India is inviting bids from commercial companies across the world to build 20,000 megawatts (MW) of independent power projects (IPPs).

Letters of credit (L/Cs) will feature in the financing of the four IPPs, despite the problems experienced with them in previous Indian power financings.

Economic power

India has decided to ask foreign companies to bid for the IPPs, partly because the power ministry has concluded that unless foreign direct investment (FDI) is attracted to the power sector, the country's burgeoning economy will be constrained by a shortage of energy.

Foreign companies will be wary, however, of the financing arrangements, bearing in mind the problems associated with the Dabhol Power Company (DPC) in Maharashtra state.

L/C woes

Wrangling over L/C-backed guarantees by both the federal government and the Maharashtra state featured prominently in the 2001 failure of the one time Enron-led privately operated DPC. (DC World News, 11 May 2001)

It emerged earlier this year, however, that L/Cs would probably still feature in power sector financings. (DC World News, 11 January 2005)

Competitive bids

The power ministry has invited competitive bids for four mega power plants of 5,000 MW each.

The ministry is mindful, however, of industry concerns about financings and that these need to be addressed to speed up the currently very poor FDI flow into the Indian power sector.

Attractive terms

Now the power ministry has arranged to make investments easier for companies. They are now being asked to tender only after the government has taken care of initial project preparations. The state will look after site selection, assure feedstock supplies and resolve environmental issues.

Moreover, the ministry says it is to cover the revenue flow risk by the creation of adequate payment security arrangements with state electricity authorities and through L/Cs and escrow accounts.

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