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C. Shivkumar

BANGALORE, Nov. 7

THE 1,015 MW power projected promoted by Nagarjuna Power Corporation Ltd (NPCL) has moved closer to financial closure, with the Karnataka Government conceding a pari passu charge on the power reform fund to be put in place.

Sources said here that once the finer details of the fund are resolved, NPCL would be the first project to be funded through this method. This method is also expected to serve as a model for independent power projects in other parts of the country stuck for want of a bankable payment security mechanism (PSM), they added.

The reform fund, along with a letter of credit, is to be created as part of the PSM as demanded by the project lenders. This fund is part of a mechanism suggested by NPCL on the advice of Crisil Advisory Services. The State Government's decision to accelerate the clearance of a PSM transpired after the intervention of the High Court .

The sources said that no other project, including public sector entities, would have a charge on this fund. Consequently, NPCL would have the first charge. The residual charges are all expected to be on a "waterfall basis." This implies the first one off the block gets the primary charge.

Crisil, which had studied alternative methods for power project funding on behalf of NPCL, had suggested creation of a reserve fund in May this year, equivalent to six months of the billing, the minimum critical level. The resources of this reserve fund would revert to the State Government if there were no defaults. Drawals from the fund would have to be replenished by the State Government.

However, some issues still required to be ironed out, sources said here. The sources said that the reform-based package was acceptable to some of the lenders like the Power Finance Corporation and the Rural Electrification Corporation However, both these lenders have sought a State Government guarantee. The official communication to the energy and finance departments said that such guarantees would not be possible. However, the sources said the guarantee was unlikely to be any major obstacle, Besides, such guarantees have already been provided to projects where the power purchase agreements have been signed much after finalising the NPCL.

The notification copy obtained by Business Line also does not indicate the source for the reform fund corpus. But one of the sources for this fund is expected to be proceeds from divestment from the four distribution companies. The sources, however, added that the onus for creating the fund was entirely on the State Government since the operationalisation of the fund would have to be done at least one month before the project commissioning. Such a commitment would have to be conveyed to the project lenders, the sources said.

The CEA approved cost of the project, to be set up near Mangalore, is estimated at $1.15 billion to be funded through a 70:30 debt-equity ratio. The equity in the project is estimated at $102 million from Nagarjuna Fertilisers and another $41.88 million from a Hong Kong-based company, Fireseed Ltd. The short-listed engineering procurement and construction contractors to the project and the other unnamed foreign investors are expected to bring in another $248 million into the project by way of equity.

But the haste in accelerating the creation of the payment security mechanism had happened in view of the low project tariffs, the sources said. First year, power tariffs from the NPCL' coal fired plant is estimated to be in the region of about 2.70 paise a unit, making it the cheapest base load station in the region. This tariff is lower than the 290 MW Almatti hydel power project promoted by Karnataka Power Corporation Ltd, expected to be in the region of Rs 4.40 paise a unit. Besides, Karnataka is faced with the possibility of worsening power deficit in the coming years since most of the planned projects have still not obtained statutory clearances.

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