Creation of PFC – Focus on financing the power sector
Power Finance Corporation Ltd. (PFC) was incorporated in 1986, as a company under the Companies Act, 1956 to finance, facilitate and promote India’s power sector development, as a dedicated Development Financial Institution in the power sector. The Corporation commenced its commercial operations in 1987-88 and was registered as a Non-Banking Financial Corporation in 1996-97 with the Reserve Bank of India. PFC was also declared a Public Financial Institution in August 1990 under Section 4A of the Companies Act, 1956.

PFC was founded with the sole objective of providing funds and to promote power projects and allied activities. During the course of two decades of its journey, PFC had developed extensive power sector knowledge, skills and expertise to provide solutions to various problems faced by power utilities. This has been amply demonstrated in the variety of products and services that had been introduced from time to time to meet borrowers’ requirements. PFC had also provided value to its clients by improving their operational and managerial capabilities and also by assisting them in their reform and restructuring programmes. Thus, PFC has been acting as a Change Agent and playing a catalytic role in bringing about reforms and restructuring of the power sector and is ensuring that power sector becomes economically and commercially viable.

Products and Services
PFC offers financial assistance through a range of products and services. Term loan, however, continues to be the principal product. Over the years, PFC has been broadening its product range, both, in the power sector and financial services. While the financial services include both fund-based and non fund-based activities, the portfolio of power sector schemes has been expanded to cover non-conventional energy projects.

PFC, through regular interactions with the borrowers, understands their specific requirements and develops suitable products. The new products/ services developed during the recent years, which include the following:

•	Rupee Term Loans, Foreign Currency Loans, Bridge Loans, Short Term Loans and Reform-Linked Transitional Loans;
•	Bill Discounting, Equipment Leasing, Buyers’ Line Of Credit, Loans To Equipment Manufacturers, Line of Credit for the Import of Coal;
•	Debt Refinancing;
•	Letters Of Comfort; and
•	Non-Fund Based Products Viz., Deferred Payment Guarantees.

 
Enhancing Customer Relationships
PFC has well developed relationships with the major power sector organizations in India including State power utilities, power departments, central power sector utilities, private power sector utilities, joint sector power utilities, power equipment manufacturers and municipal power utilities. PFC considers its customers as business partners and support their growth and development. PFC interacts with them on a regular basis at various levels and organizes workshops and seminars to facilitate discussion on topical issues and to identify areas of concern. Such forums also offer avenues for promoting its products and services in line with the needs of the clients.

Competitive Cost of Funds And Lending
PFC funds its assets, with market borrowings of various maturities and currencies. The market borrowings include bonds, debentures, term loans, commercial papers and inter-corporate deposits. Given the relationship with the GoI, PFC had also been able to mobilise foreign currency loans from agencies such as the World Bank, ADB and KfW. These sources enable PFC to raise long term funds at competitive costs, which supplement the funds available from commercial sources and broaden the maturity profile of debt.

Grants and Interest Free Loans/ Concessional Loans
PFC has earmarked 2% of its net profit for providing grants, interest-free loans and concessional loans for Studies/ consultancy assignments that may be required by the State Utilities in respect of reform-related studies, feasibility reports for R&M, Distribution Management Systems (DMS), training, etc. For an equitable utilization, it has kept a ceiling of Rs.1 crore per State per year.

Training & Workshops
PFC believes in continuous updating of the professional knowledge of not only of its employees, but also of its borrowers.  To this end, PFC organises regular workshops, training and seminars on various technical and financial subjects related to power sector, both in India and abroad.

Higher Extent of funding
Considering the importance of providing assistance to completing schemes that can add to generation capacity, PFC attaches high priority to projects/ schemes relating to R&M of old thermal power stations, old hydro stations, system improvement, communication, urban distribution etc.

Implementation of Government Policies and Programmes 
PFC, a Government-owned Company, occupies a key position in Government plans for the growth and development of the Indian power sector. PFC had played and will continue to play a key role in the implementation of government policies and programs. PFC is acting as a nodal agency to implement various policies and programmes of the GoI as detailed below:

Accelerated Generation & Supply Programme (AG&SP)
In fiscal 1998, the GoI started the Accelerated Generation and Supply Program (“AG&SP”), a scheme for providing interest subsidies for projects involving renovation, modernisation and life extension of old thermal and hydro plants, completion of on-going generation projects, construction of transmission links, system improvements and including grants for various studies.

Accelerated Power Development & Reform Program (APDRP)
The Government introduced the Accelerated Power Development Program (“APDP”) in fiscal 2001 as part of the reform of the power sector. APDP was subsequently upgraded to the Accelerated Power Development & Reform Program (“APDRP”) in fiscal 2003. APDP and APDRP schemes seek to reform electricity distribution by providing investment and incentives to SPUs and distribution companies to strengthen and improve sub-transmission and distribution systems.
 
Distribution Reform, Upgrades and Management (“DRUM”)
DRUM is an Indo-US joint initiative designed by the MoP in conjunction with the United States Agency for International Development with a planned funding of US$ 30 million. PFC’s responsibilities under DRUM technical assistance and training component include coordinating with stakeholders, providing management and implementation support, acting as a financial intermediary and banker for controlling and directing funds in the form of loans and grants, and designing a mechanism for leveraging the resources of other financial intermediaries and banks.

Delivery through Decentralised Management (“DDM”)
DDM is a scheme sponsored by the MoP that showcases participatory models of excellence in electricity distribution. Its objectives are to promote public participation, encourage community management and to attract private investment in distribution by establishing distribution franchisee and distributed generation projects. PFC has been appointed as nodal agency for successful implementation of DDM schemes.

Rural Electrification Initiative
A Memorandum of Understanding on April 25, 2006 with International Finance Corporation and National Rural Electric Cooperative Association International Limited, a subsidiary of the National Rural Electric Cooperative Association (NRECA), for cooperation in implementing pilot rural area electrification enterprises. The objective of the program is to devise and implement sustainable and replicable business models for rural electrification by utilising proven international experience. 

Promoting Reform & Restructuring Of State Power Utilities by PFC

State Entity Action Plans
PFC has been adopting a proactive and pragmatic approach to encourage improvement in the financial and operational efficiency of the State power sector. In 1991, PFC started linking its funding to the Operational and Financial Action Plan (OFAP) for State Power Utilities (SPUs) that emphasized improvement in operations and performance of utilities over a period of time within the existing State institutional framework. The OFAP system was a precursor to the structural reforms later introduced. The objectives of these reforms are to:

•	Achieve operational and commercial efficiency and improved viability of State Power Utilities;
•	Improve delivery of services and achieve cost effectiveness through technical, managerial and administrative restructuring of utilities;
•	Create an environment which will attract private capital, both domestic and foreign, to supplement public sector investment;
•	Operate State Power Utilities in a manner that enables them to generate sufficient return to meet operational and investment requirements, such that they cease to be a burden on the State; and
•	Achieve conservation of energy through integrated resource planning, demand side management and minimize waste.

Keeping this in view, Reform Operational and Financial Action Plans (R-OFAP) consisting of a series of time bound action plan for different functional areas of the utilities are formulated.  The elements of the action plan include developing a scheme for improvement of the entities’ technical and financial performance; preparing a financial package where funding is linked to the entity reaching specified targets and goals. Reform-OFAP has helped in initiating a process of improvement and has contributed in bringing about perceptible change in quantitative and qualitative aspects of functioning of SPUs. Besides aiming at bringing about efficiency improvements in the State power sector, R-OFAP focuses on reform/ restructuring activities needed to create an institutional framework for the self-sustainability of the sector in the long run.
 
The Action Plans are formulated with active participation of the utility concerned and approved by the respective Board of the Utilities.  The implementation of various activities included in R-OFAP is monitored regularly and progress report on the same is sought from the utilities. 

Appraisal Mechanism
PFC follows a systematic institutional and project appraisal process to assess and mitigate credit risk. These processes include a detailed appraisal methodology, identification of risks and suitable structuring of credit risk mitigation measures. PFC uses a range of quantitative as well as qualitative parameters as a part of the appraisal process to make a sound assessment of the extent of underlying credit risk in a project. While assessing borrowers’ eligibility criteria, emphasis is on their financial and operational strength, capability and competence. PFC evaluates the credit quality of the borrowers by assigning risk weightings (scores) on the basis of the various financial and non-financial parameters.

Entity Appraisal
PFC lending policies are guided by its Operational Policy Statement and assessment of borrower’s eligibility criteria is on financial and operational strength, capability and competence. While certain schemes are encouraged through differential lending rates, eligibility criteria and funding decision is made on merit of the project and no funds are pre-allocated.
 
PFC evaluates the entity with reference to a set of qualitative and quantitative factors. Methodology of rating of the entities takes into account its operational and financial efficiency and progress made by the entity towards implementing the government’s reform program helps to identify the relative strength and weakness of each entity. The credit quality of the borrower is evaluated by assigning risk weightings on the basis of these various financial and non-financial parameters. The result of the evaluation is considered while determining the interest rates, exposure and extent of funding to each of the borrowers.
PFC’s appraisal and sanctioning process for projects and schemes in power and allied sector is ISO 9001:2000 certified by M/s. NQAQSR Certification Private Limited. PFC’s appraisal process is considered as a benchmark for the power industry and that other lenders rely on its appraisals when funding power projects.

Monitoring and Review of Performance of SPUs
PFC works closely with State governments and State power sector utilities and assists them in undertaking reforms within their organizations. As on September 30, 2006, 28 States have set up State Electricity Regulatory Commissions and 15 States have reorganized their operations to establish unbundled and / or corporatised State Power Utilities.

PFC role in promoting the institutional development and reform of State Power Utilities had added advantages like:

•	Enabling PFC to extend finance to certain entities based on an action plan and subject to milestones and targets that it otherwise could not have lent to due to their weak financial position and thus PFC’s support would benefit the entity by improving its overall financial position;
•	Those entities that are subject to a reform agenda are better placed to improve their financial position and thus are better able to service their debt; and
•	PFC is able to access funding from multilateral agencies based on reform related activities taken up by the borrowers.

 
Resource Mobilisation
PFC has been raising resources in domestic markets as well as in external markets on very competitive terms and rates. PFC has mobilised resources from various multilateral & bilateral agencies viz. World Bank, ADB, KfW, EDC etc. and from the external debt markets through various instruments viz. Syndicated bank Loans, Fixed rate bonds, Floating rate bonds and Export credits.

PFC also accesses domestic debt markets through various instruments, which include Bonds, Long Term and Short-term Loans from various Bank and Financial Institutions, Commercial Papers, Infrastructure Bonds etc. The rating of the debt instruments are continuously reviewed by international and domestic credit rating agencies and during the past 10 years, various Domestic and International Credit Rating agencies have accorded highest credit ratings.

 
The foreign currency loans and domestic loans raised in recent years are unsecured, raised on the strength of its balance sheet and credit worthiness and not guaranteed by Govt. of India or any other agency.

Operations at a Glance
The following table sets forth the growth statistics for the years as indicated:

(Rs. in crore except %)
	Fiscal year					4-year CAGR
	2002	2003	2004	2005	2006
Sanction	8,523	14,001	16,472	18,573	22,502	27.47%
Disbursements	5,168	7,341	8,975	9,409	11,681	22.61%
Operating Income	2,105	2,641	2,822	2,838	3,020	9.45%
Profit After Tax as Restated	663	1,033	1,018	971	975	10.13%
Net Worth	4227	4958	5520	5997	6505	11.38%
Loan Assets	16,458	20,805	24,827	29,520	35,603	21.28%
Total Assets	17,984	22,490	26,673	31,146	37,490	20.16%

PFC is operating with a very meager but highly motivated manpower that is generating more than Rs. 3 crore per employee profit with relatively small operating expenditure. PFC has a negligible NPAs and attractive RoA with CRAR more than 18.

Business Strategy
PFC is committed to funding the integrated development of the power and associated sectors. PFC intend to remain a financier of choice in this area by providing financial and consultancy services to ensure the development of economic, reliable, efficient systems and institutions in the power sector. The key elements of Business Strategy includes:

Power Lenders’ Club
In January 2006, PFC formalized common lending documents with Life Insurance Corporation of India and ten (10) Indian Banks to establish the “Power Lenders Club”, to facilitate “one stop shopping” for clients in the power sector and to provide them access to capital from a consortium of financial institutions and banks to enable power projects to achieve faster financial closure. Later, HUDCO another FI also joined the Power Lenders Club in November 2006. Power Lenders Club is expected to play a major role in funding of Ultra Mega Power Projects for which PFC is the nodal agency.

Ultra Mega Power Projects
PFC has been designated as the nodal agency by the GoI for the development of seven UMPPs, each with a capacity of 4,000 MW with the objective to develop large capacity power projects in India. These projects will have the advantage of economies of scale on account of large capacity at single location, reduction in emissions on account of super critical technology and lower tariff on account of the above and tariff based international competitive bidding adopted for selection of developers.

In order to enhance investor’s confidence, reduce risk perception and get a good response to competitive bidding, it was deemed necessary to provide the required water linkage, coal linkage and to obtain various clearances including environment and forest clearance and substantial progress on land acquisition through shell companies (SPVs).

For this purpose, PFC was entrusted the role of a nodal agency at the initiative of GoI to set up SPVs as wholly owned subsidiaries. These SPVs would also facilitate tying up of power off takes from these projects with appropriate terms and conditions and Payment Security Mechanism. In the first phase, two projects at pithead site based on indigenous coal and three projects at coastal locations based on imported coal have been identified for development of these Ultra Mega Power Projects. Wholly owned subsidiaries have been established by PFC for taking up developmental work of these Ultra Mega Power Projects:

•	Sasan Power Limited for pit head Project at Sasan, Madhya Pradesh
•	Coastal Gujarat Power Limited for imported coal based project at Mundra (Gujarat)
•	Akaltara Power Limited for pit head Project at Akaltara, Chhattisgarh
•	Coastal Karnataka Power Limited for imported coal based project at Tadri, Karnataka
•	Coastal Maharashtra Mega Power Limited for imported coal based project at Girye, Maharashtra
•	Orissa Integrated Power Limited for pit head Project in Orissa
•	Coastal Andhra Power Limited for imported coal based project at Krishnapatnam, (AP)
•	Jharkhand Integrated Power Ltd.
•	One more subsidiary in Tamilnadu

Out of the above, two projects namely, Sasan and Mundra UMPPs have already been awarded to M/s. Lanco & Globeleq Consortium and Tata Power Limited in December 2006, respectively on the basis of International Competitive Bidding.

Similar endeavour will be made by PFC for formation of Shell companies for transmission projects to be offered through competitive route as mandated by Government of India.

Setting-up a Venture Capital Fund
PFC intends to set up a venture capital fund, India Power Fund, to invest in power sector projects. PFC is in the process of incorporating this fund and it is expected that it will become operational in the near future. PFC has committed Rs. 200 crore to this fund. Oriental Bank of Commerce has agreed to invest Rs. 10 crore in the India Power Fund. Further, LIC has also expressed its interest to participate in the India Power Fund.
 
PFC intends to register India Power Fund as a trust and as a venture capital fund with SEBI. PFC intends to promote and incorporate a trusteeship company to supervise and administer the trust. PFC also proposes to promote and incorporate an asset management company for the independent day-to-day management of the trust funds.

Diversification of Borrowers’ Portfolio
PFC intends to promote private sector participation in electricity generation, transmission and distribution in-line with the government’s focus on increasing competition in this sector. PFC intends to diversify our borrower portfolio by funding coal, lignite, oil and gas companies and infrastructure agencies that transport and handle fuel for power projects.

PFC has also identified funding of power projects of non-conventional energy sources such as wind farms, small hydro projects and biomass projects as a focus area. The GoI is committed to developing an increasing number of renewable energy sources. PFC have signed a memorandum of understanding with the State nodal agency of Maharashtra so as to provide “one stop shopping” for the financing of non-conventional energy generation projects in the State. PFC is in discussions with other States about the prospects of entering into similar agreements with other State nodal agencies.

PFC has been identified as a nodal agency for assisting SPUs in preparation of Clean Development Mechanism (“CDM”) project for renovation and modernisation of old thermal and hydro generation plants. PFC is taking necessary action for capacity building of SPUs and preparation of documents by them to take benefits under the CDM.

PFC intends to continue to focus on providing funding to captive power plants for those clients who wish to establish their own sources of power generation. Since the enactment of the Electricity Act, which allows the surplus power from captive power plants to be sold to the distribution companies and fed into the electricity grid, there has been a renewed interest in captive generation, which can be capitalized for growth in this area.

Promoting Consulting and Advisory Services
In pursuance of its diversification strategy, PFC had created a separate Unit namely “Consultancy Services” for providing such services in the power and financial sectors, primarily to cater to State Power Utilities / Electricity Regulatory Commissions. The range and scope of consultancy services include Restructuring and Reform activities, Financial Management of resources, Project Management, HRD, MIS etc.

PFC’s Consultancy Services Unit has grown in operations manifolds in providing consultancy services and has generated an atmosphere of competitive pricing and confidence in its clients in the areas where PFC has been providing such services.

Till now, Consultancy Services Unit has worked with `30’ Clients across `19’ States.  Some of the assignments are repeat orders, which exhibit the Client’s satisfaction with the services provided in the past. Our clients include State Power Utilities, licensees, IPPs, PSUs, SERCs and State governments. PFC has been consulted on a number of issues, most particularly issues in connection with the implementation of regulatory provisions for tariff fixation, project appraisal, resource mobilization, computerization of accounting systems and reform and restructuring matters.

Capacity addition during X and XI Plan (2007-2012)
The likely capacity addition during X Plan against the targeted capacity addition of 41,110 MW is 30,641 MW. Out of these, 18505 MW capacity has already been commissioned which includes 7100 MW capacity addition with PFC's support that constitute 38% of new capacity during 10th Plan period.

The Capacity requirement to meet the projected demand for the five-year period of 2007-12 is estimated at about 206,000 MW (excluding wind and Renewable Energy Source). The estimated capacity addition of 68,869 MW is planned during XI Plan, which includes 31,345 MW projects already under construction. The task would require commensurate addition of Transmission system & Distribution network to wheel the power to ultimate consumers. The States, which have the greater share of generation and transmission assets and almost the entire distribution under their control, would need to play a very proactive role in effecting institutional and result oriented changes.

Funds requirements in Power Sector during XI Plan (2007-2012)
It has been estimated that investment of over Rs. 10,31,000 crore will be needed to meet the capacity addition requirement during XI Plan alongwith matching transmission and distribution and renovation and modernization of existing plants, development of rural electrification etc.

Conclusion
In the years ahead, PFC’s efforts will be directed towards further consolidating its position as the premier Development Financial Institution for the power sector.  Towards this end, PFC with the active support of GoI shall strive to emerge as the nodal agency through which all credits to power sector from bilateral/ multi-lateral sources would be channelled.  PFC endeavours to achieve a share of over 20% of the Indian Power Sector outlay for the period 2002-12. PFC will also continue to work relentlessly towards maintaining its position as a premier lender to the power sector, with an array of innovative products, enriching the stakeholders’ value and being a significant partner in the development and growth of the nation.