RESOURCE MOBILISATIONRESOURCE MOBILISATION:: A CASE STUDY A CASE STUDY

IN MULTI-LATERAL FUNDINGIN MULTI-LATERAL FUNDING

Dr. Ram Chandra Rai Dr. Ram Chandra Rai Sr. Prof. Financial Management Sr. Prof. Financial Management

Railway Staff College Railway Staff College Vadodara Vadodara

VARIOUS SOURCES OF FUNDSVARIOUS SOURCES OF FUNDS

Grants Grants Internally generated resources.Internally generated resources. Capital markets Capital markets Debt – loan funds.Debt – loan funds.

GRANTSGRANTS

Funding which does not look for Funding which does not look for direct financial returns – for direct financial returns – for economically viable projects.economically viable projects.

Usually spent on projects intended to Usually spent on projects intended to improve quality of life.improve quality of life.

Sponsored mainly by government Sponsored mainly by government and non-profit making bodies.and non-profit making bodies.

Limited availabilityLimited availability

INTERNAL RESOURCESINTERNAL RESOURCES

Surplus business income.Surplus business income. Determining factors for employment Determining factors for employment

of surplus : of surplus : 1. Cost of equity1. Cost of equity

2. Cost of debt,2. Cost of debt,

3. Return on capital employed.3. Return on capital employed.

4. Return to shareholders.4. Return to shareholders.

CAPITAL MARKETSCAPITAL MARKETS

Equity takes several forms.Equity takes several forms. Private equity - capital contributed by Private equity - capital contributed by

one or several shareholders through a one or several shareholders through a private agreement.private agreement.

Capital raised through a public offering of Capital raised through a public offering of shares by a companyshares by a company

Shares may be ordinary, preferential or Shares may be ordinary, preferential or debentures or in the form of loan capital.debentures or in the form of loan capital.

Borrowings through commercial paper Borrowings through commercial paper like bonds like bonds

DEBTDEBT Debt comes in the form of loans repayable on Debt comes in the form of loans repayable on

certain specified conditions.certain specified conditions. These conditions vary widely .These conditions vary widely . The basic conditions are rate of interest and The basic conditions are rate of interest and

repayment period.repayment period. However there are a host of other conditions However there are a host of other conditions

having a huge impact on the real financial value having a huge impact on the real financial value of the loan and which therefore affect the of the loan and which therefore affect the viability of the project. viability of the project.

COST OF CAPITALCOST OF CAPITAL

Reserves and surpluses are a part of Reserves and surpluses are a part of equityequity

Equity is costlier than debt –opportunity Equity is costlier than debt –opportunity cost & Risk .cost & Risk .

Normally debt is cheaper than equity due Normally debt is cheaper than equity due to less risk.to less risk.

A company with healthy profits may still A company with healthy profits may still like to resort to some debt – trading on like to resort to some debt – trading on equity.equity.

Decision depends on the Weighted Decision depends on the Weighted Average Cost of Capital.Average Cost of Capital.

THE BEST OPTIONTHE BEST OPTION

Choice depends on the primary Choice depends on the primary objectives.objectives.

Non – financial goals ?Non – financial goals ? Lack of financial muscle.Lack of financial muscle. Profit or efficient use of resources?Profit or efficient use of resources? Option depends on circumstances. Option depends on circumstances.

THE DEBT OPTIONTHE DEBT OPTION

Cost of debt …..Cost of debt ….. Risk perception of the financial Risk perception of the financial

institution – credit ratinginstitution – credit rating Internal Rate of ReturnInternal Rate of Return SecuritySecurity Sectoral allocation.Sectoral allocation. Default zone Default zone

LENDING INSTITUTIONSLENDING INSTITUTIONS

Commercial banksCommercial banks Custodian of individual & corporate Custodian of individual & corporate

deposits deployed as interest bearing deposits deployed as interest bearing loans. Spread in the source of profit.loans. Spread in the source of profit.

Financial institutionsFinancial institutions Obtain money from the public by Obtain money from the public by

issuing income earning bonds which are issuing income earning bonds which are then used to finance debt requirements of then used to finance debt requirements of various projects at profitable rate of various projects at profitable rate of interest for long term.interest for long term.

SOME FINANCIAL INSTITUTIONSSOME FINANCIAL INSTITUTIONS

IDBI-IDBI-Industrial Development Bank of IndiaIndustrial Development Bank of India

IFCI-IFCI- Industrial Finance Corporation of India . Industrial Finance Corporation of India .

ICICI-ICICI-Industrial Credit, Investment Corporation Industrial Credit, Investment Corporation of India. of India.

IFC- IFC- International Finance CorporationInternational Finance Corporation

ADB-ADB-Asian Development BankAsian Development Bank

IBRD-IBRD-International Bank for Reconstruction andInternational Bank for Reconstruction and

Development Development

MULTI –LATERAL INSTITUTIONSMULTI –LATERAL INSTITUTIONS

Financial institutions may be purely commercial Financial institutions may be purely commercial or backed by governments (developmental).or backed by governments (developmental).

They may have the some sector focus: They may have the some sector focus: infrastructure or industry funding.infrastructure or industry funding.

Both raise money from the capital markets Both raise money from the capital markets usually through bonds.usually through bonds.

The difference lies in the cost at which they raise The difference lies in the cost at which they raise funds - cheaper by developmental. funds - cheaper by developmental.

Multi- lateral agencies like the World Bank are Multi- lateral agencies like the World Bank are backed by member governments and carry very backed by member governments and carry very high credit rating –a virtual sovereign guarantee. high credit rating –a virtual sovereign guarantee.

They can command cheaper funds than private They can command cheaper funds than private commercial bodies due to high credit rating.. commercial bodies due to high credit rating..

ATTRACTIONSATTRACTIONS

Institutions like ADB,IFC and IBRD have a Institutions like ADB,IFC and IBRD have a low cost of borrowing hence can afford low cost of borrowing hence can afford cheaper loans than purely commercial cheaper loans than purely commercial institutions.institutions.

Since they are backed by governments Since they are backed by governments committed to the stated mission focused committed to the stated mission focused on development of poorer countries they on development of poorer countries they offer favourable terms and conditions for offer favourable terms and conditions for their loans. their loans.

CONSTRAINTSCONSTRAINTS

Currency risks are unpredictable over Currency risks are unpredictable over a long term period hence final a long term period hence final liability hard to assess. liability hard to assess.

Project implementation is subject to Project implementation is subject to detailed periodic review not only in detailed periodic review not only in terms of performance but also in terms of performance but also in terms of the covenants and terms of the covenants and conditions of implementation.conditions of implementation.

CASE - STUDYCASE - STUDY

WAGONS PROCUREMENTWAGONS PROCUREMENT

FORFOR

CONTAINER CORPORATION CONTAINER CORPORATION

OF INDIAOF INDIA

SCOPE OF THE PROJECTSCOPE OF THE PROJECT

WB study revealed the lack of development in the WB study revealed the lack of development in the transport sector for modern logistics requirements.transport sector for modern logistics requirements.

Potential for growth enormous due to growth in Potential for growth enormous due to growth in international trade.international trade.

CONCOR identified as nodal agency for developing CONCOR identified as nodal agency for developing containerization in India .containerization in India .

The loan therefore was a transport sector The loan therefore was a transport sector infrastructure project for the WB.infrastructure project for the WB.

Holistic objective to not only fund the CONCOR Holistic objective to not only fund the CONCOR asset acquisition , but also facilitate change in asset acquisition , but also facilitate change in regulations and processes governing international regulations and processes governing international trade.trade.

Initiate systematic cooperation between different Initiate systematic cooperation between different organizations like railways, port authorities, organizations like railways, port authorities, Customs etc. Customs etc.

FEATURESFEATURES Primary requirement was of a fleet of specialized Primary requirement was of a fleet of specialized

wagons - flats.wagons - flats. Second ,a hub container depot strategically Second ,a hub container depot strategically

located near Delhi.located near Delhi. Detailed estimate of requirements and technical Detailed estimate of requirements and technical

parameters spelt out.parameters spelt out. The loan of USD 94 million sanctioned for The loan of USD 94 million sanctioned for

procurement of wagons and training and procurement of wagons and training and development of manpower in modern container development of manpower in modern container logistics planning and management as well as logistics planning and management as well as technical assistance in planning the mega ICD technical assistance in planning the mega ICD and drawing up a long term strategicand drawing up a long term strategic business business plan.plan.

STRUCTURE OF LOANSTRUCTURE OF LOAN $ 94 million.$ 94 million. Twenty year repayment period with Twenty year repayment period with

moratorium of 5 years on repayment of moratorium of 5 years on repayment of principal.principal.

Project life 5 years.Project life 5 years. Interest – cost of borrowing +0.5 %Interest – cost of borrowing +0.5 %

(variable)(variable) Commitment charges – 0.75 % on Commitment charges – 0.75 % on

unutilized amount. unutilized amount. Biannual payment of interest and Biannual payment of interest and

principal.principal.

COVENANTSCOVENANTS Procurement of wagons would be on International Procurement of wagons would be on International

Bidding Terms prescribed by the World Bank.Bidding Terms prescribed by the World Bank. Adherence to pre –determined performance Adherence to pre –determined performance

parameters both physical and financial included parameters both physical and financial included in the loan agreement.in the loan agreement.

Submission of quarterly progress reports on Submission of quarterly progress reports on prescribed proforma.prescribed proforma.

Submission to biannual review mission by the Submission to biannual review mission by the World Bank for the duration of project World Bank for the duration of project implementation.implementation.

Divestment of equity 5% to public as precursor Divestment of equity 5% to public as precursor to privatizing – can be problem for few Govts.. to privatizing – can be problem for few Govts..

OTHER FEATURESOTHER FEATURES

Bilateral loan between World Bank and Bilateral loan between World Bank and Container Corporation of India instead of Container Corporation of India instead of through the Government of India.through the Government of India.

Direct interaction of the company with WB Direct interaction of the company with WB for negotiating and finalizing terms and for negotiating and finalizing terms and conditions, as well as review of conditions, as well as review of implementation.implementation.

However because of a sovereign However because of a sovereign guarantee the company bound to pay an guarantee the company bound to pay an annual guarantee fee of 2.5%on the annual guarantee fee of 2.5%on the outstanding loan amount to GOI. outstanding loan amount to GOI.

OUTCOMEOUTCOME

Plus pointsPlus points Compulsory performance review induced Compulsory performance review induced

good discipline and accountability.good discipline and accountability. Importance of monitoring the right Importance of monitoring the right

performance parameters was established.performance parameters was established. Training and development covered the Training and development covered the

entire organization and provided entire organization and provided invaluable exposure.invaluable exposure.

ADVANTAGEOUS TERMSADVANTAGEOUS TERMS

Interest rate much lower than Interest rate much lower than domestic market rates.domestic market rates.

Moratorium on principal payments Moratorium on principal payments for 5 years.for 5 years.

Long term amortization.Long term amortization. Reasonable pre-payment terms.Reasonable pre-payment terms.

FRINGE BENEFITSFRINGE BENEFITS

Establishment Establishment of efficient monitoring mechanism :of efficient monitoring mechanism :

Wagon utilization, Wagon utilization,

Equipment availability.Equipment availability.

Financial ratiosFinancial ratios Technical assistance from M/s Technical assistance from M/s

HaskoningHaskoning

WB BIDDING TERMSWB BIDDING TERMS

Global bids.Global bids. Two packet system. Two packet system. Technical short list.Technical short list.

Exhaustive process with transparent Exhaustive process with transparent discussions with suppliers.discussions with suppliers.

Financial bids,detailed ,rigorous, no Financial bids,detailed ,rigorous, no scope for ambiguity.No scope for scope for ambiguity.No scope for negotiation.negotiation.

SOME FINANCIAL ISSUESSOME FINANCIAL ISSUES

Financial bids- firm prices as on Financial bids- firm prices as on delivery to be quoted , with break-up delivery to be quoted , with break-up of all charges ,transportation, of all charges ,transportation, insurance and all duties and levies .insurance and all duties and levies .

Option to quote in foreign currency Option to quote in foreign currency for imported items with exchange for imported items with exchange rate applicable as on date of import.rate applicable as on date of import.

No clarification having financial No clarification having financial implication permitted. implication permitted.

CONSEQUENCESCONSEQUENCES

Foreign bidders out priced.Foreign bidders out priced. Lowest bidder did not enumerate Lowest bidder did not enumerate

excise duty, nor commit firm excise duty, nor commit firm price,hence disqualified.price,hence disqualified.

Successful bidder did not take Successful bidder did not take advantage of quoting in foreign advantage of quoting in foreign currency for imports, and suffered currency for imports, and suffered great financial loss with subsequent great financial loss with subsequent hardship to the company.hardship to the company.

CURRENCY IMPLICATIONSCURRENCY IMPLICATIONS Common pool currency /single currencyCommon pool currency /single currency Basket of currenciesBasket of currencies 33%–USD33%–USD 33%–Japanese Yen33%–Japanese Yen 22%-European currencies22%-European currencies 10%-other currencies.10%-other currencies. Choice of allocation left to borrower mainly in Choice of allocation left to borrower mainly in

consultation with WBconsultation with WB Advantage was that Foreign Exchange risk was Advantage was that Foreign Exchange risk was

distributed.distributed. Interest was variable . Interest was variable .

CURRENCY IMPLICATIONS CURRENCY IMPLICATIONS contd. contd.

The WB offered a switch to single The WB offered a switch to single currency loan in 98-99.currency loan in 98-99.

Interest rate linked to LIBOR-1-2%Interest rate linked to LIBOR-1-2% Lower interest rate to be evaluated Lower interest rate to be evaluated

against the valuation of the principal against the valuation of the principal outstanding.outstanding.

In Concor’s case this was reducing in In Concor’s case this was reducing in rupee terms. rupee terms.

CURRENT STATUS CURRENT STATUS 1999-2000 onwards CONCOR started 1999-2000 onwards CONCOR started

prepaying, first the Common Pool Loan, prepaying, first the Common Pool Loan, then the Single Currency Loan since USD then the Single Currency Loan since USD was rapidly appreciating.was rapidly appreciating.

The project was extended to FY2000 and The project was extended to FY2000 and then terminated.then terminated.

Delay in wagon deliveries led to the Delay in wagon deliveries led to the extension.extension.

But now CONCOR in a cash rich situation But now CONCOR in a cash rich situation meant that it could self- finance its assets.meant that it could self- finance its assets.

Final draw down was only $53 million out Final draw down was only $53 million out of $94 m. rest was cancelledof $94 m. rest was cancelled

CONCOR SELF SUFFICIENTCONCOR SELF SUFFICIENT

FY 2004-05 FY 2004-05 Revenues : Rs.2044 cr.Revenues : Rs.2044 cr. Net profit : Rs. 440 cr.Net profit : Rs. 440 cr. Net worth from Rs 98 cr.in ’93 to Net worth from Rs 98 cr.in ’93 to

Rs.1800cr.approx. Rs.1800cr.approx. Estimated cash balance Rs.500cr.Estimated cash balance Rs.500cr. Now Zero- debt company.Now Zero- debt company.

THANK YOUTHANK YOU