Infrastructure Projects: Centre puts tough conditions for state entities borrowing overseas directly

Direct funding from external agencies available only for project with regular revenues that are able to provide for repayment of principal and interest

Written by Sunny Verma | New Delhi | Published: May 24, 2017 1:59:16 am
Infrastructure Projects, Infrastrucure, Overseas projects, central government, finance ministry, India projects, india infrastructure projects, india news, business news Direct borrowings by state entities would not count towards calculation of their respective fiscal deficits

The finance ministry has imposed stiff conditions in allowing state government entities to directly borrow funds from bilateral overseas lending agencies for infrastructure projects. This relaxation is available only for major infrastructure projects having total estimated cost of Rs 5,000 crore or more for each project. For a state government
undertaking or authority to borrow from overseas directly, they should be having minimum average annual revenue of Rs 1,000 crore and profit/surplus of Rs 500 crore in last three years.

Direct funding from external agencies will be available only for project having regular revenues that are able to provide for repayment of principal amount and interest. Project revenues are required to be put in an escrow account to the extent of payment of principal and interest from time to time. All repayments of loans and interest should be directly remitted by state entity to the bilateral lending partner.

The Union Cabinet last month gave approval for allowing financially sound state government entities to borrow directly from bilateral overseas lending agencies such as Japan International Cooperation Agency. The decision is expected to directly benefit important projects such as Mumbai trans-harbour link, with an estimated project cost of Rs 17,854 crore. The Union finance ministry last week notified rules governing such borrowings by state entities.

All such borrowings will carry a state government guarantee and a counter guarantee by the Central government. “As Government of India is bearing an additional fiscal risk by extending counter guarantee to state entities, the counter guarantee would be extended on payment of the full guarantee fees,” as per the finance ministry’s May 16 order.

Only those states which have a fiscal deficit of less than 3 per cent of its Gross State Domestic Product (GSDP), and debt to GSDP ratio of less than or equal to 25 per cent in the preceding year, are eligible to raise direct funding from bilateral official development assistance (ODA) partners. At present, the Central government receives external development assistance on behalf of the state governments for state sector projects/programmes.

The existing rules do not allow direct borrowings by the state government entities from external agencies. The Union finance ministry has advised state entities to first explore direct access to local capital markets and local bonds before approaching external agencies. “The state government entities should also make efforts to utilise the option of commercial borrowings from the private sector window of multilateral financial institutions,” it said.

Such direct borrowings by state entities would not count towards calculation of their respective fiscal deficits under the states’ Fiscal Responsibility and Budget Management laws. Several state agencies have funding needs for infrastructure projects, and borrowings by state government may exhaust their borrowing limits under the FRBM laws. The new dispensation allows the financially sound state entities to directly borrow and repay the loan required for major infrastructure projects without burdening the State exchequer. “The intention behind allowing states for direct funding for big projects was that states’ budgets are under pressure to provide for funds for welfare schemes and other schemes. As of now, the international funding gets counted in their FRBM, then they can’t take extra funds for infrastructure projects…this way, states will directly get money for infrastructure projects and it won’t be counted in states’ FRBM limits. This will certainly help infrastructure creation and major projects in states,” Finance Minister Arun Jaitley said last month after the Cabinet cleared this proposal.

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