NEW DELHI: The infrastructure sector could soon have a steady supply of long-term funds if the finance ministry is successful in its bid to get a part of the retirement savings of workers invested in dedicated sector funds.
The finance ministry has written to the Employees’ Provident Fund Organisation, or EPFO, that manages over Rs 3 lakh crore of retirement savings of organized sector workers to consider investments in the infrastructure development fund (IDF) that were proposed in the budget for 2011-12.
“We have taken up the issue with EPFO,” a ministry official, privy to the communication, told ET. The finance ministry has been unable to persuade the EPFO to invest even a modest 5% of incremental inflows into equities, but is hopeful it would be more favourably inclined towards investments in IDFs, which will refinance projects with AA or AAA rating.
The North Block has argued that IDF will offer lucrative and secure alternate investment option for the provident fund corpus, the official said. In 2010-11 , the Employee Provident Fund (EPF) schemes made a net investment of Rs 46,376 crore as per the rigid investment pattern prescribed.
A significant portion of these funds could go to the infrastructure funds if the EPFO agrees to include these funds among eligible investments. Under the current rules, the EPFO can invest a maximum of 40% of its corpus in AA/AAA bonds and securities of public sector financial institutions, including those by private sector. Finance minister Pranab Mukherjee had mooted the idea of IDFs in his 2011-12 budget speech to accelerate the flow of long term debt in infrastructure projects.
Four financial institutions, Bank of Baroda, ICICI Bank, LIC and Citi Financial, recently floated country’s first $ 2 billion. “Investment in IDF will earn the organisation better and assured return without subjecting its funds to unnecessary risk,” the official said. IDF can offer 11% -13 % return as against below 9% on government bonds, the finance ministry has reasoned.
The EPFO will buy this logic only if it does not entail additional risks, the reason why it has stayed clear of equities even if it has meant low returns for subscribers. Nearly two-thirds of the total EPF corpus is invested in government of government backed securities that fetch low returns, largely the reason in the current year the fund will offer only 8.25% return to its 4.7 crore subscribers, well below what is available on bank fixed deposits.
“The move is in right direction as EPFO is the largest pool of long-term retirement and pension funds.. But the challenge would be in finding AA and AA projects especially with aggressive bidding for projects,” said, Manish Agarwal, executive director , PwC. Banks have been primary source of funds for the infrastructure sector, but the government is keen to reduce their role because of serious asset-liability mismatch involved in such lending.
Banks typically have access to deposit funds with 3-5 year maturity whereas infrastructure lending is for much longer period. There are also regulatory restrictions on how much banks can lend to an individual project or a group.
India’s infrastructure, bursting at the seams, needs over one trillion dollars over next five years that has to come primarily from private resources as the fiscally constrained government has little room to step up public spending.
India is ranked 86th out of 139 countries in quality of overall infrastructure , well below the emerging countries such as China at 50 and Brazil at 62 in World Economic Forum’s 2010-11 global competitiveness index. Mukherjee had conceded before a Parliamentary consultative committee that there could be 30% gap in funds needed for infrastructure and called for intermediating greater amounts of insurance and pensions funds.