The condition has been included in the revised Power Purchase Agreement with Nagarjuna Power Corporation Ltd that was approved last weekend.

C. Shivkumar

Bangalore, Dec. 6

THE Karnataka Government has said that guarantees for power projects would be discontinued after privatisation of distribution circles.

State Government sources said this condition has been included in the revised Power Purchase Agreement with Nagarjuna Power Corporation Ltd (NPCL) that was approved last weekend. NPCL is developing a 1,015-MW thermal power project near Mangalore and is on the verge of full financial closure.

The sources said the State Government's covenant implied that guarantees, as a payment security mechanism (PSM), would no longer be available once the process of distribution privatisation was completed. Karnataka is the first State to take this step, the sources said.

However, the sources said, sub-sovereign guarantees were no longer an issue with independent power producers as in the past. Financial institutions, including the Power Finance Corporation and the Rural Electrification Corporation, have stopped insisting on such guarantees as in the past. The main reason was that alternative avenues would be available as a PSM, the sources said.

This included assignment of distribution circle revenues to meet the power producers' payments in the form of an escrow account.

Moreover, they added, that in the event of privatisation of the distribution companies, the majority equity-holders would be expected to substitute sub-sovereign guarantees with corporate guarantees to the generating companies as the third tier of financial security.

The first line of security was a letter of credit followed by assignment of revenues/escrow account.

The State Government's covenant in the draft PPA has already been accepted by the some of the IPPs awaiting the last leg of full financial closure in the State.

This included the NPCL. NPCL has already accepted the revision in the PPA and was not insistent on the sub-sovereign guarantees in the event of privatisation, the sources said.

The revised PPA is with the five DisComs in the State - Bangalore Electricity Supply Company Ltd, Hubli Electricity Supply Company Ltd, Mangalore Electricity Supply Company Ltd, Gulbarga Electricity Supply Company Ltd and the Chamundeshwari Electricity Supply Company Ltd. All these five DisComs are currently fully state-owned and were awaiting privatisation.

Of these, some private sector corporates and the NTPC subsidiary, NTPC Electricity Supply Company Ltd, have already evinced interest in BESCOM and MESCOM, though the State Government is yet to take a final call on divesting its stake from the entities.

The sources said that these conditions would also be applied to some of the public sector power developers as well in future when the privatisation process was complete.

Currently, purchases from the central generating stations such as the NTPC and the Neyveli Lignite Corporation are covered by a tripartite agreement, which also entailed a State Government guarantee.

The move, the sources said, would result in reducing the burden of contingent liabilities on the State Government's finances in long run.

(This article was published in the Business Line print edition dated December 7, 2005)
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