Search the Internet          Tips  Sites: Finance, Investment

India may commit $1.5-bn for power loan security

India, desperate for foreign investment in its shortage-ridden power sector, is considering offering up to $1.5 billion in loan guarantees to woo lenders, a US business delegation member said on Wednesday.

Mark Riedy, a member of the US-Indian Business Council board, said the government was looking at the loan guarantee proposal as an interim measure while bankrupt state power utilities are nursed back to profit over the next two years.

But Riedy, part of a 20-member delegation who met India's power minister Suresh Prabhu last week, said he did not expect the scheme to satisfy lenders.

India which started trying to lure private and foreign investors into the power sector in the early 1990s has met with little success because of the losses of state utilities which sell at below cost and are the lone distributors in most states.

India has offered sovereign counter-guarantees for loan repayments to seven private power projects but the rest have been unable to arrange loans.

"The power ministry told us they expect to put up $1.3-1.5 billion for (power) projects over a two-year period (for payment guarantees)," Riedy said.

"But that won't even take care of the Ennore project (1,850 MW) and the Hirma project (3,960 MW) in Orissa, let alone all the other projects," he said, referring to megapower projects for which India has been unable to tie up loans.

Riedy, a Washington-based lawyer, is involved in negotiating financing for major infrastructure projects among other work.

Need to be covered

Riedy said lenders would need guarantees for the entire loan period rather than the first two years considering the fragile finances of the state utilities which buy the power. "They want to be sure they're covered for the whole time," he said.

The high-profile confrontation between US multinational Enron Corp and the western state government of Maharashtra over unpaid bills for power purchases has scared off many investors.

The local unit of Enron sought federal government intervention in January to recover dues from the Maharashtra power utility after it failed to make payments.

Enron is building India's biggest private-sector power plant in Maharashtra, and its local unit, the Dabhol Power Co operates the completed first phase of the project.

Reidy said almost 70 percent of the companies that came to India between 1991 and 1998 have left partly due to poor repayment security.

"My feeling now after Dabhol is no power project is going to go through without a cover for the whole period," Riedy said.

India's installed generation capacity was 96,950 megawatts on March 31, 2000 and it needs 100,000 MW more by 2012. The government is hoping a large part will come from private firms.

The Union government summoned state chief ministers and power ministers to a meeting earlier this month to set targets, including raising power tariffs for farmers and ending electricity theft in two years.

The state electricity boards are expected to run up a combined loss of Rs 285.45 billion in 2001-02, largely because of mismanagement and theft in power distribution.

But Riedy said he did not expect the states to meet the targets in two years.

"To raise rates and do away with all the thievery, putting meters on the systems and getting all these people to pay their bills will be a monumental effort. I don't see it," he said.

Tell us what you think of this report