Goodbye To Escrow

Power sector reforms have in a way come full circle. The central and state governments first went in for negotiated projects by independent power producers, complete with state guarantee and central counter-guarantee, to quickly add to generating capacity which was seen as falling well short of demand. The Centre soon became wise to the downside risk of such counter-guarantees and sought to limit it by insisting on state governments and electricity boards entering into escrow facility arrangements with the producers, whereby a part of the revenue of the electricity board would go into a particular account earmarked for payment to the power producer. At that stage, the institutional lenders would not look at a project proposal without the escrow badge. And the state governments were perfectly willing to get into these agreements.

 

But soon it become clear to the institutions that if the escrow commitment of an electricity board far exceeded its revenue potential, then the escrow agreement was not worth the paper it was written on. Crisil reportedly calculated that the electricity boards taken together were good for escrow commitments of only 7,500-10,000 MW of fresh capacity. Clearly, the total escrow commitments far exceeded all electricity board revenues put together. With the institutions beginning to look at gift escrow agreements in the mouth, it became the turn of the state governments to get wary of signing on the dotted line. Power producers who had already sunk money into projects which were left hanging without the escrow cover started going to court, and the courts then began issuing orders asking for the escrow facility to be granted.

A committee set up by the Karnataka government under the leadership of HDFC chief Deepak Parikh advised that it should not sign any escrow agreements. Even before becoming a liability for the state governments, these agreements would bankrupt the new-style transmission and distribution companies through which the power would actually be received from the producers and who were liable to pay upfront. Already, some of these companies will be saddled at birth with past overdues and losses amounting to thousands of crores of rupees. In the states where they have sought to prevent such a situation, the write-off of past losses could total a staggering Rs 50,000 crore.

Seeing this huge mess the institutions, at the prodding of the Centre, have now decided not to insist on escrow agreements. This arcane financial term should soon depart from the pages of the popular media. Instead, the institutions will now register a charge on the revenue stream of an electricity board and give out money in phases. A project will be financed depending on whe-ther the institutions think the particular state government is serious about power sector reforms. If it is and has a plan with specific milestones to put in place the reforms, then the institutions will pay out in phases as a state and its electricity board clear the milestones one at a time. Whether the new scheme will succeed remains unclear.

This brings home the point that investment in new power capacity will never be forthcoming so long as the distribution end of the business is not set right, and until power is priced properly for users. As many as four state governments have taken up reform of their power sectors seriously. Of them Orissa has gone the furthest but hasn't much to show for it as it has been simultaneously hit by successive natural calamities. As for the three others -- Andhra Pradesh, Haryana and Rajasthan -- none of their efforts has resulted in any improvement in cash flows. And until that happens, investment in power will remain severely stunted.