The Hindu Business Line : Power sector financiers for changes in bidding norms

Bangalore, Oct 16 Power sector financiers, including the Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) have approached the Union Ministry of Power for changes in project bid guidelines.

Currently, the norms adopted are tariff based bidding, a departure from cost-based bidding till about two years ago. Sources said the steep hikes in lending rates and end-use limitations on external commercial borrowings (ECB) by the Reserve Bank of India (RBI) have created severe constraints.

Specialised financiers like the REC/ PFC have been augmenting working funds with ECBs to ensure that the overall weighted average costs remained low. But the RBI’s current norms discouraged usage of ECBs for lending in domestic currency.

Cost of funds up

This has resulted in escalation in cost of funds for projects, including the 4,000 MW ultra mega projects where the bids were awarded on the basis of the lowest tariffs. The sources said that they had sought a fine-tuning of the tariff bid guidelines. The change sought by financiers does not imply dumping the tariff bid route. Instead the financiers have asked that a tariff band be used as the norm for the bids.

One of the major reasons for proposing the change, the sources said, was the increase in the cost of funds for the projects. For instance, when the tariff bids were made for the ultra mega projects, debt costs were about 8 per cent.

Currently, even AAA financiers are raising funds at rates as high 10 per cent plus. This meant that the project debt costs were unlikely to be less than 11.5 per cent. Besides, even for projects that had drawn funds from the FIs, a three year reset covenant allowed lenders to revise rates.

The sources said, in the case of projects, in various stages of being implementation, project promoters had the option for passing through interest costs on to tariffs.

Fixed price lending

However, in projects now being taken up through the tariff bid route, this flexibility does not exist. This implied that project promoters would have to absorb increased interest costs. The alternative: financiers would have to extend fixed price lending over the entire tenure of the loan.

The latter, the sources said, was not possible, since it would expose lenders to mismatches. Passing the rates to borrowers would expose projects to operational risks, the sources said. The sources said that lenders would be vulnerable in the event of such operational risks. This was because the payment security arrangements covered only the revenues at the bid tariffs.

This meant that especially in a situation where financiers were prepared to meet up to 90 per cent of the project costs, subject to a minimum debt service coverage ratio (DSCR) of 1.25. This implied that the net project revenues would have to be at least 1.25 times more than the debt service obligations. Applying this DSCR norm, implied that promoters would have to bring greater quantum of equity for the project, the sources added.

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