It may be mentioned that the Mangalore power project (popularly known as Cogentrix project) is one of the eight fast track projects, for which the Centre had agreed to extend counter-guarantees. However, unlike the Dabhol phase-I project, the counter-guarantees for the remaining seven fast track projects would cover only the foreign debt and, that too, in case of a project termination.

Sources told The Financial Express that in a recent communication to the Centre, Karnataka has conveyed its inability to commit escrow "now or 90 days before the COD." Moreover, the state has also refused to provide a charge to FIs on its revenue stream.

Refusing to do so, Karnataka has instead asked the Centre to issue counter guarantee to the project based on the state's guarantee and on the reform and recast process proposed to be undertaken by it.

However, overruling this, the Union finance ministry has told the state that it is not in favour of any dilution of the requirement of escrow as entailed in the draft counter-guarantee document.

Besides this, the Centre has also clarified that "the counter-guarantee on the basis of a legally-binding agreement, establishing the charge provided to foreign creditors/financial institutions in lieu of a legally binding agreement establishing an irrevocable escrow account, cannot be the basis of the counter guarantee."

When contacted, a state government official said the state is now planning to explore the possibility of providing alternative security cover (other than escrow). This, he said, will also need the approval from the state cabinet.

The state is getting assistance from the World Bank to undertake reform and recast programme, sources said, adding however, that although the World Bank has agreed to finance the reform process it has, at the same time, indicated that no capacity addition from private power projects should be considered until an IPP policy is finalised by the state.

Moreover, even the Deepak Parekh panel set up to study Karnatak's escrow capacity, has recommended that there is no escrow available with the state for IPPs and, therefore, it cannot provide escrow even to the Mangalore project. "Therefore, the state is of the view that since the reform and revamp process is proposed to be undertaken by the state and state guarantee given to the project, this should be sufficient comfort for the Centre to extend the counter-guarantee," sources said.

However, the Centre is not convinced with this and wants some sort of alternative security before the sovereign guarantee is extended.