The Hindu Business Line : Ultra mega projects: Financing to be based on assignment of revenues

Public sector banks and financial institutions have indicated that project finance for the four proposed ultra mega projects in the country would have to be supported by guarantees.

High level banking sources said the financing would be allowed only on the basis of assignment of project revenues to the lenders. These project revenues in turn would have to be supported by guarantees by the State Governments, who are currently the major stakeholders in the electricity distribution companies (ESCOM).

In fact, bankers said, the preferred mechanism would be identical to the tripartite arrangement between the public sector National Thermal Power Corporation Ltd (NTPC), the bulk power buyers and the Reserve Bank of India. This mechanism entailed assignment of Central transfers to the power supplier in the event of payment defaults by the bulk power buyers and failure to honour guarantee obligations by State Governments.

Such a mechanism, bankers said, would allow for smooth implementation of the projects and limit the possibility of payment defaults. In such project structuring, no counter guarantees would be required from the Centre, the bankers said.

Three of the four proposed ultra mega projects, of 4,000 MW each, were coastal. Only one would be a pithead based station. Expressions of interest for the projects have already been floated. The second round of bids, or the request for qualification is expected to begin soon and commissioning of the projects was expected by during the next plan period.

From each of the projects, contiguous States would have a capacity share. State electricity boards or their sponsored electricity supply companies would be required to get into separate power purchase agreements with the generating companies. The sources said even where the projects were funded with external commercial borrowings, there would be no counter guarantees. Instead counter guarantees would be substituted with deferred payment guarantees (DPG) by banks/domestic financial institutions. However, the bankers said, tripartite agreements would apply to DPGs as well. This was because in the event of a DPG being invoked, the payment liability would devolve on to the guarantor.

Besides, the bankers said, the tight financial norms were necessary in view of Basel II norms. For domestic banks and financial institutions, Basel II guidelines are expected to come into effect from the next financial year onwards. Already the existing guidelines prescribe that payment over dues beyond 90 days would have to be provisioned.

Similarly bankers would also be expected to fully risk weight or provision contingent liabilities such as DPGs.

Consequently, bankers said, States would be expected to make funded guarantees, assuring compliance to payment obligations by their respective distribution companies.

For this purpose some of the States would actually be required to create a sinking fund or a guarantee redemption fund for meeting these liabilities, the sources added.

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