Date:01/08/2005 URL: http://www.thehindubusinessline.com/2005/08/01/stories/2005080101911400.htm

Back Govt to cut guarantee fee on loans raised by PSUs

Anil Sasi

New Delhi , July 31

IN a significant policy decision, the Government has decided to prune the 1.2 per cent guarantee fee charged by it on outstanding multilateral loans sourced by Central public sector undertakings (CPSUs).

To be decided on a case-to-case basis, the initial beneficiaries are expected to be CPSUs in the power sector.

The move could result in lower project costs in key infrastructure sectors such as power, water and roads, where significant amount of multilateral borrowings by CPSUs take place.

The Ministry of Finance, which fixes the guarantee fee, has agreed to lower the fees charged on outstanding multilateral borrowings of CPSUs on a case-to-case basis, based on requests from utilities including Power Grid Corporation of India Ltd and National Thermal Power Corporation (NTPC), Government officials involved in the exercise said.

The move to lower the guarantee fee, which was set at 1.2 per cent in 1993, is being taken in light of the declining interest rate regime and with a view to lower project costs, especially in the infrastructure sectors, officials said.

According to officials, multilateral loans form a big chunk of funds coming into the power sector, especially into the transmission and generation sectors. "Such borrowings require a Government guarantee due to an agreement between the multilateral agency and the Centre, even if the borrowing CPSU has credit worthiness. With the lowering of the guarantee fee, overall project cost would come down, translating ultimately into cheaper power for consumers," an official said.

The fee could be brought down to around 0.5 per cent, they added. The Kohli committee report, commissioned earlier by the Power Ministry to advice on funding avenues for executing power sector projects, had advised on lowering the guarantee fee to a rate of 0.25 per cent.

"The guarantee fee charged by the Government formed a significant part of the cost of multilateral loans. Any lowering in the fee would not only reduce the project cost but will also result in lower tariffs to the users of the system and consequently to the ultimate consumers," a PGCIL official said.