Raising funds for highway
development projects
may become significantly
easier if a recent Planning
Commission proposal that
recommends allowing infrastructure
developers to tap insurance
companies and pension
funds for their financing requirements
sees the light of day.
The proposal, already sent to
the Ministry of Finance, covers
only infrastructure companies
that are willing to guarantee
repayment of a certain portion of
the money borrowed by their
special purpose vehicles. Infrastructure
companies float SPVs
to execute highway development
projects.
Global trend
"This is not a new proposal as the
B.K. Chaturvedi Committee,
which was constituted by the
Prime Minister to speed up
highway projects, has already
focused on it in its report," M.
Murali, Director General,
National Highway Builders
Federation, told Projectmonitor.
"All over the world, funding
for infrastructure development
comes from the insurance sector
and pension funds. The
Planning Commission proposal,
if implemented, will benefit
highway developers on one
hand and insurance companies
and pension funds on the
other," Murali said.
"For highway developers, this
could mean easy availability of
funds and borrowing at lower
and fixed interest rates for a
longer period of time. At present,
highway developers have to borrow
from commercial banks at
interest rates varying between
14 per cent and 17 per cent. The
loan period ranges from 12 to 15
years. Insurance companies
would be in a position to invest
for up to 30 years at fixed rates,"
he added.
According to Murali, as much
as Rs.1,00,000 crore was available
with insurance companies and
pension and provident funds. A
substantial portion of it could be
accessed by infrastructure companies
for their highway projects
if the government relaxed the
existing guidelines that curbed
investment from insurance, pension
and provident funds in the
infrastructure sector, he stated.
Currently, insurance companies
can allocate up to 15 per
cent of their investment portfolio
to infrastructure and social sector.
For pension and provident
funds, there is no provision for
such allocation.
"At present, the insurance companies
as well as the pension and
provident funds get a return of 4
per cent to 5 per cent on their
money. This is because most of it
is either invested in government
bonds or placed in banks in the
form of deposits. Insurance companies
and pension and provident
funds are therefore looking
at new investment avenues that
offer higher, uniform and sustainable
returns. Investment in the
infrastructure sector would no
doubt yield better returns,"
Murali said.
The Planning Commission proposal,
though primarily aimed at
meeting the needs of the capitalhungry
infrastructure sector,may be difficult to implement
and find few takers because of
the condition that requires an
infrastructure company to guarantee
repayment of a certain
portion of the money that its SPV
borrows for a project.
"It would not be possible for
infrastructure companies to
guarantee repayment for each
and every project that is executed
by the SPVs. Such a condition
will become a major roadblock
for the companies seeking
funds," said Murali.
"The implementation of such
a proposal will not be easy and
cannot take place without taking
into account the impact
that it will have on the operations
of commercial banks,"
he added.
According to a preliminary
assessment by the Planning
Commission, India's infrastructure
sector would require an
investment of Rs. 40.99 lakh crore
during the 12th Five-Year Plan
(2012-17). Investment in the
sector during the ongoing 11th
Plan is expected to be close to Rs.20,00,000 crore.