Asian Genco power win sets no precedent

The group, which includes General Atlantic, Goldman Sachs, Everstone Capital, and Norwest Venture Partners, has completed India's largest-ever power-sector private financing and also serves as a test case for the Indian government’s new legislative platform supporting private-sector participation in power development. However, there are some important considerations that may mean the deal, though a strong showing, is an unreliable precedent for future infrastructure plays in India.

The deal and the company

Public announcements around the deal emphasized its significance. “This is a landmark transaction impacting the power sector in India and this financing addresses the immense infrastructure needs of the country,” said Gautam Bhandari, head of Morgan Stanley Infrastructure in India.

Participants in the deal and outside observers alike also agree on the quality of Asian Genco as a company, and of the portfolio of power generation assets it is developing.

The company’s portfolio under development is geographically divided between North and South India, with nearly 4000MW of capacity in hydro, thermal (gas and coal) and wind power assets, including India's largest private-sector hydro power development project. The 1200MW Teesta III development in Sikkim is “possibly the largest private sector hydro project under execution” in India, Krishna Tatineni, vice-chairman of Asian Genco, told AVCJ. A 1320MW supercritical coal power project in Andhra Pradesh is also on the books. The current assets form part of a strategic plan to build a 10,000MW portfolio by 2012.

“People like the portfolio,” Bhandari said in an interview. “These assets are very diversified. They cater to peak power. The peak deficit in India is around 12%, [so] when you look at peak power deficits and hydro power, it’s almost a perfect match.”

Sohil Chand, Managing Director at NVP India, concurred. “This is a relatively unique set of assets. They are highly differentiated and very large. They are very well located in the most energy-deficient parts of India”

Investors also speak highly of the quality of the company itself and its management. “It’s hard to find projects with this level of management and technical competence, which also have such a large investable amount of projects,” affirmed Chand. Bhandari described Asian Genco as “a company which has inherently a good bone structure.”

And there is no particular cause or mystery in the company’s Singapore domicile. “Asian Genco became anchored to Singapore for the simple reasons that the key person who promoted the company wanted to stay in Singapore,” Tatineni told AVCJ.

The investment will fully fund the development cost of the portfolio assets still being built, which means Asian Genco has no further need for bank loans. The investors will take significant minority positions, with board representation. Previous investors, including Indian government-backed public/private partnership PTC India and its affiliate PTC Financial Services, as well as Tiger Global Management, will remain in the company. Zeus Inframanagement advised Asian Genco on the deal.

With this funding, Asian Genco is well-positioned to launch an IPO in three to five years time, the investors confirmed, giving a solid liquidity result well inside the usual time-frame for an infrastructure investment. The company’s qualities will be particularly important because, Chand noted, the IPO market for Indian power has recently been quite heavily tapped, and businesses without its credentials “are going to have a hard time going out.”

Power needs and the company’s prospects

India certainly needs as much private-sector capital support as it can get for its power development needs. “India suffers from chronic shortage of power, both in base load, and peak power, which is even more severe,” Bhandari pointed out. “It’s partly because the country is growing at 8% but adds power capacity in roughly the 5% range.” This is in contrast, he noted, to China, where power generation capacity development exceeds GDP growth.

Consequently, Bhandari continued, “The government has a national priority to supply power” in a country where “45% of the population does not have power.” However, both difficulties in execution, and the consequences of India’s legal and political environment mean that, in Chand’s prognosis, “The government’s 11th and 12th five-year plans [for power development] are unlikely to be achieved.” Bhandari emphasized that, “the last three five-year plans in terms of power generation only met around 50-51% of target.”

Partly this is a result of operating in a democracy. “The process of developing the power plant is challenging,” Bhandari confirmed. “It’s a democratic country; you might have hearings.” This also reflects the challenges in obtaining permits within India – proverbially an area where corruption and power-broking impede the process.

Fortunately for investors, and India, “the due [diligence] process takes a long time, but the regulatory environment once you’ve built your plant is well-established now,” Bhandari told AVCJ. “The government has opened it up to the private sector.” As a result, he added, “investors feel comfortable to invest in this sector and help bridge this gap.”

All too unique?

Perhaps unfortunately, Asian Genco’s unique strengths could be exactly the reason why this deal may be hard to emulate in the future. The company itself may at least be one source of follow-on opportunities as its asset portfolio expands – “We’ll add to the pipeline slowly but definitely,” said Tatineni. However, other similar assets may be few and far between.

For one thing, as Tatineni emphasized to AVCJ, the investment consortium was also partly backing the proposition “that Asian Genco is probably the largest non-family-owned and professionally-managed power business in India.” Other power assets, primarily promoted by India’s business families, may not have the same quality of management.

There are also the execution hurdles of the deal. “It’s going to be very hard to see a lot of financing of this type coming up,” remarked Chand. “It’s very difficult to get this kind of consortium together with this kind of funding amount. The deal took over a year to do.”

Furthermore, the ad hoc award of some development rights means that there is a dearth of similarly attractive assets in the space. “Some entrepreneurs have only a single plant,” Chand noted. “A lot of projects which have been awarded ultimately might not be developed.”

These factors combined suggest that, unfortunately, what Chand describes as the “huge deficit between current demand and available supply in the market” is unlikely to be filled by private capital. Investors, however eager to participate in the sector, may simply find too few good assets to back, with regrettable results for India’s power and development situation at large.

“We see this deficit persisting and widening,” Chand concluded. “The power deficit situation is likely to worsen.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Infrastructure
• Infrastructure
• Infrastructure
• Goldman Sachs
• General Atlantic
• Norwest Venture Partners
• Morgan Stanley