Explained: How Kerala board raised infra funds — and set off govt-CAG showdown

The CAG noted that the KIIFB has no source of income, its only assured inflow being petroleum cess and part of motor vehicle tax, and that it has not invested in any profit-making enterprise or income-generating ventures so far.

In an unprecedented move a week ago, the Kerala Assembly passed a resolution against the findings of the constitutional body Comptroller and Auditor-General (CAG), The findings were about the borrowings made by the Kerala Infrastructure Investment Fund Board (KIIFB).

What is KIIFB

The KIIFB was constituted in 1999 by the then Left government for providing financial assistance to public sector undertakings for investments in infrastructure projects. In 2016, the present LDF regime, in its first Budget, declared that the KIIFB would be converted into a fund mobiliser for infrastructure projects. Due to chronic financial constraints in the state, infrastructure projects announced in budgets take years for completion; routing loans through the KIIFB was planned as a means to expedite the process.

Chief Minister Pinarayi Vijayan is the KIIFB chairman, and Finance Minister Thomas Isaac is vice-chairman. It has a director board with senior bureaucrats and independent members, with former chief secretary Dr K M Abraham as the CEO. It has got project consultants, a technical advisory committee, a quality inspection wing, and an online project and finance management system for dealing with all stages of infrastructure project implementation. Special purpose vehicles, mostly government entities, are being assigned various projects.

Sources of revenue

The government gave Rs 2,498 crore as seed capital to the KIIFB, which wanted to use innovative methods of raising finance authorised by SEBI and RBI. A major source of revenue planned was term loans from banks and financial institutions. The government decided to stand guarantee for the payment of principal and interest on these loans.

That apart, the government diverted a portion of motor vehicle taxes and fuel cess, which should normally go into state exchequer. In 2016 (the first fiscal), 10% of motor vehicle tax was earmarked for the KIIFB. This was followed by an increase of 10 percentage points every year, so that from the fifth year onwards, 50% of motor vehicle taxes would be set apart for the KIIFB. Additionally, cess on petrol is to be passed on to the KIIFB.

In 2019, the KIIFB raised Rs 2,150 crore from masala bonds listed on the London Stock Exchange. It was the first Indian agency to access this overseas debt market.

In 2018, the KIIFB launched Pravasi Chitty, a scheme targeting a huge inflow of funds from Keralites living abroad who it hoped would invest in infrastructure projects at home. The KIIFB expected to mobilise Rs 30,000 crore by the end of 2020. However, until November 30, 2020, The KIIFB could channelise only Rs 443 crore in deposit bonds via Pravasi Chitty; the Pravasi dividend scheme has brought only Rs 162 crore from 1,654 depositors. 📣 Express Explained is now on Telegram. Click here to join our channel (@ieexplained) and stay updated with the latest

As of March 31, 2020, the KIIFB has mobilised Rs 3,015 crore through term loans from various public sector banks. In 2019-20, the KIIFB received Rs 2,200 crore from the government (Rs 1,650 as its share of motor vehicle tax, and Rs 550 crore as petroleum cess share). It has availed the bank loans at interest between 8.95% and 9.30%, and the masala bonds at 9.72%. After five years, the amount to be repaid will be Rs 3,195.98 crore.

Projects planned & done

In the first Budget of the current government in July 2016, Finance Minister Thomas Isaac announced that projects worth Rs 50,000 crore would be implemented through The KIIFB within five years. Hundreds of such projects were announced.

As of January 16, 2021, the KIIFB has sanctioned 821 projects worth Rs 40,100 crore spread across various departments including public works, education, health, forest and cultural affairs. With another Rs 20,000 crore sanctioned for land acquisition of industrial parks, projects worth Rs 60,000 have been approved so far.

On the ground, despite the claim that projects worth Rs 50,000 crore would be implemented during the five-year term of the government, projects worth Rs 7,000 crore have been completed so far. The government’s term ends in April-May this year.

CAG red flag

The CAG audit report on Kerala finances for 2018-19, tabled in the Assembly on January 18, stated that off-budget borrowings of the KIIFB are unconstitutional. The borrowings of the state government are governed by Article 293(1) of the Constitution, the guiding principle of which is that the state is free to borrow money within the territory of India upon security of the Consolidated Fund of the State, and the limits on such borrowings can be regulated under Article 293(3). The auditor said off-budget borrowings are not in accordance with Article 293(1) as these are not accounted for in the disclosure statements in the Budget documents, and hence do not have legislative approval.

The CAG noted that the KIIFB has no source of income, its only assured inflow being petroleum cess and part of motor vehicle tax, and that it has not invested in any profit-making enterprise or income-generating ventures so far. As such, the CAG said, the KIIFB’s loans have to be repaid from the government’s own resources and are direct liability on the government. The CAG said creating such liabilities, without disclosing them in the Budget, raises questions both of transparency, and of inter-generational equity.

Government stand

The government is of the view that as it is providing a guarantee for principal and interest for the loans received by the KIIFB, the borrowings can be termed as contingent liabilities. It would become a liability on the government only when there is default by the KIIFB. The CAG has rejected the government view that these are contingent liabilities.

The government believes that the KIIFB can repay its liabilities using the petroleum cess and vehicle tax share received every year. The state has projected that the KIIFB would get Rs 98,355 crore as income by 2030-31 from these sources, and only Rs 89,783 crore loan would need to be repaid in that period (repayment would continue until 2030).

In its resolution against the CAG, moved by Chief Minister Pinarayi Vijayan, the government said it was rejecting all critical remarks against the KIIFB in the CAG report. It said the findings are against the larger development interests of the state, politically motivated, and amounted to violation of political neutrality of the auditor body, and lack of professionalism.

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