Finance minister T M Thomas Isaac conceded on Tuesday that the CAG report he had found fault with was not a "draft" but the final one. Nonetheless, he said his earlier insistence that it was a draft was based on his "absolute conviction" that it was indeed a draft.

"Never before has a final report contained anything that was not discussed with the state government. How can I believe that certain observations that were not aired even during the exit meeting with the CAG would be included in the final report," the finance minister told reporters in Alappuzha on Tuesday. 

He said the report was given to the KIIFB to prepare a reply thinking it was only a draft. "It is only in the draft that new references are made. If it is a final one then it is unprecedented. How can a final report be prepared without discussing its points with the state," the minister said. 

Isaac said an additional four pages, mostly about the constitutionality of floating masala bonds outside the country, were included in the final report only after the draft was sent to Delhi. He said even the CAG (Kerala) was unaware of the additions.

Even while agreeing that there was a breach of privilege in disclosing the contents of a CAG report that should have been kept confidential till the members of the Legislature had seen it, Isaac said the larger issue was that a big political conspiracy was underway to stall Kerala's development. He said he would deal with the “procedural issues” inside the Assembly.

Now that it was clear that the final report itself was out, Isaac revealed more details about the contents.

CAG's worries

He said the CAG had raised three issues. One, the loans taken by KIIFB were off-budget loans. 

Two, the loans taken by KIIFB are as good as state loans and would therefore create direct liabilities for the state. As a consequence, KIIFB has violated article 293(1) of the Constitution that makes central approval mandatory for any loans taken by a state.

Three, foreign loans were in the central list and therefore the state had bypassed the central list by mobilising money through floating 'masala bonds' in the London Stock Exchange.

On-budget projects

Isaac said the KIIFB projects were not "off-budget" but "on-budget" ones. "It is just that the loan is availed of by a separate agency, in this case, KIIFB. This is to avoid the borrowing ceiling imposed on a state government. But the KIIFB is given money for it repayment needs from the Budget, 50 per cent of the annual motor vehicles tax and petrol cess are regularly transferred to KIIFB. And so, KIIFB projects are on-budget ones," Isaac said.

There will be no liability

The finance minister said a lack of understanding of the KIIFB model would have prompted the CAG to raise the second issue, that the KIIFB loans are a direct liability for the state. 

He said when the CAG conducted its audit, KIIFB had a liability of Rs 3200 crore but the assets were higher at Rs 5700 crore. Then, the CAG argument was that when KIIFB takes up more projects in future it would impose direct liability on the state.

Isaac said it would not. "KIIFB follows the annuity model where payments are made over 15 to 20 years and the project bidders quote a tender amount taking into account the interest for the late payment," Isaac said. He said major projects like Capital Road Improvement Project in Thiruvananthapuram and Metro Rail project were based on the annuity model.

"Growing annuity model" is how Isaac called the KIIFB model. This is because th flow from the government (in the form of motor vehicle taxes and petrol cess) to the KIIFB would grow every year. 

Further, Isaac said the KIIFB works on an asset-liability management system that would ensure that at no point of time the entity's liabilities would be more than its assets.

Spicing up KIIFB for world market

About the unconstitutionality of 'masala bonds', Isaac said KIIFB was a "corporate body' and therefore was not subjected to the restrictions imposed on a state. 

He said 'masala bonds' were floated because he international visibility it would offer KIIFB was very high. "It would make it easier for KIIFB to secure future loans if it had such visibility and rating. This would show up KIIFB as a financial entity that can operate in any financial market," Isaac said.