An alternative comfort mechanism

Published : Nov 25, 2000 00:00 IST


AFTER tinkering with escrows and counter-guarantees for independent power producers (IPP) over a period of eight years, the Union government has finally realised the limitations and unsustainability of these comfort mechanisms. Union Power Minister Sures h Prabhu told Frontline that his Ministry had evolved an alternative mechanism, and he had discussed it at a meeting with the captains of financial institutions (F.Is) on November 15. The F.Is, he said, found the mechanism to be acceptable; he bel ieves that a solution has at last been found for speedy financial closure of IPPs.

The mechanism was put to test in Karnataka when, on October 15, a multipartite agreement was signed by four parties - the government of Karnataka, Karnataka Power Cor-poration Limited (KPCL), Karnataka Power Transmission Corporation Lim-ited (KPTCL) and the Infrastructure Development and Finance Company (IDFC). The agreement is designed to provide a degree of comfort to the IDFC, which is to finance the 210-megawatt Unit 7 of the Raichur Thermal Power Station, put up by KPCL and whose power will be purc hased by the KPTCL. The mechanism provides certain safeguards to enable the IDFC to recover its dues from the KPCL in a time-bound manner while enabling the KPCL to realise its dues from the KPTCL for the sale of power. The agreement, which is a legally enforceable document, is to serve as a model for comfort mechanisms for other States.

The following are the salient features of the new mechanism:

1. The disbursal of funds by the IDFC to KPCL will be contingent upon adherence by Government of Karnataka (GoK)/KPCL/KPTCL to certain milestones relating to restructuring/privatisation of KPCL/KPTCL. Milestones also apply to asset-liability segregation, manpower allocation and restructuring/formation of new companies. These will have to be done in consultation with the lenders with due regard to the protection of their dues. The agreement also lays down milestones for the separation of distribution com panies from KPTCL and their operationalisation and privatisation.

2. The Financial Restructuring Plan and Support envisages time-bound and structured financial support for the restructuring, from the GoK. Thus the GoK commits a certain quantum of funds for the purpose. The agreement also imposes on the GoK certain obli gations with respect to the tariff and revenue proposals of KPTCL.

3. It requires the GoK to create a Dedicated Power Reform Fund (DPRF), in which the proceeds from the divestment of KPTCL and Visveshvaraya Vidyuth Nigam Limited (VVNL) and their successor entities shall be deposited. Pension payment and voluntary retire ment scheme liabilities of KPTCL employees shall form the first charge on the DPRF, followed by dues towards the F.Is/banks, commitments to Central sector utilities and KPCL and finally the debt to the GoK, in that order. Similarly, divestment proceeds f rom KPCL would first be adjusted towards clearance of KPTCL's dues to KPCL and unfunded pension/gratuity liabilities of KPCL, and finally towards a deposit into the DPRF. The point to note here is that in both cases dues from KPCL/KPTCL to the GoK will be subordinate to the payment of dues to the lenders (F.Is).

4. The GoK guarantee given to any generation project under the terms of the power purchase agreement (PPA) will remain in force even after the privatisation of KPTCL and until such time KPTCL/its successor entities achieve and sustain a credit rating of 'A' of CRISIL or its equivalent for a period of one year or until such time a credit support acceptable to the lenders is worked out.

5. To ensure that the tariff of the electricity sold by KPTCL is subject to determination by the Karnataka Electricity Regulatory Commission with effect from November 2000.

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