Why national infra fund may derail India

The aim of financing commercially viable projects should be tweaked to include non-commerical projects

GN Bureau | August 1, 2015


#infrastructure   #equity   #investment   #jayant sinha  

The union cabinet has given green signal and the ₹20,000-crore National Investment and Infrastructure Fund (NIIF) will take shape by this year end.

The NIIF, which may take the role of a sovereign wealth fund, is being set up primarily to address the gap in equity financing of large-gestation and commercially viable infrastructure projects in the country. This is where the catch lies. India needs large number of infrastructure projects in transport and power sector. The infra sector calls for huge investment and the NIIF could provide that funding. However, the catch lies in the aim of the NIIF.

It says the fund will be made available to commercially viable projects. This is because of the nature of equity holders. However, every infrastructure project cannot guarantee return on the investment or commercially viable. Many infrastructure projects are for the society and should be taken up despite them not making good business sense.

The government should look beyond commercial angle and build roads, bridges and dams.

According to the details given by minister of state for finance Jayant Sinha to media, the NIIF is likely to be set up as a trust in which the government will contribute 49 per. The rest of the funds will be pumped in by long-term institutional investors, pension funds and sovereign wealth funds. There could also be an intermediate company looking at day-to-day operations.

Equity funds in entities such as IIFCL, NHB and IRFC, the NIIF could also sponsor funds for investment in infrastructure projects.

The NIIF will be ‘operational’ by the end of this calendar year, Sinha said.

“The government will have an arm’s length relationship with this entity. This will not be a government entity. The NIIF will be an investment manager and put in equity in commercially viable infrastructure projects. It will not be a project management firm,” Sinha said.

Below the NIIF will be a series of alternative investment funds (AIFs), which will provide equity capital support to commercially viable infrastructure projects. Sinha said that foreign investments could be attracted both at the level of NIIF and AIFs. The cabinet had approved the flow of foreign investments into AIFs a few days ago.

Sinha highlighted the lack of equity capital to support the country’s infrastructure development. He pointed out that the balance sheets of large business groups are already stretched and they are not being able to take up fresh exposure due to the absence of equity capital.

The proposed NIIF entity will be located in Mumbai and it will be run by a governance council with “world class governance standards”, Sinha said.

The NIIF is a good concept but the government should also keep the needs of society on its agenda.

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