Gujarat Freezes Escrow Cover For Projects

The Gujarat government has frozen all escrow support for infrastructure projects in the state. It had imposed a ceiling of Rs 8,000 crore on government guarantees early this year.

Sources said the state has chosen this step to gain time and improve the collection efficiency. This move is expected to create an escrowable fund pool for financing development project s.

Among the other plausible reasons for this move by the state government is that creation of more escrow accounts would adversely impact the revenue flows to the state government, state public sector undertakings and consequently the debt servicing capability of the state of projects where the state government has already made commitments.

These include the Rs 20,000 crore Sardar Sarovar Nigam Limited where the entire debt funding is being raised through state government guarantees and the entire debt servicing is being carved out of budgetary transfers.

Sardar Sarovar has now borrowed close to about Rs 6000 crore on a cumulative basis from the financial markets, with the bulk of it coming in the form of private placements. In addition it has also provided escrow cover for some of the funds raised from financial institutions and central utilities.

These escrow covers were provided both for meeting the debt service payment and for meeting the cash flows of the power utilities. In addition it has also agreed to provide escrow cover to independent power projects including that of Essar Power, the Torrent Power project and the 500 mw Jamnagar power project.

In addition to these projects, the state government has around 14 other IPPs in the pipeline all which have been promised an escrow guarantee from the state government. But with the state government freezing all cash flow guarantees, these projects will not be able to move towards financial closure until the cash stream of the board improves.

As a fallout of this, sources said that infrastructure projects would now have to be financed entirely on the basis of project associated risks, without any cash flow reliance and state government support.

This would also imply that the entire cash flow risks would have to be assumed entirely by the project promoters. Projects were provided an escrow support mechanisms so as eliminate revenue flow risks and making the projects acceptable to financiers.