The board which was set up to bring in investments to Kerala is now being seen as a white elephant
When opposition parties in Kerala are demanding a comprehensive Comptroller and Auditor General (CAG) audit into the Kerala Infrastructure Investment Fund Board (KIIFB), Kerala finance minister TM Thomas Isaac has declared that auditing by CAG is welcome and the board is a statutory corporate body.
A row over seeking a comprehensive CAG audit into KIIFB has been going on in Kerala for the last few months and opposition parties are staging back-to-back walkouts from the Assembly.
While Kerala finance minister Thomas Isaac repeatedly says that a CAG audit is allowed by Section 14(1), opposition and financial analysts expressed their surprise over why an audit under Section 20 is being denied.
Last Tuesday, denying a comprehensive audit into KIIFB, the Kerala finance minister gave a written reply in the Assembly that KIIFB formed under 1999 Act is a statutory corporate body.
A statutory corporation is a corporation set up by the state, which might be ordinary companies/corporations owned by a government with or without other shareholders, or they might be a body without shareholders that is controlled by national or sub-national government to the extent provided for in the creating legislation.
Life Insurance Corporation, Food Corporation of India and Airport Authority of India are a few examples of statutory corporations in India.
According to Kerala finance minister, the CAG is free to audit all receipts and expenditures of KIIFB, including those related to Masala Bond, “as the authority is empowered to do so under Section 14(1) of the CAG Act”.
“The CAG has the power to audit all the accounts of KIIFB under Section 14(1), while Section 14(2) empowers the authority to approach the government if it finds scope for auditing beyond Section 14(1),” the minister said.
Pointing out that an audit under Section 20 of the Act will be applicable only when CAG is not vested with the audit of an institution under any of the clauses in the Act, the Kerala finance minister said that none of the public sector companies or institutions in Kerala is being subjected to CAG audit under Section 20.
The CAG had asked the government permission to audit KIIFB under Section 20 (2) of the Comptroller and Auditor General’s (duties powers and conditions of service) Act, 1971, as its auditing scope is limited under the Section 14 of the Act.
In simple words, through CAG’s Section 14, audit cannot be done on fund raised from the market. KIIFB is raising funds from market other than government grants.
L Narayan, a financial analyst, said that Kerala government is trying to hoodwink the common man using this logic.
“Now by revealing that the KIIFB is a statutory corporation, the government is trying to strengthen its stance that CAG cannot or doesn’t have to do a comprehensive audit of the board under Section 20,” Narayan said.
Pointing at corruption allegations raised by the opposition parties, Narayan said that only a CAG audit can ensure transparency.
Recently, Opposition leader Ramesh Chennithala had approached the Governor seeking permission to prosecute the chief minister and the power minister in the alleged Transgrid scam which was carried out with KIIFB funds.
In a letter to Governor Arif Mohammad Khan, Chennithala sought clearance to prosecute chief minister Pinarayi Vijayan, who is also the chairman of KIIFB, power minister MM Mani and the KSEB (Kerala State Electricity Board) chairman in the alleged corruption to the tune of Rs 261 crore, in connection with the Transgrid project.
He had approached the Governor as his clearance is needed to prosecute ministers as per the Anti-Corruption Act.
A few months back, Chennithala had alleged that KIIFB had engaged a company called Terrenus Consulting for inspecting its projects and an amount of Rs 10 crore was transferred to its account from KIIFB.
Interestingly, this has happened when KIIFB has an appraisal division headed by a chief project examiner with a salary of Rs 2.5 lakh per month.
However, the Kerala finance minister had denied the allegations raised by the opposition leader in the Assembly itself.
“Opposition was deliberately creating an impression that the government was against the CAG. The government has nothing to hide and it is open to any kind of auditing by any competent authority,” the Kerala finance minister had said.
Joseph C Mathew, a former IT advisor to the Kerala government and a political observer, said that it is surprising to learn that the government is objecting to a CAG audit in KIIFB where there is 100% government funding.
“People’s Democracy, the CPM mouthpiece in its editorial in 2014, had hailed the party move in parliament for an amendment of Lokpal Bill and to include private companies and public-private-partnership (PPP) companies under the ambit of Lokpal. Now the same CPM in Kerala is denying an audit by the CAG. The CPM has to answer this politically,” Joseph added.
In the People’s Democracy editorial titled Stop Private Loot of Public Resources, the CPM had said that the power of the CAG to audit private firms using public resources need not be seen as an interference in the functioning of any private firm.
Opposition parties say that a routine CAG audit under section 14(1) of the C&AG (Duties, Powers and Conditions of Service) Act (DPC Act) will not be enough and to maintain transparency, a “comprehensive” audit under section 20 (2) of the Act is required.
CAG’s Section 14 (1) empowers the authority to audit any body or authority “substantially financed by grants or loans from the Consolidated Fund of India or of any State.”
And Section 20(2) gives the CAG the right to “propose” the audit of a body or authority substantially funded by the government but whose accounts are not entrusted to it by law. Whether to grant the CAG this right is, however, left to the governor's discretion.
According to Ramesh Chennithala, the Opposition leader, auditing only government funds is not going to help because, there are funds that are coming to the KIIFB from non-government sources, like for instance the 'masala bonds'.
“To audit these accounts, a CAG audit under section 20 (2) is necessary,” he said.
Meanwhile, VD Sateeshan, a senior Congress leader, said that the government is hesitating to do an audit under Section 20 (2) because an audit certificate (a document that will have the results of the audit) will be handed out by the CAG.
“They are not interested in it. There is no audit certificate under Section 14(1),” Sateeshan added.
KIIFB is a Kerala government-owned financial institution to mobilise funds for infrastructure development from outside the state revenue.
KIIFB came into existence in 1999 under the Kerala Infrastructure Investment Fund Act 1999 (Act 4 of 2000) to manage the Kerala Infrastructure Investment Fund.
The main intention of the fund was to provide investment for critical and large infrastructure projects in Kerala.
In 2016, the current Left government, initiated modification of the Act and Scheme though an Ordinance. And with the new strategy and structure, KIIFB aims to dynamically mobilise funds for the infrastructure development of Kerala.
KIIFB is aiming at an investment of Rs 50,000 crore and so far, it has approved projects worth approximately Rs 45,000 crore.
A few major projects are Kerala Fibre Optic Network, Petrochemical and Pharma Park in Kochi, Coastal and Hill Highway, Transgrid 2.0, Life Science Park in Thiruvananthapuram and Hi-Tech School Programme.
However, last Tuesday, Kerala’s finance minister said that the CAG can never become the statutory auditor of KIIFB.
He said KIIFB had to provide audited reports to the investors in a timely manner and hence an in-house audit arrangement vetted by the legislative assembly was better.
Isaac said that both the in-house audit and the CAG audit could co-exist.
Additionally, the KIIFB has a Fund Trustee Advisory Commission (FTAC), headed by Vinod Rai – former CAG head – which would ensure proper use of resources under the Board.
The FTAC was created in 2016 as an oversight mechanism for ensuring transparency in functioning of the Board.
The FTAC is statutory requirement to assess fund utilisation and repayment capability of KIIFB and submit a Fidelity Certificate, twice a year, certifying that the funds have been used appropriately and the Board has adequate resources for meeting debt obligations.
In an interview with Manorama Online, the Kerala finance minister had said that the internal audit reports are submitted to the FTAC, which would be vetted and placed before the Kerala Assembly.
“Which other institution in Kerala or outside has such an elaborate mechanism of checks and balances in auditing,” Isaac told Manorama Online.
However, Roy Mathew, a political commentator and senior journalist, raised his doubts over the FTAC audit.
“FTAC is an internal system set up by KIIFB itself. If we have a CAG Section 20 audit, then we can expect transparency in the fund use. In CAG Section 14, the grant-expenditure proportion is considered. However, in Section 20, the grant-expenditure proportion is not a criterion. This gives CAG more auditing scope and we should not forget the fact that CAG is a Constitutional body,” Roy said.
Narayan said that KIIFB should be definitely audited under Section 20 as taxpayers are bound to return the loans which the Board is taking.
“KIIFB is taking loans through bonds from outside India, banks and other agencies. It is not a small amount too. We all know it is Rs 50,000 crore, a mind-boggling figure as the minister said. So it is a loan. And who is going to repay it? It is us only. So, when taxpayer is going to repay the loan, why can’t it be audited?” the financial analyst asked.
In August 2019, when S&P rated KIIFB and gave 'BB' ratings, the rating agency said that their ratings reflect on their expectation that the likelihood of support to KIIFB from the government of Kerala (BB/Stable/B) is almost certain, based on KIIFB's critical role and integral link to the state.
“The ratings on KIIFB mirror the credit ratings on the Indian state of Kerala. We do not assess the entity's stand-alone credit profile because that is not a rating driver, given the almost certain likelihood of extraordinary support from the state. In addition, we do not believe government support is subject to transition risk. KIIFB executes strategic governmental policies and is a non-severable arm of the Kerala state government,” the report added.
Even ratings agency Fitch, in August, said that the KIIFB ratings are equalised with Kerala.
“We have deemed KIIFB a government-related entity (GRE) and have therefore equalised its ratings with that of the State of Kerala (BB/Stable). The rating equalisation primarily reflects KIIFB's special legal status and the local government's unconditional and irrevocable guarantee on the company's payment obligations, as well as the financial impact on Kerala's creditworthiness if KIIFB defaults,” the report added.
However, the rating agency adds that the state's ratings are partially undermined by its limited fiscal flexibility, reflected in a high level of committed expenditure and reliance on debt-funded operating and capital expenditure.
In its report, the Fitch says that KIIFB has a special legal status whereby its liabilities are automatically transferred to the state in a default.
So far, KIIFB has raised Rs 2150 crore from the international market through bonds at an interest rate of 9.723%.
It has also made long-term borrowings from NABARD (National Bank for Agriculture and Rural Development) to the tune of Rs 565 crore at a rate of 9.3%.
Other lenders are State Bank of India (Rs 1000 crore at 9.15%), Indian Bank (Rs 500 crore at 9.15%) and Union Bank of India (Rs 500 crore at 8.95%).
PG Sunil Kumar, a finance analyst, said that KIIFB was going to lead the taxpayer into a definite financial crisis.
“Assessing that Kerala lags on investing in capital infrastructure, for around Rs 25,000 crore to Rs 30,000 crore, KIIFB was created. Now how are we going to repay? Government says that it will come from motor vehicle tax and from petrol cess. Basically this a state sovereign fund,” Sunil Kumar said.
“Though there isn’t enough data to project the growth of these streams till 2024 (when the bonds will mature), at the end of the issue, KIIFB’s obligation will total Rs 3420 crore. This is more than three times the revenue in 2017-18,” Sunil Kumar added.
Meanwhile, Narayan added that KIIFB loans are going to become a burden for common man.
“Already Kerala is falling into severe financial trouble with a revenue deficit climbing up to more than Rs 19,000 crore,” Narayan added.
The revenue deficit of Kerala in the revised estimates for 2018-19 was Rs 13,027 crore, estimated at Rs 8770 crore in 2019-20.
However, net public debt this year is Rs 19,191 crore and expected to reach Rs 23,235 crore in 2019-20.