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Monday, Mar 03, 2003

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TN urban bodies using pooled finance to tap debt market

N. Ramakrishnan

For the Water and Sanitation Pooled Fund, registered as a trust by the Tamil Nadu Government, the Tamil Nadu Urban Infrastructure Financial Services Ltd will act as the trust manager.

CHENNAI, March. 2

FOURTEEN urban local bodies in Tamil Nadu have joined together and raised funds from the debt market through a pooled financing arrangement, which officials involved with urban infrastructure in the State say is the first such instance in the country without a State Government guarantee.

The pooled fund — called the Water and Sanitation Pooled Fund — raised Rs 30.41 crore through an issue of bonds carrying a coupon rate of 9.2 per cent with a 15-year tenor. This pooled fund will disburse the money to the local bodies concerned for carrying out water supply and sanitation projects, all of which are capital intensive and have long pay back periods.

According to the officials, the urban local bodies have to approach financial institutions such as the Housing and Urban Development Corporation (HUDCO) or LIC for loans, which carry an interest rate of about 15 per cent. However, thanks to the pooled financing arrangement, the interest rate is much lower.

What this means to the urban local bodies is that they can peg the user charges at more affordable levels than what they would have had to if they had borrowed from these institutions. For the Water and Sanitation Pooled Fund, registered as a trust by the Tamil Nadu Government, the Tamil Nadu Urban Infrastructure Financial Services Ltd will act as the trust manager.

Having successfully tapped the pooled fund, which had a "AA" rating, with subscriptions largely from the ICICI Bank and the Karnataka Bank, and some provident fund trusts, efforts are on to float a pooled fund benefiting more urban local bodies for executing projects under the National River Conservation Project, according to sources. This bond issue could be in the range of Rs 100-200 crore.

According to the sources, the Tamil Nadu Urban Infrastructure Financial Services Ltd (TNUIFSL) is not charging any fees, as a fund manager, for the Water and Sanitation Pooled Fund. The pooled fund arrangement reduces transaction and borrowing costs for essential infrastructure.

According to the sources, the United States Agency for International Development (USAID) has guaranteed the Rs 30.41-crore bond issue to the extent of 50 per cent of the principal.

The balance is covered by an undertaking from the State Government that the shortfall will be replenished by it by deducting the share of the urban local body from its share of State Finance Commission devolution.

The first level of credit enhancement for the Water and Sanitation Pooled Fund (WSPF) is the escrow of the property tax and other collections of the urban local bodies.

This will be covered under a tripartite agreement among the WSPF, the local body concerned and its banker.

The next level of credit enhancement is a Debt Service Reserve Fund, which will be set up by the State Government with liquid investments of Rs 6.90 crore.

This money will be invested in "AAA" rated securities and the interest accruing from the fund will be available for the investors for the bond servicing.

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