The following are the details of the scheme to encourage greater private sector participation in the electricity generation, supply and distribution:

* The Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 have been amended to bring about a new legal, administrative and financial environment for the private enterprises in the electricity sector.

* Private sector can set up coal or gas based thermal projects, hydel projects and wind/solar energy project of any size.

* Electricity projects with total outlay less than Rs 250 mln. need not be submitted to the Central Electricity Authority for concurrence.

* Private sector companies can set up enterprises to operate either as licensees or generating companies.

* All private companies entering the electricity sector will be allowed a debt-equity ratio upto 4:1.

* A minimum of 20% of the total outlay should be the equity component.

* Promoters have to bring in at least 11% of the total cost of the project.

* 30% waiver in tax for the units commencing business before 31/03/1998, for the next five year term.

* The excise duty or a lease number capital goods and instruments in the power sector has been reduced to a uniform lower rate of 5%.

* Foreign investors are allowed to repatriate dividends entirely in dollar terms with full protection against adverse exchange rate fluctuation.

* Upto 16% return on the foreign equity included in the tariff can be provided in the respective foreign currency.

* Fixed costs including 16% Return on Equity can be recovered at 68.5% PLF. Incentives are prescribed for performance beyond this PLF in the form of additional ROE (upto 0.6%) for each 1% rise in PLF.

* Insurance charges allowed in the project cost.

* The private sector will be allowed to take over an existing public sector power utility if its revival is otherwise not possible.

* Normative parameters under which generating companies will operate have been notified which inter-alia, provide for 16% rate of return on the paid up and subscribed equity.

* Generating companies operating coal-based, gas-based and hydro projects can sell power on the basis of a suitably structured two part tariff.

* The Union Government has agreed, in principle, to give counter-guarantee to back-up State Government guarantee for SEBs payment obligations to private generating companies, on a specific request of the State Government concerned and subject to the State Government agreeing certain terms and conditions.

* Licences of longer duration of 30 years in the first instance and subsequent renewals of 20 years instead of 20 and 10 years respectively as it was before.

* Licences are allowed higher rate of return of 5% in place of the 2% above the RBI rate.

* Capitalisation of interest during construction (IDC) at actual cost (for expansion of projects also) as against 1% over RBI rate as it was before.

* Licensees are allowed special appropriations to meet debt redemption obligations.

* The Foreign Investment Promotion Board constituted under the chairmanship of Principal Secretary to the Prime Minister considers all cases of foreign investment in the country, including those in the power sector.

* A High Powered Board has been constituted under the Chairmanship of Cabinet Secretary to monitor and provide for faster clearance of private sector power projects and resolve outstanding issues thereof.

* An Investment Promotion Cell has been set up in the Ministry of Power to provide information and assistance to prospective entrepreneurs in the electricity sector and take timely action for time bound clearances of the proposals.

* To ensure that private entrepreneurs bring in addition of resources to the power sector, not less than 60% of the total outlay for the project must come from sources other than public financial institutions.

* Upto 100% foreign equity participation can be permitted for projects set up by foreign private investors.

* The condition of dividend balancing by export earnings which is normally being applied to cases of foreign investment upto 51% equity will not be applicable to foreign investments in the power sector.

* The rates for depreciation in respect of assets have been liberalised.

* With the approval of the Government, import of equipment for power projects will also be permitted in cases where foreign supplier or agency extend concessional credit.

* The customs duty for import of power equipment has been reduced to 20% and this rate has also been extended to machinery required for modernisation and renovation of power plants.

* A five year tax holiday has been allowed in respect of profits and gains of new industrial undertakings set up anywhere in India for either generation or generation & distribution of power.

The five year tax holiday will begin from the year of generation of power.

The following main changes took place subsequently:

* The weighted average of depreciation for coal-based thermal projects at 5.02% is enhanced to 7.5% and it is applicable to all thermal projects.

* The operation and maintenance expenditure shall be computed at either 2.5% of the completed project cost or 2% of the completed/contracted cost plus actual insurance charges, subject to an overall ceiling of 3% of the completed/contracted cost.

* The additional incentive has been increased from 0.6% to 0.7% of return on equity for each percentage increase of PLF over the normative 68.5%.

Proposed terms and conditions for extending Government of India counter guarantee for SEB's payment obligations to the private generating companies.

ELIGIBILITY

• The SEB has signed a Power Purchase Agreement (PPA) with the foreign investor.
• The SEB has agreed to open and maintain an escrow account to which its revenues will be credited equivalent to one month billings of the private power company. The private power company will have the first charge on this account.
• The SEB has signed and is in the process of successfully implementing the Operational and Financial Action Plan (OFAP).
• In terms of adherence to the OFAP the SEB is able to maintain a rate of return of 3% or more as provided by the Indian Electricity (Supply) Act.

TERMS & CONDITIONS

• The state government has agreed to meet the shortfall in the payments by SEB to the private power proponent.
• The management of state finances is prudent in the opinion of the Government of India.
• The state government unconditionally and irrevocably agrees that any amount met on its behalf in terms of counter guarantee by the Government of India shall be debitable without any recourse to its account with the Reserve Bank of India.
• As an additional precaution, the state government agrees that any amount required to be paid by the Government of India which was not covered by above-said conditions, may be adjusted against Central assistance to the state.

Government of India had extended counter guarantee to eight fast track independent power projects. These include Enrone USA, General Electric - UK and Cogentix Dev. Company - USA.

New Package to replace Power Counter Guarantee

The Central Government had decided to discontinue issuing Counter Guarantees after the eight fast track power projects. The Union Power Ministry has finalised eight alternatives for counter guarantees and is awaiting approval from Cabinet Committee on Economic Affairs.

For profiles of these projects and also for any other details, please contact the Indian Embassy or write directly to :

The Director
Investment Promotion Cell
Department of Power
Ministry of Power
Government of India
Shram Shakti Bhawan
Rafi Marg
New Delhi-110 001
India

Fax: 91 11 371 7519
Tel: 91 11 371 4367

Source: Doing Business with India

Last Upate: July 31, 1998