Capital requirements and financing plan for the PHWR programme

On the basis of the study of nuclear power plant construction costs in India over the past twenty years, typical costs of Rs. 19 000 per kW(e) installed for 235 MW(e)

20 000

r-15 000

S

CL

o 10 000

<n

<D

o O

5000

Rs. 17 000 crores (10 050 MW(e) total)

2025.97 /

1960

FIG. 10. Cumulative expenditures by India on the PHWR programme (-: required; 1 crore = 10 000 000) [33].

-: actual;

reactor units and Rs. 20 000 per kW(e) installed for 500 MW(e) reactor units are used for projecting capital investment requirements. Figure 9 [33] shows a typical phasing of expenditures used for project schedules of eight years for 235 MW(e) units and nine years for 500 MW(e) units. Figure 10 [31] shows the projections of yearly capital investment requirements for the growth of installed capacity up to the year 2001, together with the anticipated buildup of nuclear power capacity. The total capital expenditure for the 1989-2001 programme at constant 1989 prices is esti-mated at Rs. 15 755 crores.

The three principal potential sources of funds in developing a financial plan for implementing the nuclear power programme are: the national budget, revenues of operating organizations and borrowings.

5.3.3.1. National budget allocations

The prospects for financing through equity depend entirely on the resources available to the Government and the allocation priorities of such resources. As previ-ously mentioned, at the time of formulation of the Seventh Five Year Plan, the nuclear power programme was initially allocated Rs. 1410 crores against its require-ment of Rs. 2100 crores. While the power sector has a high priority for the Govern-ment and the Planning Commission, there are competing demands for the limited resources available from other important areas, such as agriculture and rural development and even from within the power sector. In view of the urgent need to increase installed power capacity to ease power shortages in most parts of the coun-try, gas and coal fired thermal power projects with lower capital costs and shorter gestation periods appear to be more attractive in the short term.

5.3.3.2. Revenues from operating plants

To assess the availability of funds from the internal operating surpluses of nuclear power plants, it is useful to examine nuclear power pricing in India. Nuclear power tariffs are determined and notified by the NPC after consulting with the Central Electricity Authority and the beneficiary State Electricity Boards, which buy power from the NPC and distribute it to the ultimate consumers. According to the present policy on tariff formulation, the tariff for each operating plant is determined separately, for three-year periods. Depreciation of capital assets excluding heavy water is computed by the straight line method for a 25 year plant lifetime, with a residual value of 10% of the original cost. This works out to a depreciation of 3.6%

of the original capital cost, including the IDC per annum. The return on capital employed (net fixed assets plus working capital) is fixed by the Government and is currently 12%. Thus, operating surpluses consist of the return on capital employed plus depreciation less interest on borrowed capital. Since tariffs are based on a nor-mative capacity utilization factor of 62.8%, or 5500 hours per year, the operating surpluses would be less if the actual capacity factors achieved at power plants are below the norm.

With a view to increasing the operating surpluses from nuclear power plants, a proposal is under consideration by the Government to revise the rate of return from 12 to 15% of capital employed, and also to introduce an additional element in the tariff of a levy for research and development. However, since the present operating base of seven units (with a total capacity of 1465 MW(e)) is small compared with

the size of the programme up to the year 2000 (10 000 MW(e)), the impact of these measures will be marginal during the Eighth Five Year Plan period (1992-1997).

5.3.3.3. Borrowing — Debenture issues

Owing to the long construction time-span (i.e. an estimated eight to nine years for new projects being started), the Government of India introduced in 1987 a finan-cial instrument espefinan-cially suited to the needs of state owned public utilities in the power and communication sectors. This debenture, or bond, has two variants: one with an interest rate of 13% per annum payable semi-annually, subject to tax under the Income Tax Act and with a redemption period of seven years; the other with interest payable semi-annually at the rate of 9% per annum and free of income tax.

This variant has a redemption period often years and thus is especially suited to long gestation projects. Table XVI [33] highlights the special features of these debentures.

TABLE XVI. SPECIFIC FEATURES OF BOND ISSUES (THE CASE OF INDIA) [33]

Common features

Indigenous features

9% per annum bonds 13% per annum bonds

— Choice of interest schemes — cumulative and non-cumulative — under each category

— Half-yearly interest payments on non-cumulative bonds

— Postdated interest warrant with non-cumulative bonds

— Interest payable from date of realization of application money

— No income tax reduction at source

— Income tax benefits for charitable and religious trusts

— Interest totally exempt from income tax

— Redeemable after ten years

— Wealth tax exemption on entire investment

— Easily transferable — by endorsement and delivery

— Fully secured

— Buyback facilities to limits

— Bonds accepted by company as security in lieu of bid

— Guarantee/earnest money/bank guarantee

— Income tax exemption under Section SOL

— Redeemable after seven years

TABLE XVH. RESOURCE MOBILIZATION THROUGH CAPITAL MARKETS (THE CASE OF INDIA) [33]

Public sector »™,-.b ._ _i • ^ J NPC bond issues Front end costs

Year borrowings ,. a c . , „ .

. , ^ (in crores of rupees) (%) (in crores of rupees)

126 3.87 200 0.75 360 0.50 562 0.20

a 1 crore = 10 000 000.

b NPC: Nuclear Power Corporation.

1987-1988 1988-1989 1989-1990 1990-1991

2140 3139 3633

So far, the NPC has been involved in four debenture issues. The first issue for Rs. 100 crores was successfully opened for public subscription in January 1988 after a short but intensive media campaign directed at projecting nuclear power as a safe, unlimited source of energy which was also commercially viable. Having established the Nuclear Power Bond as an attractive financial instrument in the capital market, the subsequent issues shown in Table XVII [33] were privately placed with financial institutions, with a small portion (20%) reserved for sale to the public. Since the front end expenses for a public issue are relatively high, around 3.8% for a Rs. 100 crore issue, the preferred practice now is for private placement with a very small front end fee, ranging from 0.2 to 0.5% of the amount raised.

On the assumption that the mix of public borrowings will consist of one-half tax free debentures at a rate of 9 %, and one-half of the debentures at a rate of 13 %, with some possible short term borrowings from the Government or banks at 15%

per annum, and allowing for the issuing expenses, the weighted average cost of borrowings is about 11.5% per annum. This is the rate used for projections of borrowings during the programme period.

5.3.3.4. Financing plan

On the basis of the approved financing structure for projects to be executed by the NPC, and assuming that the Government would meet its commitments regarding contributions to equity, annual cash flows relating to government equity contribu-tions and internal operating surpluses have been projected for the period up to the year 2001. In this scenario, to meet a net shortfall of only Rs. 6586 crores, total

bor-rowings up to the year 2001 will have to be Rs. 8169 crores and the total funding requirements will be Rs. 26 656 crores. However, this scenario's equity subscription had to be suddenly increased in 1990-1991, but the Government was unable to accommodate large increases in its budget operations. Therefore, a more realistic approach was taken, namely that the current level of budgetary assistance from the Government would continue with an enhancement of 10% per annum to the year 2001, while the remaining requirements would have to be met from internal surpluses and increased borrowings (Table XVIII, Ref. [33]). It can be seen that to meet a net shortfall of Rs. 3305 crores, the borrowings have to be increased to Rs. 23 655 crores and the total funding requirement to Rs. 37 770 crores. Even at this level of borrowing, the overall debt-equity ratio for the NPC as a whole would only go up to about 3:1, while individual projects being commissioned in the mid-1990s would have debt-equity ratios of between 5:1 and 6:1.

Since rapidly growing power generating companies in India can avail of the benefit of depreciation allowances permissible under the Income Tax Act, they have to pay little or no tax. Thus, the benefit of high financial leverage that tax paying companies derive is not generally available to power generating companies. On the other hand, since interest on borrowings has to be paid out of the return on capital which is allowed in the power tariff based on normative capacity factors, a high debt-equity ratio could lead to heavy losses when the normative capacity factors are not achieved. Also, a high debt-equity ratio would imply a greater IDC and correspondingly higher unit energy costs, which may affect the competitiveness of nuclear power in the energy market.