Will KIIFB put large investments on hold this fiscal?

Dr Isaac says Rs20,000 cr ($2.68 bn) earmarked for FY21

THIRUVANANTHAPURAM: It’s double whammy for Kerala Infrastructure Investment Fund Board (KIIFB), which has taken up the tall challenge of developing the state’s infrastructure going beyond the confines of its financial budgets.

On the one hand, the international rating agency, Standard & Poor’s (S&P) has downgraded its issuer credit ratings from ‘BB/B’ to ‘BB-/B’, and on the other, the two anchor funding sources – the fuel cess and the motor vehicle tax (MVT), have shown signs of dwindling.

The Finance Minister Dr Thomas Isaac had stated while presenting the 2020-21 state Budget that KIIFB would be spending about Rs20,000 crore during the current fiscal. But where will KIIFB source the required funds from?

Given the specific nature of the projects undertaken by KIIFB, mostly non-revenue-generating, the debt repayment in a worst case scenario has been designed to be met through the income from the two sources – fuel cess and contribution from MVT – that have been budgeted to be growing by the year.

KIIFB’s sole mandate, as conceived by Dr Isaac, who is also the vice chairman of KIIFB, is to fast-track the state’s infrastructure aspirations without wasting time on budgetary allocations.

The KIIFB theme is more relevant for a state like Kerala that spends almost 70 per cent of its revenues on committed expenses, and has piled up a debt of close to Rs3 lakh crore, roughly 30 per cent of its GSDP.

According to investment bankers, the rating downgrading has literally dealt a body blow to the Board’s dream of tapping the market for its huge fund requirement this fiscal.

“KIIFB is doing a great job by expediting the infrastructure development of the state. Having said that, the speculative grade rating enjoyed by the Board will certainly act as a disincentive to attracting investments from established financial institutions,” said I Unnikrishnan, an investment expert based in Kochi.

The rating downgrade would not only work to the detriment of attracting good investors in the event of a market borrowing exercise, but more damagingly, it will essentially push the cost up, especially for borrowers that carry lower ratings like BB- that are speculative. By ‘definition’, debt instruments from issuers with junk rating are ‘forbidden’ areas for established financial institutions (FIs).

Even with a tad better rating of BB (from both S&P and Fitch) last May, KIIFB reportedly had to do a lot of running around to raise funds through its masala bond.

Though the finance minister Dr Thomas Isaac and the KIIFB top brass kept arguing that the Board didn’t face any difficulties in finding takers for its bond last year, it’s an open secret that KIIFB had to fold up the issue at Rs2150 crore, short of much of it really wanted to raise.

Needless to remind, the [high] price offered to the investors at 9.732 per cent kicked up a lot of dust, within and outside the Kerala Assembly.

KIIFB needs a lot of funds this year as per the investment plans drawn for 2020-21. S&P itself has said, “the state proposes that KIIFB will finance infrastructure projects worth Rs54,400 crore (Rs54.4 billion) over 2017-2024 in Kerala.” [This has been revised to more than Rs57,000 crore by the CM recently].

Moreover, KIIFB has projects worth Rs11,600 crore under construction, and it has tendered additional projects worth about Rs14,100 crore – this has also been revised upwards marginally as of recent estimates.

As said earlier, Dr Thomas had announced during the budget presentation that steps have been completed to spend Rs20,000 crore from KIIFB during 2020-21.

But the moot question is whether KIIFB’s purse is large enough to support such a large spend at this juncture. It’s a plain truth that KIIFB has to inevitably raise funds from market to reach the targeted resources.

The only committed fund is the Government corpus allowed for KIIFB and an incremental portion from motor vehicle tax (MVT) annually with a capping of 50 per cent, plus the fixed amount cess from the sale of each litre of petrol and diesel.

The committed flow of funds obviously will be a trickle compared with the actual requirement of funds. The fact that MVT has not shown any growth in the last two years has cast a pall over the future of fund flow from state coffers.

“This is also reflective of the overall trend of subdued demand of automobiles at all-India level. This will be further compounded due to lockdown and would also depend on the overall policy related to automobile sector including gradual transition to e-vehicles,” the study on impact of COVID on Kerala economy has observed recently in its report.

The new trend in the automobiles sales portents not only the bleak prospects of MVT cash flow going forward, but more seriously, could lead to an essential drop in the cess from the sale of petrol and diesel, the real staple for KIIFB.

What could aggravate the future financing problems of KIIFB is that it has envisaged very few projects that can generate revenue.

KIIFB Fund position

As per a note published in February, 2020, KIIFB has received a corpus fund of Rs2498.42 crore from the government; Rs3651.74 crore from MVT; Rs1921.11 as cess from diesel and petrol.

Additionally, KIIFB has availed Rs1800 crore as term loans out of the Rs2200 crore sanctioned by banks. While the masala bond fetched Rs2150 crore, KSFE Pravasi chitti and Pravsasi Dividend Scheme have together added another little more than Rs100 crore, taking the total to Rs12,323 crore (as of February end).

According to reports and assumptions arrived at from discussions with people, who are in the know of developments at KIIFB, the fund balance remains with KIIFB could be at the most around Rs8000 crore.

Unfortunately, businessbenchmark.news couldn’t confirm the KIIFB numbers in this regard as the officials there never bothered to respond to queries on these issues.

If KIIFB is to spend Rs20,000 crore as Dr Isaac has announced, it has no other options other than going to the market hunting for funds as banks are unlikely to lend large funds at long tenure so as to suit KIIFB’s requirement.

During the run-up to the masala bond issue last year, businessbenchmark.news had expressed its reservation against the prospects of investors putting money in the bond as KIIFB’s issuer rating then was below investment grade at BB (S&P), which has now been further downgraded to BB- along with its Rs5000 crore MTN programme.

 

Rating is the key

It is a known practice that the typical bond investors such as pension funds, sovereign wealth fund (SWFs) and insurance companies keep away from investing in instruments below investment grade – i.e. speculative grade.

Moreover, the finances of Kerala that guarantee all KIIFB borrowings are also not in good shape currently, though more to blame on the COVID 19 outbreak.

Kerala is struggling to make ends meet with the committed expenses alone consuming a big chunk of its revenues and the market borrowing is set to scale new highs after the Union Finance Ministry letting go of the rope by allowing the states to borrow up to five per cent of GSDP for 2020-21against the conventional 3 per cent.

As against a prudent level (as suggested by the NK Singh-led panel) of 20 per cent, Kerala’s debt-to-GSDP ratio has deteriorated in recent years – from 30.2 per cent in FY17 to an estimated 30.8 per cent (budget estimate) in FY20 and this is set to grow further, thanks to the 2 percentage point increase allowed for market borrowing and the imminent drop in GSDP in the current fiscal.

 

 

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