AP govt likely to raise money from bond market to fund capital city project

Andhra Pradesh Capital Region Development Authority (APCRDA), the nodal agency for the development of the green-field capital city of AP, would consider issuing the short-tenure bonds of even 18 months to 2-year repayment period in future as a quick way to raise the resources to partly fund this massive project.

The CRDA authorities have recently conducted a roadshow in financial capital, Mumbai, for a maiden bond issue for Rs 20 billion with a 10-year repayment period, redeemable from the sixth year onwards.

The rate of interest on the bond, which is backed by the state government guarantee on top of two separate accounts to guarantee the repayment, would be determined in consultation with the participating institutions after the June 6 Monetary Policy. The issue is expected to hit the electronic bidding platform (EBP) of the stock exchanges by June 15.

"While the present General Obligation Bond is meant for money to pay for various works currently underway in Amaravati, we will also consider issuing the short-term bonds for specific projects having a revenue generation potential. I can raise the funds in a matter of weeks via bonds issue compared to 4-5 months to get a loan approval from a bank," APCRDA special commissioner V Rama Manohar Rao told Business Standard.
 
This is the first time a state government was entering the bond market to fund an activity such as the construction of green-field capital city.

The bond route was chosen to help ensure a continuous flow of funds to the capital city development, even as multiple funding options, both long-term and short-term, were being pursued by the state government considering the size of capital investment envisaged.

Contracts worth of close to Rs 250 billion were already awarded for various projects within the proposed capital city area. " We may now need to start paying the bills to the contractors to an extent of Rs 15 billion-Rs 20 billion every month in the course of next one year to get these ongoing projects completed as per schedule," Ajai Jain, principal secretary, Energy, Infrastructure and Investment and CRDA department told Business Standard.

All the 3,900 residential units, which are meant for the government staff, officers of the All India Services, as well as for the ministers are expected to be ready by December, 2018. The government intends to complete the tier-1 trunk road network along with utilities and sewerage system besides the government's administrative complex (secretariat) by May next year, according to Jain.

The state government has so far tied up or in the process of finalising the funding arrangement for over Rs 200 billion with various agencies. The Government of India has already released Rs 15 billion towards the construction of the basic facilities of the capital city with a promise to give more.

The funding by banks and financial institutions include a release of Rs 12.50 billion by Hudco while Andhra Bank, Vijayabank and the Indian Bank together have sanctioned a loan of Rs 20 billion for the ongoing government housing project. The World Bank has proposed to sanction Rs 45 billion for the infrastructure of the proposed capital city project while the final discussions with the multilateral agency are expected to happen soon. Besides this, the government was in the process of raising Rs 100 billion in loans from a consortium of banks led by Andhra Bank.

Broadly, the tier-1 infrastructure would require Rs 170 billion, the tier-2 infrastructure involving the last mile connectivity covering the returnable plots of farmers who gave their lands under the land pooling scheme(LPS) would require Rs 150 billion-Rs 160 billion investment while the administrative government complex was proposed to be built at a cost of Rs 116 billion, as per the government plan.  

"The government needs to spend a total of Rs 490 billion over a period of five years starting from 2017 on this basic infrastructure before the private investments starts coming in," Rao explains about the funding requirement of the ambitious capital city project mooted by chief minister N Chandrababu Naidu.

Though the CRDA expects to generate financial resources through various means to service and repay these loans and bonds, the project consultants such as McKinsey and CBRE had told the government that it can generate the resources equivalent to this entire expenditure by monetising the 5,000 acres of land, which is being kept aside for this purpose, according to the officials.

All this would depend on the level of growth and demand, which is expected to be created by this heavy government investment in the capital city infrastructure, according to the observers.

 "About 6-7 million square feet of office and residential space is being currently built across the designated capital city area. Generating Rs 500 billion revenues by monetising 5,000 acres over a period of time is not an impossible task if  an adequate demand is generated in the new capital city because all that a buyer would need is to pay at the rate of Rs 20,000 per square yard and that price already exists in many parts of Guntur and other areas," Y Harishchandra Prasad of Maalaxmi Group said.