The Hindu Business Line : REC forms subsidiary for foray into power distribution

Bangalore, Oct. 3 Public sector Rural Electrification Corporation (REC) Ltd has formed a subsidiary company to foray into the power distribution business.

REC has traditionally been a lender to State Government-owned utilities for power transmission and distribution. Recently, though, it has also begun funding private sector utilities and power generation business.

Top officials of the REC said that the subsidiary — REC Power Distribution Company Ltd — was created to leverage the company’s distribution experience. The subsidiary was formed to operate and provide consultancy in power distribution to intending private sector entities.

Activity focus

The entity would initially focus on monitoring distribution activities in States. The functions would include monitoring and renovation of distribution networks, energy audits and evaluation of distribution systems.

The subsidiary has already secured consultancy orders from the Rajasthan Government valued at Rs 1,500 crore. The officials said that the subsidiary was looking for orders from other States as they carry out their reforms in the distribution sector.

They said that the REC subsidiary was not averse to participating in the equity of the State distribution companies (DisCom). For the purpose, it was scouting for joint venture partners in the private sector. They also said that it was willing to pitch for any of the DisComs through the JV route.

Transmission subsidiary

REC already has a power transmission specific subsidiary — REC Transmission Project Company Ltd. This was for implementing transmission projects on a build-operate-transfer basis.

REC has so far remained only as a debt financier. Most of the debt funding was provided through the support of State Government guarantees or through assignment of revenues. Recently, though, REC has also taken to using physical asset coverage for meeting the funding requirements. This included funding of generation projects in States.

The officials said that REC was attempting to meet funding of mega distribution units, or entire districts in the country. They said that REC had changed its funding patterns. It was now willing to meet debt finance requirements of up to 90 per cent of the project cost. But the funding covenants would remain in place, the officials added.

Finances

This covenant implied that the project would have to conform to a debt service coverage ratio. This implied that the net revenues would have to be at least 1.3 times the project debt service obligation. Besides, REC was also looking to take a lead role in asset financing, in all three components for the power sector, the officials said.

In projects where REC was accommodated as a lead financier, the borrowers would be provided a one per cent discount. This implied that the lending rate would be one per cent lower than the competitors.

Long term finance for the power sector is currently priced at close to 12 per cent. REC, the officials said, was prepared to meet the funding requirements at 10.75 per cent. This reduced cost of funding, the officials said, was aimed at new generation projects in the country that are currently being invited through the tariff bid routes by State Governments.