which IFC displays inthis context is not acceptable. If a subproject fund-ed through intermediaries violates the operationalpolicies of respective funders, affected communitiesand NGOs could consider filing a complaint with anInspection Panel, or with the ComplianceAdvisor/Ombudsman of IFC. Doing so again re-

quires access to basic informationabout the respective subprojects.

Apart from financial intermediarylending, NGO networks shouldalso become more aware of the is-sues at stake when official fun-ders support infrastructure utili-ties such as India’s state electrici-ty boards. NGOs already dealwith the policy conditionality ofthe respective sector restructur-ing loans. They also need to lookat the question of fungibility.NGOs should start to assess largeadjustment and investment loansbased on the overall policies andinvestment programs of the re-

spective utilities, and should hold financial institu-tions accountable for the investment programs oftheir major borrowers. In financial intermediaryprojects and sector restructuring programs withinthe water and power sectors, international financialinstitutions should, just as in straightforward in-vestment projects, follow the internationally recog-nized principles and guidelines of the WorldCommission on Dams.

NGOs and social movements have come a long way,and the new challenges are an opportunity for themto learn and to develop further skills.

PART 4 CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

115

In financial intermediaryprojects and in sector

restructuring programs,international financial

institutions should, just as in straightforward

investment projects, followthe internationally

recognized principles andguidelines of the WorldCommission on Dams.

Notes

1 See address by Edwin R. Lim, Country Director, WorldBank, at Conference on Distribution Reforms, October 12-13,2001, p. 1.

2 Sucheta Dalal in rediff.com, 20 June 2001.

3 Quotes and figures from World Bank, ‘The Cost of DoingBusiness: Fiduciary and Safeguard Policies and Compliance,’17 July 2001, p. vii.

4 See World Commission on Dams, Dams and Development:A New Framework for Decision-Making, Earthscan, London,November 2000, Part II and particularly pp. 315ff.

5 Nicholas Hildyard and Mark Mansley, The Campaigners’Guide to Financial Markets, The Corner House, SturminsterNewton, England, 2001, is a useful introduction into howNGOs can work within the financial sector.

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116

BIBLIOGRAPHY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117

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Deolalkar, D.H., The Indian Banking Sector: On theRoad to Progress (undated).

Dubash, Navroz K. and Sudhir Chella Rajan,“Power Politics: Process of Power Sector Reform inIndia,” in Economic and Political Weekly, Vol.XXXVI, No. 35, 1 September 2001.

Hagler, Bailly Consulting, Inc. & CRISIL, TheFinancing Capacity of Indian Institutions toProvide Alternatives to Sovereign Guarantees, pre-pared for USAID/Office for Energy, Environment,and Technology, 1996.

Head, Chris, Financing of Private HydropowerProjects, World Bank Discussion Paper No. 420,July 2000.

McCully, Patrick, Silenced Rivers: The Ecology andPolitics of Large Dams, Zed Publishers, London,1996/2001.

Mehta, Abhay, Power Play: A Study of the EnronProject, Orient Longman, Hyderbad, 2000.

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...., India Banking System Outlook, September2000.

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Websites

Asian Development Bank: www.adb.org

Central Electricity Authority: www.cea.nic.in

CRISIL: www.crisil.com

Dams and Development Project: www.unep-dams.org

Friends of River Narmada: www.narmada.org

ICICI: www.icici.com

IDBI: www.idbi.com

IDFC: www.idfc.com

IFC: www.ifc.org

IFCI: www.ifciltd.com

International Rivers Network: www.irn.org

LIC: www.licindia.com

MIGA: www.miga.org

Ministry of Power: www.powermin.nic.in

NHPC: www.nhpcindia.com

Power Finance Corporation: www.pfcindia.com

Power Line: www.indiapoweronline.com

Reserve Bank of India: www.rbi.com.in

State Bank of India: www.statebankofindia.com

Urgewald: www.urgewald.de

World Bank: www.worldbank.org

World Commission on Dams: www.dams.org

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118

Name of dam Location Capacity Developer/ Status Indian funders Foreign (in MW) operator funders

Allain Duhangan HP 192 IPP Plan ICICI, IFCI, PFC?Almatti Karnataka 297 IPP, then State Plan PFCBaghliar J&K 450 State U/C ICICI, IDBI,

J&K Bank, LIC, PFC; SBI?

Baira Siul HP 180 NHPC U/OBalimela VII & VIII Orissa 120 State Plan? PFCBalpahari (PSS) Jharkhand 340 DVC PlanBaspa II HP 300 IPP U/C ICICI, IDBI, IFCI, Hermes, ADB?

PFC, SBI, UTI, PSBsBhakra Left Bank HP 540 BBMB U/OBhakra Right Bank HP 760 BBMB U/OBhira VII (PSS) Maharashtra 150 TEC U/O World BankBhivpuri Maharashtra 72 TEC U/OBursur J&K 1,020 NHPC PlanChamera I HP 540 NHPC U/O EDC, CIDAChamera II HP 300 NHPC U/C SBI, PSBs EDCChamera III West Bengal 231 NHPC PlanDehar HP 990 BBMB U/ODhaulasidh HP 80 State ? KCCBDhauliganga Uttaranchal 280 NHPC U/C OECFDoyang Nagaland 75 NEEPCO ?Dulhasti J&K 390 NHPC U/C PFC COFACEGanguwal HP 84 BBMB U/OGerussopa Karnataka 240 State U/C, U/O World BankGhanvi HP 22 State U/C PFCGhatghar (PSS) Maharashtra 250 State U/C OECFHirakud I - IV Orissa 208 State U/O (ren.) PFC DFID, OECF;

KfW?Idukki Kerala 750 State U/O CanadaIndira Sagar/Sarovar MP 1,000 NHPC/State U/C PFC? World BankKalinadi Karnataka 270 State ? World BankKalpong N&A 5 NHPC U/OKameng Ar P 600 NEEPCO U/CKhauli HP 12 State ? OPEC?Khopoli Maharashtra 72 TEC U/O(ren.) IDFCKishenganga J&K 330 NHPC PlanKoel Karo Jharkhand 710 NHPC PlanKoldam HP 800 NTPC PlanKopili (Lower) Assam 150 NEEPCO PlanKopili II Assam 25 NEEPCO U/CKoteshwar UP 400 THDC U/CKotla HP 82 BBMB U/OKoyna I & II Maharashtra 560 State U/O (ren.) PFC KfWKoyna IV Maharashtra 1,000 State U/C World BankKurichu Bhutan 60 NHPC U/OKuttiyadi Kerala 75 State U/O CanadaLakhwar Viyasi UP 420 State PlanLarji HP 126 State U/C PFC Kuwait

Oil Fund?Loktak I Manipur 105 NHPC U/OLoktak Downstream Manipur 90 NHPC U/CLower Periyar Kerala 182 State U/O World Bank,

Canada Maheshwar MP 400 IPP U/C IDBI, LIC, GIC, BHEL;

IFCI, PFC, SBI, PSBsMaithon Jharkhand 60 DVC U/O

ANNEX 1: HYDROPOWER PROJECTS IN INDIANote: The following table lists the hydropower projects which are mentioned in this report, but does not present a full overview of all hydropower projects in India.

Name of dam Location Capacity Developer/ Status Indian funders Foreign (in MW) operator funders

Malana HP 86 IPP U/O ICICI, IFCI, PFC, PSBs ADB

Maneri Bhali II Uttaranchal 304 NHPC/State U/C PFCNagarjunasagar AP 960 State U/O OECFNathpa Jhakri HP 1,500 NJPC U/C PFC, LIC? World Bank,

ECGD, KfW, Omkareshwar MP 520 NHPC/State U/C PFC?Pakal Dul J&K 1,000 NHPC PlanPanchet Jharkhand 80 DVC U/OParbati I HP 750 NHPC PlanParbati II HP 800 NHPC Plan ICICIParbati III HP 501 NHPC PlanPatikari HP 16 State ? China?Pong HP 360 BBMB U/OPriyadarshini Jurala AP 239 State Plan PFC? Japan?Purulia (PSS) West Bengal 900 NHPC/State U/C OECFRampur HP 535 NJPC PlanRanganadi Ar P 405 NEEPCO U/CRanganadi II Ar P 160 NEEPCO PlanRangit Sikkim 60 NHPC U/OSalal I J&K 345 NHPC U/OSalal II J&K 345 NHPC U/OSardar Sarovar Gujarat 1,450 State U/C World Bank,

OECF Sawalkot J&K 600 ? Plan Hermes/GIEK?Sewa II J&K 120 NHPC PlanSiang Lower Ar P 1,700 NHPC PlanSiang Middle Ar P 700 NHPC PlanSiang Upper Ar P 11,000 NHPC PlanSilent Valley Kerala 240 State ScrappedSrinagar UP 330 IPP Plan ICICI, IDBI,

IDFC, PFC World BankSrisailam AP 900 State U/O, U/C OECFSubansiri (Lower) Ar P 2,000 NHPC Plan ICICI, LIC?Subansiri (Middle) Ar P 2,000 NHPC PlanSubansiri (Upper) Ar P 2,500 NHPC PlanTanakpur Uttaranchal 120 NHPC U/OTeesta II Sikkim 1,200 NHPC Plan NEXI?Teesta IV Sikkim 495 NHPC Plan NEXI?Teesta V Sikkim 510 NHPC U/C ICICI JBIC?Teesta Low Dam III West Bengal 100 NHPC PlanTeesta Low Dam IV West Bengal 132 NHPC PlanTeesta Canal West Bengal 68 State OECFTehri I UP 1,000 THDC U/C Hermes/KfWTehri II (PSS) UP 1,000 THDC PlanTilaiya Jharkhand 4 DVC U/OTipaimukh Manipur 1,500 NEEPCO PlanTuirial Mizoram 60 State U/C OECFTuivai Mizoram 210 NEEPCO U/CTurga (PSS) West Bengal 600 NHPC/State PlanUmiam I Meghalaya 36 State U/O (ren.) OECFUpper Indravati Orissa 600 State U/O PFC World Bank,

OECFUpper Krishna I - IV Karnataka 810 NHPC PlanUri I J&K 480 NHPC U/O SIDA, ODA, EKN, NIBUri II J&K 280 NHPC PlanVishnuprayag Uttaranchal 400 IPP U/C ICICI, IDBI, IDFC COFACE, ADB?West Yamuna Canal Haryana 14 State U/C PFC

122

ANNEX 2: MAJOR FINANCIAL FLOWS INTO INDIA’S HYDROPOWER SECTOR

6 PS

7

Public

8

PFC

9

DFI

s

10

PSB

s

11

Inst

.ln

v.

12

GoI

1

Ban

ks

2 IFIs

3

EC

As

4 Bil.

5 NRI

13

IPPs

14

Stat

e

15

Cen

tre

Fore

ign

Fin

anci

alIn

stitu

tio

ns

Ind

ian

Fin

anci

alIn

stitu

tio

ns

Dev

elop

ers/

Ope

rato

rs

Types of institutions:

(1) Foreign commercial banks

(2) International financial institutions

(3) Official export credit agencies

(4) Bilateral institutions

(5) Non-resident Indians

(6) Indian private companies

(7) Indian individuals

(8) Power Finance Corporation

(9) Indian development finance institutions

(10) Indian public sector banks

(11) Indian institutional investors, including LIC and UTI

(12) Government of India

(13) Independent power producers

(14) State sector utilities

(15) Central government utilities

Types of financial flows

Major flows: All major financial flows as far as theyare related to the power sector;

Debt flows and grants: Loans, bonds, guarantees, es-crow accounts, deposits, grants;

Investment flows: Investment of equity capital.

Amortisations, interest and dividend payments,and counter guarantees are not covered.

NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

123

Key to Annex 2

About the publishers

International Rivers Network (IRN) supportslocal communities working to protect their riversand watersheds. IRN works to halt destructive riverdevelopment projects, and to encourage equitableand sustainable methods of meeting needs for water,energy and flood management.

IRN, 1847 Berkeley Way, Berkeley, CA 94703, USAphone +1 510 848 1155, fax +1 510 848 1008 e-mail: [email protected], www.irn.org

The South Asia Network on Dams, Rivers andPeople (SANDRP) was started in 1998 as a smallNGO with an informal network of individuals andorganisations in South Asia. It is concerned with theissues of water and energy resources, and has a spe-cial focus on large dams and options. SANDRP is aproject of YUVA, Mumbai.

SANDRP; 53B, AD block, Shalimar Bagh Delhi 110 088, India phone +91 11 747 9916 e-mail: [email protected]

Urgewald is a German advocacy NGO that cam-paigns against the involvement of German banks,companies and aid agencies in destructive projects,including large dams, in the South. The organiza-tion played a key role in achieving Germany’s with-drawal from a number of controversial projects, in-cluding the Maheshwar dam on the Narmada River.

Urgewald, Von-Galen Str. 2 48336 Sassenberg, Germany phone +49 2583 1031; fax: +49 2583 4220 e-mail: [email protected], www.urgewald.de

About the author

From 1987 until 2001, Peter Bosshard was a pro-gram officer and later, the director of the Swiss ad-vocacy organization, the Berne Declaration. He hasa long record of monitoring financial institutionsand transnational corporations, particularly in thepower sector. Peter Bosshard is now a consultant oninternational environmental and human rights is-sues in Zurich and Berkeley.

POWER FINANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124

acknowledgments - sandrp · dpc dabhol power corporation dsm demand side management dvc damodar...

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