Kerala, one of the more developed states in the country, is currently witnessing significant activity in terms of infrastructure development. However, its journey to where it stands today has not been an easy one. Financing infrastructure projects has been a major pain point, given the limited headroom from budgetary sources, reflected in the consistent fiscal deficit of over 3 per cent of gross state domestic product since 2016-17. To address the issue, the establishment of the Kerala Infrastructure Investment Fund Board (KIIFB) has proved to be a huge success for the state. The board is an autonomous off-budget vehicle enshrined under the Kerala Infrastructure Investment Fund [KIIF] Act, 1999 (with amendments under the 2016 Act). KIIFB can raise funds off the budget, ring-fenced from state finances, thereby providing a reliable stream of funds to support infrastructure development.
Strategies for improving fund disbursement
To finance infrastructure development through off-budgetary mechanisms (such as KIIFB), building investor confidence has been a distinguishing feature of KIIFB. It has resorted to stringent project selection (owing to rigorous project appraisal) and cost optimisation processes to bolster investor sentiment. Besides, its professional oversight ensures efficient and intended fund utilisation. These factors have helped the board successfully attract investments. It has recently become the first state-owned entity to list masala bonds overseas and have an international credit rating.
Other key sources of funds for KIIFB include rupee term loans from banks (credit line of Rs 20 billion signed with three banks), rupee term loans from development institutions (Rs 40 billion credit line from NABARD), Kerala State Financial Enterprises Limited’s (KSFE) non-resident Indian chitty float fund bonds, and an alternative investment fund. Recently, the board also set up an asset management company, the Kerala Infrastructure Fund Management Company, that has received approval from the Securities and Exchange Board of India. The new vehicle will invest in commercial projects that will have their own revenue stream.
In addition, the board also has strong support from the state government. Mandated by the KIIF Act, the state government diverts the entire petroleum cess collected as well as about 40 per cent of the motor vehicle tax collected to KIIFB (the percentage is slated to increase to 50 per cent by 2020). The state government is also mandated to meet any shortfall for debt service requirements. It has further transferred about Rs 25 billion as the board’s seed corpus (which is a distinct reserve and is not used for any financing activity and acts as an additional buffer).
KIIFB is a model that can be considered for adoption by other states. Many of the board’s members hold key decision-making positions in the state government. Such an organisational fabric aids it in taking decisions in a timely manner, without relying on the administrative machinery that lies outside its ambit. KIIFB also prevents project delays owing to factors such as land acquisition and regulatory clearances by selecting projects that are ready to float tenders. After this stage, funds are directly transferred online to the contractors’ accounts. This brings in more transparency as well as streamlines governance (by minimising scope for corruption). Focus on quality is ensured too, as the board has a team of technical examiners who conduct regular inspections at each stage of the project and check the progress against pre-determined milestones. These practices have enabled significant savings on costs, sometimes to the extent of 20 to 30 per cent of the total project cost. Besides, due to guaranteed timely payments, contractors too are keen on working with the board.
So far, KIIFB has sanctioned Rs 234.14 billion across 383 projects, the majority of which pertain to the transport and energy sectors. Other projects are in the water and sanitation, commercial and social infrastructure, and information technology sectors.
Going forward, the board is mulling over bond issuances, proceeds from which would be utilised for carrying out reconstruction and rebuilding works in the state (after the recent flood disaster). Besides, fundraising through the issue of green bonds and dollar-denominated bonds is also under consideration. The state will certainly witness significant infrastructure development with the associated financing activity in the coming years. w
Based on a presentation by Sanjeev Kaushik, Deputy Managing Director, KIIFB, at the India Infrastructure Forum 2019