Irrigation scheme opens floodgates of money for few

State’s assurance to repay the irrigation corporation’s loans suited contractors, politicians and middlemen. MKVDC, where Avinash Bhosale was a dominant presence, was the first such experiment. The modus operandi yielded a windfall for all, except the taxpayer

Avinash Bhosale’s rise in the murky world of government contractors is the stuff dreams are made of. From a works contractor owning an Ambassador, to an ‘operator’ with a fleet of foreign cars within a decade, his climb was assured once he started pitching for irrigation works. Infrastructure contracts don’t get bigger than they do in the irrigation and public works departments.

Sources say Bhosale took full advantage of the ingenious model of off-budget borrowings, put into place by the irrigation department in 1996. It was meant to bypass the strait-jacketed borrowing structure laid down for state governments. To a great extent, this modus operandi was responsible for Maharashtra’s fast decline into debt, experts say.

How it worked: There are only two ways a state government can borrow money — open market borrowings, which are fixed by the Centre and RBI, or negotiating loans with financial institutions. Both offer limited funding and consequently limited scope to make money.

But a public sector unit can borrow from the market. Its borrowings, determined on the basis of the project’s viability, are entitled to a government guarantee. As irrigation projects involve a virtually free commodity like water and are meant for farmers, they are not revenue-rich and not popular with lenders. Negotiated loans therefore are difficult.

In 1996, the irrigation department decided to launch a special purpose vehicle to access big money from the market. But, as irrigation projects usually do not pay, they decided to offer not just a government guarantee (which would come by default for a PSU project) but a tripartite agreement between the government, lender, and the PSU. In this deal, the government promised to repay the loans.

By creating the illusion of a PSU, the government raised the irrigation budget ten-fold and the irrigation contractors came into business.

As Maharashtra was a revenue-surplus state then, the government’s backing got the newly-formed PSU — Maharashtra Krishna Valley Development Corporation (MKVDC) — top rating from credit rating agencies; and financial institutions and banks readily plumped for its bonds.

The bonds came with a coupon rate (interest) of 17.5 per cent against the prevailing interest rate of 14-15 per cent. But there was a small hitch — the entire operation was unconstitutional. Sources say the ‘agreement’ violated Article 293 (3) of the Constitution, which requires states to obtain permission from the Centre for all its borrowings — as long as it was in debt to the Centre. And, the Centre was never consulted. The PSU facade came in handy. Within Mantralaya circles, the resistance to the state government’s assurance of repayment was countered by the argument that the loans could be serviced by a budgetary allocation of Rs500 crore made for irrigation projects every year. The target, as set by the proponents of the scheme, was raising Rs5,000 crore for irrigation works every year, taking the debt payout to almost Rs400 crore every year. The argument ran that this amount was well within budgetary limits.

Around this time, Avinash Bhosale was a nobody, but had good contacts in every party. Along with a bright executive from a foreign financial institution, which picked up bonds floated by MKVDC in bulk, he rode his way to wealth.

Why this was wrong: This new stream of funding for infrastructure was, in effect, burdensome — while negotiated loans had a long tenure of 12-15 years, the private placements made for special ventures like MKVDC had tenures of five to seven years. This meant the loans had to be repaid faster.

Besides, the debt came at a price for the tax payer. By promising to pay off loans, raised by a PSU from the state exchequer, the government was committing future tax payers to projects that could be unviable, unnecessary and unaccountable.

Though the debt servicing was to be done through budgeted outlays for irrigation, it exceeded the outlays in a few years. The government was forced to stave off default, even at the cost of turning state finances topsy turvy.

Projects were undertaken across the state because of political compulsions and for a prompt share in the pie. “Each time a project was approved, 10 per cent was paid on the spot to politicians, officials, middlemen,” says an official. “It didn’t matter if the projects stayed incomplete or if funding dried up thereafter.” Soon, we had large projects that were partially executed, while taxes were ploughed into repaying huge loans. The net result was an ever-accumulating debt and contractors becoming rich at the cost of the tax payer.

Contractors made a killing: MKVDC’s success inspired similar ventures, though Bhosale remained active in Krishna valley. About 10 to 30 per cent was believed to be the outgo each time a project was approved — the middleman got 1-2 per cent of the project cost and the officials and politicians in the approval business lined their pockets. Cost escalations entailed another windfall.

Centre puts a stop to it: The contractor raj ended when the state started defaulting on its dues, as galloping payouts and the Fifth Pay Commission put a strain on liquidity. The lenders blocked funds and contractors kept the project hanging. And the Centre in September 2001 directed the states not to give guarantees for debt servicing without first obtaining its permission.

By that time, according to a government document, the state’s debt stood at Rs12,252 crore and interest payout on these PSUs’ accounts was Rs1,405 crore. As it records, “These repayments are so large that they cannot be honoured by the state from the resources at its disposal.”

Shelving of projects: An internal document of the irrigation department tells how several irrigation projects had been shelved.

Consider MKVDC–A sum of Rs24,130.92 crore has been raised for big and medium projects of this PSU, but about Rs11,164.03 crore has actually been spent till March 2006. The total irrigation potential created up to June 2006 is almost 5,88,51,000 hectares, leaving a balance of 8,21,93,000 hectares.

The debt servicing for MKVDC is estimated to be almost Rs35,000 crore to date — Rs6,000 per hectare of irrigation potential created.

Again, irrigation potential doesn't give an accurate estimate of the ground reality. Much of this potential is wasted because the project is not taken to its logical conclusion.