Funding the metro rail

FUNDING FOR PROJECT
VAT NEXT FOR METRO RAIL?
Will it signal lean times?
The Times of India

Bangalore: With the VAT regime, which disallows any cess, taking effect from April 1, the Dharam Singh administration is looking at alternative means to fund the Rs 5,605-crore Bangalore Metro Rail project.

Out goes Metro Rail’s dedicated funding source, infrastructure cess, once VAT comes in. “Once VAT is in force, some alternative means of funding the Metro and other infrastructure projects will have to be worked out. We are still at it,’’ finance principal secretary Sudhakar Rao told The Times of India.

Bangalore Metro’s cess account witnessed inflows of Rs 729 crore in 2003-04 and, if continued, it had been projected to raise Rs 915 crore, a sum which would have taken care of most of Karnataka’s Rs 1,807-crore share in the project.

Deputy chief minister Siddaramaiah, ever since the issue was raised at a recent meeting to discuss the project’s progress, is said to be considering several options to compensate the fund. A meeting of the Finance Department is expected to arrive at a final decision shortly.

Sources described the VAT hurdle as quite serious. “Despite the UTI Bank’s seal on the fiscal soundness of the Metro, it is an expensive project,’’ they pointed out.

One option being looked at closely is said to be another dedicated cess along the lines of the infrastructure cess on products that are outside the VAT ambit. These include petrol, diesel, liquor, stamps and registration.

A suggestion has been made for a cess along the lines of the original one mooted by Siddaramaiah in 1995 — a mass rapid transit system cess on petrol and diesel sold only within the Bangalore metropolitan area. This time, however, there are divergent opinions on the products to be taxed and whether the cess should be limited to just Bangaloreans (and for the Metro alone) or imposed state-wide to cover other infrastructure projects as well.

Funding bodies may chip in

Bangalore: The Metro Rail project is sure to change a few things for Bangaloreans when it goes on stream. Now, it could do the same for investors too.

Probably, for the first time in the country, institutions will get to invest in a 30-year bond. The Bangalore Metro Rail Transport Ltd (BMRTL) is planning to mobilise Rs 800 crore through the proposed long-term product. Sources said issue details would be finalised after the financial closure of the project.

The project has not had much funding trouble from private investors’ point of view. While 50 per cent of the project cost is expected to be jointly funded by state and central governments through equity, the balance is expected to be through term loans and private equity. Sources said banks are more than willing to provide the debt component of Rs 2,200 crore through term loans but the SPV is exploring the option of private equity to the tune of Rs 700 crore. That would mean besides banks, institutions specialising in infrastructure funding are likely to chip in.

Interestingly, the Centre too has been keen on using various innovative capital market products for funding long-term projects under its mega city projects and the Mumbai Metropolitan Region Development Authority has already issued municipal bonds for funding a few of its projects and various nationalised banks have invested in the same.

The proposed 30-year bond paper is sure to be a boon for insurance and provident fund managers who are looking for a long-term investment product. While the interest rate on the same is yet to be worked out, sources said: “With a decent credit rating, we should be able to borrow at the prevailing interest rate.’’ At present, long-term investment option is restricted to government securities but returns from the same has come down in recent times.

THE CESS STORY


•1995: Introduced as a mass rapid transit system cess on petrol-diesel sold in Bangalore metropolitan area.
•1998: Expanded state-wide as infrastructure cess on all products, to cover road construction, Bangalore’s mass rapid transit system and other infrastructure works.
•2002: Cess on petrol-diesel removed and merged with sales tax.
•2004: Road cess of 10 per cent added.