Pooled Finance Development Fund Scheme

Pooled Finance Development Fund Scheme

Pooled Finance Development Fund Scheme

The Central Government has initiated “Pooled Finance Development Fund (PFDF) Scheme” to provide credit enhancement facilities to empower small and medium Urban Local Bodies (ULBs) to access market borrowings through pooled finance municipal bonds for the investment in urban infrastructure projects. Through this scheme, the ULBs can bridge the resource gap by accessing market funds for their infrastructure projects. Let us look in detail about the Pooled Finance Development Fund Scheme in this article.

To know about the Alternative Investment Fund

Objectives

The below following are the objectives of the Pooled Finance Development Fund Scheme:

  • To facilitate ULBs to access capital market which provides financing for the investment in the essential municipal infrastructure by providing credit enhancement assistance to the State Pooled Finance Entities (SPFE) for accessing capital markets into Pooled Financing Bonds on behalf identified ULBs for investment in the urban infrastructure projects.
  • To facilitate the development of bankable infrastructure projects (structured with appropriate credit improvements in such a way that they describe the capacity for servicing the market debt to the satisfaction of the rating companies and potential investors) urban infrastructure projects.
  • To reduce the cost of borrowing to local bodies with appropriate credit enhancement facilities and through a restructuring of existing costlier debt.
  • It act as the Nodal Agency on behalf of Central or State Government for the water, sanitation and any other bankable urban infrastructure projects.

Purpose of the Scheme

The PFDF will ensure availability and utilization of financial resources to urban local bodies in order to improve the facilities of urban infrastructure projects, service delivery and aims to achieve the desired outcome of self-sustainability. Ongoing projects of both the Central and State Governments would not be adequate enough to fill the resource gap that has given the extent of requirement. The PFDF scheme initiative is an effort to address this gap which enables the cities to access the market funds for their infrastructure projects.

Also read about, the National Equity Fund Scheme

Implementation of the Scheme

The State Pooled Finance Entity (SPFE) would be required to be set up in each State for the implementation of the Pooled Finance Mechanism. Each SPFE is to be primarily State produced and could either be a Trust or a Special Purpose Entity, stated that the entity is only a pass-through vehicle. In general, the advantage of setting up of SPFE will be that it would enable the ULBs to access the bond market on a daily basis and take advantage of scaled-up operations. Further, efficient SPFEs can bring about a fair degree of goodwill in the bond market and would be able to develop much higher levels of efficiency in operations than individual ULBs. Most importantly, it would be able to hedge risks against a much larger spectrum of activities than individual ULBs.

Allocation of Funds

The Central Government would support the SPFEs through the PFDF. The funds made available with the Government for the PFDF, 5% would be utilized for the project development assistance. The balance 95% would be used for the contribution to the Credit Rating Enhancement Fund (CREF) to develop the credit rating of the Municipal Bonds to investment grade. The project cost development for each municipality/ULB would be worked out. 75% of these costs would be repaid by the Central Government and 25% by the State Government/Union Territory Government/ULBs.

The transaction cost, including the appointment of advisors, rating companies and creation and operationalisation of SPFEs would also form part of this package. The contribution by the Government to the CREF will be 10% of the proposed amount of Bond issue or 50% of the CREF need as determined by a credit rating agency for the investment-grade rating, whichever is less. The respective State Government/UT Government will contribute to the balance amount.

Disbursement Process of Fund

  • The contribution from the Government to the CREF will be one-time grant and upfront. In the case of default, no further recourse to the Central Government and the denouncement will be on the agency or institution guaranteeing the debt.
  • At the end of the tenure of bonds provided, the Central and State Government share in the CREF will remain with the State entity for leveraging of funds for the infrastructure investment to municipalities and ULBs.
  • The CREF will be performed by the SPFEs and its accounts must be separated from other services of SPFE. The funds under CREF will be invested in notes or bonds of the Government of India or in bonds/accounts/notes of the financial institutions are rated by a recognized credit rating organisation in the highest category.
  • In the same manner, the corpus of CREF will grow with time and the SPEF will be able to leverage further investment in the urban infrastructure projects. The bonds given under the Pooled Finance framework will be applicable for taxfree status under the Guidelines of Ministry on the Tax-Free Municipal Bonds, incorporating the SPFEs being Trusts as Eligible Issuers for which mandates amendment to Income Tax Act made by Ministry of Finance.
  • The dividend income and interest that are earned from the investments made from the CREF corpus will not be excluded from the income tax.
  • The PFDF will ensure availability of resources to ULBs to improve the urban infrastructure projects, service delivery and ultimately to achieve the target of self-sustainability.

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