Centre to share Metro’s cost escalation burden

Centre to share Metro’s cost escalation burden
Deccan Herald

In what may come as huge relief to the Karnataka government, the Centre has agreed to share the cost escalation of the Rs 5747-crore Bangalore Metro project.

In what may come as huge relief to the Karnataka government, the Centre has agreed to share the cost escalation of the Rs 5747-crore Bangalore Metro project.

The expenditure department of the Union finance ministry wrote to the Union urban development ministry on November 11 that “any cost escalation due to changes in statutory levies and duties, exchange rate variation and price escalation within the approved project time cycle may be shared equally between the project promoters”.

The ministry has, however, said any other cost escalation due to change in scope or beyond the approved project time cycle will have to be borne by Karnataka. Deccan Herald had first reported on September 2 that the Planning Investment Board (PIB), after its meetings on August 4 and 5, had recommended that Karnataka should bear the cost escalation and cash loss of the project. It had stated then: “The cost overruns, if any, may be shared by the government of India only to the extent of escalation in equipment cost within the approved project parameters and time cycle. All other cost escalation would be borne by Karnataka…”

Former prime minister H D Deve Gowda, who is strongly opposed to the project, had taken up this particular point as a major drawback against the Metro. The recommendation of PIB, headed by the expenditure secretary, rattled the state government which was under the impression that it had convinced the Centre of the need to bear any increased project outlay. The PIB move had meant that Karnataka would have to take the burden of making allocation for a possible hundreds of crore of rupees all alone.

Karnataka Chief Secretary B K Das soon shot off a letter to the Centre pointing out that it was agreed to in the PIB meeting that cost escalation, if any, would be shared by the promoters on pari-passu (in proportion to equity holding) basis. He had also pointed out that the PIB recommendation indicated that the Centre would share the cost escalation only in respect of equipment and not the civil construction cost. “Being equal equity holders, the promoters will have to share all the cost escalation equally,” he pointed out.

No tax waiver

The November 11 decision of the finance ministry states that the Centre’s contribution to the project was expected to be Rs 1095 crore (without exemption from Central taxes and duties). The funds will be provided under the Central sector, since the Union government’s contribution would be in the form of equity/loan and not as grant. The ministry, has made it clear that the Centre cannot make commitment to finance cash losses and capital expenditure during the operational phase. These requirements, would need to be financed by the special purpose vehicle and/or Karnataka from their own resources.

According to the ministry, the contribution from the Centre to the project would be restricted to 20 per cent of the project cost including 15 per cent equity and five per cent interest free subordinate debt. The balance funds should be contributed by Karnataka and mobilised through senior debt without any guarantee from the Centre. The ministry also made it clear that it would not waive Central duties and taxes for the project. The PIB which had also rejected the state demand for waiver of taxes (Rs 490 crore), had asked the Urban Development Ministry to give two scenarios to the Cabinet committee on economic affairs (CCEA) — with waiver and without waiver. With tax waiver, the state would be investing 30 per cent, the Centre 20 and loan component would form the rest 50 per cent, while in the scenario without tax waiver, the corresponding contributions would be 30 per cent, 25 and 45.

After the PIB came out with its recommendations, Karnataka had strongly objected to it saying that the recommendations did not reflect the views expressed at the PIB meetings on certain issues.