WATER & SANITATION POOLED FUND

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. Municipalities also require short-term working capital in view of the lags between revenue and expenditure flows. 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.

In India the sources of municipal debt have been limited usually to State Governments or institutions such as LIC, HUDCO on the basis of guarantees issued by the state. However, since the 1990's, larger cities such as Ahmedabad, Bangalore and State level financial intermediaries such as TNUDF have raised debt for municipal infrastructure by accessing capital markets based on credit ratings through issuing debt instruments of varying tenure on a non-guarantee mode. These have tended to be debt for capital investments. The need for an institutionalised mechanism to raise low cost funds for water and sanitation needs is clear-cut in the lines of US Bond Bank as a potential model.

TNUIFSL has mobilised an amount of around Rs. 170 crores from the market through issue of bonds. Out of this Rs.59 crores has been channelised into repaying high cost debt, which immensely benefits the ULB’s by diverting the savings for undertaking capital investments. The details of the market access are as under.

POOLED FUND CONCEPT AND MARKET ACCESS

A pooled entity has been created by GoTN in the form of a trust, which is registered under the Indian Trust Act 1882. The initial contribution of the trust is Rs.10,000/- and is owned fully by Government of Tamilnadu. The trust has been named Water and Sanitation Pooled Fund (WSPF). This trust would identify viable projects and fund them from concept to commissioning on a commercial mode. The main objective of the fund is to make the Urban Local Bodies (ULB) a part of the active debt markets so as to avail the best interest rates available in the market. As a pioneering effort for market access, certain ULBs and a few of their projects have been selected to be financed / refinanced by the proceeds of WSPF bond issue. The projects have been selected after careful consideration of their financial viability and commitment towards development. The projects and the structure of the bonds are detailed in the Information Memorandum, which is enclosed.

CREDIT ENHANCEMENT

The primary credit enhancement of the structure is the escrow of the bank account of the ULBs where their property tax and other tax collections of the ULBs are deposited. This will be covered by a tripartite agreement among WSPF, ULB and the ULB’s banker. The second level of credit enhancement is covered by a Debt Service Reserve Fund in the name of Bond Service Fund (BSF), which will be set up by the Government of Tamilnadu with a liquid investment of Rs.6.90 Crores. This is regardless of ULBs cashflows. The next level of CE is the guarantee issued by United States Agency of International Development (USAID), an arm of US Government, to the extent of 50% of the principal. The balance is covered by an undertaking by GoTN in the form of a Government Order that the shortfall would be replenished by the GoTN to the BSF by deducting their respective share of State Finance Commission (SFC) Devolution, which accrues to the ULBs periodically.

CREDIT RATING

Fitchratings have assigned a rating of Ind AA (SO) for this structure.

MANAGEMENT OF WSPF

WSPF would be managed by Tamilnadu Urban Infrastructure Financial Services Ltd (TNUIFSL), the fund manager of the successful Tamilnadu Urban Development Fund (TNUDF), a financial intermediary with virtually no Non Performing Assets, as on March 31, 2002. Besides the trust manager, the Board of trustees of the fund comprise the officials of Government of Tamilnadu and MD&CEO, TNUIFSL.

OBJECTIVES OF WSPF
WSPF would be managed by Tamilnadu Urban Infrastructure Financial Services Ltd (TNUIFSL), the fund manager of the successful Tamilnadu Urban Development Fund (TNUDF), a financial intermediary with virtually no Non Performing Assets, as on March 31, 2002. Besides the trust manager, the Board of trustees of the fund comprise the officials of Government of Tamilnadu and MD&CEO, TNUIFSL.

• Fund viable urban Water and Waste water projects
• Mobilise resources from the capital markets
• Facilitate the participation of private sector in the water and waste water sectors through direct investment and through joint delivery mechanism of Public Private partnerships
• Improve the financial management of urban local bodies enabling them to access debt finance from markets

Enable the ULBs to access low cost funds and to reduce their effective cost of borrowings by making them market sensitive and a part of the active debt market.

TERMS OF BONDS

SECONDARY MARKET TRADING

WSPF bonds have created a quite active secondary market for muni-bonds. The bonds have created a level playing field for the debt papers of municipalities. These long ended papers are in great demand by the Provident Fund trusts due to the dual rating and offer a better yield due to its relatively better coupon. The market absorption for this paper, particularly when there is a demand for government securities is a land mark move in the Indian financial market sector.