Move over World Bank, IDFC's here

Move over World Bank, IDFC's here
Sunil Jain

New Delhi, October 9: The Infrastructure Development Finance Corporation (IDFC) and the Government of Karnataka (and its various power corporations) will sign a first-of-its-kind agreement on financing a 210 MW power project in the state on Sunday. Much like the World Bank, before disbursing the Rs 500 crore loan, IDFC has got the Karnataka government to agree to various conditionalities such as those related to a complete and time-bound restructuring of the state's power sector.

According to Jairam Ramesh, the deputy chairman of the Karnataka Planning Commission, a key figure in this agreement on financing of the Raichur project, this will pave the way for further Financial Institutions' funding for power projects like the 1000 MW Almatty hydel and 500 MW Vijaynagar coal one, both being put up by the Karnataka Power Corporation.

Other partners in the loan-financing include the State Bank of India, Syndicate Bank, Canara Bank and Andhra Bank. The Rs 640 crore project will be mainly debt-financed.

The novel multi-party arrangement got its first real break when Finance Minister Yashwant Sinha called a meeting of various financial institutions in July, and asked them to figure out ways to finance the power sector. Sinha said that if multilateral agencies like the World Bank were comfortable with comprehensive time-bound reform promises from the states they lent funds to, surely this kind of arrangement could be worked out with the financial institutions as well.

Apart from Karnataka Chief Minister S.M. Krishna, other major players who pushed the arrangement for the last seven months include former power minister, the late Rangarajan Kumaramangalam, Deepak Parekh of the IDFC, and Jairam Ramesh of the Congress party -- both Parekh and Jairam found that while the banks were flush with funds, the states had power projects that no one wanted to finance! Hence the need to find a way to make the projects bankable.

Krishna, of course, is taking the biggest gamble on the project. For, as part of his promise to reform the sector, he will have to provide as much as Rs 4,000 crore from his budget over a period of five years. Krishna hopes to be able to generate these resources from a proposed Rs 6,000 crore reforms-linked loan from the World Bank.

Essentially, as part of the reforms, from next month, the power tariffs will be decided by the independent Karnataka Electricity Regulatory Commission. The KERC will also decide on the returns that the transmission company should be making. Now, it may not always be possible to charge this from consumers -- in which case, the balance funds will be met by the Karnataka state budget.

Krishna's reason for taking the gamble, of course, is that the state's power sector is in such deep trouble that no fresh investments are being made in it. As it is, close to three-fourths of the state's deficit is on account of the losses made by the state electricity board. Since just around a third of Karnataka's power supply is metered, Krishna's calculation is that once the reforms gain ground, and more power is metered, the losses will fall dramatically.

After a few years, when the power sector is fixed, Karnataka hopes that the power subsidies will be restricted to around Rs 600 to 800 crore, primarily that spent in the agriculture sector.

Under the loan agreement, the Karnataka government will break up the Karnataka Power Transmission Corporation into various distribution companies by June next year, and these companies will be privatised by December 2001. And, within the next few months, an independent consultant will submit a report on restructuring of the Karnataka Power Corporation Limited.

A steering committee, comprising of the Karnataka government, its power corporations and IDFC will supervise and monitor the progress of the reforms. It will meet at least once a month for this. In addition, a Dedicated Power Reform Fund will be created, and proceeds got from the sale of the distribution companies will be deposited in this. This will be used to meet all future bligations such as the pension and voluntary retirement liabilities.