Is this KIIFB's end? Sudha Pillai committee wants life support withdrawn

The Report of the Committee formed to review the Kerala Infrastructure Investment Fund Board (KIIFB) has called for the virtual shutdown of the LDF government's innovative infrastructure funding mechanism.

The Committee, chaired by former finance secretary Sudha Pillai, has asked the UDF government to unplug the two entitlements that have till now pumped life into KIIFB. One, the obligatory annual transfer of motor vehicle tax and petroleum cess from the state budget to the KIIFB account. And two, it authority to raise funds from the market. The Committee wants both these rights immediately cancelled.

The Committee wants the infrastructure works already initiated by KIIFB to be taken over by the concerned departments. "The funds required for completing these projects shall be provided as capital expenditure in the Annual Budget over the next five years, beginning in 2026-27," the Committee report, which was tabled in the Assembly on Thursday, said. It also recommended an urgent performance audit of KIIFB for a period of ten years from 2016-17.

Till June 30, 2026, ₹24,764.64 crore has been transferred to KIIFB from the state budget. Of this, ₹19,404.52 crore was motor vehicle taxes, and ₹5038.04 crore was petroleum cess. The government has also contributed an additional ₹322.07 crore.

Unspoken dangers
The Committee revealed a hidden cost of such budgetary transfers.
The report said that the daily cash outflow from the consolidated fund to KIIFB "depresses the State's minimum balance with the Reserve Bank of India and increases the frequency and duration of recourse to Special Drawing Facility (SDF) and Ways and Means (W&M) Advances and, beyond those, to Overdraft (OD)". In short, such obligatory transfers deprive the state of necessary funds in a crisis.

Moreover, such crisis borrowing from the RBI comes with a price; penal rates are involved. "Every rupee of additional recourse caused by the escrow outflow (the fund flow to KIIFB) therefore carries a cost that is additional to, and entirely separate from, the coupon (interest) KIIFB pays on the underlying borrowing," the report says.

The state, in effect, pays twice. "Once through the interest embedded in KIIFB's borrowing, and again through the carrying cost of the liquidity it surrenders to service that borrowing (which is the penal rate imposed by the RBI on the state for drawing more than its daily limit to make up for the money pumped into KIIFB)."

The bonds issued by KIIFB also pose a future risk. The outstanding value of these bonds is ₹8,649.97 crore. The maturity profile shows that repayment will touch ₹1,236 crore a year between 2029-30 and 2032-33 on the bond portfolio alone.

Here's the shock. It is still not clear how this money will be paid back. "No consolidated plan covering the redemption of the bond portfolio alongside bank and institutional repayments was placed before the Committee by either KIIFB or the Finance Department, notwithstanding that the liability falls substantially on the State," the Committee notes.

Why CAG was right
The Committee also agreed with the CAG's earlier finding that KIIFB’s borrowings were not a contingent liability as claimed by the government, but a direct charge on the state's revenues. The CAG wanted KIIFB's debts to be reflected in the state's budgets. Now, the Sudha Pillai Committee has also recommended the same.

Here is why the Committee came to such a conclusion. The CAG data shows that the government transferred ₹11,869.28 crore to KIIFB from 2021-22 to 2024-25. In the same period, KIIFB's debt service (principal plus interest) was ₹11,944.18 crore. "The transfers therefore equalled 99.4 per cent of debt service. In other words, over the period for which comparable data exist, virtually the entire flow of State tax revenue into KIIFB was consumed by servicing KIIFB’s own borrowings. None of it, in net terms, financed fresh infrastructure; the fresh infrastructure was financed by fresh borrowings by KIIFB," the committee report noted.

If more proof was needed that almost the entire debt burden of KIIFB would fall on the state, the Committee report gave details of the scanty share of revenue-generating projects in KIIFB's project mix.

Till September 15, 2026, KIIFB had sanctioned 44 revenue-generating projects worth ₹22,701.44 crore, disbursing Rs 8881.80 crore and receiving ₹4,198.32 crore in repayments from these projects. "These figures show that revenue-generating projects account for 22.63 per cent of total approved project amounts and 20.98 per cent of total funds released - that is, only about one-fifth of KIIFB's project funding is classified as revenue-generating, with the remainder's repayment falling on budgetary transfers," the report says.

Was Kerala better off without KIIFB
An implicit hypothetical question can be read in the Committee report. What if there was no KIIFB and Kerala government had invested in infrastructure directly?

The answer: KIIFB could have spent ₹13,103.64 crore more than what KIIFB has spent till now.

Here is how the Committee came to such a conclusion. First, it calculated the money the state government had to forego till now for KIIFB operations. First there is ₹26,165.93 crore, the share of motor vehicle taxes and petroleum cess collections Kerala had been transferring to KIIFB for nearly a decade.

Since March 2022, the Centre has been deducting KIIFB's borrowings from Kerala's borrowing limit. By now, this contraction in Kerala's borrowing limit has swelled to ₹25,932.55 crore. Then there is the ₹9,580 crore KIIFB had raised from the market during the 2025-26 fiscal, which too has to be fully repaid using the state's money. So all three together, ₹61,678.46 crore, is the total amount the state has released in the name of KIIFB.

Now, how much has KIIFB disbursed till September 29, 2026? ₹42,753.82 crore. If the cash balance of ₹5,821 crore that KIIFB has held is also taken into account, KIIFB's total spend is ₹48,574.82 crore. The difference (₹61,678.46 crore - ₹48,574.82 crore) is ₹13,103.64 crore.

Masala Bond extravaganza
Further, the Committee noted that KIIFB’s cost of borrowing exceeded that of State's open market borrowing in every year of comparison, by 85 to 179 basis points since 2018-19.

For instance, in 2019, KIIFB raised ₹2,150 crore through rupee-denominated bonds, which were privately placed and subsequently listed on the London and Singapore Stock Exchanges. It was one of KIIFB's most expensive borrowings.

The coupon rate was 9.723 per cent on a five-year tenure. At the same time, the State’s weighted average open market borrowing cost was 8.31 per cent.

The bonds were fully redeemed on maturity, the principal of ₹2,150 crore was repaid on March 27, 2024. The total interest (coupon) paid was ₹1045.44 crore (if it was paid in the state's interest, it would have been only ₹893 crore). Fees and other expenses added another ₹29.73 crore.

KIIFB claimed that the 'masala bond' issue lowered its subsequent domestic borrowing cost. "If the Masala Bond had created a durable pricing benefit, KIIFB’s spread over the State’s cost of funds should have narrowed after 2019. It did not," the Committee report says.

Super Cabinet
In addition to the high fiscal and welfare costs of KIIFB noted above, the Committee also finds that the working of KIIFB over the last ten years has weakened the system of governance. "The feedback received from the departments indicates that, on the whole, KIIFB's activities weakened the capabilities of Government departments," it notes.

It was also found that "heavy reliance" on the KIIFB pool for capital works eroded departments' own technical capabilities and reduced their need and incentive to pursue funds through regular budgetary channels and other sources.