Bold innovation, but KIIFB has lost value, politicised, says UDF white paper

Thiruvananthapuram: Even while describing the Kerala Infrastructure Investment Fund Board (KIIFB) as 'a bold institutional innovation', the white paper on Kerala's fiscal health tabled in the Assembly on Thursday argues that the institution's original purpose has been fundamentally undermined.

"The question is no longer whether KIIFB should continue in its current form," the report says. "The question is how to manage the transition: honouring committed liabilities, retaining institutional capacity, amending the legal framework, and ensuring that the costs accumulated are transparently accounted for and prudently managed in the years ahead."

The observation strongly suggests that KIIFB, as it has functioned over the past decade, is unlikely to continue in the same form. While the institution may not be dismantled altogether, the white paper indicates that significant restructuring is inevitable.

Skewed allocations
The report also raises concerns over what it describes as skewed project allocation patterns.

"KIIFB's prioritisation and distributional outcomes in terms of projects raise serious questions," the white paper says.

According to the report, Kannur alone accounts for more than 20 per cent of the total amount approved and 19 per cent of payments released through KIIFB. Thiruvananthapuram received 17 per cent of approved funds and released payments, while Ernakulam accounted for 11 per cent.

"Adding Thiruvananthapuram and Ernakulam, three districts absorb nearly half the total. Neither human development indices nor economic need indices provide an obvious justification for this concentration," the report notes.

State of Finances
When combined with the outstanding loan liability of ₹21,000 crore, Kerala faces an overall obligation of approximately ₹56,000 crore to repay loans and finance already-approved projects, even before accounting for future financing costs, the report says.

The state government has contributed an average of about ₹3,000 crore annually to KIIFB since 2017-18. As of March 31, 2026, total inflows into KIIFB stood at ₹74,171 crore, comprising government contributions of ₹26,497 crore, borrowings of ₹42,053 crore, project repayments of ₹3,700 crore and other income of ₹1,920 crore.

The white paper identifies the diversion of 50 per cent of Motor Vehicle Tax revenue to KIIFB as the single largest source of government support. The contribution from this source alone amounted to ₹17,593.57 crore by 2025-26, which the report describes as a significant and recurring drain on state revenues. Of the ₹42,053 crore borrowed by KIIFB, less than ₹10,000 crore has been repaid so far. The finance cost incurred by the institution stands at ₹10,198 crore, almost equal to the principal amount repaid. While KIIFB currently holds a fund balance of about ₹11,000 crore, the report estimates that around ₹21,000 crore in loan liabilities remain to be serviced by the state.

The white paper notes that KIIFB has approved projects worth more than ₹1 lakh crore. However, completed projects account for only about ₹25,000 crore, while payments made total ₹41,610 crore. Projects worth roughly ₹35,000 crore remain to be funded.

The report challenges one of the key justifications for creating KIIFB: that it could borrow more efficiently than the state government. According to the white paper, the data does not support that claim.

"Only in 2020-21, the COVID-19 year, did KIIFB marginally outperform the Government, and that too under unusual market conditions involving a relatively small amount," the paper states. In every other year, KIIFB's borrowing costs were at least 1.5 percentage points higher than those of the state government. The report estimates that even a one percentage point difference on a borrowing portfolio of ₹42,000 crore translates into an additional annual interest burden of around ₹420 crore.

"The argument that KIIFB saves money through cheaper borrowing is simply not maintainable based on the evidence," the white paper says.

It further points out that while projects worth nearly ₹97,000 crore have been sanctioned through KIIFB, the actual amount disbursed or invested in projects stands at only ₹38,621 crore.

The white paper also highlights concerns previously raised by the Comptroller and Auditor General (CAG). In 2022, the CAG warned that allowing KIIFB to operate outside the state's budget framework could push Kerala into a debt trap.

For years, KIIFB borrowings were kept outside Kerala's fiscal deficit calculations. Following the CAG's observations, the Union government began deducting KIIFB's annual expenditure from Kerala's open market borrowing limits, effectively bringing KIIFB-linked liabilities into the state's fiscal calculations.

Since KIIFB was originally conceived as an off-budget financing mechanism, the white paper argues that this change has eroded the institution's core advantage. It is in this context that the report concludes that KIIFB's fundamental premise has been undermined.

KIIFB CEO’s powers
The white paper is also critical of the extensive powers granted to the KIIFB Chief Executive Officer. A 2017 government order had conferred the powers of ex-officio Secretary, Finance (Infrastructure) Department, on the KIIFB CEO. The report argues that such an arrangement was inconsistent with the state's Rules of Business.

"This is not good financial management as officers outside the governmental system must not be empowered to issue spending orders on behalf of the Government. This is a structural irregularity that was corrected only in 2025," the white paper states.

What next
The white paper recommends that the state stop diverting revenues into KIIFB's escrow accounts and instead use budgetary borrowings to meet the institution's liabilities. It also proposes that KIIFB should no longer be permitted to borrow independently from external sources. Instead, the Finance Department should raise funds at lower interest rates and channel them to KIIFB.

The report further states that the KIIFB Act, 2016, should be amended, arguing that the institution's continued operation under its current legal framework has become untenable.

At the same time, the white paper acknowledges that KIIFB has developed valuable expertise in market borrowing, project appraisal, technical inspections, climate-resilient infrastructure and integrated IT systems. It recommends that these institutional capacities be absorbed into government departments rather than dismantled.

The report also calls for a forensic audit of KIIFB's accounts, including an examination of Masala Bond issuance costs, consultancy payments routed through the Chief Managing Director, and instances where borrowed funds were redeposited with banks.

As an interim measure, KIIFB should prepare a comprehensive statement of its obligations, including principal repayments, interest liabilities, project funding commitments and project completion schedules, to provide the government and legislature with a transparent picture of the state's commitments, it adds.