To fund infrastructure projects in the public-private-partnership model, the forthcoming Budget could lay down some broad contours on the setting up of debt funds, which will provide investment for the core sector.The sector is devoid of a long-term financing pattern owing to asset-liability mismatch fears among banks.
Officials said much work had been done both at the finance ministry level and in other departments related with the fund.
Earlier, Prime Minister Manmohan Singh had hinted the proposed India Infrastructure Debt Fund could come up in the Budget on February 28. "Talks are under way to set up an infrastructure development fund. Some discussions are going on... and most probably, I think, the finance minister will outline something in that direction," he had said.
A Planning Commission report has proposed the setting up of an India Infrastructure Debt Fund of Rs 50,000 crore to meet the long-term debt requirements of infrastructure projects set up through public-private partnership. But it is based on the needs of the Eleventh Five Year Plan, which will end on March 31, 2012. As such, officials are tightlipped about the quantity of the fund, but agree the broad contours are likely to be laid down in the Budget.
The fund will help bridge the emerging gap in the total debt required for funding infrastructure projects, which rely on commercial banks at present. The fund is required as banks find it difficult to finance long gestation infrastructure projects due to expected mismatches between assets and liabilities.
"The India Infrastructure Fund would only lend to projects that have entered commercial operations after the completion of construction and would create a secondary market for debt bonds," the report said.
To keep pace with a rapidly growing economy, the Eleventh Five-Year Plan had set a target of scaling up investment in infrastructure from about five per cent of gross domestic product as in the Tenth Five-Year Plan to 8.4 per cent. This in absolute terms entails a total investment of almost $513.55 billion, of which 36 per cent will come from the private sector.
The total debt burden, which also includes public sector projects, is estimated around $257 billion. Of this, resources could make up for around $200 billion, leaving a gap of almost $50 billion in the Eleventh Plan period. It is this gap that the fund seeks to address and also provide a model for the setting up of similar funds.
However, the Twelfth Five Year Plan is likely to peg the investment requirements for infrastructure at $1 trillion for the five-year period starting 2012-13.
The Planning Commission report suggests the fund be set up by sponsors, who could be a combination of India Infrastructure Finance Company, State Bank of India, ICICI, LIC, IDFC, UTI, an investment bank or an infrastructure NBFC. It may also include foreign entities such as IFC or ABD.
Regulators, including Irda, PFRDA and RBI need to be approached to enable insurance and pension funds to invest in the proposed debt fund, while RBI has to tweak its ECB guidelines to allow foreign insurance and pension funds to invest in this fund. The finance ministry will also need to exempt the interest income from withholding tax to enable foreign investors to invest in the fund.
"The process of discussion with the regulators and finance ministry is on," officials said.
The infra fund proposes to re-finance 85 per cent of the outstanding project debt from senior lenders. The instrument of lending is expected to be negotiable bonds with a tenor of 10 years. The India Infrastructure Debt Fund would be managed by a small team of professionals selected for this purpose.
The Planning Commission report suggests the government should play the role of enabler and facilitator in the fund and not guarantee the borrowings.