International lenders have rated various state electricity boards (SEBs) and state governments in a bid to reduce their risk while funding power projects.
The lenders have resorted to rating the states due to the inherent limitations in their favoured comfort mechanism: escrowing revenue streams from high-tension power consumers. Under this mechanism, certain cash flows are set aside to pay the power producer. In case of a problem with the cash flow, the state government provides the money.
However, the extent to which cash streams can be escrowed and back-up funding provided by the states is limited. Therefore, international lenders have worked out the maximum capacity of power that can be produced by each state.
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In this context, international lenders feel that Madhya Pradesh and Uttar Pradesh are high-risk states while Maharastra and Gujarat are low-risk. International lenders are comfortable financing power projects producing up to 3000 mega watts in Madhya Pradesh. But the state plans to produce up to 7,000 mw, which is deterring lenders from financing Madhya Pradesh projects. However, lenders are willing to finance projects with a combined capacity of up to 14,000 mw in Maharastra and Gujarat.
The internal cap fixed by international lenders is important. Says Ravi Suri, head, structured finance, ABN Amro Bank, The ceiling set by international lenders on the escrowing capacity of states creates a natural limit on the capacity per state that can be financed.
Sources point out that the international banks have moved a step ahead of Indian financial institutions, which have asked state governments to divide the state on a geographical basis for escrowing funds. Under this scenario, each IPP will get a geographical area from which cash will be escrowed.
However, international lenders have put a cap on the amount that can be escrowed. This will mean that once a state achieves the capacity ceiling set by international banks, no further funding will be forthcoming.
Other sources point out that it might put a stop to all international funding if the state government refuses to scale down its capacity target.
Setting up capacities higher than the ceiling will increase the risk on the existing independent power producers. This will eventually affect the international lenders. However, once the tariff reforms are brought in and the revenue streams of the SEBs improve, the ceiling will be enhanced, sources point out.