Distribution Firms May Opt For Full Recourse Funding

Unlike power generating projects, private investments in power distribution will be made on full recourse basis. This means distribution projects will have to be either taken directly on to the company balance sheets or corporate guarantees will have to be provided.

Among the companies likely to resort to this financing include the 11 shortlisted for Orissa's privatisation of its distribution network. These include Reliance, Tata, Enron, Grasim Industries and ModiCorp. The companies are preparing price bids for the zones.

Orissa, the first state to have embarked on distribution privatisation, will hive off majority stake to the private sector in each of four zones. Haryana, Rajasthan and Andhra Pradesh will follow the same pattern of distribution privatisation.

Meanwhile, financial institutions have indicated they cannot extend project recourse finance for distribution ventures. This is because none of the ventures will have any form of assured cash flows as in the case of power generation projects.

What is making financing such ventures on a limited or non-recourse basis difficult is state government subsidies to various consumers.

Subsidies are paid by the government to the electricity boards through book entries. Interest payments for borrowings from the government are adjusted against the subsidy payments due. This means there are no cash inflows to the board.

In private distribution projects, however, project promoters are expected to directly raise funds from consumers that will be paid to generating companies. Therefore, the distribution companies will need a cash flow from the government to compensate for the below-cost realisation from subsidised sectors.

Moreover, no financial institution or bank, barring Power Finance Corporation, is experienced to carry out due diligence for funding such projects. Any due diligence effort by financial institutions implies they will have to ascertain a minimum project cash flow to support a debt-service coverage ratio of at least 1.5. This ratio is to determine the debt-service capability of a project. Ascertaining this ratio is difficult because it needs a comprehensive survey of the load profile in states.

One thumb rule being adopted is that where the transmission and distribution losses and agricultural loads are high, the ratios are expected to be low. The debt-service coverage ratio is making project financiers jittery over the debt-servicing capability of distribution ventures.

Corporate guarantees are expected to eliminate the risk of relying exclusively on project revenues for debt service. Banks and financial institutions have begun considering this.