NIIF will tackle infra funding issues

The proposal for setting up a National Investment and Infrastructure Fund (NIIF), cleared by the Union cabinet last week, will go a long way in addressing the funding problems of the infrastructure sector. The Rs 20,000-crore fund will function as a trust on the lines of sovereign wealth funds like Temasek of Singapore for investment and capital infusion in infrastructure projects. Sovereign wealth funds are unknown in India but they play a large role in international finance through investments, project funding and funding of acquisitions and mergers. They are, in fact, commercial entities. Though sovereign wealth companies manage a varied portfolio and make different types of investments, the fund to be set up might limit itself to infrastructure funding. Union Finance Minister Arun Jaitley had announced the plan to set up the fund in his budget speech and the proposal has taken a definite shape now.

The NIIF will raise debt to invest in the equity of infrastructure finance companies like the Rail Finance Corporation and the National Housing Bank. Since its financing activity is two steps removed from the agency which implements the infrastructure project, it may be called a ‘banker of the banker of the banker’. Such financing arrangements are common in modern economies. The NIIF will be able to deploy many times its capital as it will raise money from a number of other agencies like provident funds, overseas pension funds, endowment funds and other sources. The government has said that other sovereign wealth funds and governments have shown interest in investments in the NIIF. It is expected that the New Development Bank (NDB), the multilateral lending institution being set up by BRICS countries in Shanghai, will be an important partner in the NIIF’s investment plans. The NDB is to be launched in the beginning of next year and the NIIF is to become operational in December this year.

Infrastructure development is the most important requirement for growth and it is constrained by shortage of funds. Tens of thousands of crores of rupees are needed to create and improve infrastructure in various sectors. The government has said that both greenfield and brownfield ventures, including projects which are stalled for lack of funds, will be financed by the NIIF. The Smart Cities plan, which will need huge funds, will also be financed by it. Since it will operate at an arm’s length from the government, it can be run like a commercial entity. This is expected to insulate it from the common constraints of government-run organisations.