The move to curb fiscal indiscipline through the Fiscal Responsibility and Budget Management Act has begun to impact the ability of state governments, especially those with a not-so-healthy balance sheet, to provide sovereign guarantees to overseas financiers funding infrastructure projects.
The Andhra Pradesh government’s plans to develop Krishnapatnam as the power hub of the country, one of the two core projects there, has run into financing problems as the Act has placed hurdles in the way of the state government giving a sovereign guarantee.
As a result, doubts are being raised about the financial closure of the 1,600MW Krishnapatnam stage-I project, which was to come up at an investment of Rs8,432 crore.
The €281 million (Rs1,546 crore) grant from Germany development bank KfW Entwicklungsbank was originally sanctioned for the state’s Vijayawada stage-IV 500MW project, which was to come up with an investment of Rs1,950 crore.
The state government wanted to transfer this grant to its Krishnapatnam stage-I project, which would be ramped up later to 4,000MW.
Now, the German government, which is a 80% stakeholder in KfW, wants the state to provide a sovereign guarantee to underwrite the proposed grant. As the state’s finances are not in a very healthy shape, the Union finance ministry has objected to such a proposal.
“We are aware about the problem and are hopeful that things will be worked out,” said a senior state power minsitry official who did not wish to be identified. “We are still reviewing the isssue.”
“Everything is on track,” insists a spokesperson at the German embassy.
The initial investment for the Andhra Pradesh Power Development Co. Ltd (APPDCL) project’s first phase is expected to be around Rs8,432 crore. After the grant component is taken into consideration, the project will require an additional Rs5,000 crore, which the state government plans to raise from either the Power Finance Corp. or the Rural Electrification Corp. at an interest rate of around 10.75%.
An industry analyst, who didn’t want to be identified since he was associated with the project, said, “State governments have a tendency to go for generation projects on their own, even if they are cash starved. If the Krishnapatnam project is getting delayed, the private sector should be allowed to develop it. Every year we lose will add to the power shortage problem.”
The project will use coal as fuel. According to P. Kodandarami Reddy, electrical adviser to APPDCL, 70% of the coal would be sourced from the domestic market and the balance imported.
After the first phase is completed, three additional units of 800MW each will be added.
“Currently, APGenco (Andhra Pradesh Pwer Generation Corp.) has a 50% stake in APPDCL with the balance being held by IL&FS (Infrastructure Leasing & Financial Services),” said Reddy. “Once the engineering, procurment and construction contracts are awarded, IL&FS will sell its stake to APGenco, which will then retain a 51% stake in APPDCL and sell the balance to the state’s power distribution companies.” Andhra Pradesh has a total installed capacity of 11,617.4MW.