Financial institutions have agreed to link funding of power projects to reforms for both independent power producers and state projects with specified milestones.
The mechanism was suggested in a report submitted to the Union power ministry a couple of days back as an alternative to overcome the escrow cover crisis the states are facing while executing power projects.
The decision to work out an alternative model was mooted in March after a meeting between the power ministry, financial institutions_including ICICI ,IDBI, IDFC_and officials from the Prime Minister's Office and the finance ministry.
Top power ministry sources said according to the FIs' requirements, the state governments would have to give a written commitment on the reforms model and chalk out the milestones acceptable to the funding bodies.
They said the funding would be done in a phased manner similar to the terms of the World Bank loans given to states. Now, the FIs could stop funding if the state did not stick to the milestones, they added.
The FIs would decide on the capacity of the projects on the basis of the reforms agenda and the state concerned, sources said. The time-frame for the review of financing would have to be worked out on case-by-case basis.
The sources also said these issues would be discussed at a meeting next week between the FIs and the government. According to officials, the FIs model was crucial for kickstarting private investment in the sector as the states had reached a dead-end in attracting investments due to the lack of escrow cover.
The ministry has discussed the issue with Andhra Pradesh and Madhya Pradesh. Both these states have several IPPs which have got stalled due to the lack of escrow cover.
Karnataka has also expressed it inability to provide escrow for any IPP in the state. Projects such as the 1000mw Mangalore power project promoted by China Light and Power and several other small projects have been held back due to this issue.
