The agreement is part of a new reform based approach to power project financing, wherein projects will be financed based on reform milestones achieved by the state electricity board (SEB). The agreement will also involve a provision wherein the lender enjoys a concurrent charge over the revenue of TNEB along with the working capital bank. This could, however, turn out to be a bone of contention between the TNEB and the lenders. ICICI sources said that no time frame has been fixed for signing of the agreement.

According to the new approach, the state government, the SEB and the lenders to the power project in the state will enter into a memorandum of agreement, under which the state government and the SEB will undertake an obligation to achieve reform milestones in a time bound manner. The escrow cover will also be made available before the commercial operation of the power project.ICICI sources said that the funds for the project have been tied up, but the financial closure will be achieved once the TN government, TNEB and financial institutions (FIs) enter into an agreement. This project gains importance as it would be the first to achieve financial closure on the lines of the new reform based approach.

The power project will have a 70:30 debt equity ratio of which BPL will hold 26 per cent and the EPC and O&M contractors will hold another 26 per cent. The remaining 48 per cent equity has been privately placed.

The project was originally slated to achieve financial closure in January. However, ICICI sources said that it would be very premature to say if the clause binding the TNEB to give a concurrent charge on its revenue will be accepted by the former and the TN government.

The FIs, this time have insisted on the agreement as this would be a very practical mechanism to mitigate the payment risk, which being the most critical factor in financing a power project has been accentuated, due to various reasons. The most important reason being the weak finances of the SEBs, lack of tariff rationalisation high transmission and distribution losses and other inefficiencies, including theft.

The FIs have earlier failed to mitigate the payment risk by traditional payment security comprising of letter of credit, escrow mechanism and state government guarantee.

An ICICI officials said that power projects in India have suffered due to delay in finalising escrow arrangements. Working capital banks are also been reluctant to cede charge on revenue, he added. Another problem is the limited escrow and unwillingness of the SEBs to allot regional escrow.