Railway Accounts Department Examinations

Showing posts with label LIC. Show all posts
Showing posts with label LIC. Show all posts

Saturday, August 4, 2018

EBR(IF)

EBR(IF) – EXTRA BUDGETARY RESOURCES(INSTITUTIONAL FINANCING)

Ø  New source of finance for funding CAPEX-Capital Expenditure in Indian Railways in addition to the existing sources of finance.

Ø  Existing/traditional sources of  finance in Indian Railways are 1) Loan Capital 2) Depreciation Reserve Fund 3) Development Fund 4) Railway Safety Fund 5) Capital Fund 6) EBR – Extra Budgetary Resources like IRFC, RVNL, PPP.

Ø  Context/backdrop of initiating EBR (IF):

A.      Railways expansion (Works Budget) has suffered very much due to shortage of resources either by insufficient support from Ministry of Finance (General Revenues) in the form of Loan Capital or unable to generate internal resources due to not increasing passenger fares to match cost recovery.

B.      Large shelf of projects could not be completed due to insufficient funds.

C.      Result is “time over runs” and “cost over runs”.  Also non realization of revenue/income for the period of delay.

D.     To overcome the shortage of funds for works programme, Railway Ministry decided to borrow funds from INSTITUTIONS, so as to ensure the completion of crucial railway projects for generation of revenue.

Ø  Utilised for only priority works such as New Lines, Gauge Conversion, Doubling, Traffic Facilities, Railway Electrification, S&T etc.  - Object is to enhancing throughput on the congested corridors.

Ø  One more condition for employing these funds are " Should be utilised in such a manner either completion of projects in the same year or first quarter of the following year".

Ø  As of now, LIC funding is the main source of EBR(IF).  In this regard an MOU between IR and LIC was  signed on 11.3.2015.  LIC has agreed to fund 1.5 lakh crores over next five years.  This is just beginning of new era of funding Railway CAPEX.

Ø  In future, several institutions including foreign pension funds may funding the Railway projects through this mechanism.

Ø  Mechanism of LIC funding Railway projects is a interesting one. IRFC issued to BONDS to the LIC.
A.      The funds which recd through BONDS , will be provided to the Indian Railways for completion of crucial projects by IRFC.

B.      IR develops/constructs the projects (behalf of IRFC) by entering "DEVELOPMENT AGENCY AGREEMENT" with IRFC.

C.      The required land for development or construction of such projects is licensed to the IRFC by IR duly entering "LICENSING AGREEMENT".

D.     IRFC will own the project on pro rata basis (to the extent of funding by IRFC)

E.      Such owned assets will be leased to the IR by IRFC duly entering the "LEASE AGREEMENT"

F.       Based on Lease Agreement, IR will pay the Lease charges to the IRFC during the lease period.  Usually Lease charges contain i) Capital component chargeable to New Allocation 2231(projects) & 2232(Rolling stock) under Minor Head 2200 i.e., Plan Head 2200 under Demand No.16 and ii) Interest component chargeable to Demand No.09 - Operating Expenses - Traffic ( 09-791 (Projects) & 09-792 (Rolling stock)

G.     IRFC will use these lease charges for redemption of bonds (issued to LIC) and arrange payments to the LIC.

H.     Thus the account has come to an end.

Ø   The flow chart is enables to explain this mechanism clearly.

Ø  LIC (subscribed the bonds issued by IRFC)  -------> IRFC (provided loan amount to IR on pre-lease disbursement)--------------> Indian Railways (will execute the projects)   -------->  IRFC (will lease the developed projects to the Indian Railways to the extent it is funded.) ---------->Indian Railways (will pay the Lease charges to the IRFC)-----------> IRFC (On maturity of bonds, IRFC use these lease charges paid by IR for payment to LIC)  -------------------->LIC ( Get back their amount by redemption of Bonds to the IRFC)

Example:

ü  Construction of New line of 100 Kms between Stations A and B.  LIC funds (through IRFC) were utilised to the extent of 25 Kms (out of 100 Kms). 

ü  IRFC will own the project assets i.e., 25 Kms (on pro rata basis) and the lease the same 25 Kms to the Indian Railways on LEASE basis.
COMPARISON OF IRFC FUNDING ROLLING STOCK AND PRESENT FUNDING BY LIC

·         More or less, EBR (IF) is similar to funding of Rolling stock so far by IRFC by issuing bonds to the public/institutions since 1986.

·         In both cases, IRFC is leasing assets to the IR and in lieu of Lease charges.

·         However the good sign is coming forward of Institutions such as LIC for helping CAPEX of Railways.

·         But Railway has to bear the interest rate around 8 to 10 % in case of EBR(IF) instead of traditional funding by Loan Capital at the rate of 4 % dividend ( effectively it was 2.5 % only considering the subsidies/reliefs)

SOME MORE FACTS ABOUT EBR(IF)

v 
v  IRFC will raise funds from LIC against BONDS periodically based on IRs requirements.

v  Deposit -IF account is maintained by PAO/RB/Northern Railway (similar to the IRFC Deposit a/c for rolling stock funding).

v  v  PAO/RB will transfer the funds to the Zonal Railways on requirement basis.

v  EBR-IF funds drawn for a project will be NON-LAPSABLE and any amount unspent for unavoidable reasons shall be carry forward as Opening Balance for Next year.

v  EBR-IF funded projects would be treated like 'DEPOSIT WORKS" for accounting of fund flows.  However  no departmental charges i.e., 12.5 % shall be applicable for works funded from EBR(IF).  (Because departmental charges are levied for Deposit works, but the works which are proposed were purely Railway ones)

v  Repayment of Loan through Lease charges by IR to IRFC is as follows. Period of payment is 30 years.

1-5 years
6-10years
11-30 years
Interest component
Interest component
Capital component
Though Interest, but it is capitalised and charged to Demand NO.16 (PH 2200)
Charged to Demand No.09-790
Charged to Demand No.16(PH 2200)

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