The government's decision to amend counter-guarantee norms when some projects have already finalised power purchase agreements (PPAs) has upset the prospective lenders, specially the Indian institutions, experts believe.

According to the new guidelines, counter-guarantees will now be limited to the payment of outstanding foreign debt, but only if the contract is terminated.

"The centre has limited the exposure and scope of counter-guarantees by guaranteeing only the foreign debt and also by adding the condition of termination of contract," Maharashtra State Electricity Board (MSEB) chairman Asoke Basak told The Financial Express.

This may will pressure the SEBs as power companies may now ask for additional security cover from states, he says. "An elaborate escrow account facility will be considered an option," he adds.

As Indian debt is not covered in thecounter-guarantee provisions Indian lenders, including banks and bondholders, will look for cover, adds Ashok Shinkar of JM Financial & Investment Consultancy Service, Mumbai.

"Letters of credit and even state guarantees are not considered sufficient." The lenders will want a good quality escrow to assure returns.

The centre will now not be liable to pay annual energy charges to an independent power producer (IPP) as provided under the earlier scheme, says Basak. But this could also be covered through the escrow facility. As SEBs have limited escrowable capacity, they will have to bargain hard, he adds.

Earlier, the counter-guarantee provided to Phase I of the Dabhol Power Company (DPC) had covered the entire debt besides the MSEB's payment to DPC.

Inconsistencies in government policies heighten the political risk premium, sources at IDBI say. The financial institutions will certainly oppose the guranteeing of only terminal payments and ask for guarantees on operational payment, they add.

While theUnion power ministry believes that the new norms have simplified the procedure for counter-guarantees and speed up decision making, the power companies see these changes are reasons for further delay. "These will spawn further negotiations and delay the implementation of projects," says Ispat Industries' director, power projects, MR Rao.

"The truncated guarantee has put additional pressure on the companies as arranging debt is becoming difficult, says a senior official of the Hindujas, who are putting up a power project in Andhra Pradesh.

Though the risk of the foreign debt is covered, the reduction in financial risk cover in general is perceived as an increase in the project risk which will affect the cost of funding of the project, he says. Given the US sanctions and downgrading of sovereign debt by the international rating agencies, the concerns of foreign lenders are magnified.

The centre changed the guarantee norms while providing counter-guarantees to three fast-track power projects, including the250 mw lignite-based Neyveli power plant in Tamil Nadu, the 1,040 mw Hinduja power plant in Visakhapatnam, Andhra Pradesh, and the 1,082 mw coal-based project at Bhadravati in Maharashtra.

It has also clarified that an IPP will not get any tax relief on the revenue earned from additional generation. The payment of heat rate and auxiliary consumption will be based only on the actual consumption.

The power ministry has also asked states to reduce project costs by selecting equipment suppliers through international competitive bids, or renegotiating the costs in view of the fall in equipment prices in the international market.

A fall in the rupee against the dollar, however, will offset these price benefits, analysts said.

The power ministry, however, feels that by lowering the return on capital, the tariff will also be reduced. Private power projects will, therefore, try to bring down capital costs, says the ministry.