The Hindu Business Line : Power projects sans govt guarantees — FIs ready to accept alternative payment security mechanism

POWER projects failing to tie up funds due to lack of government guarantee cover may finally see the light of the day. Financial institutions lending to the power sector have started to look beyond government guarantees for financing of new projects.

Power projects, not in a position to arrange for a State Government guarantee, can now provide `charge on assets' as an alternative payment security mechanism. The Power Finance Corporation (PFC) is already considering this option as a viable payment security alternative to utilities furnishing a State guarantee, a Government official said.

Other institutions are also looking at the option of waiving the State guarantee requirement as it was proving to be difficult in view of the large contingent liabilities of most projects, officials said.

According to institutional sources, a `charge on assets' essentially means a right which a lender or creditor obtains on the property of the company by way of security that the debt will be repaid.

Broadly, charges are of two types: Fixed, which is against a specific, clearly identifiable and defined property, and floating, where the company does not attach any definite property but covers asset of a circulating and fluctuating nature such as stock-in-trade and debtors. A floating charge on crystallisation becomes a fixed charge.

State guarantees have been the main feature of the payment security mechanism of most power projects, including State sector projects and for independent power projects, which have come up during the last decade or so.

"The move by financial institutions towards waiving the requirement of government guarantees for financing power projects would enable projects with strong fundamentals and credible promoters to come up faster. It is definitely a step forward for the future of the power sector," a power sector expert said.

The fate of several power projects has been hanging in the balance due to the promoters' inability to get a State guarantee.

For instance, the financial closure of Mangalore Power Company's 1,013.2-MW coal-fired project was held up for over three years due to the non-availability of the State government counter-guarantee cover.

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