Top FI sources told The Financial Express that under the new mechanism, a legally enforceable memorandum of agreement (MOA) will be signed between the state governments/state electricity boards (SEBs) and the term lenders, financing power projects.

This MOA, sources said, will be based on a cash flow model, to be formulated by the Power Finance Corporation (PFC) for each state electricity board.

Under the fall back options, the FIs and banks have asked for third-party sale of the power by the IPPs, second/subsequent charge for the FIs on SEB revenue and a payment security mechanism, in the event of non-compliance of the MOA.

Till now, third party sale was allowed only in the event of termination of the power purchase agreement (PPA) between the IPP and SEB.

With these new measures, the hurdles faced by the IPPs in achieving financial closure due to poor financial health of SEBs are likely to be removed.

It may be recalled that FIs were asked by the power ministry to work out an alternative mechanism based on reform milestones.

Following a series of meetings, FIs, PFC and banks have decided to appoint consultants starting with three states-Madhya Pradesh, Karnataka and Andhra Pradesh.

Sources disclosed that CRISIL Advisory Services, along with DESCON, has been selected for Karnataka and Madhya Pradesh while ICRA Advisory Services, along with SNC-Lavlin, has been appointed for Andhra Pradesh. The new security mechanism will expedite the financial closure of private power projects in various states. Sources said that in a recent meeting of the power ministry, it has been decided that PFC would be the lead agency of FIs and banks for deciding on issues related to cash flows of different states and the charge on the revenues of the SEBs by FIs.

After working out a draft cash flow model, a team from PFC would visit each SEB to finetune the model and validate the data concerned SEB officials. uIt is significant to note here that the FIs and banks had earlier asked PFC and the working capital banks to share their first charge on the revenues of the SEBs. This has, however, been turned down by PFC saying that issue of distribution of charge on a pari-passu basis can hold good in the fresh revenue streams of SEBs and not from the existing revenues.

Fnancial closure of 7 projects by next month
As many as seven private power projects totalling 2,814 mw will be able to achieve financial closure by December end and another nine projects by the end of this fiscal.

The decision for financial closure of these projects totalling a capacity of 7,000 mw was taken on Wednesday at the crisis resolution group (CRG) meeting of the power ministry with leading financial institutions and banks. The meeting was chaired by Power Minister Suresh Prabhu.

The meeting with FIs was convened by the ministry as part of its efforts to resolve the pending issues coming in the way of financial closure of the projects.

Speaking to The Financial Express, power secretary Ashok Basu informed that the financial institutions and the project developers have arrived at an understanding and that the FIs and banks would no longer insist on an upfront escrow.

Mr Basu said that an alternative arrangement by way of a legally enforceable agreement, which will lay down well-defined milestones towards reforms, has been worked out.

"The model worked out by Infrastructure Development and Financial corporation (IDFC) for Karnataka will be followed by other states with suitable modifications, to be worked out by the Power Finance Corporation (PFC)," Mr Basu said.

The milestones to be followed include a commitment to reduce subsidies, unbundle the state electricity boards and compulsory metering. The setting up of state level regulatory commissions would also be a condition.

The next meeting with FIs would be held in December to discuss other pending power projects.

Some of the projects which will be enabled to achieve early financial closure include the Reliance-promoted 447.1 mw Patalganga and 500 mw Jamnagar power project, S Kumar's-promoted 400 mw Maheshwar hydel project, Birla-promoted 578 mw Bina and 567 mw Rosa thermal project, 1050 mw Videocon project, Ispat group-promoted 1,072 mw Bhadrawati project, Tata Electric and China Light-promoted 1013.2 mw Mangalore thermal, AES's 500 mw Ib Valley project and Hindujas-promoted 1040 mw Vizag power project.