Fis Agreement With Sebs Seen As Escrow In Disguise

The envisaged new arrangement between financial institutions and state electricity boards (SEBs) is being viewed in the power industry and investment banking circles as nothing but an escrow account via the backdoor.

On Tuesday, financial institutions agreed to drop their demand for an escrow account for funding power projects.

This followed a high-level meeting between the representatives of FIs and banks with Union power minister P R Kumaramangalam. FIs have now agreed to fund SEBs based on the progress of reforms and more importantly will now have first charge on SEB's revenues.

"This is nothing but an escrow account through the backdoor. There is no significant difference between the two," investment banking sources stated. "This is definitely another form of an escrow account," said the chief executive of a leading independent power producer (IPP).

 

Under the earlier arrangement, FIs refused to fund a power project unless an escrow arrangement was in place due to the poor financial health of the state electricity boards. An escrow account was a dedicated account into which the SEBs receivables flowed. The IPPs who sold power to SEBs had first charge on the account. FIs are the lenders to IPPs.

In effect the IPPs first used the proceeds of the account to pay the fuel suppliers and the operations and maintenance contractor. They then created a debt reserve. Finally what was left was to be paid to the institutions.

In case a state electricity board defaulted in its payment to IPPs, the escrow account was triggered with the receivables flowing directly to the IPP.

This in effect meant that the FIs will automatically receive their dues as they had the first charge on the IPPs receivables.

"Now, instead of the FIs having a charge on the receivables of the IPP and thus indirectly on the receivables of the SEB, they have direct charge on their receivables. What is this if not an escrow account by another name," query investment banking and power industry sources.

In a manner of speaking, escrow accounts are still notional as only phase-II of the Dabhol project under construction enjoys escrow cover.

In Madhya Pradesh, when escrow accounts were awarded to some IPPs, the power producers who did not get this cover went to court. The total escrow capacity too has been a bone of contention between FIs and SEBs. Initially, the escrow capacity of Madhya Pradesh Electricity Board was estimated at 2,561 mw after much argument.

This led to litigation. Even while, court cases were on the escrow capacity was reduced to 900 mw by credit rating agency Crisil. Similarly, in the escrow capacity of Uttar Pradesh State Electricity Board too was pared significantly.