Not by masala alone

When Chief Minister Pinarayi Vijayan rang the opening bell of London Stock Exchange on May 18, 2019, it not only paved a new way for the state to achieve its long pending infrastructural dreams but also cross a remarkable milestone in its financial journey.  A competent government will give more importance to infrastructure creation rather than giving subsidies and sops. The steps taken by the Kerala government for raising capital funds through Masala Bonds for developing the infrastructural facilities of the state is towards that direction.

Investment in infrastructure will attract quality investments and thereby increase the gross state domestic product (GSDP) and create employment opportunities. As the government has already reached the permissible limits to generate capital funds from the available local sources, it had adopted this unconventional method. The insight and vision of the government machinery to explore the untapped potential of foreign bond market is unique and is to be appreciated. The government has achieved a new level of compliance standards in the process of raising funds from international markets,  which is difficult even for big corporates. The new Kerala model fund raising can be adopted by other states to improve their infrastructural facilities.

The Kerala infrastructure Investment Fund Board (KIIFB) is a body incorporated solely for the purpose of funding infrastructure projects in Kerala and to engage in the activities incidental to or related to the funding of infrastructure projects in the state. Kerala being a very small state with limited revenue sources has a budget with revenue deficit and fiscal deficit.  Kerala's primary source of revenues is own taxes and non-tax resources.  In addition to that the state is getting the shares of taxes levied by the Central government and also grants and other financial aid. Kerala has a revenue deficit of Rs 13,026.98 crore and a fiscal deficit of Rs 23,686.44 crore, representing 1.68 per cent and 3.06 per cent of its GSDP for fiscal 2019.  With such kind of a deficit budget it is difficult for the government to fund the ever growing infrastructural demands.

As Kerala's economy is largely driven by service sector which includes trade, tourism, real estate, communication etc, it requires good connectivity and allied infrastructure to create better employment opportunities. KIIFB has been formed to meet the financial requirement to build the required infrastructure to cater the growth of the state.

As per the note offering circular filed with London Stock Exchange (LSE) to issue Masala Bonds, there is a fund requirement of Rs 50000 crore in next four years to realise the major infrastructural initiatives approved by KIIFB. But the fund received by KIIFB up to December 31, 2018 was Rs 6008.12 crore which is not enough to meet its requirements. The government had partly contributed the said amount out of the motor vehicle tax and cess.

It has now successfully raised Rs 2150 Crores through synthetic INR notes (Masala Bonds) senior secured. Masala Bonds are bonds issued outside India but denominated in Indian rupee. The term Masala Bond was used by International Financial Corporation (IFC) to popularise Indian economy among foreign nations. The objective of Masala Bonds is to fund infrastructural projects in India and thereby boost the internal growth of the nation. The foreign investors who want to invest in Indian assets but constrained to invest directly can invest in these bonds.  

Though fund raising through International bonds is very popular in corporate world, none of the government bodies in India had ever shown the courage to explore the unlimited opportunities. This mode of fund raising is the first ever state-level initiative from India and the largest dual currency issue backed by a sovereign backed entity from entire emerging markets and Asia.

Though the steps taken by KIIFB to raise funds through Masala Bonds are revolutionary, we have to keep in mind that there is no free lunch anywhere in this world. The fund raised through Masala Bonds carry an interest of 9.723 per cent and it is secured by way of first and exclusive charge over the Debt Service Reserve Account and the Sinking Fund Account. The government of Kerala had given unconditional and irrevocable guarantee for the amount which is maturing on March 29, 2024.  As the Bond has a fixed repayment tenure of 5 years along with interest, it casts a heavy responsibility on the government of Kerala, which is the guarantor for the loan, to ensure the prompt repayment of the amount.

It may be noted that at present, the total debt of the State is 30.49 per cent of the GSDP. As per the third schedule of the Kerala Infrastructure Investment Fund (Amendment) Act, 2016, the infrastructure projects which are in public private partnership (PPP) model are to be carried out in the forms such as Build-Operate-and-Transfer (BOT), Build-Own-and-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Build-Transfer-and-Operate (BTO) and Design-Build-Finance-Operate-Transfer (DBFOT). All these models enable the private participants to collect user fees. There will be a minimum 26 per cent government holdings in the project and the rest will be held by the private investor. As the bonds and other funds have to be repaid along with interest and to make the project viable, the government will be compelled to collect the user fees in stricter manner even if the project is fully in the public sector. This demands for the implementation of good corporate governance system in the projects to ensure proper utilisat
ion of the funds and to ensure adequate return on investment. Most of the state owned public sector undertakings and projects in Kerala at present are being operated in a very unprofessional manner. The poor management of the public infrastructure has affected the financial performance of many of such institutions and a handful of them are struggling to pay even the salaries. The frequent change at the top level of management, politically influenced recruitment, deputation of staff who have no sectoral knowledge etc. are also adding fuel to the downfall.  KSRTC is a classic example for the lethargic management system. When the government is creating infrastructure using the fund raised through bond markets, it does not have the luxury to leave the management of such projects into unprofessional hands. The government will have to plan for an excellent management system with proper accountability on managerial personnel to ensure the timely execution of the projects and ensure return on investment.

It will also have to thoughtfully plan and install a professional and independent management team in those projects. This will lead to more accountability and ensure proper governance systems. If the government fails to convert this massive infrastructure investment model into a self-sustainable project the same will further increase the total debt of the state and thereby further widening the fiscal deficit.

The writer is a company secretary and insolvency professional and can be reached at bijoy@artismc.com