Published in Financial Express, Janurary 2016
Devil is in the NIIF detail
While the fund is an innovative mechanism to employ, how the government implements the agenda will be key
The government’s plans for revolutionising the quality of infrastructure is impeded by the availability of funds. For the currently envisaged set of infrastructure projects are expected to cost at least $8 trillion over a period of 20 years. To put this in perspective, this is four times the total current GDP of India. To garner this magnitude of funding would require innovative mechanisms.
In addition, it is not merely the issue of raising funds but of raising funds at an affordable cost. Many of the infrastructure projects will be financially infeasible if the cost of funds is not reasonable. A potential solution is to create an institutional framework that would help create a pool of low-cost funds that could be made available for infrastructure creation.
However, such a framework must avoid the pitfalls faced by the past development financial institutions (DFIs) in India. DFIs had weak project assessing capabilities and were involved in Ponzi debt restructuring schemes, which in turn led to rising NPAs. Also, an end to concessional funding prompted development banks to turn to the financial markets for money and, in the process, they incurred higher funding costs. In order to make up for this, they chose to finance high risk projects, a development that also added to the increase in NPAs.
The National Investment and Infrastructure Fund (NIIF) is the proposed institutional framework for resolving the aforementioned issue. As we have been witnessing, a slew of innovations are being adopted by the government for resolving some of the fundamental issues of the economy. NIIF is one such innovation. It is a funding mechanism that will be the fund for banker of bankers, providing funding to bodies such as National Housing Board and Indian Rail Finance Corporation, which in turn provide funding to regular banks. It is proposed to be constituted as a trust which would raise debt to invest into equity of infrastructure finance companies. It proposes to raise Rs 20,000 crore.
This is a very timely initiative. It would help to provide access to large pools of low cost funds to the banker of banks, in turn helping to funnel in the funds into infrastructure. It would provide depth to the funds market for infrastructure development.
But how will NIIF raise its funds? 49% of the corpus will be provided by the Government of India. The balance will be raised as off-shore credit enhanced bonds and investments from anchor investors. This also implies that NIIF will be like a sovereign fund. It would also take in funds from other domestic sources such as pension funds, provident funds, National small savings and proceeds of monetised lands and other such assets of PSUs. However, NIIF may not be a single fund but multiple funds, operating under SEBI guidelines.
The challenge of such structures created under the government is to attract appropriate talent and have a strong governance system that would not asphyxiate the fund. To avoid a build-up of NPAs, the new development bank must have robust project assessing capabilities. Framing stringent accountability guidelines and getting the funding mechanism to comply with them would address questions about the government’s influence over lending decisions. The government should eventually make the funding mechanism an independent organisation with a self-financing capacity.
In fact, it is proposed that NIIF will have a strong governance system, ring-fenced from the government, with employees hired at market rates. NIIF is envisioned to be supported by one or more Chief Executive Officers and a set of experts forming an investment team which will work at an arm’s length from the government.
In conclusion, NIIF will provide greater funding headspace for an accelerated rollout of large scale infrastructure. It appears that NIIF has worked out the potential governance and talent issues that would be the critical success factors. The challenge would be in the details, of implementing the fund as per the design.
The author is Partner, Infrastructure and Government Services, KPMG in India
In addition, it is not merely the issue of raising funds but of raising funds at an affordable cost. Many of the infrastructure projects will be financially infeasible if the cost of funds is not reasonable. A potential solution is to create an institutional framework that would help create a pool of low-cost funds that could be made available for infrastructure creation.
However, such a framework must avoid the pitfalls faced by the past development financial institutions (DFIs) in India. DFIs had weak project assessing capabilities and were involved in Ponzi debt restructuring schemes, which in turn led to rising NPAs. Also, an end to concessional funding prompted development banks to turn to the financial markets for money and, in the process, they incurred higher funding costs. In order to make up for this, they chose to finance high risk projects, a development that also added to the increase in NPAs.
The National Investment and Infrastructure Fund (NIIF) is the proposed institutional framework for resolving the aforementioned issue. As we have been witnessing, a slew of innovations are being adopted by the government for resolving some of the fundamental issues of the economy. NIIF is one such innovation. It is a funding mechanism that will be the fund for banker of bankers, providing funding to bodies such as National Housing Board and Indian Rail Finance Corporation, which in turn provide funding to regular banks. It is proposed to be constituted as a trust which would raise debt to invest into equity of infrastructure finance companies. It proposes to raise Rs 20,000 crore.
This is a very timely initiative. It would help to provide access to large pools of low cost funds to the banker of banks, in turn helping to funnel in the funds into infrastructure. It would provide depth to the funds market for infrastructure development.
But how will NIIF raise its funds? 49% of the corpus will be provided by the Government of India. The balance will be raised as off-shore credit enhanced bonds and investments from anchor investors. This also implies that NIIF will be like a sovereign fund. It would also take in funds from other domestic sources such as pension funds, provident funds, National small savings and proceeds of monetised lands and other such assets of PSUs. However, NIIF may not be a single fund but multiple funds, operating under SEBI guidelines.
The challenge of such structures created under the government is to attract appropriate talent and have a strong governance system that would not asphyxiate the fund. To avoid a build-up of NPAs, the new development bank must have robust project assessing capabilities. Framing stringent accountability guidelines and getting the funding mechanism to comply with them would address questions about the government’s influence over lending decisions. The government should eventually make the funding mechanism an independent organisation with a self-financing capacity.
In fact, it is proposed that NIIF will have a strong governance system, ring-fenced from the government, with employees hired at market rates. NIIF is envisioned to be supported by one or more Chief Executive Officers and a set of experts forming an investment team which will work at an arm’s length from the government.
In conclusion, NIIF will provide greater funding headspace for an accelerated rollout of large scale infrastructure. It appears that NIIF has worked out the potential governance and talent issues that would be the critical success factors. The challenge would be in the details, of implementing the fund as per the design.
The author is Partner, Infrastructure and Government Services, KPMG in India
First Published on January 20, 2016 12:03 am
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