The National Investment and Infrastructure Fund (NIIF) was announced during the Union Budget in February 2015, for investing in commercially-viable greenfield, brownfield and stalled infrastructure projects. The government will infuse R20,000 crore per annum as 49% contribution towards this fund, and will also invite and encourage participants such as sovereign wealth funds, pension funds and domestic institutions with appetite for long-term investments to invest in NIIF.
NIIF was approved on August 20 by the Department of Economic Affairs and the first meeting of its governing council was held on December 28. The NIIF Trust is registered as Category-II Alternative Investment Fund (AIF) under Sebi.
In the current scenario where many infrastructure projects are stalled, NIIF seems to be equipped to provide a quick push to the sector. It can do so by funding viable projects that are languishing due to the inability of debt-ridden sponsors to inject equity capital. Subsequently, NIIF can identify greenfield/brownfield projects in transportation, energy, railways and urban infrastructure segments, which will account for most of the infrastructure investment over the next five years.
Infrastructure development will not only remove the hurdles for growth, but it will also contribute to GDP growth and result in immediate job creation even before the projects are commissioned. There is no debate around the magnified effects of infrastructure spending on economic growth through its multiplier effect. However, at this stage when the banks have turned overcautious in providing project finance, funds need to be rapidly channelled into infrastructure sector to revive it and also to resurrect the stalled projects before they sink further.
Over the next five years, India will have to find new and innovative resources, mechanisms and institutions to fund its infrastructure spending, if it has to grow faster than 7%. The Twelfth Five Year Plan had estimated the investment in infrastructure sector to grow from around R10.6 lakh crore in FY15 to R15.9 lakh crore in FY17. About half of this is projected to come from the private sector through public private partnerships, or the PPP model.
To date, a majority of infrastructure financing has been supported by the country’s banking sector, notwithstanding its own asset liability mismatches. The commercial banks have stepped up to fund a bulk of non-governmental financing of infrastructure projects, with a total exposure of about R10.1 lakh crore, as on March 2015. However, the multiple challenges faced by infrastructure projects and their sponsors have had an adverse impact on banks’ asset quality.
The share of infrastructure sector in the stressed assets of banks stood at around 30% as compared with its share of 15.5% in total assets, as mentioned in the June 2015 report by RBI on financial stability. Nearly 23% of gross advances to the infrastructure sector were stressed (gross NPAs plus restructured standard assets) as on March 31, 2015.
Given this experience—asset liability management (ALM) imposed constraints in lending long-term funds (exceeding 15-20 years) for project financing and the need to set aside larger capital under Basel-III framework by FY19—India’s commercial banks will struggle to keep pace with the projected rapid growth in financing requirements in the infrastructure space.
Bond markets, on the other hand, though growing, still lack depth as there is abysmal appetite for long-dated paper and for papers rated in lower investment grade category. Though the annual issuance in corporate bond markets increased to about R4.1 lakh core in FY15 (R3.3 lakh crore April-December 2015), less than 30% of this issuance was by corporate and infrastructure sectors put together. Unlike banks, the domestic insurance companies and pension funds have easy access to long-term funds and are ideal candidates for investing in stable, long-term, income-generating assets like infrastructure projects. But they do not invest in bonds rated below AA category.
NIIF could catalyse the inflow of long-term foreign funds through sovereign wealth funds and global pension funds in India’s infrastructure sector, as its stated objective is to invest in commercially-viable projects. Once NIIF invests through its arms into various projects and infrastructure finance companies, they, in turn, will be able to channel more resources into the sector by further leveraging.
While there is no dearth of stalled projects today, the challenge for NIIF will be to separate viable projects from unviable ones. As per the Economic Survey 2014-15, the value of stalled projects was around R8.8 lakh crore, or about 7% of GDP as of December 2014. Of this, several projects may not be amenable to resurrection and must be avoided. NIIF will succeed and gain investors’ confidence only if it decides to judiciously choose commercially-viable projects and provide acceptable risk-adjusted returns to its investors.
This will be possible if its investment committees/fund managers operate in a transparent, independent and objective environment, and if the fund is able to build and preserve a strong investment and credit culture across its investment arms over the years. India’s experience of more than a decade in the PPP space tells us that funding viable projects is not an obstacle, but saying no to unviable ones is the biggest challenge.
The author is senior VP & co-head, Corporate Sector Ratings, ICRA Ltd