For long, the twin spectre of revenue deficit and fiscal deficit has been haunting Kerala. Had it not been for remittances from the diaspora, with their pronounced linkage effects on varied markets, Kerala's economic condition would have been even worse. Forming about one-third of the state income, the remittances, however, have seen hesitant growth in recent years. It would be unrealistic to park hope on a large-scale, future migration, given the slow growth of the host economies and their increasing preference for local workforce. The persistent mismatch between receipts and expenditure has caused Kerala's public debt to rise to about 30 per cent of the gross state domestic product, with its attendant implication of a huge interest burden. For the period 2019-2022, the servicing charges of the present debt are estimated at Rs 6,000 crore.
Strangely yet, Kerala is bent on further borrowing, and that too, on a massive scale. It now seeks to raise offshore funds to the tune of Rs 5,000 crore to finance infrastructure. The expectation is that the development of infrastructure would invigorate the economy. To make this borrowing, the Kerala Infrastructure Investment Fund Board (KIIFB), a special purpose vehicle, would float medium term notes, which are unconditionally and irrevocably guaranteed by the state government. The notes may be denominated in the national currency or in any other currency as the rules permit and distributed through private or public placement. Axis Bank and Standard Chartered Bank have been chosen as the arrangers and dealers of the notes, and the HSBC, as the trustee, registrar, principal paying agent, and transfer agent. The KIIFB's planned expenditure for the next five years is Rs 50,000 crore. Clearly, a lot more borrowing is on the anvil.
Offer and acceptance
The KIIFB global notes worth Rs 2,150 crore, the private placement of which was closed in March 2019, form the first tranche of the proposed Rs 5000 crore borrowing. Kerala is the first Indian state to enter the international debt market and the present borrowing marks the third largest mobilisation by an Indian entity since the Reserve Bank of India formulated the rupee denominated Masala Bonds scheme for overseas investors in 2015. The KIIFB issue has a maturity period of 5 years and bears a fixed interest of 9.723 per cent per annum, payable every half-year. If the payment falls overdue, an incremental, penal interest of 2.0 per cent shall apply. Although the notes are denominated in rupee, all payments of principal and interest would be made in US dollars without deduction for taxes. The periodic payment of interest and the final redemption of principal would be based on the then prevailing USD/rupee spot rate. The present issue, at par, is worth $312.28 million at the rate of conversion Rs 68.85 for one dollar. Available only to professional investors, the minimum lot size is $0.2 million. The notes, issued on private placement exclusively in Quebec, Canada, were entirely bought by CDPQ, a Canadian corporate investor.
When compared with the global lending rates, the coupon rate of 9.723 per cent offered on the KIIFB notes is disproportionately high. The London Inter Bank Offer Rate (LIBOR), the benchmark for short-term lending, is less than three per cent, and the returns on medium term notes in the international market, typically, work out at five to six per cent per annum. Yet, it is doubtful if without such a high coupon rate, the KIIFB bonds can attract investors. Although the notes are guaranteed, the issuer is a sub-sovereign entity. Besides, the economy of the issuer is not particularly robust. Kerala's credit rating for long-term issue is 'BB'. This marks non-investment grade and indicates uncertainties and exposure to adverse conditions that may affect the capacity to fulfil commitments. Any default in servicing the debt could result in the erosion of market value of the notes and push these into the category of junk bonds. As the principal and the interest are reckoned in rupee, the investor has to bear the risk of currency and exchange rate fluctuations. A depreciation of rupee would diminish the dollar value of both the principal and interest, even leading to a net loss for the investor. Besides, the notes represent a new stream of securities in the market, initiated by an altogether new issuer. The investor cannot be certain whether an active market would develop for the notes.
A question that arises here is, despite the host of adverse factors as outlined above, why has the CDPQ chosen to invest in these notes. This may not owe solely to the attraction of the high coupon rate and is probably explained by the company's growing stakes in infrastructure investment worldwide. Established in the mid-1970s, the CDPQ was primarily a finance company during the initial years, managing the funds of the Quebec Pension Plan. Beginning from the 1980s, it diversified into a range of activities including commercial mortgage loans and investment in real estate and shopping centres. Subsequently, infrastructure became a prime area of focus for the company. As business grew, in 2015, a subsidiary, CDPQ Infra, was established to undertake design, financing, development and operation of infrastructure. The company is now a world leader in infrastructure and is involved in the development of various types of infrastructure, comprising seaports, airports, highways, wind farms, public transit systems, and energy distribution networks. The CDPQ now has offices and operations in 75 countries, including in India where an office was established in 2016. The India office is committed to an investment of $150 million for the development of renewable energy.
Genesis and transformation
The trajectory of KIIFB opens a window to neo-liberalisation at the sub-sovereign level in India, carrying in its stride, even a left-wing party and government. The KIIFB was established by the Left Democratic Front government by legislating The Kerala Infrastructure Investment Fund Act in 1999. The coverage of the Act was confined to a few sectors such as electric power, roads, seaports and airports, inland navigation, irrigation, water supply and drainage, and solid waste management. The resources were expected to be mobilised primarily through grants, advances, and loans from the government. Borrowings by issue of bonds and debentures were envisaged but only from the internal market and on a relatively small scale, with a cap of Rs 1,000 crore. The prime objective of the KIIFB was to provide financial assistance to three types of ventures: public sector undertakings; joint sector companies in which the government held at least 40 per cent of the share capital; and, registered societies where the government, including local self government, and public sector undertakings had not less than 50 per cent of interest in ownership, assets and management. The KIIFB was administered by a fund board comprising primarily government officials: the chief secretary to the government and six department secretaries, ex-officio. Additionally, two experts in development banking were nominated.
The 1999 Act was substantially amended in 2016. The changes introduced had important implications, both institutional and political. The scope of activities was widened, definitions were altered, several clauses were re-written and many, newly inserted. The number of sectors covered by the KIIFB was increased from less than 10 to more than 20. With the induction of new domains like land reclamation, minerals, gas, fisheries, information technology, renewable energy, education, health, sports, tourism, and hospitality, hardly any major economic sector was left outside its purview. While earlier it was stipulated that, besides public sector undertakings, only joint sector companies and registered societies having a government investment of 40 per cent and 50 per cent respectively could participate in the KIIFB projects, the requirement of government investment was brought down to 26 per cent across the board. While the 1999 Act had mandated that the fund resources shall be deposited in the public account of the government or in a nationalised bank, the amendment additionally allowed parking funds in a "prudent investment".
The earlier Act was silent on the monetary value of projects eligible for finance. It was merely mentioned that the total guarantee undertaken by the government in respect of the projects shall not exceed Rs 10 billion. Further, there was a ceiling of Rs 14,000 crore on government guarantee on all debts outstanding in a year. In 2015, with the ceiling on guarantee of overall debt increased to Rs 21,000 crore, the KIIFB received a much greater leeway. The KIIFB amendment of 2016 stipulated that eligible projects implemented by a public agency shall be of the value of at least Rs 100 crore, and each tranche, Rs 10 crore. Alongside, the composition of the fund board was changed, with the chief minister, rather than the chief secretary to the government, being designated to the chair; the position of vice-chairperson was newly created to be occupied by the minister of finance; and the vice-chairperson of the state planning board was newly inducted as a member. The number of ex-officio members was brought down from seven to four and the number of nominated experts increased from two to seven.
The neoliberal state creates powerful institutions to facilitate capital accumulation by precipitating commodification of the economy. In its new avatar, the KIIFB is precisely one such institution. The amendment of 2016 sought to privatise the establishment and maintenance of public utilities through the contractual framework of 'public-private partnership'. In relation to infrastructure, public-private partnership was spelt out as an arrangement between a public agency and a private sector participant to provide such components as investment, design, development, construction, maintenance and operation. The state support to the concessionaire may take one or more of the following forms: subsidy or capital grant, equity, loans, guarantee, opening and operation of escrow account, conferment of right to develop land, and incentives in the form of exemption from the payment of, or deferred payment of, any tax or fees or such other incentives as may be specified in the scheme. A new clause, relating to 'user levy', was inserted in the amendment. This is specified as "user charge or fee or any other amount, by whatever name called, payable by the user of an infrastructure facility".
The reconstituted KIIFB envisages five types of investment-related agreements, all with a prime role accorded to private capital: Build - Operate - Transfer (BOT), Build - Own - Operate (BOO), Build - Own - Operate - Transfer (BOOT), and Build - Transfer - Operate (BTO), Design - Build - Finance - Operate - Transfer (DBFOT). Besides, in the case of state-owned projects, five types of operations and management agreements are proposed. Under the first type, known as the management agreement, the government entrusts the operation and management of the project to the private participant for a specific consideration and collects the user levy directly or through any concessionaire. The second, the lease management agreement, involves leasing the project to the private participant along with the right to collect user levy. The third is the Build - Lease - Transfer (BLT) agreement, where the facility is handed over to the government upon completion but is given back to the same concessionaire on lease. The fourth and the fifth relate to the operation and management of existing facilities. In the case of the Rehabilitate - Operate - Transfer (ROT) agreement, a facility is passed on to a private participant to invest, refurbish and operate for a specified period. The Rehabilitate - Own - Operate (ROO) agreement differs from this to the extent that the facility is not returned and only the ownership of land vests with the government. A fundamental feature of all the ten types of agreements as outlined above is that the private participant is allowed to collect user levy from the public. In sum, the new KIIFB socialises cost and privatises yield.
K.T. Rammohan is former dean, faculty of social sciences, Mahatma Gandhi University. Email:
rammohankt@gmail.com
Tomorrow:
The burden of debt
