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State Government Debt Risk - a history that repeats too often!

As the work on building Amravati, the new capital city AP, comes to a grinding halt, concerns emerge about Amravati (APCRDA) bonds held by Franklin MF (~Rs. 1000 Cr) and Birla MF (Rs. ~300 Cr). Thread 1/11
During the Chandrababu Govt, Amravati received political as well as financial patronage. Now, with Jagan Reddy being incharge of the state, the project is in shambles. World Bank & ADB pulled out of the project and the Government is looking for reasons to scrap it. 2/n
The bonds issued to support the financing needs of the project were subscribed by Franklin MF and Birla MF. The bonds are guaranteed by the AP Govt but it's not sure if the Govt would keep servicing the bonds. The risk of lending to a state govt has again come to the fore. 3/11
State govt bonds, state guaranteed bonds and bonds from state level undertakings have defaulted/ delayed so often in the past that it doesn't surprise anyone any longer. Here, I list out some risks that holders of these bonds face. 4/11
1) Political risks - New government comes with new priorities and the flagship projects of the last government are the first ones to feel the cash squeeze. Amravati is a recent example of this risk. 5/11
2) Risk of reneging on contracts - bonds secured by cashflows from govt are always at a risk default on account of Govt. not fulfilling its contractual promise. E.g. Karnataka DISCOMs, in 2017, cancelled 76MW of power purchase agreements unilaterally. 6/11
3) Business Model Risk - Some state govt entities have perennially been in financial crisis. E.g. the debt of DISCOMs have been restructured thrice (2001, 2011 and 2015), yet things fail to improve. 7/11
4) Bureaucratic risks - Governments - State or Central, seldom pay the government- guaranteed debts of SLUs/ PSUs on the due date. There have been many instances of credit rating downgrade of government- guaranteed debt to "D" on account of bureaucratic apathy. 8/11
5) Bifurcation risk - Though this risk appears once in a while, it is a major one. Once a state is bifurcated, there is a fair bit of confusion about who owes the debt. Servicing debt during this period could pose a challenge for the new-born states. 9/11
There was a confusion about who would pay what amount of debt, for a fairly long time (and some of it still continues), after the division of AP. Many road contractors, power companies etc. faced prolonged delays in payments who in turn defaulted to their lenders. 10/11
While market borrowings provide an easy access to finance for States, the sustainability of this source depends on disciplined servicing of debt. Investors should be wary of portfolios and fund managers investing in state government papers (SDLs excluded). 11/11
For more on Amravati Bonds -1

For more on Amravati Bonds - 2

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