STATE REVOLVING FUNDS:

THE INDIAN CONTEXT

PARIS 2003

SCHEME OF PRESENTATION

• BACKGROUND• ISSUES• PROSPECTS

BACKGROUND

Until now, since the 50’sInstitutional Borrowings by Governments from State owned Financial Institutions

on basis of Guarantees.

Project Implementation by Parastatals / Cities

Under investment in Urban Water and Sanitation

User charges rarely covering even O & M

Lending now: Potential drying up of institutional sources based on State Guarantees on account

of ceilings on contingent liabilities.

Limited low cost / equity / grant type funds.

Excess supply of commercial funds.

Primary Infrastructure Requirement Water supplies vary from 34 lpcd in Small Towns to

74 lpcd in larger cities significantly below the norms of 90 lpcd.

Only 57% of population in larger cities, 32% in medium towns and 16% in small towns have access to sanitation.

Sector wise break up of investment needs indicates that 74% of the requirements is for water and sanitation sector.

BACKGROUND : Demand - Supply Gaps

ISSUES: Basic Principles

Stable regulatory framework for debt finance. Mechanisms for ensuring predictability of revenue

flows. Transparent procurement process to minimise

implementation gaps and improve contestibility of capital costs.

Acceptance of pricing through political consensus.

ISSUES : Need for Water Sanitation Funds

• Urban Infrastructure, especially water and sanitation investments require long term debt on account of externalities over time and space, severe fiscal constraints on the supply of equity from State and local Governments for new investments, and substantial low income population constraining the ability to pay for high financing costs.

• Consequently, the need to link city infrastructure financing requirements with domestic capital markets is well understood.

• Debt finance is a pre-requisite for undertaking essential civic investments, and in the long run, domestic savings through capital markets would have to be, predominant source of supply.

• The need for an institutionalised mechanism to raise low cost funds for water and sanitation is clear cut with the US Bond Bank as a potential model.

PROSPECTS : Linking Markets & Cities with Intended Use Plans

• Creation of a revolving fund by GoI - States

• Tax concessions for municipal bonds by GoI

• Structure a statutory framework to manage the fund

• Borrowing eligibility criteria to be established

• Project implementation procedures including rational & quick procurement

• Framework for tariff setting - through a democratic process

• Fixation of rational levels of upfront contribution by the community / local body

• Capacity building for the Raters/Merchant Bankers

PROSPECTS - Institutional Positioning of Pooled Finance Framework

Umbrella CrdEnchanc.

Sov.GrantSov. Govt.TransferPayments

DONORS

WSPF

Reserve Account

RevenueIntercept

Partial Credit Guarantee

Technical Assistance

Investors

Co-finance

Bonds

Trustee

LocalGovt.

Project

LocalGovt.

Project

LocalGovt.

Project

Funds Market Rate Long term

Principal & Interest paymentsIf necessaryIf necessary

PROSPECTS – Water and Sanitation Pooled Fund

• A Pooled entity namely, a Trust called Water and Sanitation Pooled Fund (WSPF) has been registered on 20.8.2002.

• Objective is to link civic financing needs with the capital market.

• The use of DCA as a market creation tool.

The terms of the issue are as follows:

ACHIEVEMENTS – Water and Sanitation Pooled Fund

Mode : Private Placement IssueIssuer : Water and Sanitation Pooled Fund (WSPF) a trust, the

deed of which is registered under the Indian Trust ActThis will pool certain Water and Sanitation projects of14 participating Urban Local Bodies (ULBs) and theissue proceeds would be utilized to refinance/financethese projects. Tamil Nadu Urban InfrastructureFinancial Services Ltd., (TNUIFSL) would act as theTrust Manager

Issue Size : Rs. 304.1 Million (USD 7 million approx.)Coupon : 9.20% p.a.Tenor : 15 years (With a put and call option at the end of 10th

year)Redemption : In 15 equal annual instalmentsPayment of Interest : Annual payment of coupon on a diminishing balance

method.Security : Unsecured Issue

Credit Enhancements : a) The first level of credit enhancement is the escrow of theproperty tax and other collections of the ULBs. This will becovered under a tripartite agreement among WSPF, ULB andULB’s banker.b) The second level of credit enhancement is covered by aDebt Service Reserve Fund in the name of Bond serviceReserve Fund (BSF) which will be set up by the Governmentof Tamil Nadu with a liquid investments of Rs.6.90 crores.This is regardless of ULB’s cash flows.c) The next level is the guarantee issued by USAID to theextent of 50% of the principal. The balance is covered by anundertaking by GoTN in the form of a Government orderthat the shortfall would be replenished by the GoTN to theBSF by deducting their respective share of State FinanceCommission (SFC) devolution accruing to the ULBs.d) WSPF represented by TNUIFSL would monitor theescrow account of the ULBs, coordinate with GoTN in caseof a shortfall and ensure the repayment amount payable tothe investors, in the bank account of the WSPF, before 30days from the due date of bond annuity.

Credit Rating : L AA (SO) by ICRA , Ind AA (SO) by FitchMethod of Servicing byULBs to WSPF

: 1/9th of the annuity due would be placed by the respectiveULBs in a Fixed Deposit every month for a period of 9months. At the beginning of 10th month the amounts soplaced in Fixed Deposits would be transferred to the accountof WSPF. In case there is a short fall in the amounts to beserviced, the same would be met out of SFC devolution/BSF.

ACHIEVEMENTS – Water and Sanitation Pooled Fund

ACHIEVEMENTS – Water and Sanitation Pooled Fund

LIST OF POOLED PROJECTS Rs. In Million

S.No. ParticularsProjectCost

Loan amtsanctioned

Loandisbursed

Water Supply Schemes:1 Ambattur Municipality 33.656 6.732 6.7322 Tambaram Municipality 18.200 10.920 10.9203 Madhavaram Municipality 32.500 10.575 10.5754 Rajapalayam Municipality 8.500 5.100 5.100

Adjacent Urban Areas - AUA 5 (I) Alandur Municipality 42.700 40.300 40.3006 (ii) Pammal Municipality 37.800 35.700 35.7007 (iii) Ankapathur Town Panchayat 18.800 17.800 17.8008 (iv) Ullagaram Town Panchayat 29.800 28.100 28.1009 (v) Porur Town Panchayat 57.900 54.700 54.70010 (vi) Maduravoyal Town Panchayat 14.600 13.800 13.80011 (vii) Valsaravakkam Town Panchayat 18.900 17.900 17.90012 (viii) Meenambakkam Town Panchayat 1.700 1.600 1.600

Under Ground Drainage:13 Madurai Corporation 140.700 50.000 32.500

455.756 302.152 275.727

ACHIEVEMENTS – Water and Sanitation Pooled Fund

Sl. No. Subscribers No. ofBondsallotted

1. Karnataka Bank Ltd. 20002. ICICI Bank Ltd. 10003. Gujarat Industries Power Co.,

Ltd, Provident Fund Trust11

4. Metlife India EmployeesProvident Fund Trust

5

5. City Union Bank Ltd., 25

WSPF bonds have created quite an active secondary market. The bonds have been sold by the original holders to the following entities at a premium!

ACHIEVEMENTS – Water and Sanitation Pooled Fund

1. The Karnataka Bank Ltd2. The Tata Engineering And Locomotive Company Ltd Superannuation Fund3. The Tata Engineering And Locomotive Company Ltd Provident Fund4. Credit Capital Investment Trust Company Ltd Trustees Taurus Mutual Fund

A/C Libra Bond Fund5. The Tata Engineering And Locomotive Co. Ltd Employees Pension Fund6. The Baghat Urban Co Operative Bank Limited7. The Indian Hotels Co. Ltd Employees Provident Fund8. Trust Capital Services (India) Pvt. Ltd.9. Digital Globalsoft Limited Provident Fund Trust10. Staff Provident Fund of Nicholas Piramal India Ltd11. City Union Bank Limited - Mount Branch12. Gujarat Industries Power Co. Ltd. Provident Fund Trust13. Metlife India Employees Provident Fund Trust14. Advanta India Management Staff Provident Fund

ACHIEVEMENTS – Alandur Underground Sewerage

ACHIEVEMENTS – Drinking water in Madhavaram