KIIFB: Economic logic of a poetic idea

If Escrow mechanisms into which cash flows are captured are monitored along with supervision of project implementation, this will emerge as second Kerala model for funding State-level infra

Though the previous LDF government had brought in Kerala Infrastructure Investment Fund Act in 2009, it was not until the ordinance and the amendment that followed in 2016 that gave the State Government powers to fully utilise this vehicle of extra-budgetary resource mobilization for both physical and social infrastructure in the State.

To impartial observers of the State’s finances, given the limited leverage that the Government has for raising funds on its own books, an idea like KIIFB is an innovative solution for infra development, which will give the much-needed push for increase in GSDP. (For fiscal deficit calculation, the Guarantees issued for extra-budgetary loans are not reckoned.)

Last year, “KIIFB” appeared no fewer than 63 times in the poetic budget speech of Finance Minister Thomas Isaac. When he presents his budget on Thursday, if that number were to go down, it will have more to do with reasons of language and style rather than the substantial thrust of this concept.

In all, 469 projects worth Rs 39,714 crore have been approved by KIIFB as on a recent date. Of this, 215 projects with an outlay of Rs 7,735 crore have completed the tender process and works on 144 of them, worth Rs 5,106 crore, have been awarded.

To commentators like me, the progress achieved by KIIFB is not a surprise as considerable planning and thinking had preceded the activation of the Fund. Also, the presence of an outstanding bureaucrat with rich experience like Dr.K.M. Abraham as the CEO is a big plus for KIIFB.

Under the KIIF Act, KIIFB is eligible to receive a share of Motor Vehicle Tax (MVT) and Petroleum Cess collected by the State Government. This, along with cash flows from revenue generating projects executed through KIIFB (revenue being interest on loans provided by KIIFB) will go for repayment of funds raised by it.

Further, as provided by the Act, the Government guarantees the payment of the principal and interest of any fund proposed to be raised by the Board.

No wonder the KIIFB structure has found favour with market players and lending agencies. NABARD has agreed in principle to sanction loa-ns of Rs 4,000 crore under NABARD Infrastructure Development Assistance (NIDA) and the first tranche of Rs 565 crore has already been documented for disbursal.

Similarly, it is understood that commercial banks have recently given sanctions aggregating to Rs 3,500 crore at very competitive rates of interest for a period of 10 years.

KIIFB’s current liquidity position is good with about an estimated Rs 4000 crore of cash deposits as on March 31, 2018. The structure of regular cash flows is mainly from a share of the Motor Vehicle Cess, (which started with 10 per cent in 2017-18 and rising up to 50 per cent share by 2022) and a minimum of '1 per litre of petrol sold in the State. Last financial year alone, KIIFB is reported to have received not less than Rs 1,100 crore through these two avenues.

Further, as accompanying charts show, the Fund will be lending for both revenue generating as well as non-revenue generating projects and if the Escrow mechanisms into which the cash flows are captured are monitored along with close supervision of project implementation this will emerge as the second Kerala model for funding State-level infrastructure. In future, it is likely that this will be replicated by other State Governments, particularly those whose fiscal situation is tight.
But there are three major concerns which KIIFB should address.

One relates to the sustainability of cash flows for repayments five/six years down the line. As projects go on stream, cash requirements will gather steam but inflows may not be up to the expected levels for a variety of reasons, some extraneous. Partially, this can be overcome if lines of credit, including the bank loans, are structured for longer tenors. In the past, many infrastructure funding deals have run into difficulties because of the shorter tenor of, say 10 years, being given and accepted between borrowers and lenders.

At the minimum, there should be an “option” for both parties to “refinance” the debt at the end of 5/10 years, which is the standard international practice for long-term debt so that stress in the loan accounts/debt servicing can be avoided. This structure will be good for both the Fund as well as lenders.

Second is the liquidity of the Government to honour the Guarantees issued for the borrowings by KIIFB. Through an amendment to the Ceiling on Guarantees Act of 2003, the State has now set 5 per cent of the GSDP as the cap for issuing guarantees. Rating agencies reckon these also while giving ratings for State Governments. So, it has an indirect bearing on raising resources. Also, it is not known whether provisions are being created for the redemption of these Guarantees as mandated by the Act

The third relates to the need for preferring revenue-generating projects, as a rule.  As funding requirements surge Kerala should realize that there are no free lunches.

It is time we thought of levying bearable user charges wherever possible. For instance, every day on average at least 10, 000 people flock as outpatients to the three Medical College hospitals at Kozhikode, Ernakulam and Thiruvananthapuram. Assuming that at least 70 per cent are citizens who can pay a nominal fee of Rs 10, this can go towards repairing and maintaining toilets properly.

From each according to his ability, to each according to his need is a slogan popularized by Karl Marx. As one who swears by socialist principles, Dr Isaac will do well to usher in a regimen of bearable user charges for medical facilities and education and other resource mobilization like higher land tax (from those who can afford) if not in this budget, at least in the next. (Land tax rates are ridiculously low and do not cover even the collection expenses, including staff costs)

Entities like KIIFB will necessarily have to service their debt. A loan is still repayable whether it is taken on the budget or off it.