Govt proposes launch of Infrastructure Investment Trusts by Nov
The government is proposing to launch infrastructure investment trusts by November, 2013, for project management in the long-term. This move would go a long way in reversing the plunging growth of the economy as stated by the Economic Affairs secretary, who also blamed foreign speculators for the slump in the rate of the rupee. Simultaneously, the government was contemplating other effective measures like deepening of the bond market as well as the formulation of an investment trust fund. It was felt that these measures would go a long way in promoting debt and equity investment in the infrastructure sector.
The Rupee which has plunged to a low of almost Rs.70 a US Dollar a few weeks back, had considerably gained ground in subsequent weeks, and is currently trading at about Rs.62 a dollar. It was infact stably placed at around Rs.52-55 a dollar before May 22nd, 2013. It was after this that the US Federation informed that it was considering the withdrawal of the quantitative easing programme. The Rupee derives it intrinsic value from its purchasing power, which in Real Effective Exchange Rate (REER) terms could be in the range of Rs.58-60 a dollar.
Pension funds from Canada a boost for India’s infra sector:
At the FICCI Infrastructure summit, Canada proposed to bring in pension funds for India’s infrastructure sector. Both Canada and the US are willing to invest hundreds of billions of dollars of such funds in emerging economies like India. However, India not able to may use of this benevolence due to the delay in implementation of the pension and insurance reforms. During the summit, it was also felt that the government could save about $ 1 billion in this financial year due to the considerable drop in demand for diesel. Apparently, over 40% of India’s fuel consumption is in the form of diesel, with oil imports accounting for $150 billion annually. Also, going by current trends, the expected foreign direct investment flows into India is around $36 billion. Moreover, there was a significant increase in the net FDI to i$9 billion in Q1 of 2013 compared to $5 billion in the corresponding quarter last year. This increase could be used to fund the targeted $70 billion current account deficit this year.
IITs to facilitate long-term management of projects:
It is believed that infrastructure investment trusts (IITs), similar to real estate investment trusts (REITs), would facilitate the management of projects in the long-term. This would negate the existing practice of private sector companies turning into developers overnight with the motive of contracting for construction activities rather than building a long-lasting relationship with the government. The major cause that can be attributed to hurdles faced by many PPP projects in the infrastructure sector is due to the fact that the risk in projects was not priced by many private players over a longer time frame. Besides, a long-term relationship could not be nurtured by the public sector with the private sector players. It cannot be concluded that PPP in the infrastructure sector was a total failure, with around half the projects doing well.
Annuity model more attractive for private investors:
Canada is expected to collaborate with India for successful implementation of PPP projects across four areas namely, food security, energy security, infrastructure and education. Canada, which has one of the strongest pension systems in the world, is willing to utilise this to a large extend in infrastructure building. To derive long-term money from pension funds or sovereign wealth funds, it is imperative that infrastructure debt funds are prolonged for 15-20 years. The FICCI has suggested an annuity model for commercially unviable projects having an uncertain revenue stream from toll collections, and thereby unable to attract Build-Operate-Transfer (BOT) operators. The annuity concessions model is more attractive from the perspective of private investors as they are able to recover their costs through fixed and periodical (annual) payments from the government spread over the concession period, rather than expecting it to be recovered from the proceeds of toll collections.
