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Government raises concerns over power project loans during UPA tenure

Power projects were loaned money by the banks without either a fuel supply agreement (FSA) from state-owned Coal India Ltd (CIL) or long-term power purchase agreement (PPA) with a distribution utility. Photo: Hemant Mishra/MintPremium
Power projects were loaned money by the banks without either a fuel supply agreement (FSA) from state-owned Coal India Ltd (CIL) or long-term power purchase agreement (PPA) with a distribution utility. Photo: Hemant Mishra/Mint

Around 28,000MW of projects were given loans without fuel supply, power purchase deals during the earlier government's tenure

New Delhi: The Narendra Modi-led National Democratic Alliance (NDA) government has expressed concern about the way in which loans were given to power projects totalling around 28,000 megawatts (MW) during the tenure of the previous government without fuel supply tie-ups and power purchase agreements, rendering them unviable and adding to the pile-up of bad loans with lenders.

Power projects were loaned money by the banks without either a fuel supply agreement (FSA) from state-owned Coal India Ltd (CIL) or long-term power purchase agreement (PPA) with a distribution utility. To be sure, the loans were given as per the earlier policy on the basis of letters of assurance (LoAs), which required approval by a panel headed by the coal ministry.

LoAs are converted into coal linkages after a project completes financial closure, which occurs when a firm puts in place legally binding commitments to raise funds. Later, these linkages were converted into FSAs, a legally binding document that requires CIL to supply the quantum of coal agreed upon. This conversion is usually done after the project meets certain milestones in two years.

A capacity of 28,000MW is stuck for want of FSAs and PPAs, said a top government official requesting anonymity, adding, “How could they be given loans without an FSA or PPA?"

Such coal linkages pertain to only those projects that do not have a captive coal block and instead need to source coal from CIL—the only company allowed to undertake commercial mining of the fuel in the country.

Earlier, power projects were directly awarded coal linkages. However, scarce resources and an increase in the number of applicants prompted the government to introduce a system of awarding LoAs that required approval by a standing linkage committee (SLC), a panel headed by a representative of the coal ministry and comprising representatives from the Planning Commission, the ministries of power, shipping and railways, the Central Electricity Authority, the Central Mine Planning and Design Institute and CIL.

A senior executive at a financial institution, requesting anonymity, defended the lending practice.

“Coal India gives an undertaking on fuel allocation only after the structure is erected, which then gets converted to fuel supply. For erecting a structure, promoters need loans," the executive said. “Coal India could not keep up with the coal supply. PPAs are also signed after the plant
is erected. Many of the electricity boards did not invite bids for new PPAs because of the financial mess they were in."

While India’s power generation capacity has grown by 60% over the past five years, coal production has risen by only around 6%. The country mined 564 million tonnes (mt) of coal in 2013-14.

“Banks typically take an undertaking from the promoters that 1.1 times of the repayment should be through long-term PPAs. Also, they take some type of guarantee from the promoters," the executive said.

Arguing similarly, the chairman and managing director of a state-run bank, who too did not want to be identified, said, “Because of a slowdown in the economy, projects were not taking off. At that time, the government nudged banks to lend to big infrastructure projects including power projects. Coal India issued many provisional letters of supply and not confirmed letters. It then could not meet the demand. Lack of coal supply made sure that the projects got stuck and deteriorated the asset quality of banks. Also, many of the promoters entered into PPAs only when the project was complete to get a better price per unit."

The executive added that banks now insist that all approvals such as land acquisition and coal supply are in place before sanctioning a loan as part of their efforts to ensure that funds are not stuck in stalled projects.

Queries emailed to a power ministry spokesperson on Thursday remained unanswered.

CIL had assured supply to 172 power projects through LoAs for a generating capacity of 108,878MW. The number doesn’t include assurances for projects commissioned before March 2009.

“Since getting an FSA from CIL is linked to the IPP (independent power project) having a long-term PPA with a distribution utility, many of the ready or almost-ready generation projects are stuck without a PPA and FSA," said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.

As power distribution companies owned by state governments owe 2 trillion to lenders, this has reduced their ability to buy power.

“Utilities have slowed down procurement of long-term power. Other than Uttar Pradesh, Rajasthan and Tamil Nadu, no other state came out with long-term procurement contract in the last three years," said Mishra. “On the supply side, generation capacity addition is happening at robust pace. Half way through this Plan period, the country has already added 50 gigawatts of capacity, almost the same as the capacity added in five years of the previous plan period."

The power ministry was aware of the danger of such loans turning into non-performing assets (NPAs), or bad loans, and had impressed upon the state-owned power sector lenders such as Power Finance Corp. Ltd (PFC) and Rural Electrification Corp. Ltd (REC) in April 2011 to stop loan disbursements in the absence of a PPA. REC and PFC together account for 60% of the money lent to power companies in India.

“Lending to a project without an FSA or a PPA was a commercial business decision then as per the government’s policy. It might be a wrong decision today. A decision was later taken to not disburse loans without a PPA," said a senior PFC executive, requesting anonymity.

“Looking at the uncertainties, the government director on the board insisted upon the conditionality of a project inking a PPA prior to the disbursal of the loan," added a senior REC executive, who also didn’t want to be identified.

Mint reported on 18 September 2012 that there were significant irregularities in assuring supply of coal to private sector power projects. The process of selecting companies that were assured coal supply was as subjective as the process of allotting captive coal blocks and also involved factoring in recommendations from Union ministries and state governments. Later, a point system was introduced for linkages for the 12th Plan (2012-17) projects.

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