Opinion

A new ‘Kerala model’ for infra growth

Adikesavan S | Updated on April 10, 2020 Published on April 09, 2020

The cash-rich Kerala Infrastructure Investment Fund Board is well-placed to deal with challenges arising out of Covid-19

Even as States have been struggling to come to terms with the financial impact of Covid-19, Kerala has been first off the block with a financial package of ₹20,000 crore. Though questions can be asked about where the money is going to come from, in one area at least Kerala need not worry much — funds for infrastructure spend, when the lockdown ends.

The Kerala Infrastructure Investment Fund Board (KIIFB), floated by the State government in 2009, is right now sitting on cash — just when it might be required.

Though the KIIFB laid low for a few years since 2009, an amendment to the Kerala Infrastructure Investment Fund Act in 2016 gave the much-needed elbow room for State government guarantees, and the idea then took wings. The famed “Kerala model” of social development has been universally acknowledged as distinctive, with indicators comparable to the developed countries. The KIIFB is the “new Kerala model for infra development”.

In 2016, the KIIFB spread its wings with the State’s Finance Minister Thomas Isaac and former Chief Secretary, KM Abraham, steering it for resource mobilisation, with good structures in place.

Among State Finance Ministers, Thomas Isaac has stood out for his pragmatism, anti fiscal-fundamentalist stance, and clarity of views, even among those who may differ with his politics. The CEO of KIIFB, Abraham, cut his financial teeth in the Sahara issue while being Director of SEBI, withstanding threats for the sake of duty.

The KIIFB has been turned into an instrument which can be used by the State, no matter who is in power, for development. Chief Minister Pinarayi Vijayan’s recent plea that the KIIFB should not be seen only through a political prism is therefore valid.

Infra push needed

Any keen watcher of Kerala’s developmental aspirations will vouch for the fact that the next big push here must come from infrastructure. The gains that the State has made so far in the socio-economic sphere is in danger of searing at the seams if infrastructure languishes; more so in these tough times. Soon there will be need to spend on infrastructure, especially on health, transport links, fisheries and others. There could even be demands for new investments like the Tirupur model for disinfection at all public markets, which has been pioneered by a small-scale entrepreneur in Tamil Nadu.

It is no secret that the State’s finances are stretched with both revenue and fiscal deficits overshooting projections. It has a bloated officialdom. Salaries and interest payments take up most of revenue expenditure and capex is under strain.

A comparison of the capital outlay for the State over the last eight years (see Chart) indicates that the amount has almost doubled lately, even though the stress on the deficit figures has continued unabated.

Under the KIIFB, the approvals for new projects stood at about ₹46,000 crore for about 600 capex projects in areas like health, sports, tourism, roads, forest, fisheries and power.

The credibility of the structure for review of end-use of funds is above reproach. The Fund Trustee and Advisory Commission consists of Vinod Rai, former CAG, Usha Thorat, former RBI Deputy Governor, and G Padmanabhan, former ED of RBI.

The KIIFB has been able to therefore get funding from leading Indian banks including the SBI, national institutions and international investors. In a first of its kind, it mobilised ₹2,150 crore through a masala bond offering — the Chief Minister rang the bell for the listing of the bonds on the London Stock Exchange.

Supported by a cess of ₹1 per litre on petrol/diesel sold in the State and a share of the motor vehicle cess (which started with 10 per cent in 2017-18 and will rise up to 50 per cent share by 2021), the KIIFB’s inflow is estimated at about ₹1,300-1,400 crore per year. In addition, the State can allocate resources from the Budget for the repayment of the KIIFB’s obligations.

Some caveats

The KIIFB’s current liquidity is good with a reported amount of ₹7,000 crore in cash as on a recent date. But what does the future hold for KIIFB? Prospects are exciting but a couple of caveats would be in order.

The structuring of the borrowing, especially for shorter tenors, should necessarily have an option for rollover of debt. Else, we might run into an asset-liability mismatch as the utilisation of funds for project implementation (outflows) and the inflows (as per the KIIFB Act) will not necessarily match.

As early as in 2015 itself, the Union Budget had clarified and the RBI had stated that it would not have any objection to the structuring of debt for infrastructure including in the 5/25 years format.

Kerala should realise that there cannot be free lunches. The fundamental socialist principle “to each according to his need and from each, according to his ability” needs to be adopted in letter and spirit. The idea of levying user fees on segments of the population who can pay, whether it is school fees, hospital expenses including OP tickets and the like, brooks no delay so that non-tax revenues for the government are bolstered wherever possible.

There is no time like the present to levy some fee based strictly on the ability to pay for services.

A loan is a loan, and is repayable whether it is on the Budget or extra-Budgetary.

Ab initio hedging through interest rate swaps for long-term bonds could be examined so that the KIIFB doesn’t pay higher interest in a falling rate scenario.

The government should reach out to all political parties to recognise the institutional need for the KIIFB, so that it is not buffetted by any political changes in future.

It may be a good idea also to report the KIIFB’s finances and status as an addendum to the State’s Budget, even without bringing it within the ambit of CAG audit and CVC norms, which could be a drag on its effectiveness. This will jell with the statement of the CEO that “the KIIFB strives to be an exemplar for best practices in corporate governance and fund management.”

Finally, it is necessary to ring-fence the KIIFB’s financial and decision-making independence. It is quite comforting that the current structure and the CEO have credibility transcending politics.

Kerala’s continued infrastructure development will be well-served by the KIIFB model. In these coronavirus-impacted times, the KIIFB may well help addresss what looks like a guaranteed economic downturn.

The writer is a top public sector bank executive. Views are personal.

Published on April 09, 2020

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