The agreement will be among the Government of India (GoI), the Government of Tamil Nadu (GoTN) and the Reserve Bank of India (RBI) to transfer funds from Plan allocations to cover the GoI counter-guarantee for the project and recover the funds through the RBI if and when required, top TN government sources told The Financial Express.

If the agreement is concluded as expected, ST-CMS will be the first private sector fast-track power project to have the counter-guarantee in place.

It may be recalled that the central government has taken more than four years to come to this stage of signing an agreement for offering counter-guarantee although the ST-CMS project has been identified as one of the eight fast-track projects eligible for a GoI counter-guarantee with an assured 16per cent rate of return.

Sources said the draft agreement with ST-CMS by GoTN and Tamil Nadu Electricity Board (TNEB) for counter-guarantee has been finalised and a team from the concerned parties will meet in a week and sign the agreement.

The GoI has recently revised counter-guarantee norms by diluting the quantum of 16 per cent guaranteed rate of return. Earlier this was offered for the entire project cost covering both foreign and domestic loans. Now the ministry of power says the counter-guarantee would cover only outstanding payments of foreign debt if a contract is terminated and not the entire tariff.

As regards project cost escalations owing to rupee depreciation against the dollar, sources said foreign exchange risks were covered in the power purchase agreement (PPA) and TNEB would be paying part of its dues in foreign currency. It is pointed out that power projects are capital intensive and so exchange fluctuations could affect rupee costs.

In fact, an independent power producer (IPP)source said import costs of equipment may go up because of rupee depreciation. For the ST-CMS project, it is said import costs can go up by about some Rs 15 crore.

Impact of sanctions on the ST-CMS project is not known yet, but sources say that the main concern is not about getting foreign loans but the cost of funds. Company sources are hoping that the cost of funds would not exceed Libor plus 2 or 3 basis points.

Meanwhile, ST-CMS intends to place the entire counter-guarantee after its approval by GoTN and TNEB before the bankers who will syndicate the loans within one month. ST-CMS, it may be recalled, has tied up for raising 30 per cent of foreign debt with Bank of America and ANZ Grindlays and ICICI. The balance 40 per cent of debt is to be raised through Indian financial institutions.

The capital cost of the project is estimated at $316 million (over Rs 1,328 crore) and the debt-equity ratio is 2.33:1. CMS Energy of the US has 50 per cent equity stake while ST-Holdings Inc of the US and ABB EnergyVentures, BV will hold the balance. ABB is also the engineering, procurement and construction (EPC) contractor.

ST-CMS has signed the PPA with TNEB in November 1996 on a two-part tariff system covering a 30-year period. The levellised tariff is said to be Rs 70 per unit.

The company has also signed a fuel supply agreement with Neyveli Lignite Corporation of TN for lignite supplies of between 1.5 million metric tonne and 1.9 mmt per annum.