Column: Pensioning infrastructure

IRDA & PFRDA limit the exposure of pension and insurance funds in infra projects despite sufficient resources

It is known that the pension funds baulk at investing money in infrastructure projects. With the share of private investment in the Eleventh Five Year Plan (2007-12) flagged at 37.53% as compared to 22.04% during the Tenth Five Year Plan (2002-07), surveys have displayed an investment of a dismal 1% by pension funds in infrastructure projects. It isn’t just India; pension funds globally paint a bleak picture for infrastructure investment. In the European Union, pension funds have allocated only 1-3% of the total portfolio investment to this sector. The US stands on the same line with private equity still qualifying as one of the more preferred routes for investment. The hesitancy could be attributed to high risk values, non-availability of right resources and uncertainty.
However, Canada tops the list of keen pension fund investors. Through reformative action by the Canada Pension Plan Investment Board, the value of the Canadian Pension Plan, one of the largest pension funds, leapt from $152 billion to $172 billion in just one year. The success could be attributed to the fund’s firm belief in the growth of infrastructure projects. Canada is believed to allocate a staggering 10% equity in infrastructure projects. So insatiable is the thirst for financing infrastructure that pension funds invest directly in the sector, providing cut-throat competition to other funds and sponsors during the project bids. Canada’s success story proves the adeptness and proficiency of Canadian pension funds to correctly utilise resources. Similarly, South Korea’s National Pension Service found itself investing heavily in global property and infrastructure markets, accounting a 12% annual return from it.
Considering the immense scope of infrastructure investment revealed, India formed the high-level committee on financing infrastructure with an aim to suggest ways in providing an investor-friendly environment for private investment. The committee, led by Deepak Parekh, highlighted the difficulty in funding the proposed investment of $1 trillion in the 12th Plan, anticipating the debt gap of substantial proportions. Hence, it suggested the mobilisation of funding from insurance and pension funds, external debt and household savings.
The committee recommended the substitution of direct lending operations by guarantee operations that would enable cash flow through non-banking long-term income for infrastructure projects. Pension funds would therefore serve as an alternate source of investment in infrastructure through a continuum of long stream credit.
Pension funds play a pivotal role in credit enhancement. One of the schemes proposed by the committee is to give partial guarantee to bond issues of infrastructure projects so that the bonds reach a respectable credit rating of ‘AA’. This would assist in attracting long-term investors including pension funds. The idea is for the government instituted India Infrastructure Finance Company, IIFCL, which pioneers long-term debt for infrastructure projects to undertake credit enhancement up to 40% and provide an unconditional, irrevocable credit guarantee up to 50% of the bond issuance. As a result of credit enhancement, it would be possible to accelerate flow of foreign debt in financing infrastructure projects.
The Union Budget of 2013 has provided for an increase in the limit of tax-free bonds from the current limit. IIFCL will also be looking to utilise the opportunity to raise long-term funds through tax-free bonds. This move will also help in the development of corporate bond market for infrastructure companies.
The Working Sub-Group on Infrastructure, one of the wings constituted by the Planning Commission for formulating the Twelfth Five Year Plan (2012-17), has duly taken note on the importance of pension funds and proposes regulatory reforms to mobilise their funds into infrastructure. The essence of pension funds lies in their ability to invest in long-term projects without asset-liability mismatch. Unfortunately, the restrictions imposed by regulatory bodies such as Pension Fund Regulatory and Development Authority (PFRDA) and Insurance Regulatory and Development Authority (IRDA) limits the exposure of pension and insurance funds in infrastructure projects even though these funds have sufficient resources available to invest. The working group was quoted saying: “India, though has the largest growing middle class population, has very small proportion of its population investing in insurance and pension schemes. However, this can be changed by introducing proper incentives and suitable schemes, thereby generating additional long term funds for infrastructure investments by these institutions.”
In the wake of such developments, the working group urges the PFRDA and IRDA to amend regulations enabling insurance companies and pension funds to invest in infrastructure projects.
Funding infrastructure projects has always been a prickly issue and one cannot help but give credit to the government for finally tapping alternate resources such as pension funds for financing such projects. With high expectations from the PFRDA and IRDA, we hope to witness reformative action that would ease the discomfort of pension fund investors. Such a welcome change would keep the infrastructure development on the move and contribute to their fast-paced growth especially when the financial budget of 2013 hints at such a change.
Sidharrth Shankar and Rupinder Malik are partners in JSA. Views are personal

Source : Financial Express.
Date:15/03/2013

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