Independent Evaluation

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Evaluation of the Dahej Liquefied Natural Gas Terminal Project
Completed: 2006

This report evaluated the first ADB private sector transaction to utilize a long-term partial credit guarantee. The funds, sourced from ADB's ordinary capital resources, were used to construct and operate a liquefied natural gas (LNG) import and regasification terminal. The project performance report assessed ADB's support to help develop the LNG plant at Dahej, using four criteria:

• development outcome
• ADB's investment returns
• ADB's effectiveness
• ADB's additionality

Summary of Findings

• Development outcome was rated satisfactory, based on an assessment of the following five subcriteria:
• private sector development
• business success
• economic sustainability
• contribution to living standards
• environmental performance


• The executing agency, Petronet LNG Limited, is in a strong financial position, which was reflected in the substantial appreciation in ADB's equity shareholding in the company. ADB's stake in Petronet LNG Limited rose in value from Rs10 per share to Rs60 per share-a 500% increase over 2 years.



• ADB's effectiveness was rated satisfactory, with the establishment of a commercially viable and environmentally friendly LNG plant that supported the country's program objectives of removing impediments to the liberalization and growth of privately financed energy infrastructure in India. ADB also regularly monitored the project with plant site visits.



• ADB's additionality to the project was rated satisfactory. ADB played a critical role in liberalizing the market before the investment. While ADB did not participate until construction was almost complete, its presence helped crystallize industry reforms, strengthen corporate governance and support partial privatization. Offsetting this however, was the inability of ADB to pursue the pioneering issuance of a partial credit guarantee, equivalent to $65 million.



• Overall, the project was rated satisfactory.

Lessons and Findings

• Private Sector Development. An important issue that emerged from the analysis of private sector impact was the long gestation period for enabling environment reforms to flow through to tangible ADB investments and loans. In many respects, these delays were necessary to provide the Government time to implement reforms before ADB and private investors could commit funds.



• Revenue and Cost Projections. Price forecasts for Petronet LNG Limited gas during the appraisal were based on an assumed price of $29 per barrel, which was below the price approximated during the time of the evaluation. Adjustments highlight the random volatility inherent in commodity products, as well as the need for aggressive sensitivity analyses, to ensure that credit risks are managed adequately.



• Social and Environmental Impacts. The Government was well organized when dealing with social impacts, keeping risks associated with resettlement with the public sector agency, Gujarat Industrial Development Corporation. Environmental operational impacts have been negligible due to the nature of LNG, and the associated technology that resulted in almost zero emissions.



• Ownership Structure. Equity ownership can complicate buyer and supplier incentives unecessarily. Ideally, reliance should be placed on input and output contracts wherever possible, to minimize risks of conflicts of interest.



• Financial Structure. Despite having a relatively sophisticated banking sector, India still lacks access to sufficient long-term funds to finance necessary infrastructure projects. This makes private sector participation increasingly important, and ADB can play a central role in allaying investor and lender concerns.



• Partial Credit Guarantee. The potential benefits arising from the application of a partial credit guarantee were one of ADB's primary motivations for participating in the Project. However, the partial credit guarantee was not used due to adverse movements in the market. Corporate bond market activity was limited, and the market for raising local currency through the use of swaps became more active.

Recommendations

• ADB is recommended to exit its equity participation as soon as practicable. The main development objectives of the equity participation-i.e., allaying financiers' concerns and strengthening governance provisions-have been largely achieved. ADB can exit safely through the share market.



• ADB should investigate ways of using the swap market to access low-cost local currency funds, as this approach appears to be more efficient, than direct ADB bond issues and the use of partial credit guarantees to support corporate bonds.



• Under certain market conditions, corporate bonds supported by a partial credit guarantee might be more cost efficient than swaps. Given the potential for substantial shifts in the market between ADB's approval and financial drawdown, a degree of flexibility needs to be incorporated in the structures presented to the Board.