Project Financing Of Thermal Power Plants – OpEd

We previously examined the situation surrounding the auction of the thermal power plant—its value, budget, and current status. Today, we will turn our attention to the necessary steps following the transfer of operational rights and how the required financing can be secured.

First and foremost, there is the matter of settling the auction price. No buyer covers this entire amount from their own pocket. While a portion is typically paid from their own funds, 70-80% of the total amount is usually financed through a loan from a financial institution. Project finance organisations, private equity investment funds, and investment banks are specifically designed for this purpose.

After the operational rights auction, the company that acquires the thermal power plant must secure the required operational financing. This involves preparing an assessment report on the current status of the plant, which is then presented to financial institutions. This report is commonly referred to as a "project finance evaluation report" or a "Loan Application for Loan Agreement."

Preparing this document requires more than just knowledge of thermal power plants or engineering expertise. It also necessitates skills in applied mathematics, financial calculations, and risk assessment.

The "Due Diligence" report offers a summary of the situation, but the "project finance evaluation" (Loan Application for Loan Agreement) is far more comprehensive. It provides a realistic assessment of the project, details what needs to be done for renovation and rehabilitation, estimates the associated costs, and outlines the necessary restructuring for personnel.

Every aspect must be meticulously examined, from determining expenditure allocations and ensuring compliance with environmental standards to obtaining a new operating licence, enhancing fuel quality, improving efficiency and availability, and managing personnel. This also includes maintaining relationships with the local community, professional bodies, nearby universities, and public authorities. All these factors must be carefully considered, analysed, and costed.

The evaluations conducted by financial institutions are much stricter and more unforgiving than other assessments. Providing inaccurate or misleading information will not only result in the denial of financing from that particular institution but may also jeopardise your chances of securing funding from other financial institutions.

This is not the place to talk about peripheral issues like wildlife or greenery. Even if such matters are mentioned, everything here is quantified and converted into monetary terms.

Therefore, it is crucial to prepare your project finance application (Loan Application for Loan Agreement) with great care and attention to detail. There should be no technical errors, no misrepresentations of the current situation, and not even a single typographical mistake. Many projects have been rejected due to incorrect technical explanations or minor spelling mistakes, and this is entirely understandable. You must avoid providing incorrect information and refrain from submitting empty or meaningless documents.

Project financing requires international collaboration. The project will be scrutinised by numerous financial institutions, and only a select few will be convinced enough to invest. The documentation for international financing must be in English, and the language used must be of a high standard. The content must be comprehensive, with figures, calculations, and explanations that are logical, accurate, and convincing.

Following the operational rights transfer auction, the company that wins by offering the best price has several tasks to complete before the transfer can take place. First, it must secure financing. This involves outlining, identifying, pricing, and documenting all the necessary actions.

The financing package obtained must be repaid within a reasonable time frame, including interest. The market generally considers a period of 6-8 years to be acceptable, though a shorter period is even more favourable. You must demonstrate with figures that you can repay within this time frame. Your operating costs, the cost of the coal you will use, the efficiency of the plant, its availability, and the electricity sale price are all known factors. The annual payment you will make to the Treasury is also predetermined.

What kind of rehabilitation programme will you implement? What will you change? What new equipment will you add? What personnel policies will you adopt? How will you upgrade the coal?

These are the critical questions that must be answered and documented.