Escrow cover - will this issue be solved ? - Views on News from Equitymaster

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Escrow cover - will this issue be solved ?

Mar 31, 2000

As per a newspaper article to provide a breakthrough to the issue of escrow cover the power ministry, finance ministry and financial institutions have come together to solve it. The alternative being worked out is reform linked financing of power projects. The lack of escrow cover of the state electricity boards (SEBs) is an issue in the Indian power sector which needs to be addressed. Many independent power projects are held up because of the poor financial conditions of the SEBs resulting in them not being able to provide escrow cover to projects in their respective states.

What is an escrow cover?
It is a separate account opened by the SEB in order to provide guarantee of repayment of debt to the financial institution. As most SEBs are in poor financial condition they have exhausted their escrow cover limits.

IPPs in states like Karnataka and Tamil Nadu are held up because of the inability of these states to provide escrow cover. Some of the projects that are held up are the Sujana Power Project in Tamil Nadu and the Mangalore Power Company (MPC) in Karnataka.

One of the options is that the respective state government, the respective SEB, and the financial institutions enter into a tripartite for financing of projects and the reforms being taken. The financial institutions and the bank would have the right to recall the loans in the event the state government and the SEB do not undertake the reforms as per the fixed schedule.

Though this measure sounds simple in reality it may not work out. As the SEBs have very poor financial conditions it is not going to be very easy unless they are viable enough to be able to payback the financial institutions incase of a default in the reforms undertaken by the state. They will need to work out on who the final onus for default would lie on, otherwise the financial institutions non performing assets will only go up.

The financial institutions should piece meal fill the financial gap of the escrow cover of the SEB. This would provide an incentive to state governments who undertake the power reforms more seriously than others. This move will provide an impetus to the power sector reforms and make it more attractive for private participation and would encourage Independent power producers (IPPs). This will result in higher interest by foreign and private power companies in investing in power projects across the country.

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