Effect of FOREX Fluctuation on Metro Rail Projects in India
Funding of Indian Metro Rail Projects
Metro rail projects in India are funded by the Central Government, concerned State Government and the Multilateral Financial Institutions (MFIs) which are playing a vital role in making this sustainable mobility vision a reality.
European Investment Bank (EIB), Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), New Development Bank (NDB), Japan International Cooperative Agency (JICA), etc. are the key MFIs which provide loans with low interest rate and long repayment period of say 30-50 years after the commencement of train operation. These loans are backed by sovereign guarantee of the central government but the responsibility to repay these loans rests with the metro rail companies. Loan agreement is made between the central government and the MFI and later on, a project agreement is signed between the metro rail company, central government and the MFI.
Forex Risk in Metro Rail Projects
The release of funds by and repayment of loan to MFIs, both are in foreign currency – USD, EURO, etc. The projects also engage several contractors where payments are necessarily to be made in foreign currency. In other words, a metro rail project’s payment and receipts both are exposed to foreign currency and hence, carry the risk of forex fluctuation. Forex rates are subject to change on account of various factors including trade balance, inflation, geopolitical situation, etc.
As these projects are capital intensive and the amount of financial commitments by MFIs in foreign currency is substantial, the exposure to forex risk is also substantial. Although a portion of the forex fluctuation risk will be set off between receipts and payments, yet the quantum of risk is high.
Mitigating the Forex Risk
Hence, the metro rail projects are required to enter into hedging contracts with the authorised dealers to mitigate the risk of financial burden that may arise due to adverse forex fluctuation. The change in currency at the time of transaction is the other alternative to mitigate the forex risk.
Some of the metro rail companies are still not recognizing the forex exposure in their financial statement as they consider it a risk of the central government only. It is an industry-wide risk and therefore, the Ministry of Urban & Housing Affairs (MoUHA) has sought clarification from the Comptroller & Auditor General (CAG) of India to allow exemption to the metro rail corporations across the country from recognizing the forex risk in their books of account. If this is allowed, it will be major relief to the metro rail companies from managing the forex risk.
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