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Karnataka to guarantee debt funding component of Almatti

C.Shivkumar

BANGALORE, May 27

THE Karnataka State Government has agreed to guarantee the debt financing component of the 297 MW Almatti hydel project now being taken up on a joint venture basis.

The Almatti project is being jointly promoted by the State sponsored special purpose company, Krishna Bhagya Jala Nigam Limited (KBJNL) and the Karnataka Power Corporation Ltd (KPCL). The total cost of the project has been estimated at Rs 715 crore or ab out Rs 2.41 crore per MW.

This project is to be funded through a 80:20 debt equity ratio. This in turn would mean that of the Rs 143 crore of the equity Rs 93 crore have to be brought in by the KPCL. A matching amount would also have to be brought in by the KBJNL. Part of KBJNL's civil works for construction of the power house has been valued at Rs 50 crore, which would comprise its equity component.

The KPC had decided to take the IPP route for implementing the project in order to avail of the five year tax holiday and the concessional rate of taxation for another five years. In addition the project tariff would also be fixed on the basis of a minim um return on equity of 16 per cent.

The debt financing component of the project cost amounting to Rs 572 crore is to be raised from the Power Finance Corporation. However for availing of PFC funds, one of the conditions imposed was that the project debts would have to be guaranteed by the State Government. Initially the State Government had balked at providing this kind of a guarantee since two other projects promoted by the KPC, the KPC Bidadi Corporation Ltd along with Unocal and the Vijainagar Thermal project with Larsen Toubro would n ot be getting such guarantees.

Besides, the State Government was also near the contingent liability ceiling in view of the downscaling of the additional resource mobilisation target for the current fiscal. This downscaling automatically implied that the contingent liability ceiling wa s also scaled down.

But sources said, that the PFC offer came with an interest subsidy of 4 per cent. This would bring down the cost of debt funds to just 9 per cent. This in turn mean that the fixed cost component of the tariff could be kept down. Based on this debt costs the tariff would be just Rs 2.31 a unit, the lowest among all the IPPs.

But PFC's other conditions for availing this subsidy included that the preliminary works on the project including signing of the Power Purchase agreement (PPA) and the financial closure would also have to be completed by March next year.

The sources said that discussions in finalising the PPA were still continuing with the bulk buyer. But even here there were some new hurdles. These hurdles included the State Government's new power policy of restricting the tenor of the PPA's to just fiv e years. The KPC-KBJNL combine has sought a PPA of 30 years.

Besides to avail of FI funds, the tenor of the PPAs would have to match at least the debt financing maturity profile. Besides if the maturity of the debt finance is shrunk to five years, there was also a possibility of a tariff escalation. This is beca use any tariff based on revenue projection would have to meet the minimum debt servicing coverage ratio imposed by the Financial institutions. This ratio is currently 1.5 times and reveals the ability of any project's debt carrying capacity.