Among infrastructure activities, power is the most vital and capital-intensive. In the medium term, private investment would be critical for meeting this sector’s resource requirements. The government has taken several short-term and long-term risk-mitigation measures.
Today most state electricity boards (SEBs) and state governments have come forward with a new payment security mechanism involving letter of credit, escrow accounts and state government guarantees. But the escrow capability of SEBs after meeting their own working capital requirements would be limited. Accordingly, in most states, realisation is growing that the only long-term solution to the problem would be commercial viability and enhancement of credit worthiness of the SEBs.
Another issue which needs risk mitigation is fuel risk. In the past power projects have been developed on the basis of confirmation of fuel linkage by Coal India and the ministry of coal. The government has later decided that power project developers can have the associated coal or lignite mine developed by themselves or through joint venture arrangement on a captive basis.
Many state governments have issued tender notices for developing ports by the private sector. Once these ports are developed, it would be easier to import fuels like coal, naphtha or gas, and to that extent the transportation risk in respect of fuel for power projects will be mitigated.
To mitigate power evacuation risks, the government has taken measures like a commitment from Power Grid Corporation to create the transmission network to evacuate power. The government is also opening up the transmission sector to private investment. As for operation and maintenance risks, developers have tied up with equipment suppliers for performance guarantees.
The government has, however, withdrawn the facility of counter-guarantees, which are available only to the eight fast-track projects. Considering the concerns of lenders, many state governments and SEBs have provided guarantees for payment obligations. To further enhance the level of comfort, the SEBs have also agreed to implement the escrow account mechanism. But the escrow mechanism has limited scope for expanding the power industry through private investment.
Concerns about the bankability of power projects can be addressed only by improving the credit worthiness of the electricity distribution agency. In the present framework of SEBs, in most cases, this problem may remain unresolved and the ultimate solution appears to be tariff rationalisation through the regulatory mechanism, restructuring of power industry through privatisation of distribution & transmission, privatisation of mine development and a new collection mechanism.
The author is ex-dean, Management Development Institute, Gurgaon.