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$1.3-billion Mangalore power project -- Karnataka guarantee plan rejected

C. Shivkumar

BANGALORE, Aug. 28

THE Centre has turned down Karnataka's proposal for a counter guarantee without an escrow for the 1,013-MW Mangalore power project. Instead, the Centre has suggested that the escrow be operationalised 90 days before commercial operations.

Sources said this mechanism had been suggested to accelerate the financial closure of the $1.3-billion project. This mechanism, the sources said, would also allow the State Government sufficient time for carrying out the necessary reforms, including unbu ndling of the integrated transmission and distribution company.

The timeframe would be about five years. So far, in the escrow covers extended by some States, the operationalisation was done as a precondition to wet financial closure. Wet financial closure takes place only when actual drawdowns from institutional cre dit is permitted.

This is because, if the State Government complies with the Centre's recommendation, then CLP Power-Tata Electric promoted project could go into financial closure at the earliest, and allow for commercial operations by early 2005.

The Union Ministries of Power and Finance have taken this stand in view of the fact that all the other States _ Andhra Pradesh, Orissa, Maharashtra and Tamil Nadu _ have been provided counter guarantees on the strength of the escrow cover. Therefore, the re cannot be an exception in the case of Karnataka, the sources said.

However, the Centre has not specified any escrow structure to be adopted by Karnataka. This implies that the Government would have the liberty to adopt any escrow structure it preferred, either the centralised escrow structure, the two-tier escrow as in the case of the Andhra Pradesh for the Visakhapatnam power project or the sectional escrow as recommended by IDBI as per their model.

The Karnataka Government has already begun work on providing a kind of centralised escrow structure, though it remains to be seen whether this mechanism is acceptable to the financial institutions, particularly IDBI. IDBI has consistently insisted on ass ignment of some low credit risk revenue circles so as to ensure debt service payment obligations. This is because if the centralised model is accepted, the State Government would be in a position to support at least 1,500 MW of projects immediately which could progressively rise after it improves the revenue realisation methods and cuts transmission and distribution losses from the current 42 per cent to acceptable levels.

But, based on the IDBI model, the State would be in a position to support 500 MW immediately, from which it has to allot to the projects taken up through the competitive bidding route. These include the 220-MW Tannir Bhavi project, which had won a legal battle with the State Government on the issue about two months ago.

The new suggestion by the Centre now means that the escrow issue has taken a full circle, after the State Cabinet accepted the Deepak Parekh committee report in January this year. The Cabinet had then stated that the Government would not give any escrow guarantee to projects and alternative security mechanisms would have to be worked out.

But alternative security mechanisms, referred to as project derisking mechanisms, also involved assignment of revenue circles, which amounted to the same. The option of raising the equity stake was not acceptable to the projects since this system would h ave resulted in increasing the tariffs, on the basis of 16 per cent return on equity.