ACKNOWLEDGMENT
Infrastructure Project Finance
Study on EPC Contractors
ACKNOWLEDGMENT
This working paper owes its completion to the assistance, insight, guidance and cooperation of many persons who have been most kind and gracious in helping us to successfully negotiate through various features of an EPC contract process. Through the aegis of this paper, they enabled us to underpin the conceptual and rudimentary framework of an EPC contract.
We express our sincere thanks and gratitude to Mr. B. Bhambani, General manager (Commercial), BHEL; Mr. P.L. Sehdev, Sr. Manager (Fin. Packages & B.D.), BHEL; Mr. Mohammad Khalid (Sr. Accounts Officer, Corp. Fin.), BHEL; Mr. Satnam Singh, Power Finance Corporation.
There are others who were equally generous with their contributions and ideas. However, in deference to their wishes we shall maintain their anonymity to preserve the integrity of confidential assistance. Nevertheless, if not in letter then in spirit, we acknowledge their support and heartily thank them for it.
We are also grateful to our Professor, Dr. S.K. Chaudhary for giving us an opportunity to work on such an interesting and enlightening subject. The leanings derived in the process have been invaluable and we are confident that it shall hold us in good stead in the future.
Further, errors, omissions, and mistakes, if any, are our responsibility alone.
PrologueInfrastructure projects with their enormous implications on the economic and social development of a nation, possess three inherent risks. First, is the risk of inaccurate estimation of demand and the consequent underutilization of built up capacity. Second, is the is of cost and time overrun, which plays havoc with the IRR, NPV and payback period calculation and place the viability of the entire project in jeopardy. Third is the risk of force majeuer.
An answer to the second type of risk is the emergence of EPC contractors who are responsible for the design , engineering, manufacturing, supply, storage commissioning and handing over of the project. The caveat here is that EPC contractors have to necessarily deliver on time , and as per the prescribed specifications. Any default on their part, empowers the project sponsor to levy a penalty from the EPC contractor. Therefore such contractors need to be disciplined , punctual, financially prudent, deeply committed, resourceful, knowledgeable and should possess sufficient financial clout.
Since an EPC contract assumes the entire responsibility of the project, commissioning ab initio and since it is organised under a single point of responsibility, it is extremely convenient for the sponsor to coordinate and oversee the operations. The very fact that responsibility can be pinned down and a penalty charge levied has enhanced the popularity and stature of EPC among project sponsors.
The intention of this working paper is to ascertain the roles, responsibility and rules of an EPC contract. We attempt to investigate the strengths of successful EPC contractors and strive to derive some learning from this study.
Our working paper is built on an actual real life project that is currently under construction . This is the BINA power project jointly promoted by the Grasim group , India; and Power Gen, UK The EPC contractors are Siemens AG Germany, Siemens (India), BHEL (India). This particular case has been selected not to evaluate and discuss the project per se, but to use it as an illustration in improving our understanding of an EPC contract pricing
EPC CONTRACTSDefinition and CoverageAn EPC Contract encompasses the design, engineering, manufacturing, supply, transport to site, storage, installation, testing and commissioning, conducting Performance Test and handing over to the power station in reliable operating order. The power Station shall comprise all works, plant and equipment necessary for a complete working Power Station including interalia, steam generators, steam turbine generators, condensers and other boiler and turbine auxiliary equipment, electrical equipment, control systems, control room, air conditioning, ventilation, fire protection and fire fighting system, air pollution system, dust extraction systems, cooling water systems, site civil works, coal unloading, storage and handling facilities, fuel delivery system, fresh water supply systems, dust and ash handling equipment, stack, 400 KV switchyard, fuel gas desulphurisation plant, and any other plant and equipment necessary for successful operation for a power station and a township for the O&M staff.
Scope of Works and Supply by the Contractor
The materials to be provided and the works and services to be performed by the contractor pursuant to the contract include the following :
1. Project administration
2. Design and engineering
3. Procurement and expediting
4. Material control
5. Tests and inspection
6. Shipment, transportation, customs clearance and storage
7. Construction
8. Sub contracting
9. Control of schedule and quality
10. Commissioning and reliability test
11. Performance guarantee test
12. Supply of initial spare parts
13. Training of the owners operating and maintenance personnel
14. Any other item of work/supply required to fulfill the contractors obligations
Project Administration
Provide the Owners Representatives with all the information and data necessary for the works, including master plan, time schedule of the works, the contractors project team organization chart together with the identities and curricula vita of key personnel, copies of insurance policies, and estimates or reports on the performance of the works as required from time to time by the Owner.
Appraise and administer all engineering, procurement and field construction work performed by sub-contractors for quality and schedule
Coordinate and manage the progress of the works, while submitting the monthly progress reports for the entire works as correlated with the agreed time schedule.
Survey, verify or otherwise ascertain the geographical conditions, producing the site survey drawings, subsoil conditions of the site and other construction areas, and local conditions, local laws and regulations pertinent to the proper performance of the works.
Establish the works procedures fro such items as called for in GC 18.5 of the General Conditions.
In connection with the permits, approvals and/or licenses from local state or national government authorities or public service undertakings to be obtained by the Owner in its name, assist the Owner in preparation of supporting documents and application submitted to the authorities.
Obtain and pay for the permits, approvals and/or licenses from local state or national government authorities or public service undertakings fro the performance of the works developed on or off site
Design and Engineering Plan design and schedule and prepare the following
Basic design and engineering
Site survey drawings
Project design basis
Plot plan
Design intent memorandum
Mechanical P&I design
Line design data sheets and diagrams
Equipment schedule
Equipment data sheets
Electrical Single line diagrams
Instrumentation Description of instrumentation, control systems, alarm and interlocking system, control room, special provision for instrumentation in hazardous areas.
Civil Basic design drawing for civil, building and other structures
Drawings for infrastructure development such as leveling, drainage, roads including access to the site
Concept drawings or single line diagrams, with appropriate explanations for all building service systems such as lighting, communications, fire prevention, and fighting, air conditioning and ventilation, plumbing systems.
Waste water treatment system concept
Detailed Design And Engineering
Documentation
Produce the following items of documentation through every category of the engineering design
Document schedule and index
Purchase requisites
Manufacturing drawings operation and maintain instructions and manuals
Program of commuting
Catalogue of equipment
As built drawings and record documents
List of codes and standards used
List of lubricants chemicals catalysts and other materials for commissioning
Mechanical electrical instrumentation and civil specifications for fabrication, assembly, installation, and other field works
Bills of material
Mechanical Engineering Design
Layout
Equipment sketches or drawings
Equipment specifications
Piping arrangement drawings
Terminal point drawings for the interconnection of pipes, going in and coming out of plant site
Scale model of the plant
Structural steel works : fabrication, assembly and installation drawings
Insulation and painting
Electrical Engineering Design
Power balance
Detailed power distribution diagram
Electrical system layout and cable routing
Electrical equipment specifications and list
Terminal point drawings
Instrumentation engineering design
Lists of instruments, cable, instruments air tubing
Data sheets for all instruments orifice plate specifications and typical calculations
Control valve specifications ad typical calculations
List of settings of switches and relays for operation of alarms and interlocks
Tele automation/telecommunication engineering design
Functional specifications for tele automation
Electrical power supply diagrams
Control room design
Communication layout drawings
Civil Engineering Design
Structural calculations and loading diagrams for major structures
Typical details for anti corrosion, thermal insulation lighting protection, maintenance access etc.
Detail design drawings for civil, building and other structures and all building service systems
Quality Assurance
Quality assurance documents and programs for implementation
Completed quality assurance dossier
Procurement And Expediting
Procurement
Prepare requisites for procurement of material s
Issue inquiries to vendors and receive quotations
Evaluate vendors quotations from both technical and commercial point of view and prepare bid comparisons
Prepare technical bid evaluations
Issue purchase orders to selected vendors
Instead or in addition to any of a) to e) above, either entirely or partly , prepare and produce the standards and specifications for manufacturing.
Expediting
Expedite vendors engineering, design calculations and other data fabrication and delivery, so that the overall time schedule may be maintained.
Submit a production schedule for major equipment reports periodically. If required station expediters shop.
Expediting shall be carried out in accordance with the works procedures.
Material Control Prepare material lists for bulk materials based on estimated quantities.
Check bulk material requirement by making takeoffs in accordance with progress of engineering
Maintain bulk material summary sheets up to date, showing takeoff quantities and surplus shortages status.
Prepare procedures for control of material substitution in various phases of the project development to minimize material substitutions
Tests And Inspections Perform tests and inspections in vendor's shops by contractors inspectors and /or third party testing or inspection agency, as specified in the contract. Shop inspections shall be carried out in accordance with the works procedures
Arrange or perform any additional or special tests including lab tests when required
Have any statutory or specialist authority conduct the tests and inspection where required by laws and regulations
If so required, produce manufacturers certificates concerning material , pressure tests etc.
Station field inspectors at the site and perform tests and inspections for items specified
in the contract
Assure that welders are all qualified in accordance with accepted standards
Prepare inspection reports and submit them to the owner
Field specifications to be carried out in accordance with the works procedures.
Shipment And Transportation, Customs Clearance And Storage Shipment and transportation Arrange packing of the materials as specified and transport them to the port of loading
Arrange shipment of the materials to the port of unloading by ship, aircraft or other means
Transport the owners supplied equipment and materials from the delivery points
Arrange insurance in accordance with the contract
Customs Clearance Obtain import and reexport licenses for temporary facilities, construction equipment, personal effects of the contractors personnel, etc.
Arrange and conduct customs clearance of all materials, construction equipment, and other supplies at the port of unloading
Transport all material, equipment, etc. From the port of unloading to the site.
Storage Store all materials in a warehouse or yard, and implement proper inventory control for receipt, stocking and checking
Construction Provide the following services and facilities for all of the contractors and sub contractors, personnel engaged in the Works
A. Transportation to and from the site
B. Medical care and treatment
C. Living accommodation and catering
D. Recreational and communication facilities
Provide for the owners review as soon as possible after the award of the Contract, detail field construction plans including the following:
Estimated manpower requirements by crafts
Procedures and organisation for security, safety, sanitation, gate control, loss prevention and fire fighting at the site
Procedures for inventory control
Plans for mobilising equipment, material and labour
Plans for making critical and heavy lifts
Provide preliminary construction items
Conduct leveling, compaction of the areas and remove obstacles at the site
Provide access roads
Supervise labour and sub-contractors
Supply utilities
Manage construction work
Sub-Contracting
Control of Schedule and Quality
Commissioning and Reliability Test
Performance Test
Supply of spare parts
Training of the owners operating and maintenance personnel
The BidThe bid prepared by the bidder shall be in two parts:
1. Unpriced Techno-Commercial Bid
2. Price Bid
Unpriced Techno-Commercial Bid shall contain no prices or price schedules for the scope of Works. The following should be attached to the Bid:
1. Bid Security
2. Power of Attorney
3. Bidders eligibility and Qualifications
4. Eligibility of the plant, equipment, systems and services
5. Sub-Contractors/Sub-Vendors proposed by the bidder
6. Technical Deviations
7. Alternate Bids
8. Performance Guarantee Parameters
9. Construction Equipment
10. Technical Data Sheets
11. Local Representation
12. Contract Quality Assurance
13. Work Program
14. Electrical Power Requirement
15. Additional Information
16. Commercial Deviations
Price Bid shall cover the bid prices for the entire scope of work, facilities and shall contain the appropriate price schedules furnished in the bidding document as per the ITB Clause. Bidder shall furnish the Bid Price in the Summary Sheet and the breakdown of prices as follows:
I. Schedule of bid price (Summary)
A. Schedule of Prices for Offshore supplies
B. Schedule of prices for onshore supplies
C. Schedule of Prices for Offshore services
D. Schedule of Prices for Onshore services
II. Schedule of services for initial spare parts (Both onshore and offshore)
III. Valuation Program Chart
IV. Taxes, Duties and Levies included in the bid price
V. Optional items/Services
VI. Takeout Price
VII. Alternative Offer
Insurance Requirements (To be effected by the Contractor)
InsuranceAmount to be Insured
Marine Cargo110% of CIF Value
Erection All RisksFull Replacement value of Plant
Third Party LiabilityFor any one occurrence
Automobile LiabilityFor any one occurrence
Workmens CompensationIn Compliance with statutory requirement s which are applicable to the employees
Employers LiabilityFor any one occurrence
Payment
Contract PriceThe Contract Price shall be a firm lumpsum not subject to any alteration except in the event of a change in works and is specified in the agreement.
Terms of Payment The Contract price shall be paid as specified in the Terms of Payment as given in the table below. The owner will have to pay interest for delayed payment at the rate shown.
BondsThe following bonds shall be provided in favour of the owner at all times:
1. Initial Advance Payment Bond
2. Performance cum Warranty Bond
3. Intermediate Bond
4. Claim Under Bond
Intellectual PropertyLicense/ Use of Technical InformationFor the operation and maintenance of the plant, the Contractor grants a non-exclusive and non-transferable license (without the right to sub-license) tot the owner under the patents, utility models, or other industrial property rights owned by the contractor or a third party from whom the contractor has received the right to grant licenses thereunder, and shall also grant to the owner a non-exclusive and non-transferable right (without the right to sub-license) to use the knowhow and other technical information disclosed to the owner under the contract. Nothing contained shall be construed as transferring ownership of an patent, utility mode, trademark, design, know-how or other IPR form the contractor or any third party to the owner.
Confidential InformationThe Owner and Contractor, during the continuation of the contract will keep all information confidential and shall not without prior written consent anything to the third party. The Owner shall not use any documents or other material received for any other purpose.
Commissioning Guarantees and LiabilitiesThe Contractor guarantees:
1. Ontime Completion
2. Defect free design and engineering
3. Performance subject to details agreed upon
4. Contract of Indemnity for patent
5. Availability of the plant for the entire period till the expiry of defect liability period
Security PackageThe Security package must be acceptable to power purchasers, sponsors and lenders. It has to take into account:
A) The relative negotiating positions of sponsors and power purchasers based on relative experience of the parties, pressures on developers and pressures on power purchasers.
B) Relative negotiating positions of lenders and sponsors based on comprtition for funds, limited banking capacity and expertise as well as sponsors sunk investment cost.
Constituents of a typical security package includes Shareholders agreements and Government support arrangements in both phases of a project. The security is not in the technical legal sense, but the matrix of project contracts which underpin a projects costs and revenues.
Operating Phases
Power purchase agreements
Fuel supply contracts
Operating and maintenance agreements
Insurance package
Permits and licences
Other special situations ( Co-generation, tolling contracts, technical or management services, LNG facility contracts, commissioning gas, back-up fuel contracts ect. )
Construction Phase
Plant construction contract
Other construction contracts ( eg. For pipelines or transmission facilities )
Engineers appointments
Insurance package
Permits and licences
Lenders rarely accept a full exposure to al l risks of a project, thus there are few, true limited recourse project financings. The building blocks of a Security package include :
To keep the risk within the project, ie. the risk impacts on the sponsors equity return and/or the debt
Pass-throughs, ie. The project contract matrix effectively transfers the risk to the power purchaser
External support, the project is sheltered from the risk by aa third party: eg. Government support, insurance or shareholder undertaking
Risk ProfilesEven apparently very similar projects may display profound differences of risk assessment and allocation on detailed examination of the security package. The risks would be PRE as well as POST completion.
Pre-Completion Risks
Cost overrun - will the plant be completed and commissioned on budget. The issue that needs to be addressed is under what circumstances should the capital cost be passed through to the power purchaser.
Delay in completion
Interest rates - is the risk passed through to the power purchaser or is the interest rate risk held within the project and whether there is need for a hedging programme.
Force majeure - Problem areas include strikes, fuel contracts force majeure, is there a perfect match between construction contract force majeure and force majeure protection in fuel supply and power purchase contracts. How is loss of revenue coveredand if there is a DSU ?
Performance risks - is there adequate protection against errors by the contractor in design, procurement or workmanship. The issues in this case would be how much risk canthe contractor be asked to accept and what liability should the sponsors have to the power purchasers for the performance defects.
Foreign exchange - who bears the risk of any foreign-currency denominated element of the turnkey contract.
Permitting risk - does the project have all necessary consents required for construction and operation. In this case Permitting stability, ie. The role of host governments is significant.
Political risk - how is the project insulated from fedral or state political risk. Scope of political risk takes into account Premitting stability, Custos duties/import licences for plant and equipment, spares and imported fuel consents to raise local equity/debt. Government support would be in the form of comfort letters, government agreements, state acts of parliament.
Post-Completion Risks :
Station defects - are there adequate remedies protecting the project against post-completion defects.
Fuel cycle risks - does the project have committed supplies of fuel over the life of the PPA and do the escalation provisions match. Is the take-or pay risk passed through and if there is any currency or fuel stoking exposure.There is big risk for the purchaser because of - Demand profiles, Regulatory change, step change in escalated prices, Commissioning of cheaper plant.
Electricity Market risk - Is the projects income isolated from fluctuations in demand for power in the electricity market, and against volatility in prices for power in any wholesale market. The issue that needs to be addressed is whether the capacity charge is fixed, and paid irrespective of dispatch.
Plant performance (availability, net output, heat rate) - are the risks of availability, net output and heat rate equitably shared between the project and the power purchaser.
Interest rates
Currency of payment- to accommodate forex exposure on fuel purchases in energy prices. Is the project protected against depreciation of local currencey against hard currency commitments, how is the tarif denominated, is there exchange rate protection against foreign currency debt service.
Credit risk - is the power purchaser credit-worthy, what protection is available against credit dilution on subsequent privatisation.
Legislative change - are the effects of legislative change passed through to the power purchaser such as carbon tax, impact of more stringent environment regulation.
Force Majeure - Pass through of fuel cycle force majeure, effects of political or uninsurable force majeure, insurance : is payment of claims in foreign currency assured, how assured is business interuption cover.
Political risk - to what extent is the project protected against nationalisation or expropriation, currency non-convertibility : not only for equity return and debt service but also offshore payments for fuel and insurance ect. There are also other risks such as discrimination in favour of state-owned generators, Price review.
Bina Thermal Power Project1. Promoters
The project is being promoted by Aditya Birla Group ( through five of its companies, i.e. Grasim Industries Limited, Indo Gulf Fertilizers and Chemicals Ltd., Hindalco Industries Ltd., Indian Rayon Industries Ltd., all based in India and P.T. Indo Bharat Rayon , Indonesia) and Power Gen of UK. The Aditya Birla Group would hold 27% of the equity share capital, Power Gen 26% and balance would be by way of public issue and/or by way of private placement. The Birla Group alongwith Power Gen PLC of UK are presently in the process of setting up two power projects. One power project will be set up in Rosa in Uttar Pradesh and the second Power project being set up is the aforementioned Bina project in MP.
A.V. Birla group has more than 50 companies worldwide. The groups 350 MW Renusagar captive power plant is widely considered the best privately managed power plant with more than 91% availability and 90% PLF during last 10 years.
The other promoter Power Gen is one of the worlds largest private sector power generating company . It has a total 25.9% share of total electricity market in England and Wales. Power Gen has extensive expertise in generating electricity from coal, gas, oil and hydro. Power Gen has a proven track record both in UK and internationally.
2. Brief Description of the Project
The proposed Bina Thermal Power Station (coal based) has a capacity of 2x289 MW (578MW) in Phase- I and 2x250 MW in phase -II. The proposed power station site is about 15kms from Bina Town. The site area is uninhabited and no settlement is envisaged. Part of the land is under private holding and the rest of the land is with Go MP. The EPC contractor would be responsible for project completion on a guaranteed fixed cost and time schedule basis. A limited ICB exercise was undertaken for selection of EPC contractors. In view of both the sponsors having adequate experience in O&M of coal based power plants, the project does not envisage the appointment of an outside O&M contractor. The project and equipment design would incorporate the latest pollution control devices and is expected to adhere to all environmental norms.
DCL, Calcutta has been engaged as consultant for economic feasibility study, evaluation of EPC tender, negotiations with other reputed contractors for engaging them for detailed engineering, project supervision services, etc.
3. Forward and Backward Linkages
Fuel Linkages: Coal linkage of 2.7 million TPA from Korba Coal Fields of SECL, a subsidiary of Coal India Ltd.
Water Availability: Received water allocation in July 1995 (A barrage proposed to be constructed to meet the water requirement in the lean season.)
Land Acquisition: Land to be acquired, token advance paid.
Rail Linkage for coal transportation: To be finalised with Indian Railways.
Fuel transport agreement: To be signed with South Eastern Coal Fields Limited
PPA with MPEB: Signed in Feb. 96
EPC Contractors: Consortium of Siemens AG and BHEL
Power Evacuation: Proposed to be evacuated by MPEB through two 44kv feeders to 400 kv system of MPEB at Bina at a distance of 17 kms from project site.
4. Project Main Plant and Equipment Details
Main Plant EquipmentMakeParameters
BoilerBHEL907 tonnes/hr, 152 bar, 540deg.C
TurbineSiemens AG289 MW at 33degC(max)
Condenser Cooling Water
GeneratorBHEL & Siemens350 MVA, 289 MW at 0.85 p.f.,3 phase, 50 Hz.
ESPs ( BHEL, Ranipet ) will control SPM emission less than 150 mg/ NM3 . Stack height will be 275 meter (multi flue) for all units.
5. Environmental Parameters(Emission Levels)
Emission TypeStatutory LimitAnticipated Level
SPM (Mgm/NM3)200126
Sox ( Microgm/NM3)8037
NOx(Microgm/NM3)8033
6. Implementation Schedule
The project would have total implementation period of 36 months from time of Notice to proceed which will be immediately after the financial closing. The anticipated date for completion of the first unit is June 2000 and second unit is September 2000.
7. Fuel Supply Agreement
BPSCL proposes to enter into a long term fuel supply contract with SECL, a subsidiary of CIL, for an estimated requirement of 2.7 MTPA, to be met from Korba coal fields, 712 km, by rail. CIL is finalising a model fuel supply agreement, which would be used by all coal based independent power projects. The quantity and quality will be defined in the agreement.
8. Coal Washery
As per recent GoI notification, it has been made mandatory to use washed coal for coal based power plants. The sponsor of BPSCL have been indicated that they will jointly put up a washery to be established at pit head at Korba, the capital cost of which is expected to be Rs. 125 crores and construction period is anticipated to be 21 to 24 months.
9. Tariff Estimation based on PPA : PPA validity 30 years
Parameters Considered
Coal Cost
Basic Price of grade F coal@332/MT
Washing chargesRs.125.68/MT
FreightRs. 450/MT
Other charges(excise, royalty, sales tax)Rs.377.32/MT
Total1285/MT
Specific coal consumption of washed coalRs. 0.524 kg/kwh
Specific oil consumption3.5 ml/kwh
Heat rate2500 kcal/kwh
Calorific value of washed coal4200 kwh/kg
Oil costRs. 8750 /MT
Auxiliary consumption9.5 %
O&M expenses2.5 % of capital costs
Return on Equity16 %
Incentive@ 0.7% for every % increase in PLF
Working Capital Requirement-90 days of coal
-60 days of secondary fuel requirements
-30 days of O&M requirement
-60 days of debtors
Tariff depreciation@ 7.5% of capital costs
Tariff Calculations
S. No.ParticularsPlant Load FactorPlant Load Factor
68.49 %85.00 %
1Ist year two part tariff2.872.69
2Average fixed expenses for 30 years1.341.31
3Average variable expenses for 30 years0.750.75
4Average Tariff for 30 years2.092.06
5Levellised tariff for 30 years
(14% discounting factor)1.841.81
Schedule of Implementation
The project will be implemented on a turnkey basis by the consortium of Siemens and BHEL who start construction in October 1997 and complete the first unit by June 2000 (33 months) and the second unit by September 2000 (36 months). The project would have total implementation period of 36 months from the time of Notice to Proceed (NTP). The NTP would be immediately after the financial closing. The schedule is available as BPSCL has taken advance action in implementation of the project.
The company has targeted financial closing of the project at September 30, 1997. As per the PPA, the financial closure should occur by December 31, 1997.
Cost of the ProjectThe cost of the project has been estimated at Rs. 2630 crores (equivalent to about US $741 million at US$ 1 = Rs. 35.50), broad break-up of which is as given below:
Foreign
Currency Cost
(US$ mn)Rupee Cost
(Rs. Crores)Total Cost
(Rs. Crores)
Land and Site Development
4646
Non EPC Civil works
100100
EPC Contract175.410761699
Miscellaneous Fixed Assets
9999
Preliminary and Preoperative expenses
559559
Contingencies and Escalations
5959
Capital Cost of the Project175.419392562
Margin Money for Working Capital
6868
Total Cost of the Project175.420072630
Land and site development includes preliminary investigation costs of Rs. 3 crores, land cost of Rs. 16 crores, land acquisition costs of Rs. 13 crores, access and diversion roads costs of Rs. 6 crores and ash disposal area development costs of Rs. 8 crores.
Non EPC civil works cost of Rs. 100 crores comprise barrage cost towards water supply system of Rs. 52 crores, township cost of Rs. 45 crores and temporary construction and enabling costs of Rs. 3 crores.
The Letter of Intent for the EPC contract has been awarded to the consortium led by Siemens AG at a price of US$ 175.4 million and Rs. 1076 crores. The EPC contract includes the steam generator, turbine generator, mechanical balance of plant, electrical balance of plant, civil works, duties and taxes, installation, engineering and erection, testing, tunkey fees, overheads,management fees and commissioning.
Miscellaneous fixed assets amounting to Rs. 99 crores include coal transportation system of Rs. 13 crores, spares of Rs. 29 crores, heavy equipment and tools of Rs. 14 crores and ash development plant and disposal of Rs. 43 crores.
Preliminary & Pre-operative expenses of Rs. 559 crores comprise development expenses of Rs. 15 crores, legal & financial expenses of Rs. 21 crores, establishment and construction supervision expenses of Rs. 41 crores, operator training expensses of Rs. 2 crores, start up fuel expenses of Rs. 8 crores, insurance expenses of Rs. 22 crores, capital issue expenses of Rs. 22 crores, upfront fee of Rs. 61 crores, HERMES insurance premium of Rs. 35 crores, commitment fee of Rs. 6 crores, guarantee commission of Rs. 32 crores, interest during construction of Rs. 287 crores and other expenditure of Rs. 7 crores.
Contingencies and escalations amounting to Rs. 59 crores has been arrived at based on a percentage of the non firm costs - 10% on land & site development, 15% on non EPC civil works, 10% on miscellaneous fixed assets and 5% on preliminary and pre-operative expenses.
Margin money for working capital of Rs. 68 crores has been computed based on the estimated requirement of working capital - 3 months of fuel costs (advance payment of a month plus stock of two months), 2 months of secondary fuel, a month of O&M expenses, 2 months receivables, and one year stock of spares.
Capital cost as approved by Central Electricity Authority (CEA)The capital cost of the project, as approved by CEA is US$ 175.412 million and Rs. 18206.27 crores aggregating Rs. 2433.34 crores. The lower cost is attributable to the following factors:
1. The contingencies and escalations as approved by CEA are Rs. 6.45 crores. As this estimate was lower than that usually assumed by lenders in similar projects, the same was increased to Rs. 57.86 crores after considering the non firm costs.
2. The financing plan submitted to CEA assumes a rupee funding of 44.45% of the project cost (against 40% assumed here), ECAs of US$ 125.2 million and balance by ECBs of US$ 50 million. The ECBs of US$ 50 million were assumed to be on a non-recourse basis in the CEA estimates. This memorandum assumes that these ECBs may also have to be guaranteed. This increases the upfront fees and guarantee commission payable during the implementation period.
3. The interest rate on rupee loans has been assumed to be 17% against 18.88% assumed in the memorandum
4. The management fee on the guarantees issued has been assumed to be 1.05% against 3.15% assumed in this memorandum for guarantees of similar maturity.
5. The interest on the ECAs and ECBs would also need to be guaranteed. This has not been computed in the CEA approved cost.
For the purposes of profitability projections, the sales revenue has been computed based on the tariff calculated as per the CEA approved cost and financing plan, as a measure of conservatism.
Comparison of Project CostIFIs have appraised four major coal based projects in the private sector and two projects promoted by Gujarat State Electricity Board. A comparative statement of their project cost, configuration, details of their installed capacity and expected dates of completion are as below:
Name of CompanyDate of CompletionCapacityEPC Cost (incl. duties)EPC Cost/MWCapital CostCost/MW
AES Ib Valley#May 199842013263.1620804.95
Balabgarh#July 199850014312.8625155.03
Jindal Tractebel@June 19982609073.4911884.57
Jamshedpur*April 199667.5--316 4.68
GSEC (Gandhinagar)April 1998210--6393.04
GSEC (Wanakbori)April 1999210--7363.5
BPSCLSept 200057816992.9425624.43
#: Revision of costs of these 2 projects, sanctioned by IFIs in 1994, is in progress. Financial closure for the projects are yet to be achieved. The capital costs of these projects are at historical exchange rates (1994)
@: Project uses dual fuels - corex gas and coal
*: Provision made in the project for expansion upto 400 MW capacity in the cost handling and electric substation sections
The capital cost of GSEC units is lower primarily on account of no EPC contract being envisaged, progress already made in implementation, sizeable cost savings due to sharing of certain facilities with Gujarat Electricity Board and low interest during construciton as equity contribution has been brought upfront.
Means of Financing
US$ 1 = Rs. 35.50
SourceForeign Currency SourceRupee SourceTotal
(US$ million)(Rs. crores)(Rs. crores)
EQUITY
Promoters
Aditya Birla Group30107213
Powergen plc58
205
Others
371371
Total Equity88477789
DEBT
Rupee Loans
10521052
FC loans from ECAs125
445
FCBs97
344
Total Debt22210521841
GRAND TOTAL31015292630
Equity
Out of the total equity of Rs. 789 crores, the Aditya Birla group would subscribe to Rs. 213 crores (27%), Powergen would subscribe to Rs. 205 crores (26%) and the balance of Rs. 371 crores (47%) would be placed on a private placement basis and/or thru a public issue. The sponsors would underwrite the entire balance of 47% of the equity share capital of BPSCL. A suitable pre-commitment condition has been stipulated to this effect.The sponsors would be required to bring in 50% of the core promoters contribution prior to seeking disbursement of the loans. A suitable pre-commitment condition has been stipulated to this effect.
Rupee Term LoansBPSCL has sought term loans of Rs. 1052 crores from IFIs and ICBs for meeting a part of the cost of the project. The applicable terms and conditions are given below:
Repayment Schedule40 equal quarterly instalments beginning 42 months after financial closure
Security1. Mortgage of immovables and hypothecation of movables
2. Assignment in favour of lenders of all rights, titles and interests of the project company in all project documents
Drawdown Schedule0 - 12 months: 8%
13 - 24 months: 58%
25 - 36 months: 34%
Overseas BorrowingsECA BackedThe EPC consortium led by Siemens AG has offered long term buyers credit covered by HERMES, the ECA of Germany for 85% of the German export portion amounting to approximately US$ 125.2 million. The loan would be offered by a syndicate of commercial banks, with political risk cover being provided by HERMES. The project risk would need to be covered by suitable guarantees from IFIs and SCBs.
The HERMES backed FC loan of US$ 125.2 million would carry a mgt. fee of 0.5%, a HERMES insurance premium of 8%, a commitment fee of 0.25% and an interest rate of 7.76%. Interest would be payable semi-annually, with the repayments being spread over a period of 12 years commencing 6 months after commercial operations.
BPSCL has requested IFIs and ICBs to guarantee the aforesaid ECA credit. The applicable terms are as under:
AmountUS$ 125.2 million (+) interest thereon
Security1. Mortgage of immovables and hypothecation of movables
2. Assignment in favour of lenders of all rights, titles and interests of the project company in all project documents
The sponsors have had discussions with a few leading international banks which are active in the project finance market. It is envisaged that a syndicate of international banks would be underwriting the entire requirement of FC borrowings to the extent of US$ 222 million. While a few banks have evinced interest in extending commercial FC loan (non ECA backed) on a non-recourse basis, given that the FSA and FTA are yet to be finalised and may not match intl. Standards by way of guaranteed supply and penal charges, the appetite for overseas non recourse debt can be gauged only after the offers are invited from the banks. Thus this memorandum assumes that even the non ECA backed FC loans would need to be guaranteed by IFIs and ICBs. The guarantees sanctioned for these loans would stand reduced to the extent BPSCL is able to attract overseas non recourse loans.
Salient Financial Indicators
On Completion of Project, as on Sept 30, 2000
Debt - Equity Ratio2.33:1
Fixed Assets Coverage1.39 times
Promoters contribution as percentage of project cost16%
The above parameters are more favourable than the GOI guidelines in this regard for the financing of private power projects (max. D/E of 4:1 and min. Promoters contribution of 11%). The above means of finance is also within the GOI guidelines as to the extent of assistance provided by IFIs and ICBs not exceeding 40% of the total project outlay.
Additional Sponsor SupportThe sponsors have agreed to provide completion support to the project. The same would be quantified based on an assessment by the Independent Engineer (IE), prior to financial closure. A suitable pre-commitment condition has been stipulated that the spsonsors agree to provide completion support to the project as determined by the lenders, based on an assessment of the IE. This sponsor support would be without recourse to the lenders. This is over and above the contingencies of about Rs. 58 crores, which has been included in the project cost.
Marketing and Selling ArrangementsThe Indian Electricity Scenario
The Indian electricity sector has grown manifold over the last 50 years and India is the third largest producer of power in Asia. The power generating capacity inceased from 1362 MW in 1947 to about 83,288 MW at present. Until 1991, this sector was confined primarily to Government (Central or State) owned utilities except for a few licensees in the private sector operating in some of the large cities. With the growth in the economy and consequent growth growth in the demand for electricity, the gap between supply & demand has widened with the current energy shortage being about 8% and peaking shortage of 17%.
BINA POWER SUPPLY COMPANY LIMITED
PROPOSED OWNERSHIP STRUCTUTRE
Grasim
Indo-Gulf Indian Rayon Hindalco
1.21%
0.29%
0.69%
1.35%
Powergen plc.
PT Indo Bharat Thai Carbon
Thai Rayon
Black
26%
9%
4.5%
4.5%
Indo Thai
Asian Infra
Synthetic
(Power) Invst.
4.5%
Co Based
0.96%
Mauritius
BPSCL
Other
47%
Investors
BINA POWER SUPPLY COMPANY LIMITED
CONSOLIDATED FINANCIAL STATEMENTS OF SIEMENS GROUP
Siemens worldwide consolidated statement of incomeYear ended Sept 30
(million DM)
Particulars19961995
Net Sales9418088763
Cost of Sales-66710-62126
Gross profit on sales2747026637
Research & Development expenses-7296-7274
Marketing & Selling expenses-14170-12985
General administartion expenses-3039-2606
Other Operating Income6844479
Other Operating expenses-578-4932
Restructuring changes and exit costs-764-2173
Net Income from investment in other companies314496
Net Interest Income534700
Other financial gains103260
Income from continuing ooperations before income taxes32582602
Taxes on income from continuing operations-767-518
Income before extraordinary gains & accounting changes24912084
Extraordinary gains and accounting changes (net of applicable income taxes)496-
Net Income29872084
Assets19961995
Intangibles, fixed assets and investments
Intangible assets1382901
Property, plant & equipment at cost5382849511
less: Accumulated Dpepreciation-33880-31842
Investments1927818455
4060837025
Current Assets
Inventories2796826055
less: Advances received from customers-19884-19392
Accounts receivable and miscellaneous assets
Trade accounts receivable1951716782
Other accounts receivable and miscellaneous assets1150711242
3102428024
Liquid Assets764810164
Prepaid expenses137101
Total Assets8750181977
Shareholders Equity and Liabilities19961995
Shareholders Equity
Capital stock of Siemens AG27542753
Common stock (No. Of votes 550,695,940)4646
Preferred stock (No. Of votes 9,236,340)28002799
86178615
Additional paid-in-capital1231410324
Retained earnings840728
Unappropriated consolidated net income16381526
Minority interest-1011-1501
Translation adjustment2519822491
Accrued Liabilities1864917747
Pension plans and similar commitments1984020471
Other accrued liabilities3848938218
Debt61795141
Other liabilities80807349
Trade accounts payable900982991
Additional liabilities1708915640
Deferred Income546487
Total Shareholders equity and liabilities8750181977
The GOMP constituted a high level committee, in Jan 1996, under Dr. N. Tata Rao, Ex-Chairman APSEB, to arriveat guidelines on restructuring and privatisation of power sector and power tariff in the state. This committee submitted its report in Jan 1997. The recommendations are summarised below:
The committee was of the view that the current problems being faced by MPEB was due to the various social obligations which were performed by it over an extended period, including supply to rural areas and energising a large number of villages. In order to give relief to the SEB from the existing burden of running the huge monolithic organisation into which it had grown and is finding itself unable to provide the needed investments and the quality of sevice a customer expects from it, the committee has recommended dividing MPEB on a functional basis into 3 entities, viz.:
1. Madhya Pradesh Power Corporation (MPPC)
2. Madhya Pradesh Transmission Corporation (MPTC)
3. Madhya Pradesh Zonal Distribution Companies (MPZDC)
Initially these will be susidiaries of MPEB. Distribution functions of MPEB will be decentralised into a number of independent zonal companies of manageable size in area, turnover and employee strength. The committee was of the view that MPEB, unlike other SEBs, has managed to keep its generation wing separate from the transmission and distribution wings and ahs not allowed inter-transfers of staff. This is expected to facilitate the proposed restructuring of MPEB on a functional basis.
GOMP is understood to be intending to evolve a consensus for the restructuring of MPEB. The restructuring is likely to result in improvement in the risk profile of the offtake entity. Further, the escrow arrangements would continue even in this scenario..
Proposed Credit Enhancement MechanismThe project envisages 3 sources of security for the obligation of MPEB:
1. Letter of Credit: MPEB shall establish for the benefit of BPSCL one or more Lcs in respect of the amounts payable under the PPA. Each such LC shall remain in place for the longest period commercially available (not less than 12 months). The aggregate of each LC shall be an amount necessary to meet 2 months projected tariff payments. A PLF of 80% is assumed for the 1st yr. of operations and for the subsequent years, an average of the previous period PLF will form the basis. MPEB shall renew or replaceeach LC at least 70 days prior to its expiration. BPSCL shall be entitled to drawdown upon a LC if MPEB does not make payment by the invoice due date. MPEB shall restore the LC to the envisaged amount within 5 days of such drawdown.
2. Escrow Account: MPEB shall at all times following the first unit commercial operations date maintain an escrow account with MPEBs bank in a form and substance mutually agreed to by the parties and on terms no less favourable than applicable to any other indpendent power generating company. Such an escrow account shall be credited with an amount suficient to equal one and half months of the monthly tariff payments payable by MPEB under the PPA. MPEB shall be at liberty to withdraw amounts from the Escrow account till such time that MPEB fails to renew, replenish, replace or restore any of the envisaged LCs. Upon an event of default, MPEB bank shall withhold all further withdrawals or disbursement instructions by MPEB from the escrow account and BPSCL shall be entitled to draw on the escrow account.
3. GOMP Guarantee: The GOMP irrevocably and unconditionally guarantees to BPSCL the payment and performance obligations of MPEB under the PPA.The Escrow mechanism is seen to be a major security measure for payments due to MPEB. Further, the projected revenues from MPEB would be insufficient to meet the escrow requirements of all the IPPs envisaged in the state (8195 MW). Broadly it has been estimated that the projected revenues of MPEB would support about 2000 MW of private sector generating capacity (assuming a cover of 1.5 times at the time of commercial production). All the PPAs which have been signed envisage escrow as a credit enhancement mechanism. It has been indicated to MPEB that escrow should be awarded to only a select few projects based on certain criteria, to enable at least a few projects to achieve financial closure. The sponsors have indicated that MPEB is presently in the process of identifying projects which would be awarded the escrow and BPSCL, being one of the early projects envisaged to achieve financial closure would not encounter any problem in securing the escrow. A suitable pre-commitment condition has been stipulated that the escrow arrangements be finalised to the satisfaction of lenders.
Retention Reserves
As a limited recourse project, BPSCL would be required to maintain reserves for meeting payments for fuel, O&M and insurance expenses, tax payments, interest on working capital, interest on long term debt and principal repayments. A suitable consition has been stipulated that the company shall maintain retention amount suficient to equal one and half months of the monthly tariff payments payable by MPEB under the PPA. MPEB shall be at liberty to withdraw amounts from the Escrow account till such time that MPEB fails to renew, replenish, replace or restore any of the envisaged LCs. Upon an event of default, MPEB bank shall withhold all further withdrawals or disbursement instructions by MPEB from the escrow account and BPSCL shall be entitled to draw on the escrow account.
Events of Force Majeure
Neither party to the PPA will be held liable for the non or delayed compliance of its performance obligations if such breach is solely due to certain events of force majeure, i.e., to the extent such event is outside the reasonable control of the relevant party. Four types of force majeure have been defined in the PPA including natural, non-political, political and foreign political event. During the pendency of force majeure of the types including natural, non-political, political and foreign political event, BPSCL shall be entitled to receive monthly tariff payments from MPEB.
Consequences of Indian Political EventFor an Indian political event occuring prior to the projects commercial operations date, BPSCL has a right under the PPA to terminate the agreement and (i) sell the project to MPEB for a termination purchase price or (ii) accept payments from MPEB including interest due on loans, costs associated with any suspension, cancellation of any contract entered into by the company, any additional costs incurred by the company as a result of the event of force majeure and 7% simple interest on the equity invested in the project for the period of continuation of the Indian political event.
For an Indian political event occuring during the operational period of the power plant, BPSCL shall be entitled to receive monthly tariff payments in the following manner: (i) in the event the plant has not operated for more than one month, the monthly PLF shall be 51.37% for the first 6 months and 68.49% for the next 6 months, (ii) if the plant has operated for less than 12 months, the PLF assumed shall be the PLF achieved during the last full month of operation, (iii) otherwise the PLF shall be assumed to be the average of the PLF over the previous 12 months period.
COST OF THE PROJECT
ParticularsCost Break-upTotal Total
FC CostRs. Cost(Rs. mn.)(US$ mn.)
Land & Site Development
455.4455.412.8
Preliminary investigation
30.230.20.9
Land cost
155.8155.84.4
Cost of land acquisition
128.4128.43.6
Access & Diversion Roads
64641.8
Ash disposal area development
77772.2
Non EPC Civil works
997.6997.628.1
Barrage - water supply system
52052014.6
Township
452.6452.612.7
Temporary Const. & Enabling works
25250.7
EPC Contract175.410760.916988478.5
Miscellaneous Fixed Assets
993.1993.128
Coal transportation system
131.8131.83.7
Spares
295.3295.38.3
Heavy equipment and tools
137.5137.53.9
Ash disposal plant & equipment
428.6428.612.1
Preliminary &Preoperative expenses
5593.25593.2157.6
Development expenses
1501504.2
Legal & Financial expenses
206.1206.15.8
Establishment/Const. Supervision
405.9405.911.4
Operator training expenses
20200.6
Start up fuel expenses
77772.2
Insurance
2202206.2
Capital Issue expenses
222.5222.56.3
Upfront fee
607.8607.817.1
Hermes insurance premium
354.7354.710
Commitment fee
63.663.61.8
Guarantee commission
319.9319.99
Interest during construction
2874.52874.581
Other forex charges
71712
Contingencies & Escalations
592.8592.816.7
Capital Cost of the Project175.419392.925620721.7
Margin money for working capital
68068019.2
TOTAL COST OF THE PROJECT175.420072.926300740.8
Our Comments on the Proposal
The cost/ MW installation works out to be Rs. 4.46 crores which is on the higher side. A detailed review of the cost estimate needs to be done to ascertain the reasons in this regard.
The EPC consortium, headed by Siemens AG is well reputed in the turnkey construction projects sector and is quite experienced in the coal based power plants construction. The experience of their consortium members , viz. Siemens AG and BHEL is expected to minimise the construction risk to a large extent.
The boiler is to be designed and supplied and erected by BHEL who have got sufficient expertise in this area. The design of the boiler is similar to BHELs most recent coal fired 2x250 MW plant at Dahanu (BSES).
The turbine will be supplied by Siemens AG, who has got experience on combined HP/IP LP turbine cylinder design and has been fabricating reheat condensing turbines since 1950 and total capacity added using such turbine is about 95000 MW.
BPSCL would be executing a long term agreement with SECL, the most profitable subsidiary of CIL, with annual production of coal in excess of 54 million tonnes in 1995-96. Further, in the event SECL fails to supply required quantity of coal from linked mines, SECL shall have to pay the liquidated damages to BPSCL.
Both the sponsor groups are having adequate experience in operation of coal based plants. The Aditya Birla Group is operating 11 power plants in India with an aggregate capacity of 864 MW, with another 272 MW expansion underway.
Power Gen is the fifth largest private sector power engineering company in the world and is predominantly a fossil fuel based generating company, with expertise in generating electricity from coal, oil and ash.
The plant would be operated as base load station and MPEB will purchase the entire power generated by BPSCL. Further , two part tariff structure insulates BPSCL from any anticipated/ actual price increases.
The State of Madhya Pradesh has been experiencing deficit in both peak and energy demand. The peak power deficit and energy deficit by the end of the year 1995-96 was estimated at 23% and 9% respectively. As per the 15 th Electric Power Survey, the peak demand is estimated to increase from 5151MW in 1996-97 to 996 MW by 2006-07, while the energy demand is estimated to increase from 31137 Mkwh to 55583 Mkwh during this period. Considering addition of 7180MW capacity (including the Bina Project) upto the year 2004-05, it is estimated that energy availability situation will be satisfactory, while additional peaking capacity of about 600 MW would be needed by 2006-07, to meet the peaking requirements. However it is unlikely that more than a few projects are to achieve financing closure in 1997-98. Thus the actual demand-supply gap is likely to be adverse than the scenario described above.
M/s. ICICI, have already appraised the project as a lead institution for mobilising RTL of Rs. 1052 crores and FCL of Rs. 222 million US $ and have recommended various FIs for financial support.PRELIMINARY FINANCING PLAN
Bank GuaranteePolitical Risk CoverFunds provided (% project cost)Funds provided ( appox. In $)
IFIs10%-40%$300m
Indian Banks10%---
HERMES-18%--
Intl banks--30%$220m
Equity--30%$220m
Totals20%18%100%$7.40m
( International portion takes some clean project risk)
The Preconditions for Financing They have to be a Bankable Project Contracts.
- PPA with acceptable security package
- EPC contract with umbrella grantee from Siemens AG
- Coal Supply Agreement covering mining, washing, transport
- O&M contract
Satisfactory Studies by International Consultants
- Coal mine study
- Coal washery study
- Rail logistics study
- Hydrology study
- Environmental Impact Assessment
- etc.Thereafter 6-9 months for financial Close
EPC Contractor Selection Process for the BINA Power ProjectThe selection of Siemens and BHEL as the EPC contractors was the result of extensive supplier evaluation by the sponsors over a period of nine months. And international competitive tendering exercise was undertaken with selection based primarily on commercial and technical criteria.
The prequalification tendering process was initiated in September 1995. Detailed prequalification questionnaires were issued to nine parties, including GE Industrial and Power Systems, USA; GEC Alsthom Power Plants, UK; Parsons Power Generation Systems, UK; Siemens AG, Germany; ABB Power Generation, Germany; Korean Heavy Industries, S. Korea; Hyundai Heavy Industries, S. Korea; BHEL, India; and Mitsubishi Corporation, Japan. The quality of response received from Hyundai was found to be unsatisfactory and the EPC tender was issued to the remaining eight parties in November 1995.
The tender was opened in February, 1996. In addition to the review carried out by the sponsors, a preliminary review on technical aspects of all the bids received was carried out by Development Consultants Ltd., Calcutta. Of the above parties, Parsons Power Generation withdrew without submitting a bid, while the bid received from GEC Alsthom was rejected on account of inadequacies and high tender price. Korea Heavy Industries was not short-listed on account of high tender price and lack of experience in working in India. Though Mitsubishi Corp. submitted a bid, it subsequently withdrew from the process. Thus the short-listed bidders were GE Industrial and Power Systems, ABB Power Generation Ltd., and the consortium of BHEL and Siemens AG. The tender assessment process was detailed and the main parameters for the award of the contract were :
The EPC Price.
Output/ Heat Rate.
Financing.
Technical and Commercial Compliance.
The price and construction schedule offered by the BHEL and Siemens consortium (hereinafter referred to only as consortium) was found to be the most competitive, and a Letter of Intent was issued on June 21st, 1996 to the consortium as the preferred bid.
Siemens AG
Siemens AG is a world-wide leader in the engineering and electronics industry with operations around the world. It specialises in turnkey plant aspects in virtually every type of industry and is recognised as a leading edge player in engineering research. The various power business segments of Siemens AG group include: the power generation group, industrial and building systems, automation products, communication and networks, defence electronics, transportation, medical engineering and semi conductors.
For the financial year ending September 30, 1996, Siemens AG reported total sales of Deutsche Mark (DM) 87.5 billion (Rs. 1,83,750 crores), Profit Before Tax of DM 3.2 billion (Rs 6,825 crores), and a Profit After Tax of DM 2.49 billion (Rs. 5,229 crores).
Siemens Limited (India)
Siemens (India), a subsidiary of Siemens AG, has interests in power generation and distribution systems, telecommunication, network and products, rail transportation, medical engineering, industrial products, systems and projects, components and software. Together with its subsidiaries and associate companies Siemens (India) employees over 9,000 people in the country.
Since the 1950s, Siemens has provided know-how, technology, equipment and expertise to the power industries both in the power and the private sector. Siemens is associated with major power projects in the country including the combined cycle power plant of Tata Electric Co., Trombay; Gas based combined cycle power plant of MSEB, Muran; and the 655 MW combined cycle power plant of Gujarat Torrent Energy Corp., Gujarat.
For the year ending March 31, 1996, Siemens (India) reported a net profit of Rs. 58 crore on a total income of Rs. 1198 crores. The net-worth of the company as on March 31st, 1996, was Rs 286 crores.
Bharat Heavy Electrical Ltd. (BHEL)
BHEL is one of the premier engineering companies in India involved in the manufacture of power plant equipment and products like motors, captive power plants, co- generation plants encompassing gas turbines, steam turbines, heat recovery boilers, compressors, heat exchangers and pressure vessels. BHEL has 14 manufacturing divisions, and four power sector regional offices spread across the country. BHEL has been consistently expanding its manufacturing capacity, and has also been updating its technology by entering into collaboration agreements with leading manufacturers world-wide.
The power division product range of BHEL is comprehensive and includes the entire range of Power Plant Equipment (PPE). The products include thermal sets, gas turbines, hydro sets, equipment for nuclear power plants, boilers and pressure vessels, heat exchangers and boiler auxiliaries.
BHELs financial performance has been satisfactory, with net profits of Rs. 468 crores on a total income of Rs 5740 crores during 1996-97.
Engineering Procurement and Construction contract
Salient FeaturesThe project will be implemented on a Turnkey Basis by a consortium comprising Siemens AG Germany, Siemens India
1) Off shore supply contract with Siemens AG
2) Off shore engineering services with Siemens AG
3) On shore Supply contract with Siemens India
4) On shore civil contract and other services contract with Siemens India
5) On shore supply contract with BHEL
6) On shore civil and Other services-BHEL
The broad scope of work for each member of the consortium as under:
1) Siemens AG-GermanyConsortium leader and overall project management will supply the turbine island and generators and major C&I equipment
2) BHELBHEL will be responsible for the boiler island, coal unloading and handling plant transformers, ESP and erection of all such equip. and BHEL. 6 separate contracts would be awarded which will collectively be equivalent to a single
turnkey contract.
3) Siemens IndiaWill be responsible for water treatment plant, C&I equipments and all main civil works including building and structures.
The scope will comprise all works , plant and equipment necessary for a complete power station ( inter alia)
Subcritical reheat boilers
Steam Turbines
Condensers and regenerating heaters
Turbine auxiliary equipment
Boiler feed pump, condensate extraction pump etc.
Electrical systems- 400kv system, 6.6 kv and 400 V switchgears
Instrument and control system
Central control room
Air pollution control system
Make up water systems
Site civil works
Rail infrastructure for cost unloading
Storage and handling facilities for fuel, chemicals et c.
Fuel oil delivery system
Dust and ash handling system
Station chimney
Above includes all civil work within the plant boundary limit
Price: A lumpsum fixed price contract without any escslationhas been negotiated at US$ 175.412 millions and Indian rupees 1076.088 crores. The break up is as follows:
US$ in millionRs. in crores
Siemens AG127.412
Siemens India
462.58
BHEL48613.508
Total175.4121076.08
The above cost includes all import duties, taxes, works contract tax and spare parts during start up. Spares worth RS 29.53 crores will be ordered separately being strategic spares.
Terms of payment:QTR145678101112
US$(%)7.390.450.4559.6624.770.910.573.182.61
Rs(%)6.121.2515.4835.5932.012.51.564.021.48
Guarantee
The consortium leader Siemens AG, Germany has given a wrap around guarantee covering the entire EPC contract.
a) Performance guarantees and liquidated damages
b) Warranty obligations
c) Default and termination
d) Indemnities
Performance Guarantee and the contract guaranteeNet Electrical outputGross Output
289 Mw
Net output
263.5 MW
Gross heat rate9152 KJ/KWH
Net heat rate
10057 KJ/KWH
Availability
90%
EmissionsDust 100mg/nm3
NOX 650mg/nm3
Sound 85 db at 1.5 meter from any equipment
Warranty periodThe entire plant is covered for two years full defect liability period plus additional three year for significant defect in plant and machinery. The contractor will provide a performance bond for 20% of the contract price which will be reduced to 5% on taking over and to 0% after completion of the defect liability period.
Liquidated damages For delay: 20% of contract price(CP), 0.7% of CP per week of delay
For performance: 20% of Contract Price
For output: 1.75% of the CP for every 1% shortfall in output
For heat rate: 1.5% of CP for every 1% excess in heat rate
Availability: 0.5% of CP for each full 1% by which availability fall shortly
Maximum cap.: 35% of contract price (CP)
Total liability: CP + maximum capacity
Comparison of EPC bidsConstruction period in months. All financial figures in millions
Original as on 21/2/96ABB.GESiemens & BHELGEC AlsthomMitsubishiKorea heavy ind.
Construction period39/4239/4236/3939/4239/4242/45
Bid price US$178.731748578.6543572
Rs11378729614250.8
DM
244.22
Bid Value @ Rs 34.519169.7518232.522012.3619892.718733.519734
Revised as on 15/3/96
Construction period37/4036/3936/3939/4236/3936/39
Bid price US$208.73312.548551.85538542
Rs11043729613065.8
DM
236.89
Bid value@ Rs34.518708.518542.0120644.0519038.921858118699
Revised as on 24/4/96
Constr. period37/4036/3936/39
Bid price US$208.73309.648
Rs 110436806.113065.8
DM
236.89
Bid value @ Rs 34.518708.9517952.0620644.15
Revised as on 30/5/96
Constr. period36/3933/3635/38
Bid price US$212.51322.3448
Rs11294.56449.113065.8
DM
236.89
Bid value @ Rs 34.518090.817569.920644
Revised as on 14/6/96
Constr. period36/3933/3635/38
bid price US$
196.83320.3174.85
Rs10815.86670.110587.4
DM
Bid values @ Rs 34.517666.4417927.4516619.86
Final as on 15/6/96
Constr. period33/3633/3633/36
Bid price US$
196.83320.3175.41
Rs10745.86670.11076.08
DM
Bid values @ Rs 34.517536.4417720.4516812.44
EPC STRUCTURE
The EPC contract would be executed by the Siemens AG, Siemens (India), and BHEL consortium. Separate contracts are to be entered among the three members linked with each other by cross-default breach stipulations. Single plant responsibility with Siemens AG by way of a wrap around contract.
In terms of the contract, the contractor shall perform all work and services required in connection with design, engineering, procurement, manufacture, construction, commissioning, start up, demonstration and testing of facilities. As per the contract, all the civil works within the project plan site, would be the responsibility of the EPC contractor.
IN order to execute the project, Siemens (India) will have a coordinating office, covering local supplies, and BHELs scope in New Delhi, with the project office in Germany. The site management team will be headed by Siemens (India) together with the BHEL site manager. The project company has the right to confirm the acceptability of site construction sub-contractors. The salient of the EPC Contractor are summarised below :
CONTRACT PRICE
Contract PriceThe contract price is USD 175,412,000 and INR 10,760,880,000 (fixed price)
ValidityJune 30, 1997, with an agreement to extend beyond that date at the mutual agreement of both the parties. (The sponsors have indicated that the EPC Contract validity will be extended till Sept. 30, 1997 at the same price)
Contract StructureThe consortium proposes to structure the Contract between the number of on-shore and off-shore contracts. This is conditional upon BINA being satisfied that the employer retains the same rights and remedies and a single point responsibility is maintained.
CONDITIONS
Termination ClausesBINA has rights of termination in cases of : prolonged delay, failure to pass tests on completion, failure to remedy a defect, Contractors default, consequences of a force majeuer event.
Contractor has rights have termination in cases of : prolonged suspension, employers default, force majeuer event.
Ground ConditionResponsibility of Contractor
Changes in LawCovered under force majeuer clauses in both PPA and EPC Contract.
Force Majeuer ClauseSame as in PPA
CONTRACT REMEDIES
Liquidated Damages for delay20% of Contract price @ 0.7% per week
Performance GuaranteesIf the works fail to achieve any o f the guaranteed figures, the following liquidated damages will be payable subject to a cumulative maximum of 20% of the contract price.
Net output - 1.75% of the contract price per 1% shortfall in output
Net heat rate - 1.5% of the contract price per 1% excess in net heat rate.
Availability - 0.5% of the contract price for each 1% by which actual availability falls short of the availability.
Cap on liquidated damages35% on the contract price.
Cap on total liability100% of the contract price plus 35% of (liquidated damages)
Performance securityAn on demand bond of 30% of contract against Siemens AG
Defects Liability2 year full default liability plus an extra extended defects period
Availability GuaranteeA 90% availability guarantee has been agreed to on the basis that LDs will only be levied after allowing a grace of 10% for an equivalent forced outage rate. Plan outages are considered separately.
It may be mentioned that the liquidated damages and other penal charges proposed in the EPC Contract are on the higher side compared to similar Contractor and would be sufficient to cover any penalties which Bina Power would be required to pay for any under-performance or delay.
OPERATION AND MAINTENANCE
In view of both the sponsor group having adequate experience, in the operation of coal based power plants, the project envisages the appointment of an O&M company, which would be promoted by the sponsors. As mentioned earlier, Power Gen has been operating coal based power plants in UK, with high levels of availability and efficiency. The Aditya Birla Group is operating 11 power plants in its various companies in India, with an aggregate capacity of 864 MW, with another 272 MW of expansion under way. The largest captive at Hindalco, Renu Sagar, is a coal plant with a capacity of 425 MW (expansion by additional 150 MW is underway). This plant has been operating at PLF levels of upwards of 85% consistently.
The sponsors have formulated a detailed organizational setup for the O&M company and the total manpower requirements are estimated at 888 for the two units of 298 MW each. The manpower requirements for the general maintenance is estimated at 60 staff and 120 workers. All the scheduled major maintenance works are proposed to be carried out through Contractors. Apart from a technical department, provision has also been made for personnel for services like a hospital, rural development, guest house, schools, and security. Individuals with adequate experience working with the sponsors group would be deputed to man the key positions in the organizational set up on commencement of operations.
A suitable pre-commitment condition has been stipulated that the O&M arrangements be made to the satisfaction of lenders.
PLANT & MACHINERY
The power generating equipment has been based on the Siemens pre-engineered basic concept for coal fired power plants which have been developed for Indian requirements. The plant & machinery for the project can be broadly classified into boilers/ steam generator, the turbine generator, balance of plant, electrical equipment and control, and instrumentation.
Steam Generator
The boiler or steam generator will be dwsigned, supplied, and erected by BHEL. BHEL has significant experience in the design and manufacture of boilers firing Indian coal for power station projects of similar and larger capacities than that required for BINA power. The corner fired, natural circulation, single stage re-heat, two pass steam generator, will operate at sub-critical steam conditions with moderate super heat and re-heat steam temperatures. The boiler will be designed to accommodate the unique nature of Indian coals reflecting the design practice from other Indian plant designs. The design of the boiler will mirror BHELs most recent coal fired 250 MW reference plant, BSES (2*250 MW at Dahanu, Maharashtra), in India.
Steam Turbine
Siemens has extensive experience in the combined HP/IP turbine cylinder design and has been fabricating reheat condensing turbines since 1950, and total capacity added using such turbines is close to 95,000 MW, involving 414 machines. The proposed turbine generator set will have one combined HP/IP (K type) and 1 double flow LP turbine casting with a hydrogen cool generator arranged in line with the LP turbine.
Electrical Equipment
The two maintain generators with a generation capacity of 275 MW (289 MW maximum) will have their output at 21 KV (Kilo volts) at 0.85 power factor. This will feed electric power through 320 MVA generator transformers to an adjacent 400 KV double busbar switch yard, from where power will be exported to MPEB Transmission System.
Control and InstrumentationA comprehensive state of the art Control and Instrumentation (C&I) system allowing a high level of automatic operation and diagnostic facilities envisaged to be provided as a apart of the EPC contract. The same will be based on the Siemens TELEPERM XP design.
Coal Transportation and Preparation System
The system has been designed to handle unit rakes upto 60 wagons and handling capacity of 5 rakes per day over a 16 hour period. The normal rake speed is 0.8 kilometer per hour to the maximum speed of 3.2 kilometer per hour. The track hopper is designed to empty a complete rake with a capacity of 32,000 tones and is provided with covers to protect the system against rains.
Risk Analysis - Allocation & MitigationA detailed risk analysis is provided below:
Risk FactorRelevant FactorProposed mitigation mechanism
Pre - construction delay
Finalisation of key contractsBPSCLFSA, transport agreement and EPC contract to be finalised shortly. PPA and GOMP guarantee already signed.
Approvals and permitsEPC Contractor/ BPSCLMPEB to assist BPSCL to obtain necessary approvals. Work permits within site to be obtained by the EPC contractor
Force MajeureMPEBPPA provided for rescheduling of scheduled commercial operations date in the case of natural force majeure or Indian political force majeure.
Off take Risk
Volume RiskMEPBPlant to operate as a base load plant with obligation on MEPB to lift entire power.
Price RiskMEPBThe two part tariff structure insulates BPSCL from any actual price increase, but the O&M expensed, which are linked to inflation.
Payment RiskMEPB, GOMPCredit enhancement mechanism include provisions of L/C, escrow account backed by GOMP guarantee.
Construction Risk
Cost increaseEPC contractor / BPSCLFixed price turn key contract on a completed cost basis. Project Co. To bear risk on non EPC cost.
InflationEPC contractor / BPSCL- Do-
CompletionEPC contractor / BPSCLStringent liquidated damages for completion on time
Plant performanceEPC contractor Experienced EPC consortium, liquidated damages
Force MajeureMEPB/ BPSCLRescheduling of scheduled commercial operation date
Delay in construction of GridMEPBProject to be deemed commissioned
Damage / DestructionEPC contractor / BPSCLCommercial Insurance to be purchased
Equipment Under performanceEPC contractor / BPSCLReputed EPC contractor.
Sponsor groups having adequate power plant operating experience
Environmental requirement
Shortage of fuelEPC contractor / BPSCLEPC contractor stipulates emission norms prevalent in India.
Sponsor groups having adequate power plant operating experience
StrikesSECL/BPCLFSA provides for commercial supply of coal. Provision for two month coal supply in stock. BPCL will bear residual risk.
Insurance riskInsurance Co. / BPCLMinimal risk in light of few and trained personnel
Adequate insurance will be provided to the extent commercially viable.
Political Risk
Foreign Exchange availability & convertibilityBPCLAvailability of foreign exchange is likely to be effected by economic and monetary conditions prevalent in India
ExpropriationBPCL/ GOIGOI actively wooing foreign investments.
Provision for payment of fair price in the event of expropriation.
Rupee exchange rate riskMEPB/ BPCLMEPB to cover base return on equity, interest and principal payment against exchange variation.
BPCL to bear risk on incentive payment and O & M expenses.
change in lawMEPBImpact to be absorbed by MEPB after mutual agreement.
Others
Force - Majeure - Indian political riskMEPBMEPB to pay fixed charges at a PLF linked to period of operations.
Force - Majeure - Non -Indian political riskBPCLBPCL to retain risk
InflationMEPB / BPCLThe two part tariff passes on all price increase (except O&M expenses to MEPB.
BPCL exposed to risk on incentive payment and O&M expenses.
Real estate riskBPCLImplementation agreement with GOMP expected to facilitate land transfer in an encumbrance free condition
STATUS OF APPROVALS
Statutory Clearances
S. NoItemAgencyStatusRemarks
a)Techno - Economic clearance from CEACentral Electricity AuthorityObtained in last week of May 1997Formal letter expected shortly.
b)Notification to be issued under section 29(2) of Indian Electricity (Supply) Act, 1948State Government (SG)IssuedDated 17/1/97
c)Water Availability1. SG
2. Central Water CommissionObtained
ObtainedDated 18/07/95
Dated 05/11/96
d)Pollution Clearance (Water & Air) from State pollution control boardState Pollution Control BoardObtainedDated 16/10/95& 21/11/96
e)Environment and Forest Clearance from MOEF, SG1. SG
2. Ministry of Environment and Forests (MOEF)Obtained
ObtainedDated 23/04/96
Dated 04/12/96
f)Civil Aviation Clearance for Chimney height from National Airport AuthorityNational Airport AuthorityObtainedDated 06/07/95
g)Company RegistrationROCObtainedDated 19/12/94
h)Rehabilitation and resettlement of displaced families by land acquisition.1. MOEF
2. SGNA-
i)Hydro projects (mini- micro)Ministry of water resourcesNACoal based project
j)Equipment procurement / Import LicenseDGTD,CCI&ETo be obtainedExpected by 30/09/97
Non Statutory Clearance
a)Land AvailabilitySGTo be acquired, token advance paidExpected by 30/06/97
b)Fuel LinkageDepartment of CoalObtainedDated 06/01/97
c)Transportation of CoalMinistry of RailwaysObtainedDated 16/01/97
Other Clearances
a)FIPB Clearance- ObtainedDated 02/01/97 & 25/03/97
b)ECB clearance-To be obtainedExpected by 31/07/97
c)Tying up of finance-To be tied up
d)Foreign exchange permission from RBI / for foreign equity / ECB-To be obtainedExpected by 15/08/97
STATUS OF MAJOR CONTRACTS / AGREEMENTS
a)Power Purchase agreementMEPBSigned on 12/ 02/96Modification to be made.
Expected by 15/07/97
b)EPC contractEPC consortium / BPSCLLOI issued. To be signedExpected by 30/06/97
c)Fuel Supply Agreement
To be signedExpected by 30/06/97
d)Fuel Transport AgreementIndian Railway / LessorTo be signedExpected by 30/09/97
e)Washery ContractWashery CompanyTo be signedExpected by 30/09/97
Prospects for EPC ContractorsInternationally, several factors have placed downward pressure on EPC contract pricing of combined cycle power plants over the last several years. Throughout the 80s, cogeneration and supplementary firing were incorporated in most industrial-size projects. Then when PURPA efficiency requirements were removed, plant capacity increased to utility size units and unit EPC costs started to drop. Increased competition and deteriorating power sales pricing have led to reduced margins and additional reductions in unit EPC costs to a point where significant reductions in the near term are doubtful.
International EPC contractors are a far more competitive lot than their Indian counterparts. This competitiveness stems from various factors but the primary is that they are much more experienced in the field and they bring the whole gamut of services to the project - not only engineering, procurement and construction, but also financing arrangements. They have been working with these financing bodies and they both understand each other well. Indian EPC contractors on the other hand have had no such linkages and are only just beginning to get a feel of how business is done internationally. It is imperative for their well being that they get their act together and tie-up with financial institutions. As long as they are learning the ropes, there can surely be tie-ups with international players, but they cannot continue to hold their hand forever, especially if they aspire one day to ever compete on a global basis. The strength of the Indian EPC contractors is that they understand the domestic scenario better than the international players and thus can potentially be more efficient in implementation of the project.APPENDIX
Annexure: 1Project Financing Issues
Some of the Major Factors that need to be considered while financing Indian Power Projects are:
Lack of credit worthiness of the Electricity Boards- Most SEBs are technically bankrupt
Individual state guarantees are insufficient, since under many of the previous cases the state did not honour its obligations.
The refusal of Govt. Of India to extend guarantee, except in the case of some of the early fast-track projects.
World Bank support is also not available to these projects since the GOI has refused to provide counter guarantee to the World Bank. And the World Bank requires complete restructuring of the Electricity sector before it will provide support without GOI guarantee. Orissa is the first state that has been able to go in for complete restructuring.
Indian Funding Sources
The various sources that can be taped to finance Indian Power Projects are:
( Indian Financial Institutions (IFIs)
- are development agencies, providers of term loans
- now limit project exposure to 50% of project cost
- limit term loans to 40% of project cost
( Scheduled Commercial Banks (SCBs)
- unable to find themselves long- term, mainly providers of guarantees
- limited capacity to take project exposure: 10% on Bina
( Capital Markets
- no depth in retail market
- regulations favour public sector issuers (no access to pension funds)
- significant redemption reserves requirement dilute ROE
( Lessors
- Indian PPA tariff structure does not accommodate lease payment.
The other key Funding Alternatives for IPP are::
EQUITY:
Sponsors
Equipment/ Fuel suppliers, O&M Contractors
Infrastructure Funds e.g. AIF, GIP
Bilateral and Multilateral agencies
Domestic Public offering
DEBT:
Domestic financial Institutions/ Banks
Export credit backed
International banks
Multilateral Development Agencies
International / Domestic Capital Markets
Country Specific fund providers (e.g. OPIC, AIMEC)
Domestic Financial Institutions
To take a closer look at the domestic financial institutions, we study them closely and assess the advantages and disadvantages that are attached to financing of these institutes.
The Advantages are:
These institutes are willing to assume state risk with Escrow L/Cs
They are usually more comfortable in assuming fuel risk
They have one year Moratorium
The Disadvantages are:
The sponsor support being extended is not well defined
This source of funding is usually very costly
The Exposure Cap is informal
The repayment has to be made in a shorter tenor
Their are limited number of players in this field.The factors that inhibit International Financing are:
The revenue risk that arises due to the creditworthiness of the SEB.
Fuel Risk, this is significant but will reduce - due to the recent abolition of the State monopoly on fuel sourcing and supply
Pre- completion risk, this is viewed as significant factor by international lenders, especially political risk (e.g. Dhabol)
The state govt does not guarantee good behaviour, since this concept has not yet evolved in India
DRR requirementsThe alternative funding ideas for this project are:
Accessing Domestic Bank Grantees
Packaging ECA debt with Non- ECA funding
Accessing International Banks with a Rombust structure
- Mitigate SEB Risk with L/Cs
- Mitigate Fuel risk with alternative arrangements
- Mitigate construction period risk
Annexure 2
BHEL: Corporate Profile
Vision
A world-class, innovative, competitive & profitable engineering enterprise providing total business solutions.
Mission
To be the leading Indian Engineering Enterprise providing quality products, systems & services in the fields of energy , transportation, industry, infrastruct
