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The overriding objective of the National Investment and Infrastructure Fund (NIIF) must be adequate economic return, not financial return, says Vinayak Chatterjee.
The distinction is important. The Ahmedabad-Mumbai bullet train project is expected to provide the country an excellent economic return over a period of 50 years or so.
However, the financial return in the first 10 years of operations is unlikely to elicit a positive response from any private investor.
But a project like this is what the country needs in its quest for nationally relevant initiatives in line with those in irrigation, river-linking, inland waterways, rural electrification, civic infrastructure, railways et al.
Such investments provide great economic return to the country over a period of time, but poor financial returns to market investors.
Thus the nature of funding the NIIF chooses to access, and partner with, will depend on whether the government subscribes to this point of view.
The proposition, if accepted, means the NIIF should not be moulded along private equity (PE) lines, which typically target 20 per cent-plus internal rates of return over a seven-year period.
The investment-partnership targets for the NIIF should be long-term players like multilateral and bilateral institutions, sovereign wealth funds, pension and provident funds and Japanese-style development funds.
The temptation to rope in or sponsor PE funds must be avoided. PE funds should be left alone to play in the commercial marketplace.
Without doubt, the announcement of the NIIF in Union Budget 2015-16 was a masterstroke by the finance minister.
It underscored the point that the government had got financially savvy, and was now able to reduce dependence on traditional budgetary sources and raise external resources through smart leveraging.
The concept is also eminently amenable to monetising Prime Minister Narendra Modi’s highly successful global outreach.
By July 2015, the Union Cabinet had approved the creation of NIIF. It became operational by December 2015, with a Governing Council in place and with the state-owned India Infrastructure Finance Company Limited being appointed interim investment advisor.
Market regulator Securities and Exchange Board of India approved it as a Category II Alternative Investment Fund (AIF) on December 28, 2015.
By the first week of February 2016, the NIIF had already received 70 applications for its CEO position from its globally advertised search communiqué.
Further, about six investment-ready projects have been identified in the highways and railways sector. And some leading banks are already salivating at the prospect of their stressed infrastructure assets being taken off the books by the NIIF!
Clearly, this has been a much swifter implementation than the Rs 500 crore earmarked for 3P India (to address public-private partnership revival) in the finance minister’s maiden July 2015 Budget.
The NIIF, which mimics a domestic sovereign fund, envisages a starting corpus of Rs 40,000 crore (Rs 400 billion), with the government investing the first Rs 20,000 crore (Rs 200 billion) from the Budget.
The next Rs 20,000 crore is expected to come from partner-investors. Already funds from Russia, Singapore, Canada, Qatar and the UAE have expressed interest.
The NIIF was formally introduced to potential foreign investors by the finance minister at the India Investment Summit in New Delhi on February 4, 2016.
The concept has been carefully designed to keep the operations and functioning at arm’s length from the government. Minister of State for Finance Jayant Sinha has gone on record stating, “We are fire-walling the NIIF from the government — not just this government, but all other subsequent governments as well.”
This desire is laudable and manifests itself in the government holding a minority stake of 49 per cent, as well as having a professional CEO from the market.
However, with such a large seed contribution from public finances, concerns are being raised as to whether the day-to-day functioning will indeed be impervious to investigations by the troika of Central Vigilance Commission, Central Bureau of Investigation and Comptroller and Auditor General.
It would be advisable to have a clear ex-ante opinion on this matter before full commercial operations commence.
The NIIF will be structured as a “fund of funds”. There will be multiple investment funds underneath the main fund. It is suggested that five step-down bucket-funds be considered: asset reconstruction fund (for existing stressed assets); Brownfield fund (for divesting state-owned assets); Greenfield fund (for new projects — public and private); renewables fund (for green energy projects); social infra fund (for mass housing, rural renewal off-grids, city upgrade, rural broadband).
The NIIF’s charter should be restricted to “core and social infrastructure” and not stretched or diluted to include manufacturing.
The government should plan to invest Rs 20,000 crore every year from the Consolidated Fund of India as core contribution to the NIIF.
Leveraged 10 times, the total NIIF corpus could therefore grow by Rs 2 lakh crore every year. Further, while “sovereign guarantees” are not envisaged, clearly the state can provide “credit enhancement measures” that go towards increasing the ratings grade for external investors.
Quick estimates from the finance ministry suggest a 30 per cent deficit in infrastructure investments vis-à-vis targets for the 12th Plan period (2012-2017). This five-year period is expected to achieve Rs 39 lakh crore in infra investments against the target of Rs 56 lakh crore set by the erstwhile Planning Commission.
The bulk of the shortfall is in public-private partnerships - the surrogate for private capital. The strategy, therefore, for public expenditure to get infra investments going is unassailable. With a fiscal deficit challenge, creative off-budget solutions are the answer.
The NIIF is a perfect solution for the times.
The author is chairman, Feedback Infra.
