Risk Description & Evaluation

The criteria for appraisal , given in the proposal have been defined as follows.

Criteria Definitions Scale Rating

ValueA function of the ease of risk mitigation. High value implies difficult to mitigate

0-5 Low

5-10 High

Weight age A function of criticality, and its relevance to the given project

0-5 Low5-10 High

A. Social Risk

The project is planed a region comprising of people engaged in farming activity. This in turn would mean a high degree of dependence on rainfall as a water source.

Thus this project would face a high degree of opposition from locals which is the biggest risk both in terms of relevance ( 40%) and value of the risk ( 7) .

The absence of land acquisition and farmers relocation program further add to this risk

B. Environmental Risk

This risk arises due to variability in precipitation patterns highlighted in the proposal.

This variability is likely to be amplified due to diversion of natural water and land resources on a large scale (500MW project).

This in turn would impact the power generation capability of the plant We consider this of low relevance ( 10%) as compared to the social risk as it is

more of a detailed planning exercise. However we believe this risk would require sizeable resources namely periodic

approvals and environment protection plans for mitigation hence have allocated a high value to criticality ( 6).

C. Structure of the project

o The absence of a separate SPV makes the project susceptible to promote r and Offtaker bankruptcy . Additionally the absence of an SPV reduces project rating as the risk is only shared between the promoter (MS Energy) and Offtaker and not the parties such as the contractors.

o MSEB has a low equity stake (20%) and it is a government backed enterprise thus is relatively safe. Despite MS energy (80% equity) being a leading player in the infrastructure sector we would consider such financing to be risky.

o Finally the strength of the project is a low equity contribution by the Offtaker (MSEB), in a sense implying that he is not anticipating financial returns thus making him a strategic investor.

We consider the structur e to be of medium relevance (25%) an d floating an SPV is relatively easy so low value to criticality ( 3)

D. Means of Financing

This is a long term project demanding huge upfront capex; the absence of following is thus a source of risk

o Contingency (debt/equity), escrow account or any form of liability funding o Central, state government guarantee and contingent promoter supporto Guarantees for the loan by sponsors till completion of the project, this guarantee

could ensure project completiono Forward contract to insulate project from raw material cost escalation

E. Variability of Cash Flows

o Plain equity and debt funding and absence of quasi equity such as convertibles implies low variability of cash flows .Convertibles are normally present when the initial cash slows are uncertain

o However there is a risk diversion of revenue to show equity return. A waterfall mechanism of revenue fund flow to ensure continual debt servicing and regular operation before equity returns.

o PPA limited to just one Offtaker (MSEB), high source of risk try and include power trading may reduce the associated market risk.

o A s asset utilization more important than asset value, in the absence of rainfall water as power source ensure turbine operation via other water sources. This may be done by cogeneration coupling of hydro plant operation with thermal power (Steam) to ensure continual operation.

Thus based on the above analysis the following Risk/Return Matrix is constructed.

Risk Weight age Value at Risk Net RiskSocial 0.4 7 2.8

Environmental 0.1 5 0.5Structure 0.25 3 0.75

Means of Financing 0.1 5 0.3Cash Flow 0.25 3 0.75

Risk Analysis

The return in a project is a profitability measure. This project is a capital and time intensive project. However it has very low O&M cost as compared to thermal and other power generation technologies once commissioned. Thu s it can be classified as a high return project. Cumulative risk as analyzed above is 5.3, on the border of high risk.