Official sources said that in order to hedge the construction risks involved in setting up these projects and ensure returns to investors after the agreed scheduled date of commissioning, the ministry has proposed that Power Finance Corporation (PFC) should give construction guarantees to cover the risk of construction delay. This will also enable the generator to provide additional comfort to FIs for long-term funding.

Significantly, these construction guarantees will have the centre's backing. As a step in this direction, the centre will create a risk- coverage fund for PFC to meet the commitment towards these guarantees.In addition, the ministry plans to involve the Infrastructure Development and Finance Corporation along with PFC in re-financing of hydel projects after the initial funding, for a period of six to seven years, isarranged from the FIs.

The ministry also intends to create a separate PFC window for allocating funds to states for `grant-cum-loan.' This will help states meet any funding gap requirement for the ongoing state-sector schemes.Officials said the grant-cum-loan will be given on a matching contribution basis from the state government. To meet the commitment for this scheme, the government will initially provide PFC with Rs 250 crore from the proposed Hydro Development Fund The measures will remove bottlenecks in funding of the long gestation and cost incentive hydel-power projects.

Explaining the basis for providing guarantees by PFC, officials said that various types of innovative financing instruments have been developed by FIs for infrastructure projects, but these require bankable security arrangements in the form of collateral guarantees from government/banks."PFC is ready to bear the construction risks by providing guarantees but with due support from the government. It is in this context, thegovernment has initiated the move to set up a risk-coverage fund which will meet the commitment towards these guarantees," official said. A loan-syndication scheme by PFC along with FIs is also under active consideration of the ministry. To discuss this issue, the power ministry had recently held discussions with leading FIs like the IDBI, ICICI and IFCI, who have been taking exposure in power-sector funding.

"During our interactions with the FIs, it was clear that all these agencies are unwilling to block their money for more than seven years. However, these agencies may like to associate themselves with a financial institution like PFC for financing the requirements of the power sector under loan syndication arrangements," officials added.

It was also discussed that after the initial funding by FIs, IDFC and PFC can offer re-financing and in order to reduce the cost of long-term financing, both can work out a suitable security package to support these arrangements.