Largest Foreign Investor in Indian Power Sector Talks PPPs

November 27, 2014: Rajiv Ranjan Mishra is the Managing Director at CLP India Private Limited. He is responsible for asset management and business development of the company’s investments in India. He has close to 20 years of experience in the power industry, both in India and internationally, mostly involved in project financing, investment appraisal, finance and accounting and general management.

“Institutionally, private investors look for certainty of regulation (whether it is tax policy, electricity regulation, etc.), they look for predictable fiscal and monetary policies, they look for a market in which contracts are fair and are respected.  Essentially, foreign investors are looking for fairness in regulation and a firm structure where they can plan for the long term.”

While many foreign investors hesitate to do business in the Indian power sector, CLP India is currently the largest foreign investor in this sector. What are a power sector investor’s greatest challenges and what strategies does CLP India use to avoid the pitfalls that might scare other investors away?

Rajiv Ranjan Mishra: I will start with the second part of the question first. In retrospect the privatization or the invitation for the private sector to invest in India was incompletely thought through. This is not a criticism to whoever designed this system. The government invited private sector investment (including foreign investment) in just one sector, which is generation. I think that other parts of the supply chain, like the fuel and the distribution sectors were overlooked, but they needed to change as well. The first round of privatization ended up being unsuccessful in the sense of having very few or no financial successes. That, of course, had the foreign investors pulling out.


What other things were not done well? The fundamental aspect was someone needed to pay the bills to the distribution companies (the people that are actually supplying electricity) in a manner that was enough for them to pay for their power purchases. In other words, they should have received enough to pay for their fuel suppliers, service their debt and also make a profit. Only then could the whole chain have worked. At that time, the fuel suppliers could make money, the generation side was pushed to the private sector, but the distribution end did not make money. That was because of the government’s regulatory interventions and so on. This situation has been the main challenge for investors. Obviously, the government is taking some action.


We, at CLP, because it is a 114-year-old company, tend to take a long term view. If you look at our history you will find that generally we take our time before we exit a country. That gave us an advantage. There are other aspects. For example, we are by design an Asia-Pacific Company and, being from here, we cannot avoid talking about India and China, both of which actually need a lot of electricity. So even though these development problems were unfortunate, we knew that perhaps we could work with the government to solve these. Other aspects: we have invested in more credit-worthy states, so we didn’t have cases of financial stress or non-honoured contracts. Another more strategic factor: in India, given the weaknesses in the chain I described (which are being solved but inevitably are taking too much time) you need to not be in a position where you end up being a high cost producer (as a private sector generator). When you have financial stress in the system, being a low cost producer is the safest place to be. So, what we always tried consciously to do are projects where we occupy the lower or lowest end of the cost curve. The choice of state and the end of the cost curve are the two strategic decisions that we made which in retrospect, helped us to weather the bad times.

Have any of CLP India’s projects been carried out in the framework of a PPP? Can you tell us more about the projects and their implementation? What have you found the most challenging? What went well and what went wrong? Any lessons learned?

Rajiv Ranjan Mishra: We have one experience of a true PPP. We participated in an international competitive bidding process for the building of a 1,320 MW coal fired power plant. We won that bid in 2009 and commissioned the project in time. That was under the government scheme in which they acquire the land and the fuel, and the private sector bids for the cheapest tariff. This project has been a classic case of what can go well and what can go wrong.


What went well: I think this was the first ever private sector project in that state. A large capacity was being added and there was a lot of support. It was a win-win in the sense that during the construction period the interests of both parties were completely aligned. The government wanted more capacity and as quickly as possible. Therefore, we got a lot of support from them. The risk allocation was well-structured. We took the risk of what we could manage, which is, getting the cheapest equipment, building it as fast as possible, etc. The government took the risk for what they could do best: land allocation (they paid for the land that they needed to acquire but then they could recover that cost from us). The Haryana state, in which this project was being carried out, also had a unique feature: one would not pay the villagers a large amount upfront for the land, but, we committed to pay them a certain sum, increasing with inflation, for the next 30 years. This prevented the situation of the villagers spending all of the funds rapidly and then going back to the same situation in which they were before but this time, without their land (and livelihood). This scheme worked very well for the project because it ensured we never had any type of problem with the villagers and they used their money in a wise manner.

What did not work well: we were not able to get the fuel for the first couple of years because of unclear designation of responsibility between the state and the federal governments. All in all, this project has taught us to look at some of these risks that go into the operational period far more carefully and upfront.

There are two other lessons: sometimes the private sector displays “irrational exuberance” and by taking risks or making bids which are short term, we end up suffering. In the operational period of this project, too much risk was allocated to the private sector. Of course, the private sector should have priced that risk properly, but in its “irrational exuberance,” it didn’t. For sustainable long-term success, risk allocation should look at the whole project life and should be fairer.

The other lesson is that in PPPs, which extend 25, 30, 40 years, new developments and risks will come up, and perhaps the documents need to be designed in a manner that permit a reallocation of risks, when possible, at certain prefixed intervals or predefined milestones.

CLP India is currently one of the generation companies with the fastest growth in India and the fastest growing company in the wind sector. What are CLP India’s plans and expectations for the next five years?

Rajiv Ranjan Mishra: We are number one in terms of wind generation capacity. Our view was that carbon dioxide was a business risk, which perhaps, being an international organization, came to us sooner than many companies in India and led us to take on investments in renewables. At that time in India, the mainstream players were not really interested in renewables so for us it created a natural fit. We would like to build on that and also expand into solar, which we have not yet done in this country. We are a little bit unique in the sense that we do not tend to set MW targets – which might eventually lead to wrong investment decisions. We tend to keep the target flexible. Having said that, we would obviously like to remain in a leadership position in the renewable sector.


And the final point is: how does India itself do? If we look at the Indian wind energy sector in the last five years, capacity addition has varied between 1,500 MW per year to 3,000 MW per year. The current government is talking about 10,000 MW a year, which is similar to China. How much we are able to do will depend on how many projects are able to be finished successfully in the country. This will depend on how the country and the government itself perform and what regulatory support is put in place.

To become such a significant player in the Indian electricity market, you had to make alliances. What type of partners have you been working with?

Rajiv Ranjan Mishra: All of our investments in India are wholly owned and always have been. That was able to be achieved by depending a lot on local management. We have a multinational staff of course, but it has all been hired by the India team. That was the way this was managed. However, “partnership” is a much wider term. It does not only mean equity partnership. One of the things we did initially: we were careful in choosing the right states. India has 29 states, and each of them has different track records. We consciously made a choice of investing in those states that are reforming faster than the others, which, at the same time, tended to be the states which are growing faster than the others and therefore had better financial capability to pay than the others. In generic terms, what one looks for in a partnership is a win-win situation. One of the things I consider as a manager is that one must enter into a contract where both parties are making money. Obviously one party will always capture more value than the other. However, I start to get worried if I’m in a contract where I see my supplier is losing money.


When you talk about the government, the key is to not get into the high cost end of energy production. If they already don’t have enough money, and you situate yourself in the higher end of the cost curve for energy production, you will be putting more stress on the situation. The question is determining what a win-win situation is. If one has a good understanding of that, one minimizes the chances of making expensive mistakes.

What financing method is usually used in CLP India’s power sector projects? From your experience, could you say a certain model seems to be the most adequate?

Rajiv Ranjan Mishra: I would say that for large projects (for example, the US $1.3 billion coal plants that we have here), the only way out is non-recourse financing. Otherwise, you are taking too much risk and a mistake could be so serious that it could bring the whole company down. For wind projects on the other hand, that are about US $150-200 million, we started with non-recourse project financing, but once we had commissioned a certain number of projects in the portfolio, we moved on to a next stage and brought an innovative scheme of financing: a certain type of pool financing. Instead of doing a limited recourse for each individual project (which is time-consuming, expensive and cumbersome), we grouped several projects together and applied this new type of non-recourse financing for that. Having a large portfolio under one legal entity and a fairly high credit rating, we have now taken it to the next logical step: corporate financing, which implicates accessing the debt capital markets such as bonds.

The Indian government is now taking measures to increase healthy competition and a much more open access to the power market amongst private and public companies in the power sector. What initiatives is CLP India taking in order to prepare for what is expected to be a much more competitive atmosphere?

Rajiv Ranjan Mishra: To be fair, from our company’s perspective, nothing is changing. I mentioned earlier some of the strategic decisions we have made in term of not having the highest costs etc. One of the interesting things the government has started to talk about (although it will take some time), is “separation of carriage and content”, which means to separate the wire business from the supply business so you have retail competition. As we move towards that, we will have to move to consider other things as well as lower cost production:  reliability, added value, services, etc. At CLP we have experience of that sort in Australia (which is one of the most competitive retail markets in the world) and even in a regulated market such as in Hong Kong where we have generation, transmission and distribution. We are considering the introduction of elements of choice, for example in pricing: if a consumer wants to run a washing machine overnight, they can pay cheaper for doing so. So I was hoping to be able to draw on this experience elsewhere in the group. As I said it is still some time away. At this point in time, if we stick to the earlier disciplines of choosing the state and the cost sector of the curve appropriately, that should see us through for now.

From a private developer’s perspective, what are the most critical elements or mechanisms to be put in place in order to allow for increased flows of private financing in India?

Rajiv Ranjan Mishra: Institutionally, private investors look for certainty of regulation (whether it is tax policy, electricity regulation, etc.), they look for predictable fiscal and monetary policies, they look for a market in which contracts are fair and are respected.  Essentially, foreign investors are looking for fairness in regulation and a firm structure where they can plan for the long term. Proof of that is that we have at least ten private sector companies listed on the Bombay Stock Exchange. A majority of them should be making money, some more than others, but they should all be profitable.


You ought to also have an industry structure which lets everyone make profit. You cannot ask for private capital and wish for a situation in which nobody is making profit. Ultimately, it has to be a profitable sector. This country has a lot of young people (60% of the population is under 35 years old), our per capita energy consumption is a third of China’s approximately, so not only is it a young and growing population, but the access to energy is so low that the opportunities are limitless. If the government gets this right, CLP will no longer be one of the only foreign private investors.

Have private investors gained public acceptance in such a strategic sector which has been traditionally dominated by strong state-owned enterprises? What measures have you put forward to address this challenge?

Rajiv Ranjan Mishra: It is a very thoughtful question. I must say I do not have a very straightforward answer to it. What I would say is, in some ways the private sector has been kept away from the public. The private sector is not the one who bills. What the public actually sees is the name of the retailer (and of course, we only have private distributors in a few cities). There will be a time when the private sector will have to face this. Also, I must say, in some ways the political rhetoric affects public perception. In popular democracies in particular, when people start badmouthing the private sector, sometimes that rhetoric affects the perception of the individuals. On the other hand, in Delhi, one of the largest distributors is Tata Power. The Tata name has such a big respect in this country that no matter which industry they are in, no one will resent their presence. That has lessons for the private sector on how to behave, how to treat the communities, and the respect in the stakeholder relations. If relations are good, then for sure the private sector will be better off.