For a state with struggling finances, this could be highly reassuring. Committed government funds (a part of motor vehicle tax and the whole of petrol cess) alone would be enough to pay off the galactic debts of Kerala Infrastructure Investment Fund Board (KIIFB).
No additional budgetary support or even tolls or rentals or levies would be necessary to keep the KIIFB afloat. This was stated by Finance Minister T M Thomas Isaac during an exclusive chat with Onmanorama.
“Even if recession causes a fall in revenue from motor vehicle taxes or petrol cess, it will not matter at all,” Isaac said.
Isaac says there is more room for manoeuvre than what the KIIFB model suggests. “In fact, 25 per cent of the funding is based on revenue model. KSEB, for instance, is taking a Rs 5000-crore loan for Transgrid. It will be paid back. The money spent on industrial parks will be returned. K-FON (Kerala Fibre Optic Network project that promises 100 per cent internet connectivity for Kerala) would pay back. Therefore our proposition is much more viable,” he said and added: “It is like a virtual sinking fund. It is not a ponzi game where you borrow and then you borrow to pay back.”
Dream repayment schedule
The repayment schedule drawn up by KIIFB looks like a dream, a boon. According to this, an investment of Rs 50,000 crore in five years will necessitate repayment of Rs 94,119 crore. But even after the last penny of debt is paid off, the schedule shows that KIIFB will still have surplus money in its kitty.
Onmanorama told Isaac that it was too good to be true. He smiled and said it was even better. “Our non-revenue model was very conservative in assuming 9.5 per cent as the average interest. This model was presented in the Assembly at the inception of the programme. Since then we have fine-tuned the asset-liability matching. What will be our borrowing, our payment schedule, all of this have been carefully calibrated,” the finance minister said.
“We don't take all the loans together. We get into agreements with banks and other institutions and we will borrow only a token to begin with. All the Rs 50,000 crore is not front-loaded, it is spread out,” Isaac said.
Expenditure side
KIIFB's future expenditure needs have been calculated assuming that the average interest rate for the money borrowed would be a prohibitive 9.5 per cent.
Here is the outgo pattern till 2020-21, the last fiscal of the Pinarayi Vijayan government.
2017-18: borrowing – Rs 5000 crore; annual interest – Rs 1345 crore; total outgo – Rs 9412 crore.
2018-19: borrowing - Rs 10,000 crore; the annual interest - Rs 2689 crore; total outgo - Rs 18,824 crore.
2019-20: borrowing - Rs 20,000 crore; annual interest - Rs 5378 crore; total outgo - Rs 37,647 crore.
2020-21: borrowing – Rs 15,000 crore; annual interest – Rs 4034 crore; total outgo – Rs 28,236 crore.
All this adds up to Rs 94,119 crore. In short, a debt of Rs 50,000 crore will necessitate a repayment of Rs 94,119 crore by 2031-32, the fiscal the repayment is scheduled to end.
Revenue side
At the moment, KIIFB has Rs 1643 crore (from motor vehicle tax and petrol cess). After taking into account the petrol cess and the share of motor vehicle cess that will flow to KIIFB and the interest that will accrue, the KIIFB will have Rs 3974 crore in its kitty by 2021-22.
By 2027-28, it will be Rs 8348 crore. And finally, in the last repayment year of 2031-32, the KIIFB will have Rs 15,116 crore.
All the yearly amount in KIIFB's coffers are added (from 2016-17, when the government had begun diverting petrol cess and motor vehicle tax to the KIIFB, to the final repayment year of 2031-32), KIIFB will be in possession of Rs 94,980 crore, funds more than enough to take care of its expenditure (Rs 94,119 crore).
Failed assumptions
What is of significance here is that two of Isaac's assumptions have already gone wrong. One, he assumed motor vehicle taxes to grow by 15 per cent per annum. It grew by 17 per cent in 2017-18. Thereafter it fell to 11 per cent. Now, the collection is even worse.
Two, he said the repayment needs to start only after three or five years. But the interest for 'masala bonds' had to be paid right away. KIIFB has to pay Rs 1045 crore in five years as interest alone, starting now.
Isaac said these had still not upset his calculations. “We have calibrated our fund flows accordingly. Short term disturbances will not upset the model, which experts have said is excellent,” Isaac said.
Even then, there is the pressure of interest rate. What Isaac thought would be extreme, an interest of 9.5 per cent, now looks like the norm. The masala bonds have an interest rate of 9.72 per cent.
But Isaac said the average interest rate would come to only around 8-plus. “We have loans of 9.5 per cent but we also have private placement by KSFE at 7 per cent. So the average will be somewhere in between,” he said.
Masala bond confusion
There were other reasons, too, to suspect that the KIIFB model was not as robust as Isaac would want it to seem.
Here is what the circular for 'masala bonds' says: “such amounts will not be sufficient to satisfy the entire obligations in respect of the notes.” It further states that the government would have to make “appropriate alternative budgetary allocations”, meaning the government would have to provide additional budgetary support.
Isaac categorically says no. “Nothing more than what is legally mandated needs to be given to KIIFB. Whatever mismatch can occur at times can be adjusted. Overall the framework is very robust,” he said.
