KIIFB: Keep what works, fix what doesn’t; no elegy yet

A forensic audit is normally undertaken when there is a well-founded suspicion of financial irregularities, diversion of funds or embezzlement. It was therefore surprising when a committee headed by a retired IAS officer and convened by a serving Additional Chief Secretary, who is also a KIIFB Board member, recommended a “forensic audit” of the Kerala Infrastructure Investment Fund Board in its White Paper on the State’s finances. A self-goal, if ever there was one?

A forensic audit can be like moving a patient into intensive care. In Kerala’s polarised political environment, it can also put officials associated with the institution in the line of fire, with vigilance inquiries, investigative agencies and PILs potentially following.

But is KIIFB really in such a financial mess that it requires “root-and-branch” reform? And what would this do to its credibility among lenders such as NABARD, HUDCO, REC, PFC, and commercial banks? Lenders dislike uncertainty. Even restructuring could raise red flags if the assumptions underlying existing lending decisions are altered. Correcting irregularities, therefore, has to go hand in hand with preserving stakeholder confidence. For any financial institution, trust and confidence are foundations which should never be tampered with.

Where did the White Paper err? It argued that if KIIFB’s borrowings count against the State’s borrowing limit, the entire off-budget mechanism loses its purpose. This was almost like a full-stop.

An alternative model could have been considered or hinted at. The National Highways Authority of India (NHAI), for instance, operates with substantial budgetary support (about ₹2 lakh cr allocation in Union Budget 26-27) while also generating some revenue through tolls and user charges. Of course, there is no credit enhancement through government guarantees, the only design difference.

When experienced bureaucrats sound downbeat, the impact can be much greater than they perhaps intend. The White Paper, in effect, told the government: we see no compelling locus standi for KIIFB; you take a call.

That call now appears to have been taken. The Government has constituted another committee, under retired IAS officer Sudha Pillai, to “restructure” KIIFB.

That could be the most important development in KIIFB’s recent history. It opens up the possibility of re-engineering it rather than defending it unchanged or writing its obituary.

A possible direction could be an NHAI-like transition: no incremental State guarantees, substantial but transparent budgetary support, and a gradual move towards generating perhaps 15–20 per cent of revenues from projects capable of levying user charges.

The White Paper also highlighted KIIFB’s higher borrowing cost compared with State Development Loans. But KIIFB was created to mobilise resources outside the conventional budgetary framework for infrastructure. There was never an expectation that it would necessarily borrow more cheaply than the State. The more important questions are whether infrastructure can be created faster, projects executed more efficiently and, wherever feasible, revenues generated through user charges.

Here, KIIFB’s record deserves recognition. It has approved projects worth around ₹1 lakh crore, with roughly ₹75,000 crore reaching various stages of disbursement. Its projects include schools, hospitals, roads and bridges. The Hill Highway has made considerable progress; the Amboori and Perumbalam bridges have changed connectivity.

I have a personal reason to notice this: a government school in the capital where I studied has received infrastructure improvements it had not seen in recent memory.

KIIFB has also attracted loans from NABARD, HUDCO, PFC and REC even after the Enforcement Directorate’s action relating to Masala Bonds in 2022. From a debt-financing perspective, the Masala Bond was an innovation demonstrating its ability to tap overseas money. But in Kerala’s “entertainment-based” debate “Masala Bonds” were mistaken for “Masala films’?

KIIFB’s A-plus rating from CRISIL, supported by government guarantees and escrowed cash flows, is another part of the picture. Both credit-enhancement mechanisms were approved by the Legislature in the 2016 amendment to the KIIFB Act. CRISIL also stated that even without them, KIIFB would be rated BBB — investment grade.

None of this suggests that KIIFB should receive a clean bill of health. Its 2024-25 audited accounts contained one Qualified Opinion and nine Emphasis of Matter observations. One serious observation related to a KSFDC loan: around 40 per cent of the sanctioned amount had been disbursed without even a basic loan agreement, and ₹16.04 crore is outstanding. Another concern is ₹30.83 crore spent on media promotion on a nomination basis (no tender), without adequate evidence authenticating the services received.

These are serious lapses. They should have triggered sustained scrutiny by the Legislature and its Public Accounts Committee. We don’t know whether the PAC in the last 10 years ever examined or discussed the KIIFB annual reports. The failure to do so is worth examining in itself.

The 2016 amendment to the Act enabled the infusion of professional expertise into infrastructure appraisal, monitoring, and evaluation. KIIFB has since approved around 1,200 projects and developed capabilities in project appraisal and ESG considerations.

It undoubtedly needs stronger governance, greater transparency and tighter financial controls. But an institution created to overcome some of Kerala’s longstanding weaknesses in infrastructure financing should not be written off because its first model has developed weaknesses.

The Sudha Pillai Committee therefore is an opportunity to preserve what has worked, correct what has not, and design a financial architecture that can make KIIFB fit for the next decade. One wishes there is greater clarity from the Government on the interim arrangement. It is a safe bet that a new committee, its recommendations and implementation will take at least one year. No financial institution can afford limbo.

An elegy for KIIFB should not overtake deliberations and decisions on the way forward. Time is of the essence.