Bankers’ working group bats for stressed power plants

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New Delhi | Published: November 25, 2014 2:07:21 AM

Recommends that such plants be allowed to switch from competitive bidding-based tariff regime to regulated regime

A working group of bankers headed by IIFCL CMD Santosh Nayar has recommended that all power plants that remain stressed due to unexpected fuel price escalation be salvaged by allowing a switch over from the competitive bidding-based tariff regime to a regulated regime.

The idea is that the relevant regulatory commission will decide on the tariff for the remaining contract period for these projects as a one-off measure, as opposed to the periodical cost-plus tariff changes that is the case with the regulated regime.

The group has also suggested that the burden of increasing tariff be shared by all stakeholders. Banks may convert a share of debt into equity and the developer may agree to a lower return on equity (RoE), it said. “A proper study of all such projects which have PPAs under section 63 (competitive bidding-based tariff) be conducted to examine the under-recoveries in the changed economic scenario and explore ways of financing such under-recoveries”, the group said.

The department of financial services had formed a working group comprising major lenders to take stock of issues and suggestions made by the Association of Power Producers (APP) in a meeting in October. The group was tasked with preparing a report on suggestions related to the banking sector.

The group cautioned lenders on funding discoms and suggested that any additional funding should be linked to implementation of financial restructuring plan terms. Going forward, it said, all lending to discoms should be done on consortium-lending basis rather than multiple banking arrangements.

The report bats for assured coal supply to projects that don’t have firm fuel supply agreements (FSAs) with Coal India. Interestingly, a proposal made by the power ministry on similar lines was shot down by the finance ministry citing Coal India’s inability to fulfil existing commitments.
The finance ministry had termed the proposal a ‘moral hazard’ that would expose CIL to litigation from power plants that have long-term FSAs with the miner if CIL commits to supplying coal to projects that don’t have FSAs with it.

On the fuel-starved gas-based projects, the working group recommends that lenders should re-examine the viability of such projects and take up the matter for a special package on a case-to-case basis. Capacity of nearly 16,000 mw gas-based plants is currently stranded in the country as domestic gas output has dwindled dramatically in the last two years.

For resettlement and rehabilitation cost in the case of hydropower projects, the report has suggested that the states fund such costs in lieu of proportionate free power from the project.

Advocating creation of an infrastructure bond market, it has been recommended that the government should allow its institution to act as a market maker for infrastructure bonds.“The working group is of the opinion that ensuring speedy completion of viable projects by providing necessary financial support, coupled with longer amortisation of debt repayment in line with the economic life of the asset is crucial. Similarly, ensuring a long-term and assured fuel supply mechanism is also critical for optimal utilisation of such capacities created. However, unless reforms are not carried out in the distribution sector, such as implementation of terms of FRP, the implementation of recommendations of the working group alone may not be able to resolve the issues in a sustainable manner,” the report said.

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