KIIFB as Development Engine of Kerala Draws Mixed Reactions

Kochi: The first edition of ERAM Group presents ‘Destination Kerala CEO Roundtable: The Growth Dialogues’ in FY 2017-18 took place recently where leaders from the banking & financial services industry and academia gathered at the Le Meridien Kochi to deliberate on whether Kerala Infrastructure Investment Fund Board (KIIFB), Finance Minister Dr. Thomas Isaac’s elixir for all fiscal problems facing the State, is in reality, a boon or bane.

At the ERAM Group presents ‘Destination Kerala CEO Roundtable: The Growth Dialogues’ held in Kochi recently, leaders from the banking & financial services industry and academia evaluated the KIIFB-driven development model

The panelist were George Antony, MD, UAE Exchange India; Mathew Vilayil, Director, India Operations, LuLu International Exchange, Tablez The Food Company and Twenty14 Holdings; S R Nair, Founder & Mentor Director, MentorGuru and Adjunct Professor, IIM-K; Shalini Warrier, COO, Federal Bank; Dr. Sunil Puliyakotte, Associate Professor, Rajagiri Centre for Business Studies; Dr. V K Vijayakumar, Investment Strategist, Geojit Financial Services Ltd. and Vivek Krishna Govind, Partner, Varma & Varma Chartered Accountants. The session was moderated by Jose Kunnappally, Chief Editor, Destination Kerala Business Magazine.

KIIFB is the LDF Government’s biggest gamble to date. Is it a revolution or rebellion?

DR. SUNIL PULIYAKOTTE: I am only looking at the government’s endeavour to fund such massive infrastructure projects through unconventional methods and not at its technical feasibility. And my view comes from the fact that the State has substantial fiscal deficit and hence, not in a position to raise any more resources. At the same time, we cannot postpone infrastructure development. I find the attempt and the intent attractive. And if it materialises, if the projects selected are good and if people invest, this looks good to me for the State and its people.

MATHEW VILAYIL: We should not reject anything outright however radical it may be. From the point of view of the NRK investor, they will look at two angles: one is equity/ownership and the other is Return on Investment (RoI). In 2015 March, the RBI had allowed NRIs to invest in chit funds with a specific rider that the proceeds are non-repatriable. NRKs in the US or European nations will find this unpalatable. Only GCC NRKs will be fine to invest in non-repatriable vehicles. The bond structure is still a grey area – most likely it will be a medium term general obligation bond with 5 years lock in, non-repatriable and with government security! I am not sure if investors will take that at face value. The director board has only two politicians and the rest of them are career bureaucrats and domain experts, which is very good. On the whole, if it’s piloted well and run professionally, we should go for it.

DR. V K VIJAYAKUMAR: The government is borrowing Rs. 50 crore daily to pay salaries, pensions and interest. This is not sustainable. If you look at private finances in Kerala, in the last 20 years (1996-2016), the growth rate of Kerala’s economy was better than the national average. If you include remittances, our per capita income would be almost double the per capita income of India. So private finances are in good shape while public finances are in bad shape. And the successive governments are responsible for this mess. I would describe KIIFB not as an innovation but desperation. A scheme with high ambition – raising Rs. 50,000 crore in five years. I am certain the government will not achieve this target. Rs. 12,000 crore from KSFE? For KSFE the money they have by running chitties is the free float. If the government has to raise Rs. 12,000 crore like that, then imagine the huge amount of chitty and subscribers needed to achieve that? It is very unrealistic.

GEORGE ANTONY:The government does not know how to meet its daily expenses. In such a scenario we have to think out of the box. So the FM has taken infrastructure outside the budget into a separate vehicle to ensure focus. Wise decision, I would say. Based on the limited information available, I do not think independent directors of KIIFB have much role in the selection of the projects. Their role is limited to auditing end use of the money. In fact, I think the correction needed is to give the final decision of sanctioning the projects to the independent directors. The guidelines on which KIIFB can take up projects need threadbare clarity.

S R NAIR: I will commend the FM for out-of-the-box thinking. I have a concern around borrowing money and investing it in social welfare projects with no return. We cannot have huge per capita loan riding on every Malayali shoulder. Instead of doing many small projects, may be it is better for KIIFB to look at a handful of large viable projects. I am worried with the intellectual overconfidence surrounding KIIFB. This requires huge amount of planning and discussions. I find haste in their approach. KIIFB needs a lot more of protracted discussions among umpteen stakeholders. Now KIIFB is giving funds for hospital modernisation to INKEL. So what is then the relevance of KHRWS (Kerala Health Research & Welfare Society)? Isn’t it their mandate? Does INKEL have any expertise in healthcare?

SHALINI WARRIER: I am of the view that this is a financial revolution. But there are many a slip between the cup and the lip. KIIFB has the potential to usher in that fiscal transformation. The FM could have done nothing or kept doing the same thing. At least, to be fair, he has attempted something innovative. There is liquidity available especially in Kerala where the banks have low CD ratio and are looking for opportunities for deployment. If the government is well intentioned and has attractive projects, those funds will find their way to these as long as its thought through and developed. I want to give benefit of doubt to the renowned names associated with KIIFB, their personal credibility is on the line and I don’t think they would risk it.

VIVEK KRISHNA GOVIND: As a citizen of the State, I am for it. But when I wear the hat of a finance person, I will have to go with Dr. Vijayakumar. It doesn’t seem to have any financial viability. If you borrow Rs. 12,000 crore, you have to pay Rs. 1200 crore interest on a 10 per cent slab over and above the principal. No two ways about it. Where is that money going to come from? Smart classrooms, bridges, roads etc. cannot give you tangible returns. People don’t invest in KIIFB thinking it’s CSR. They need returns. And I don’t see clarity there. Even if they had clearly demarcated funds share for revenue generating and non-revenue generating projects, and gone forward it would have inspired confidence.

Kerala’s finances are in very bad shape that the government cannot borrow a penny more even if it is for incurring capex. Does the FM have any other option?

DR. VIJAYAKUMAR: Ideally a government should fund its capital expenditure through its revenue surplus. This is not a pipe dream. Neighbouring Karnataka has a revenue surplus. Kerala is a remittance-driven economy. Our agriculture or manufacturing as a percentage of State GDP is negligible. It is services-driven and within that its mostly hotels, restaurants etc. all driven again by remittances. Now there is a general acceptance that the price of crude will not go over $55. The break even for shale oil is only $45. This is impacting remittances already as GCC economies are under pressure. Our government should cut down on expenses. We cannot afford pay revision for employees every five years. The union government does it only once in 10 years. Cutting expenses is equally important like generating income.

SHALINI: I honestly think not many options are available to the FM. Having said that whatever Dr. Vijayakumar said, one is not in lieu of the other. If you have to raise funding, and there are no other options, then go for it but it doesn’t preclude the other fiscally responsible behaviours – limited bureaucracy, controlled pension costs, reduced administrative overlays. Success of KIIFB is dependent on getting the other part right.

MATHEW: As Shalini said banks have very low CD ratio and are happy to lend. But why are banks not able to find bankable projects? Government has to seriously think about how do you make projects lendable? Detailed viability studies for projects are a must and this should be undertaken involving professionals.

DR. SUNIL: Political will is needed to control costs. For example, in the education sector, in many countries instead of funding schools and colleges, governments have started funding the students. But here we are still funding the institutions and its political.

Budget to budget, the revenue deficit has only increased. Should not the focus of the government be on addressing revenue deficit and enhancing efficiency of tax collection? Is this easier said than done?

DR. VIJAYAKUMAR: GST will increase compliance and the transfers from central to state governments will also increase. There is now a general feeling that punishment for tax evasion is going to be heavy and the incentive for tax compliance very compelling. So the financial culture of India is transforming and that was kick started by Demonetisation.

VIVEK: In the last few months post Demonetisation, our SME clients have started asking us “how to comply?” There is a general feel good factor towards compliance. Clients have become very receptive towards compliance. But still collection of local taxes is so bad – building tax, land tax, corporation trade license fee etc. require complete overhaul.

NAIR: The best way is to marginally increase building and land tax at least in urban areas because today it is so low and the society can afford to pay more. This can enhance tax receipts. But they will not touch it because it will not be a popular decision.

Is KIIFB model of raising capital sabotaging a proven method like the Budget and circumventing the democratic institution called the State Legislature?

DR. SUNIL: It is not circumventing. In fact, there are quasi-government bodies, KIIFB is in the same category, which have taken this route of raising capital from public through structured bonds but they have done this to the tune of maybe Rs. 500 crore – Rs. 1000 crore and not to this magnitude. It is the scale of Rs. 50,000 crore that’s scary.

NAIR: Even within the government, many MLAs are not very bullish about KIIFB. There are silent critics also. Even the CM took time to warm up to it! We should really debate this out with policy makers, politicians, social influencers, common man, and maybe keep intelligentsia out as the government may not like their views.

SHALINI: I think when you take public money directly, it also fosters greater accountability, maybe I am being more moralistic here. So it is possible KIIFB ushers in greater accountability, as you are not borrowing from the RBI.

VIVEK: If the government comes out with clear-cut targets for disbursement and performance metrics, then like CIAL (Cochin International Airport Limited) this will also work. If you look at CIAL, initially there were hardly any takers except few NRKs who invested looking at it as philanthropy. Later, when CIAL came up with a clear sensible document, many people invested and CIAL has not let anyone down. Similarly, if the government can say KIIFB will collect Rs. 50,000 crore and this is the financial projection, revenue forecast and payback calendar, and stick to it, then it will make sense to a lot of NRK investors.

In the first six months since rolling out KIIFB, 55 projects worth Rs. 4000 crore have been approved for funding. Considering the one-year gestation period for even Rs. 50-lakh projects, the traction achieved in just six months looks promising.

DR. VIJAYAKUMAR: If you look at the last budget, KIIFB is all over the place. I am all for social projects, but don’t fund it from NRK money. Kerala cannot sustain its last 20 years’ growth rate because the remittances will fall. Venezuela is number one in the world in misery index. Their exchange value was Rs. 8 four years back. Now it is Rs. 760. For inflation they are number 1 in the world at 360 per cent. Why because they got revenue from crude and spent it all on welfare. When crude prices fell, they got into trouble because everything in that country is imported and nothing is manufactured locally. Kerala is very vulnerable. I am not saying we will become like Venezuela. No other state is as vulnerable as Kerala.

How will the government pay back if much of the funds will be used for non-income generating welfare projects or strengthening PSUs which have been bleeding cash?

GEORGE: For the Malayalis abroad, KSFE is a brand with a lot of trust. 95 per cent of people go with trust. And KIIFB is for the betterment of Kerala. So there is emotional connect there as well. So they will spare some money. That’s all about it. When CIAL came, all Malayalis paid Rs. 5000. UAE Exchange was promoting it. Every customer who came to us, we showed them the offer document and they subscribed to it.

SHALINI: When Resurgent India Bonds and India Millennium Deposits came also, due to emotional connect of NRIs in the GCC with their homeland, they subscribed in large numbers. Some amount of gamble they will do. I think first few tranches of KIIFB will run successfully on emotional connect and trust. But after that unless clear information and strategy are in place with convincing RoI, the funding will not come through. As I said, liquidity is there and yield from alternate investments like bank deposits are going down, so there is an opportunity.

VIVEK: My fear is KIIFB will ruin the credibility of KSFE a highly reputed and trustworthy brand for millions of Malayalis and an organisation running very successfully. Look at the West Bengal scenario with chit funds and how it is impacting their economy. If KSFE crashes, our economy also will be in tatters.

KIIFB calls for developing mega projects involving detailed project studies by all government departments. Can such complex projects be developed by our bureaucracy?
NAIR: I would say engage the services of the Big 4 or strategic consulting firms of similar stature.

SHALINI: There are smart bureaucrats. Support them with expertise from outside like the Big 4 and transfer the knowledge and processes over a period of time so there are no forever dependencies.

Does Rs. 50,000 crore look feasible? What if they cannot meet the target?

DR. SUNIL: KIIFB needs projects to fund and I have reservations on how the projects are created, selected and funded. That apart, another concern is the fact that it is very difficult for projects to come up in Kerala. Land acquisition is a huge task. In Kerala how can income generating mega-projects take off in five years? If that is the case, do we run into the possibility of a successive government deploying the money into social welfare projects?

NAIR: We see that every five years when the government changes, there is a total rework of policies and strategies. Will that happen to KIIFB also? Look at Obamacare. Trump has quashed it. What if Thomas Isaac’s successor finds KIIFB a mega gamble not worth taking forward? Then what happens to these multi-crore projects which will be half way through? So we need to plan it out well and build understanding and consensus across the political spectrum.

DR. VIJAYAKUMAR: In the short to medium term, the price of crude is going to be determined by shale gas and in the long term by Tesla and electric cars. Lithium Ion batteries today have a range of 600 km and once scale is achieved their prices will drop. So the price of crude is certain to keep going down impacting GCC economies. Hence raising Rs. 50,000 crore is not going to be possible. Projecting revenue based on boom period receipts of the past, which is what the FM is doing, is dangerous.

DR. SUNIL: It’s not just the NRK funding that will be difficult to cough up, but the calculation of revenue from petrol cess and motor vehicle tax also will be impacted by the situation in GCC. If remittances fall, the sales volume of cars will also fall, overall consumption will fall, taxes will drop.

The CEO Roundtable concluded that while we want KIIFB to succeed, we also believe that deeper thinking and wider consultation are required to bring clarity to the policies and processes so that the entire idea is economically feasible and interests of investors are safeguarded.