Andhra Pradesh has agreed to honour escrow commitment extended to the Jegurupadu and Spectrum projects, setting the ball rolling for the financial closure of five other private projects.

Financial institutions had earlier said funding for the balance five projects would depend on the state providing escrow to Jegurupadu and Spectrum.

The lenders were now expected to agree to an alternate payment security model developed by the Andhra Pradesh government for expediting financial closure of these five independent power projects, including the 520 MW Ramagundam project of the BPL group (about Rs 2,776 crore -- Rs 27.76 billion), the 468 MW Vemagiri project of the Ispat Power group (about Rs 1,700 crore - Rs 17 billion) and the 210 MW BSES-promoted power project, institutional sources said.

The other two projects include the 350 Mw Kondapally project (Rs 1,100 crore - Rs 11 billion) promoted by Lanco Industries and the 464 MW NCC/Gautami project.

While the financial institutions involved in financing of these projects, led by the Industrial Development Bank of India and Power Finance Corporation, had reacted positively to the business plan proposed by the state, officials said the institutions had also called for inclusion of some changes in the scheme, including pegging the rate of return assumed for the projects at 'more realistic terms.'

The Andhra Pradesh business model bypasses the requirement of the state government to provide upfront escrow, as a precondition for institutions to lend to the project.

The state government has instead provided measures through which payments would be ensured for power purchase, in case both the state electricity board and the Andhra Pradesh Transmission Company (APTransco) defaults on payments.

All the five projects had been beset with the problem of lack of viable payment security mechanism, with State Electricity Board and APTransco (the state owned transmission company) not having enough money to purchase power generated by these projects.

Consequently, financial institutions involved in the projects had been dithering on funding the projects.

In the last meeting of the financial institutions and state government officials on the issue, the former had expressed doubts about the 8-9 per cent return on investments for the projects assumed by APTransco.

They were of the opinion that the figures have been overestimated and consequently have asked the state government to rework the returns in more realistic terms.