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Maharashtra power board to issue bonds for Rs 4 billion

The Maharashtra State Electricity Board has decided a raise a loan of Rs 4 billion in the form of private bonds from domestic and foreign banks to tide over the financial crunch facing the utility.

MSEB will employ these funds to stake its 30 per cent equity participation in the controversial Dabhol power project, promoted by Enron of the United States.

The money will be raised in two tranches in the form of bonds worth Rs 2.7 billion from private institutions and the remaining portion of Rs 1.3 billion will be raised in the form of borrowings from foreign banks.

After the sustained fall in interest rates, the climate favours MSEB issuing bonds at competitive rates. Last year, Krishna Valley Development Corporation had to pay a hefty 27.5 per cent interest to its subscribers bonds issued. MSEB bonds, on the other hand, will have an interest of only 14 per cent, according to sources.

In recent days, Indian paper has gained a significant advantage and many foreign banks and Indian funds, interested in the proposal, have had formal negotiations with Nimesh Kampani of J M Financial, the investment banker appointed by MSEB. MSEB needs the money to pay for its 30 per cent equity stake in the Dabhol Power Corporation.

The amount, incidentally, has sparked off a row between the MSEB and Enron, the parent company of Dabhol Power Corporation. Enron's insistence that MSEB shell out Rs 7.3 billion for the 30 per cent state has been rejected by the state government. According to Enron, the state government should also share the burden of Rs 980 million spent by the company before the agreement was signed and for the Rs 1.5 billion raised as contingency fund. Hence, as per their calculations, a 30 per cent equity participation will cost Rs 7.3 billion.

However, the state government has pointed out that a 30 per cent equity stake would only cost Rs 4.8 billion and Enron's demand about the contingency fund expenditure and pre-agreement expenditure had been rejected the the Reserve Bank of India.

MSEB has already formed a subsidiary, the Maharashtra Power Production Corporation, which will hold the 30 per cent equity in the Dabhol Power Corporation.

MSEB Chairman Purshottam Gajralwar is at present in the United States to negotiate the second phase of the power project with the Enron officials.

The state government has decided to provide a guarantee to the bond proposed by MSEB and is confident of the bond issue being well received in the market.

Meanwhile, MSEB has decided to increase its power tariff rates by 22 to 23 per cent for residential and commercial consumers. A proposal in this respect will be tabled at the MSEB's standing and advisory committees during a special meeting which will be called to discuss the hike.

MSEB's revenues have dropped due to a decrease in its regular collections and its failure to realise a massive outstanding amount of Rs 22 billion. It also suffers a monthly loss of Rs 2 billion.

Consequently, MSEB had to agree to the World Bank's prescription of raising the power tariff. The state government is also mulling over the idea of privatising MSEB in case it fails to collect its arrears and bridge the widening deficit.

The World Bank had suggested an increase of 40 per cent in the tariffs last year. Accordingly, MSEB had proposed the same, but the state government only permitted a 17 per cent hike.

At the same time, the World Bank stopped its loan facility to the Chandrapur power generating project. This forced MSEB to undertake its own project at Khapar Kheda to produce 500 mw.

The estimated cost of this project is Rs 11 billion. Interestingly, till date, MSEB has not been able to even raise Rs 250 million to meet its daily expenditure. It has thus become almost impossible for MSEB to sustain itself without the WB's support.

Under the circumstances, MSEB has decided to raise the tariff by 22 to 23 per cent over and above its 17 per cent hike last year.

Compiled and translated from the Marathi media by Prasanna Zorey