Government Seeks To Attract EPFO, LIC, PFRDA To Infrastructure Investments—BQ Exclusive
In a continued attempt to draw more funds towards infrastructure investments, the government is mulling a new structure to attract long-term money parked with institutions like the Employee Provident Fund Organisation, the Pension Fund Regulatory and Development Authority and Life Insurance Corp. of India.
According to three people familiar with the matter, the government is considering setting up a new "fund of funds" under the National Investment and Infrastructure Fund, which will be used to invest in operational projects. This fund of funds will look to tap into long-term funds held by EPFO, PFRDA, LIC and other public-sector entities, the first of the three people cited earlier said.
The NIIF, which will steer this new fund of funds, is currently in talks with these organisations to pitch the idea, the person cited earlier said. The discussions are at early stages, the two other people said.
Funding infrastructure has remained a challenge for India for decades. A spurt in bank funding after the global financial crisis led to a pile-up of bad loans and traditional lenders risk averse.
To bridge the funding gap, the government set up the National Infrastructure Investment Fund in 2015. The NIIF already has three funds under it—a master fund, a fund of funds focused on social infrastructure, and a strategic opportunities fund structured as private equity fund. Across these three funds, the NIIF manages $4.5 billion, according to its website.
The new fund of funds being considered is separate from these, said the second person cited earlier.
The government is trying to convince domestic insurance and pension companies to put money in infrastructure projects as funds are required but government budgets are constrained, the first person said. These monies can be invested in operational projects, particularly listed infrastructure investment trusts or InvITs, said this person, adding that if may also help improve returns for these organisations.
Not everyone agrees.
In the last 10 years, one of the largest sources of bad debt has been the infrastructure sector and many of these risks were beyond the capacity of any private entity to manage, said Suneet K Maheshwari, managing partner at Udvik Infrastructure Advisors. Many of these emerged due to judicial decisions or multi-layered government approval processes, he said.
Should our retirement money be invested in projects where risk is high? Insurance and pension/provident funds comprise hard earned savings of the working class and should be invested wisely in safer investments. Mandating them to invest in infrastructure sector with its current risks could potentially risk these savings of people and create a political backlash.Suneet K Maheshwari, Managing Partner at Udvik Infrastructure Advisors
Within Investment Mandates
To be sure, organisations such as the EPFO, PFRDA and LIC all have strict investment mandates with a large share of funds collected directed towards safe investments such as government securities.
As such, any investments into infrastructure would be limited.
The second person cited earlier, an official at PFRDA, said it must be examined how the investments meet their safety criteria. Each organisation has to take its own call, this person said, adding a "small part" can be invested in the funds of funds. A decision on the quantum will be taken at a later stage.
The third person cited earlier, an official at the EPFO, also said the proposal is at an early stage. EPFO will likely invest a small amount of Rs 100-200 crore initially from their corpus to help finance infrastructure projects, the third person said. This investment from EPFO will be within the existing investment guidelines of the provident fund body, the person added.
The PFRDA has close to Rs 6 lakh crore in assets under management, while EPFO has a corpus of over Rs 12 lakh crore.
According to Maheshwari, if policymakers wish for more monies to flow into infrastructure, they should focus on de-risking the infrastructure sector for an equity or a debt investor. "Given our multi-party democracy and a three-layered governance structure (union, state and local), along with the ability of the courts to intervene, achieving this de-risking will be complex and also take time," he said.