Tamilnadu Urban Development Fund (TNUDF) A Presentation October , 1999

Scheme of Presentation Introduction Purpose of the fund Objectives Eligible borrowers / sectors Lending policies and procedures Grant Fund

Scheme of Presentation Performance (as on date) Lending volumes and profits Sector-wise investments Status of projects Project prototype Financials

Scheme of Presentation Prospects Infrastructure demand situation in Tamilnadu Financial Projections Vision

Introduction

Introduction A Trust established under the Indian Trusts Act, 1882, by GoTN, ICICI, HDFC and IL&FS with a line of credit from the World Bank

Purpose of the Fund TNUDF is a trust fund engaged in the development of urban infrastructure in the state of Tamilnadu. This trust was created as part of a restructuring exercise of an existing World Bank credit to the Government of Tamilnadu (GoTN) in September 1996. Under the World Bank credit of Rs.167 crores, the Municipal Urban Development Fund (MUDF) was set up in 1988 to fund urban infrastructure needs. The fund has been in existence for 8 years and had extended loans of about Rs.200 crores to 74 Urban Local Bodies (ULBs) upto September 30, 1996.

Purpose of the Fund Financial discipline, strict project accounting and strong management enabled the fund to perform successfully, ending up with a net worth of Rs.140 crores as on September 30, 1996. Repayment from ULBs to the fund was also an impressive 96% The projects funded varied from commercial ventures, such as markets etc, to core civic amenities including sanitation and solid waste management.

Purpose of the Fund Successful track record enabled GoTN to broaden the scope of the fund so as to attract private capital into urban infrastructure, and facilitate better performing ULBs to access capital markets. In 1996, GoTN, with the assistance of World Bank, invited three financial institutions namely, ICICI, HDFC and IL&FS to convert MUDF into a full fledged trust, namely TNUDF with a private fund manager to deploy the resources of the trust. Accordingly, TNUDF was established as a trust under the Indian Trusts Act 1882, and is managed by an Asset Management Company, Tamilnadu Urban Infrastructure Financial Services Limited (TNUIFSL)

Purpose of the Fund GoTN’s equity in the venture is restricted to 49%, based on the motivation to facilitate private sector management in investment decisions. Other shareholders of TNUIFSL are ICICI (21%), HDFC (15%) and IL&FS (15%). ICICI, the lead institution, has taken up management responsibility, putting in place appraisal systems and key personnel.

Fund Objectives Fund urban infrastructure projects which improve the living standards of the urban population; Facilitate private sector participation in infrastructure through joint venture and public-private partnerships; Operate a complementary window, the GRANT FUND, to assist in addressing the problems of the urban poor.

Eligible borrowers / sectors Urban Local Bodies (ULBs), statutory boards, public sector undertakings and private corporates are the eligible borrowers of the Fund. The eligible sectors include water supply, sanitation, solid waste management, roads / bridges, transportation, sites and services and integrated area development

Lending policies & procedures Eligible items for TNUDF funding Only for capital expenditure Civil works Services Goods / Materials TNUDF will not fund Land acquisition costs O&M expenditure / other revenue expenditure such as salaries etc.

Eligibility Criteria For ULBs etc. TE / TR < 1 Annuity / Total revenue < 30% In case where ULBs fail to meet above criteria, the project specific returns (IRR) should be greater than 18.5% p.a. For private sector borrowers Long term debt < 1.5 Net worth Net fixed assets > 1.5 Long term debt Average DSCR > 1.5

Lending terms Interest rate structure :(From 1998-99 onwards) - Water supply and Sewerage projects : 16% pa -Other projects : 16.5% pa -Market determined rates for private sector borrower. Overdue interest : 18.5% p.a. on overdue amount charged from the date of scheduled repayment till the date of actual payments. Annuity : Consistent with MUDF - 1 year moratorium, 15 year repayment for service projects and 5 year moratorium, 16 year repayment for water supply and sewerage projects. Repayment terms fixed on basis of cash flows (for commercial ventures).

Project Cycle Letter of intent from ULB Issue of loan application form by TNUDF Preparation of initial screening report Preparation of detailed project report Appraisal Issue of sanction letter Signing of loan agreement Disbursement Sample audit / monitoring / site visit Project completion reports

Security Measures Special recovery mechanism such as escrow accounts of property tax, water charges etc. and hypothecation of movables are being put in place. In case of commercial complexes,default option of conversion of upto 40% of loans outstanding into office space is being stipulated.

Grant Fund TNUDF also operates a complementary GRANT FUND fully owned by GoTN with following objectives: Strengthening and upgradation of ULB’s financial, technical, managerial and service capabilities, training and computerisation of municipal accounts and basic records e.g. birth and death register (Category I); Meeting the cost of Resettlement and Rehabilitation related to sub-projects to be financed by TNUDF (Category II);

Grant Fund Financing projects which directly benefit urban low income populations such as water supply, sanitation, storm water drain, street lighting, sewerage systems etc. (Category III); Meeting cost of project preparation for TNUDF financed projects as well as to facilitate private sector participation (Category IV).

Grant Fund (as on 30.09.99) Rs. in crores Stage / Category I II III IV Application 16.75 0.40 79.30 13.05 Sanctioned 10.32 0.20 26.23 13.03 Disbursed 6.21 0.20 13.56 5.49 Cat I - Strengthening and upgradation of ULBs Cat II - Resettlement and Rehabilitation of urban poor Cat III - Capital grants Cat IV - Meeting the cost of project preparation, technical assistance and consultancy

Performance (as on date)

Lending Volumes & Income

Performance Loan Fund / Grant Fund TNUDF has appraised projects costing Rs.316.47 crores and approved loans of Rs.186.82 crores upto September 30, 1999.

Status of Projects as on 30.09.99 Rs. in Crores Stage Cost Loan Grant Applications received 1034.94 733.76 109.51 Closed 117.98 100.63 3.86 Sanctioned 316.47 186.82 49.78 Loan agreements signed 169.47 109.85 41.34 Disbursed 148.67 87.64 25.47 Ratio of sanctions to applications - 25.46% Ratio of disbursement to sanctions - 46.91%

Project Prototypes BOT projects - Karur Municipality Bridge Public Private Partnership - Madurai Inner Ring Road Loan - Grant Blending

Public - Private Partnership In general factors enabling private investments are: where cashflows of projects are predictable and assured; where regulatory framework is in place; where contractual obligations amongst the various participants are clear cut with respect to risks, performance and returns; and where scarce resources of ULBs can be freed up for pressing investments in basic civic amenities.

Karur Toll / BOT Bridge Based on these principles, TNUDF has facilitated the first BOT / Toll bridge, contracted by an ULB in India at an estimated cost of Rs.16 crores. The users of the bridge are freight traffic with the capacity to pay. As the bridge would substantially reduce vehicle operation costs (VOC) and time, cash flows to the operator is expected to be predictable. The enabling provisions of Tamilnadu State Toll Act has been amended allowing ULBs to enter into BOT style operation, thus offering the investor a stable regulatory framework.

Karur Toll / BOT Bridge This project would enable Karur Municipality, the project sponsor, to use its resources for pressing public investments in core civic amenities. The concession has been awarded to East Coast Constructions and Industries Private Limited (ECCI) on the basis of competitive bid for a 14 year period, including the construction period. TNUDF has already sanctioned Rupee loan of Rs.100 lacs to meet a part of the cost of the project.

BOT Bridge Across Amaravathi at Karur

Madurai Toll Road TNUDF is also funding a 27 km Madurai bye-pass at an estimated project cost of Rs.47 crores. Madurai Corporation, the project sponsor, would auction out the toll collection at the end of the 2 year construction period. GoTN has indicated its willingness to meet the shortfall if any, between the toll revenue and annuity payments. This project structure allows for a major transportation facility where project benefits flow directly to Madurai Corporation, without recourse to the Corporation’s cashflows.

Madurai Bypass - Linking Highways and People

Madurai Toll Road Consultants appointed to review designs, validate traffic data, prepare bid documents, valuate bids, design of toll plazas / tolling mechanisms and secondary level supervision of work. Further the II and III phases of the bye-pass are being developed on a BOT basis, with recourse to revenues from phase I. This would clearly enhance the entry conditions for private participation.

Madurai Bypass - Under Construction

Solid Waste Management Contracts Conversion of Municipal Solid Waste into Organic Manure (50 tpd plant) Supply of pay contract between ULB and Private Sector operator at Rs.3.50 pt + lease rentals Pressure / Incentive for the ULB to keep the streets clean.

Veeranam Water Supply Project 180 mld, Rs.200 crore Water Supply to 13 cities and Industry Project IRR of 16.31% at prices of Rs.25 per 1000 litres for industry and Rs.3.50 for Municipalities. Consultants appointed for RFP documentation.

Storm Water Drain in Valasaravakkam - Loan Grant Blend

PROJECT MANAGEMENT CONSULTANCY - VALASARAVAKKAM Valasaravakkam a selection grade Town Panchayat located on the Western Boundary of Chennai. First Urban Local Body implementing service schemes by appointing a Project Management Consultant (CES) to undertake the following: Preparation of detailed designs and Bill of Quantities. Bid Evaluation and recommendation of contractor Project Supervision Quality control Payment recommendation

PROJECT MANAGEMENT CONSULTANCY - VALASARAVAKKAM Cost of Project Improvement to Roads - Rs.113.00 lacs Construction of Storm Water Drains - Rs.153.00 lacs Work was awarded for construction in October 1998 and construction was completed by March 1999.

Underground Sewerage Projects TNUIFSL, through consultants, has undertaken detailed study for design of underground sewerage systems for 14 towns / cities in Tamilnadu Most of the consultancy assignments have been completed and the schemes are ready for tendering out. The schemes have been developed on user charge basis.

Underground Sewerage Projects Works at Alandur and Coimbatore are proposed to be taken up initially to assess viability of these schemes on user charge basis; Suggested tariff rate to cover O&M expenses, debt servicing and sinking fund allocation; Deposit mobilisation From household : Rs.5,000/- From commercial and industrial customers : Rs.10,000/- Cross-subsidy scheme for fixation of tariff: Household : Commercial : Industrial Users = 1:3:5

Underground Sewerage Projects Initial tariff in Alandur fixed at Rs.150 per house per month as required tariff of Rs.180 phpm. GoTN would fund the gap of Rs.30 phpm. Tariff to increase at 6% per annum. Innovative contracting procedure to be adopted; The successful bidder would undertake all the following: Construction of conveyance system through regular World Bank Works’ Contract Construction of STP through BOT format backed by Supply or Pay mechanism. O&M Contract at fixed annual fees over a five year period.

Underground Sewerage Projects Administrative sanction has already been issued to GoTN for Alandur and Coimbatore Underground Schemes; Tendering process underway for Alandur UGS Project and contract expected to be awarded in Nov ‘99. The supervision of works would be undertaken by an independent private sector Project Management Consultant;

Loan Grant Blending TNUDF has structured investments in basic civic amenities on the basis of debt servicing capabilities of ULBs. This implies elementary budgeting based on demand analysis of civic needs. Project preparation by way of technical support through the Grant Fund has been a feature of all TNUDF activities in these sectors.

Bus Stand at Rajapalayam - During construction

Loan - Grant Blending Further when the ULBs have established a clear geographical-demographic linkage in terms of direct benefit to the urban poor, TNUDF has supplemented its debt with a Grant component, thereby reducing the effective rate of interest. In the longer term, TNUDF believes that these investments can be sustained only by improved project management performance by ULBs. Pursuant to this, TNUDF has supported capacity building efforts such as computerisation of accounts and training programs to manage environmental and social issues etc.

Drinking Water at Madhavaram - Loan Grant Blend

KEY PROFITABILITY INDICATORS Rs. in Crores For the Period 1.4.98 to 1.4.97 to 29.11.96 to 31.3.99 31.3.98 31.3.97 Total Income 44.51 39.01 9.72 Net Interest Income 24.81 20.42 6.12 Profit before tax 23.44 19.65 5.62

Prospects

Infrastructure Demand situation in Tamilnadu

Urban Tamilnadu : Existing Situation Demography and Urbanisation In 1991, Tamilnadu had a population of 55.08 million which makes it the 7th highest State in the country and somewhat smaller in size to countries such as Turkey, Thailand or France. Tamilnadu has a relatively large urban population. The percentage of States urban population in 1991 was 34%, significantly higher than the all India average of 26%, and next only to that of Maharashtra.

Urban Tamilnadu : Existing Situation Demography and Urbanisation Compared to other major States, such as Maharashtra and West Bengal, the urban population in Tamilnadu is more evenly spread out among various size classes of urban agglomerations and towns. Chennai had a population of 5 million in 1991 accounting for 20% of State’s urban population of 19.02 millions. Other major agglomerations in the States are Coimbatore (9.89%), Madurai (8.15%), Trichy (5.78%) and Salem (5.94%).

Urban Tamilnadu : Existing Situation Demography and Urbanisation The pattern of urbanisation also seems to be related to large scale industrialisation as a thin belt across the northern part of the State, consisting of large urban agglomerations like Madras, Vellore, Salem, and Coimbatore which accounts for the bulk of the urban population of the State. On the other hand, the State has dry, backward areas where the degree of urbanisation and the process of urbanisation appears to be a reflection of recurring distress conditions in poor and unstable agricultural regions.

Institutional Framework The 74th Constitution (Amendments) Act, 1992 has paved the way for significant devolution of powers to the ULBs. The spirit of the amendment seeks to achieve a paradigm shift in the role of a ULB from that of a constrained and indifferent service provider to a freer and more responsive developer of urban infrastructure.

Institutional Framework This amendment seeks to make municipalities focal institutions in the provision of urban infrastructure through participation of people at the local level and by endowing it with authority commensurate with responsibility. In practical terms an annual statutory devolution of about Rs.200 crores to all ULBs has been put in place. This implies an opportunity to leverage resources for substantive upgradation of basic civic services.

Urban Tamilnadu : Existing Situation Primary Infrastructure Requirement Water supplies vary from 34 lpcd in Town Panchayats to 74 lpcd in Corporations, significantly below the state norm of 90 lpcd. Only 57% of population in Corporation areas, 32% in Municipalities and 16% in Panchayats have access to sanitation. Although 70% of Solid Waste generated is collected, must local bodies do not have organised disposal facilities. Less than 50% of the roads are provided with Storm Water Drains.

Urban Tamilnadu : Existing Situation Financial Implication Investment needs by Local Body type Local Body Rs. in crores Corporations 2087.99 Municipalities 1063.58 Town Panchayats 634.05 Total 3785.62 Sector wise break up of investment needs indicates that 64% of the requirement is for water and sanitation sector, followed by 31% for roads, drains & lighting.

Urban Tamilnadu : Existing Situation Financial Implications (Sectoral Investment requirements) Rs. in crores Local Body Corporations Municipalities Town Total % Panchayat Water Supply 522 212 167 901 24 Sewerage & sanitation 875 520 127 1522 40 Solid waste mgmt. 40 32 24 96 2 storm water drains 287 81 192 560 15 Roads 337 197 62 596 16 Lighting 26 21 63 110 3 TOTAL 2087 1063 635 3785 100 Source : State Finance Commission, 1996 Note : Price Escalation - 12% p.a.

Urban Tamilnadu : Existing Situation Urban Local Body - Finance Gap Estimates of Finance Gap 1997-2002 Rs. in crores Local Body Investment Investment Borrowing Gap Class needs 1997-98 needs end Capacity costs 2002 1 2 3 4 3-4 Corporations 2088 2653 1698 955 Municipalities 1064 1351 419 932 Total 3132 4004 2117 1887

Financial projections for the plan period 1999-00 to 2002-03

Lending Volumes & Profits

Evolution of TNUDF’s portfolio March 31, 2003

TNUDF’s sanction’s as on 30.9.99

TNUDF’s disbursements as on 30.9.99

Financials Projected Balance Sheets Rs. in Crores As on March 31, 2000 2001 2002 2003 Total contribution 209 226 248 285 Term debt 443 573 696 816 Loans and advances 526 657 785 908 Investments 129 150 177 222 Debt-equity 2.12 2.54 2.80 2.86 Ownership pattern - GoTN 70% 67% 62% 57% - FIs 30% 33% 38% 44%

Financials Projected Profit and Loss Statement Rs. in crores For the year 1999-00 2000-01 2001-02 2002-03 Income - Operations 35.8 59.2 82.2 104.6 Total Income 47.7 73.1 98.5 124.5 Net profit 32.9 49.2 59.5 84.8 Net profit / Networth 15.7% 21.8% 23.9% 29.7%

Assumptions The projected financial assumes a primary source of long tenure finance as a line of credit from IBRD of US$ 80 million. It is assumed that the entire drawal in a year is disbursed to sub-borrowers in the same year. The entire share of GoTN profit is assumed to be transferred to the grant fund while the entire share of the FI profits is ploughed back into the trust fund. As on March 31, 2003 the debt equity ratio of the entity would be satisfactory at 2.86 and GoTN would hold 56.5% of the paid up contribution whereas the FIs would hold 43.5%.

The total income of the Fund would increase from Rs. 30 The total income of the Fund would increase from Rs.30.7 crores in 1997-98 to Rs.124.5 crores in 2002-03. The profits of the Fund would increase from Rs.23.6 crores to Rs.84.8 crores during the same period. The loan outstanding of TNUDF as on March 31, 2003 would be Rs.908 crores:

Vision

Vision TNUDF would position itself as a strategic intermediary linking capital markets with Urban Infrastructure needs. Positive performance during the plan period, achievement of lending targets, high repayment rates and quality infrastructure would demonstrate a track record enabling market access for the Fund. Preparation for Pool Finance Structure would commence by year 2001. Capacity building activities, financially disciplined ULBs and strong project pipeline are enabling factors. Preparation includes rating of TNUDF risk assessment of ULBs, setting up a credit enhances, revenue intercepts etc.

TNUDF - Institutional Positioning Partial Credit Guarantee MLA Umbrella Crd Enchanc. Technical Assistance Co-finance Sov. Govt. Transfer Payments Sov. . Grant Bonds TNUDF Investors Funds Market Rate Long term Reserve Account Local Govt. Project Local Govt. Project Local Govt. Project Revenue Intercept Trustee Principal & Interest payments If necessary If necessary