Six years after the power sector was opened for private investment, the country has realised that relying on the private sector in power generation projects can prove costly. In the Eighth Plan, less than 18,000mw was added to the country's generating capacity _ almost a third of the initial 30,500mw planned.
Of this, hardly 1,000mw came from the private sector. Just five private power projects, of a list of some 170 projects, have achieved financial closure (a stage when the equity and debt commitments to a project have been firmed up) and started generation. Government officials now say that just 10,000mw, out of the 170 projects totaling 75,000mw, have the potential to actually fructify.
Of the five projects that have achieved financial closure, the only large project that has managed to tie up its finances is the controversial Enron-promoted Dabhol Power Comp- any for the first phase of the project. The other four are either captive or relatively smaller projects.
In view of the poor financial health of state electricity boards, the Centre decided to give counter-guarantees to seven projects to attract private investments into the sector. Of the seven, only two were given counter-guarantees (Enron and GVK) enabling them to achieve financial closure.
Under the guarantee to GVK, the promoter was given a cover for plant termination and limited tariff payments (12 months receivable). The project, which started generation before its financial closure, later took part of the project cost on to the promoter's balance sheet. The Dabhol project was able to achieve financial closure on account of the counter guarantees extended to it both for cash flows and debt repayment.
However, the present counter-guarantee does not hold the Centre liable for tariff payments in the event of default by a state government, implying that the other fast-track projects will have to rely on a guarantee on just the outstanding foreign debt. Essar's Hazira plant has an assured cash flow as it is a captive project.
Further, since not all corporates investing in power are willing to give guarantees, financial closures are solely dependent on the escrow cover. Under an escrow cover, the board sets aside a part of its own revenue to meet the payments to the project. This guarantee can be invoked in the event of the board not meeting tariff payments.
The reality, however, is that most of the SEBs are making losses and cannot extend such guarantees. For instance, there are several projects with all necessary clearances, but without escrow cover. In Madhya Pradesh, all the 13 independent power producers, totaling some 8,000mw; are trying to get an escrow cover from the state government.Financial institutions say the state can only provide guarantees to about 2,560mw of projects.
The Centre feels that not more than 10,000mw of private power projects can materialise, which compares poorly with Ninth Plan estimate of around 13,000mw. It is for this reason that the Centre is pushing state reforms (both distribution and tariff), failing which private investments in power can never materialise.
The Centre has already made legislative changes for the creation of power regulatory bodies which will overlook the entire process. Union power minister R Kumaramangalam feels "these commissions (regulatory bodies) are the best form of counter-guarantees for the private sector". The number of projects going into financial closure will be testimony to that.
