KIIFB faces uncertain future

Kerala Infrastructure Investment Fund Board (KIIFB) is at a crossroads eight years after the state government maximised the potential of this 24-year-old funding body. The financial crisis, stemming from the union government's intervention in KIIFB's borrowings, has posed an unanswered question: What lies ahead for KIIFB? 

Background
The KIIFB was established in November 1999 during the tenure of the Left Democratic Front (LFD) government led by EK Nayanar. It operates as a body corporate under the governance of the Kerala government. The primary objective is to create a fund for investing in the state's infrastructure projects, allowing for borrowings outside statutory opportunities under annual budgets. 

State borrowings are governed by the Fiscal Responsibility and Budget Management (FRBM) Act, introduced in 2003, which stipulates that only 3 percent of the GDP can be borrowed in a given year. The concept of off-budget financing wasn't groundbreaking, as several central agencies and organisations established by other states were already employing or planning similar opportunities. (Former finance minister Thomas Isaac argues that KIIFB loans don't fit the off-budget category. According to the Status Paper on Government Debt by the Union Finance Ministry, extra-budgetary resource liabilities involve financial obligations raised by public sector undertakings but fully serviced, both principal and interest, by the Government of India through the Union Budget. KIIFB's principal or interest doesn't come from the state budget.)

KIIFB remained relatively inconspicuous in the economy until Isaac decided to harness its potential in 2016. Isaac had mentioned the possibilities of the Board during his previous term (2006-2011), but this time, he took a more earnest approach. He amended the 1999 act to transform it into a "powerful body functioning as the key arm of the Government for large-scale infrastructure investment in the State," as highlighted in the state economic review of 2016-17.

During that financial year, KIIFB greenlit 144 projects with a total outlay of Rs 9,281.56 crore, encompassing areas such as roads, bridges, school buildings, ICT in schools, irrigation, and more. As of November 2023, the tally has risen to 1,073 projects amounting to Rs 82,383 crore. To contextualise this, the 2023-24 state budget indicates that the estimated expenditure (excluding debt repayment) of Kerala is Rs 1,76,089 crore.

The KIIFB amendment of 2016 facilitated diverse modes of financial support for projects, encompassing "new infrastructure fund mobilisation structures approved by SEBI and RBI." This broadened the scope to include "modern investment structures such as Infrastructure Investment Trust, Infrastructure Debt Fund (IDF), Alternative Investment Fund (AIF); financial instruments like General Obligation Bonds, Land Bonds, and Infra Bonds, etc.; tailor-made investment packages through existing government financial agencies such as Kerala State Financial Enterprises Ltd. (KSFE); grants, annuities, and other guaranteed payments from the Government; returns from investments, loans from domestic/bilateral/multilateral financial institutions, etc."

As of November 2023, KIIFB has disbursed Rs 26,926  crore for the approved projects. It boasts a total mobilisation of Rs 35,697 crore, comprising Rs 19,634 crore from the financial market and Rs 16,063 crore as the Kerala government's contribution (a share of Motor Vehicle Tax and cess on petroleum products). Additionally, it has an NRI chitty and dividend schemes, with a cumulative collection of nearly Rs 4,000 crore.
The honeymoon for KIIFB came to an end in 2018 when the Comptroller and Auditor General (CAG) contested the model, asserting that KIIFB's borrowings would fall under the state government's debt ceiling, as stated in its State Finance Audit Report. The Fiscal Responsibility and Budget Management (FRBM) Act says that state borrowings will be curbed to control fiscal deficit at an annual limit of 3 percent of Gross States Domestic Product (GSDP).

Despite the Kerala Assembly rejecting CAG's findings, the auditor reiterated the comment the following year. Ultimately, the union government declared its intent to consider KIIFB's borrowings as loans of the state government. This decision resulted in a reduction of the net borrowing ceiling (NBC), ultimately plunging the state into a severe financial crisis.

The crisis
The financial strain is not unique to KIIFB; the state is grappling with an unprecedented financial crunch due to a significant reduction in borrowings this fiscal year.  This trend is anticipated to persist in the upcoming years, given the ongoing constraints on borrowing. The borrowings of Kerala Social Security Pension Limited (KSSPL), established to ensure timely disbursement of welfare pensions, are also now included in the net borrowing ceiling. Notably, since 2017, public account deposits in the state treasury have been considered as a form of borrowing.

According to Thomas Isaac, the loan amount of Kerala in 2022 was Rs 43,000 crore, decreasing to Rs 23,000 crore in 2023. The government attributes the financial crisis to the union government's “discriminatory policy”, contending that while agencies like KIIFB that are under the union government can continue borrowing, Kerala is being penalised. The government argues that no other states are facing such curbs. Isaac challenges the Congress-led opposition for not questioning the union government and instead focusing their criticism on the state. Kerala Finance Minister KN Balagopal points out that nearly Rs 12 lakh crore in loans obtained by union entities similar to KIIFB are not considered part of the union debt, citing NHAI alone having a Rs 3 lakh crore loan.

Opposition slams govt
VD Satheesan, the opposition leader in the Kerala Assembly, asserts that the state government ignored the warnings from the opposition regarding KIIFB. In a statement to mathrubhumi.com, he stated, "We are not against the project (KIIFB). We had informed the government in the Assembly (during the discussion over the 2016 amendments) that this violates constitutional provisions. The very next year, CAG objected to KIIFB. It is true that the financial crisis is caused by cutting short of loans. But this government invited it knowingly."

Satheesan further characterised KIIFB as a 'maverick' move by Thomas Isaac, emphasising that the government lacked funds for Public Works Department (PWD) projects.

"KIIFB is a state, with 51 percent stake owned by Kerala government. Budget money is spent in KIIFB. There is a Supreme Court verdict that clarifies this situation. Therefore, CAG is bound to act," he added.

When questioned about Congress's stance on the union government's policies affecting the federal system, Satheesan responded, "UDF opposes the formula for devolution of taxes." In the same breath, he pointed out that LDF governments received Rs 53,000 crore in revenue deficit grants in five years, a sum that no other government has received.

Satheesan contends that if at least 51 per cent of KIIFB projects were self-sustainable (revenue generating), the government would have a stronger argument before the union government. He pointed out that NHAI collects tolls, making a distinction between the road authority and KIIFB. Notably, KIIFB currently has 25 percent of self-sustaining projects, although none involve toll collection. United Democratic Front (UDF) leader CP John suggested that the government could have constructed more overbridges and bypasses using KIIFB, and collected tolls. However, the UDF has not officially advocated for toll collection, as public sentiment in Kerala is against tolls, even with the BJP marching to toll booths on National Highways.

CP John criticised the priorities of KIIFB, asserting that spending on schools is unnecessary since they are already infrastructure surplus. He alleged that the board did nothing for hospitals or medical colleges.

Regarding the future of KIIFB, Satheesan believes it has lost its relevance. With its borrowings now falling under the state ceiling, he suggests that the government should instead announce projects in the budget and allocate funds accordingly. When asked about an alternative to KIIFB, Satheesan responded, "How did we come so far?"
Thomas Isaac argues that the "business as usual" approach is insufficient for Kerala's immediate need for more infrastructure development. He emphasises the necessity for creative solutions, citing KIIFB as an example.

In response to questions about the sudden urgency for massive infrastructure development, Prof. Jayan Jose Thomas, a development economist at IIT Delhi, explains that Kerala currently has the best demographic opportunity in India. While Kerala is advanced in demographic development compared to other states, the demand is high. To avoid becoming a state of retirees, the economy needs to transition into a knowledge-based one. Kerala's unique feature of urban qualities in rural areas presents an opportunity to start ventures like a biotech park in Thiruvananthapuram, Thiruvalla, or Thalassery. However, attracting global youth requires better infrastructure, including not just roads but also improved universities and even a high-speed rail system. Prof. Jayan warns that if action isn't taken now, Kerala could miss out on the momentum.

Prof. Jayan views KIIFB as a "lifeline during a difficult financial period" with "enormous untapped potential for economic growth." He argues that the debt created by KIIFB will not pose a danger as long as it grows at a rate slower than the growth of incomes, triggered by the expenditure.

CP John expresses a pessimistic view of the future of KIIFB, stating that it is detrimental to the planning process in the state and amounts to recentralization, encroaching on the roles of various entities, including local governments. He highlights concerns about the funding source, noting that the income from fuel cess, which supports KIIFB, has not increased this the previous quarter, and with the anticipated rise of electric vehicles, the model's sustainability is questionable.

John suggests that the state should have resolved the legal issues regarding the loan ceiling with the union government before implementing KIIFB. (Congress government led by Oommen Chandy had announced plans to mobilise Rs 30,000 cr using KIIFB in its final budget in 2016. VD Satheesan said that this was well within the budget and not considered an off-budget borrowing).

The UDF proposes the annuity model as an alternative to KIIFB. In this model, the contractor takes a loan, completes the project, and the government pays the contractor a sum annually until the total amount is settled. Thomas Isaac, however, regards KIIFB as a "better annuity model," overcoming flaws in the traditional annuity model, such as a lack of competition and the burden of high-interest rates. Isaac argues that KIIFB's flexibility allows for the funding of smaller projects. On the other hand, CP John contends that the annuity model and KIIFB are not comparable.

According to Prof KN Harilal, a former member of the state planning board and a development economist associated with the Left, the crisis could adversely impact the state's routine work if it persists. Harilal sees KIIFB as a means to utilise the finance market for the benefit of Kerala. He criticises the union government for creating rules that it doesn't follow itself. Harilal believes that for capital expenditure, KIIFB is the right model. He raises concerns that if the current trend continues, the union government might even classify annuity model funding under the debt ceiling as well. Harilal emphasises the need for a solution, stating, "In the long run, we are all dead."

Regarding the future of KIIFB, Harilal suggests that the government may need to prioritise projects within KIIFB and consider postponing those that can be delayed.

In response to criticisms from UDF leaders, Prof R Ramkumar, a state planning board member and faculty member at the development studies department at TISS, defends KIIFB, stating that the money spent through KIIFB couldn't have been mobilised in any other way. When asked about the future of KIIFB, he acknowledges the possibility of setting priorities for certain projects but mentions that no such discussions have occurred yet. He also adds that future borrowing may be limited, but it might not affect ongoing projects.

(Finance minister KN Balagopal and former finance minister Thomas Isaac did not respond to the queries of mathrubhumi.com despite multiple attempts)