Thiruvananthapuram:
A committee appointed by the VD Satheesan-led Kerala government has recommended ending the Kerala Infrastructure Investment Fund Board's (KIIFB) role as a borrowing agency, saying its funding model has placed a massive financial burden on the state without delivering the benefits originally promised.
Releasing the 106-page white paper on Thursday, Chief Minister VD Satheesan said the report was not a political document but an assessment of KIIFB's financial position.
The most baffling thing the committee estimates is that Kerala has lost out on nearly Rs 13,104 crore because of the KIIFB funding model, which was established by the Left Democratic Front (LDF) government. It also warns that the state faces repayment obligations exceeding Rs 70,000 crore in the coming years.
The findings raise serious questions about one of the flagship infrastructure initiatives of the previous Pinarayi Vijayan-led LDF government.
How KIIFB Became Kerala's Infrastructure Funding Model
KIIFB was transformed into a major infrastructure financing agency in 2016 under former state finance minister Thomas Isaac.
The LDF government amended the law governing the board and announced a Rs 20,000 crore infrastructure investment programme aimed at boosting economic growth.
Under the arrangement, half of Kerala's motor vehicle tax revenue and the entire petrol cess were earmarked for KIIFB. The board was authorised to raise funds through market borrowings to finance roads, hospitals, schools and other infrastructure projects.
In May 2019, then Chief Minister Pinarayi Vijayan rang the opening bell at the London Stock Exchange to mark the listing of KIIFB's Rs 2,150-crore Masala Bond. It was the first such international bond issue by an Indian state-level entity.
The LDF government projected the initiative as a major breakthrough that would allow Kerala to undertake large infrastructure projects without depending entirely on the state budget.
Tax Revenue Used To Repay Loans
The committee, headed by former Planning Commission Member Secretary Sudha Pillai and including former Union Revenue Secretary Tarun Bajaj, examined KIIFB's finances over three months.
Its findings suggest that the funding model failed to achieve its central objective.
Between 2021-22 and 2024-25, the Kerala government transferred Rs 11,869 crore to KIIFB. During the same period, the board spent Rs 11,944 crore on loan repayments and interest.
This meant that almost the entire amount transferred by the government was effectively absorbed by debt servicing, while fresh borrowings were used to finance new projects.
The committee concluded that a mechanism intended to reduce pressure on the state budget had instead created an additional financial burden.
It also found that KIIFB's borrowing costs were higher than those of the state government, resulting in an additional annual expenditure of approximately Rs 396 crore.
The much-publicised Masala Bond issue alone cost around Rs 182 crore more than conventional government borrowing would have, according to the report.
Rs 13,104 Crore Financial Disadvantage
One of the report's most significant findings concerns the overall cost of operating KIIFB.
The committee calculated that Kerala had committed Rs 61,678 crore in tax revenue and borrowing capacity to support the board.
However, only Rs 48,575 crore had either been spent on infrastructure projects or remained available in KIIFB's accounts.
The panel estimates that if the state government had directly financed the same projects, it could have retained approximately Rs 13,104 crore in additional financial resources.
The committee also found that KIIFB's borrowings had reduced Kerala's borrowing capacity.
Since 2022, the Centre has adjusted Rs 25,933 crore against Kerala's borrowing limits on account of KIIFB's debt.
This effectively defeated one of the principal objectives behind KIIFB's expansion: financing infrastructure without reducing the government's own borrowing capacity.
The findings also bring renewed attention to the controversy surrounding the Comptroller and Auditor General's 2018-19 audit report.
The CAG had questioned KIIFB's borrowing arrangements, arguing that its liabilities were effectively state government debt and that the borrowings had been undertaken outside the normal legislative approval process.
In January 2021, then Chief Minister Pinarayi Vijayan moved a resolution in the Kerala Assembly rejecting the CAG's observations and seeking their removal from the record.
The Opposition walked out in protest. VD Satheesan, who was then chairman of the Public Accounts Committee, was among those who opposed the government's move.
Five years later, the committee appointed by his government has reached a similar conclusion on the financial implications of KIIFB's borrowing model.
The new committee has not examined the constitutional validity of the Masala Bond issue, noting that the borrowing was fully repaid in 2024.
It has also clarified that its findings do not question the value or necessity of infrastructure projects undertaken through KIIFB.
Instead, the report focuses on the financial structure used to fund those projects and the long-term burden on the state.
Committee Recommends Ending KIIFB Borrowings
The committee has recommended that KIIFB should no longer function as an agency that raises money from financial markets to fund infrastructure projects.
It has proposed that the Kerala government take over the board's outstanding debt and repay it transparently through the annual state budget.
The panel also recommends replacing expensive loans with cheaper borrowing arrangements wherever possible.
Another major recommendation is to cancel the 2018 government order that directs motor vehicle tax revenue and petrol cess into KIIFB's accounts.
The committee has further called for a comprehensive CAG performance audit of KIIFB's operations between 2016 and 2026.
The report further says that KIIFB's existing repayment commitments extend until 2041-42. Including the financial requirements of unfinished projects, the state's future obligations could exceed Rs 70,000 crore.
The report marks a significant challenge to the infrastructure financing model championed by the previous LDF government.
Former state finance minister Thomas Isaac and the CPI(M) are yet to respond to the findings.