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Govt changes tack on power guarantee

Our Bureau

NEW DELHI, Nov. 22

THE Finance Ministry is set to reverse its stand on the terms to safeguard its exposure of over Rs 30,000 crore in the mega power projects - 3960 MW Reliance-SEAP promoted Hirma project and the 1800 MW Grasim-promoted Ennore-based 1800 MW LNG project.

Since the SEBs are in a financially-fragile condition - the more electricity they buy, the more losses they incur - the Centre had earlier set conditionalities which set a minimum benchmark for the health of the SEB at the time of sale like 3 per cent ra te of return, minimum prescribed agriculture tariff, cost of supply of power in line with cost of purchase from the mega producers, etc.

This was aimed at mitigating the possibility of default besides acting as a stringent driver for reforms in the State power sector which is plagued by low collections (in certain States), technical and non-technical losses and other system inefficiencies .

Under the revised formulation, these conditionalities have been reduced to guidelines and the Power Finance Corporation (PFC) was in to undertake reforms in the State sector with milestones underlined in its reform programme - Operational and Financial A ction Plan (OFAP).

The earlier conditionalities were formulated during the tenure of the previous Economic Affairs Secretary, Dr. E.A.S. Sarma.

The safeguard is crucial since the Centre is undertaking to pay off the outstanding debt of the project promoters in the event of termination of the project due to payment default on the part of the purchasers - the SEBs.

At today's meeting taken by senior officials of the Finance Ministry, financial institutions (FIs) have been asked to look at payment security issues to mitigate the possibility of a payment default by the SEBs. To avert this, under the existing arrangem ent, the producer has to be paid for the period that the Power Trading Corporation (PTC) locates a paying consumer or the original consumer satisfies his payment obligations. The PTC purchases power from the mega developer and sells it to the various con suming States.

To enable liquidity support for six months from the period of default, the FIs have been asked to explore the possibility of raising bonds since the PTC's balance sheet would not have the requisite strength to finance the developer's dues.

The FIs have also been asked to look at the possibility of offering a Deferred Payment Guarantee (DPG) to the developer in the event of termination, thereby reducing the Centre's liability. The Finance Ministry was earlier of the view that it was against extending guarantees for projects if PTC on its own would not be able to provide any financial security to avert invoking of the Central guarantee.

However, the cost of a DPG (3.5 per cent per annum on a reducing balance) is higher than that of a Central guarantee (1.5 per cent per annum on a reducing balance).