Quoting the Chinese and the Malaysian initiatives, where similar models were adopted for funding mega-power projects, SBI Caps, in a recent presentation before the Union power ministry, has asked the government to take lead in terms of policy and financial initiatives.

According to SBI Caps, the Malaysian government gave eligible developers soft loans through SPV and kick-started the domestic private initiative in the sector, at a time when foreign investors required unreasonable sops. Moreover, this also proved to be highly advantageous in providing insulation from the vagaries of forex fluctuations.

A similar SPV, the State Development Bank of China, was set up for tying up funds for mega-projects from local and overseas sources. This bank, as per SBI Caps, now operates as a commercial entity and is a nodal agency for bidding and negotiating rates. This also resulted in credit enhancement by way of an unlimited and irrevocable line of credit from the Chinese central bank.

SBI Caps has asked the government to make the first move, considering the huge fund requirements in the power sector to the tune of Rs 2,00,000- 2,50,000 crore over the next four-five years (during the transition period when reforms are being implemented).

This SPV, as per SBI Caps, can entirely finance some of the large generation projects during the transition period, ie when state electricity boards are in the process of undertaking reforms and till the time they become financially viable.

"Once the reforms are implemented and SEBs become financially viable, the Centre can then off-load its stake in this SPV after three to four years," says SBI Caps in its recent presentation before the power ministry on `Strategic Initiatives for Development of the Indian Power Sector.'On the policy front, it has recommended third party sale of power by IPPs in a limited way.

Towards this, it has suggested that this can be allowed as an interim measure, till reforms are implemented and up to a certain percentage of total capacity. Besides, third party sales should be allowed to a few large identified customers.

Another significant recommendation is the creation of a captive facility for the railways, say through a capacity of around 2,000 MW. This could be an attractive proposition for IPPs, as no payment risk is involved and would also help in freeing a substantial generation capacity of SEBs.

On attracting the foreign direct investment, SBI Caps pointed that FDI will come in automatically under a normal business risk scenario, but that needs a more efficient, market-oriented, commercially viable power sector scenario in the country.

SBI Caps said, "there is a difference in attracting FDI on healthy grounds and on a bad wicket. When well managed and marketed, India is an attractive investment destination."