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NATIONAL INVESTMENT AND INFRASTRUCTURE FUND (NIIF)

6th October, 2023

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Context: The National Investment and Infrastructure Fund (NIIF) has partnered with the Japan Bank for International Cooperation (JBIC) to establish a $600 million India-Japan Fund.

Details

  • The India-Japan Fund is dedicated to environmental sustainability and carbon emission reduction investments, while also promoting heightened Japanese investment in India. Its overarching goal is to enhance and solidify the economic partnership between these two nations, fostering collaboration in green initiatives and economic development.

Key Highlights

  • The primary focus of the India-Japan Fund is on investments that promote environmental sustainability and reduce carbon emissions. This includes projects related to renewable energy, energy efficiency, clean technology, and other green initiatives.
  • The Government of India will contribute 49% of the target corpus for the India-Japan Fund. This underscores the Indian government's commitment to supporting infrastructure development and sustainable projects in the country.
    • JBIC will provide the remaining 51% of the target corpus. This demonstrates Japan's keen interest in investing in India's infrastructure and sustainability initiatives.
  • NIIF Limited (NIIFL), which is experienced in managing infrastructure investments, will be responsible for managing the India-Japan Fund. NIIFL has a track record of financing and promoting infrastructure development in India.
  • The establishment of the India-Japan Fund represents a significant milestone in the strategic and economic partnership between Japan and India. It signifies both nations' commitment to working together on infrastructure and sustainability projects.

National Investment and Infrastructure Fund (NIIF)

About

  • The National Investment and Infrastructure Fund (NIIF) is India's first sovereign wealth fund, acting as an Alternative Investment Fund under SEBI regulations. It is a platform for national and international investors to invest equity capital in domestic economic and social infrastructure.

Background

  • The idea of NIIF was first proposed in the Union Budget 2015-16 by the then Union Finance Minister. He announced that an infrastructure fund with an annual flow of Rs 20,000 crore will be set up to finance infrastructure projects in India.
  • The fund was formally launched in December 2016 with the signing of the first investment agreement between NIIF and Abu Dhabi Investment Authority (ADIA), which committed to invest $1 billion in NIIF's Master Fund.

Features

  • NIIF has three funds under its umbrella: Master Fund, Fund of Funds and Strategic Opportunities Fund.
    • The Master Fund invests primarily in core infrastructure sectors such as transportation, energy, water, sanitation and urban infrastructure.
    • The Fund of Funds invests in funds managed by third-party managers in infrastructure and associated sectors such as green energy, affordable housing and digital infrastructure.
    • The Strategic Opportunities Fund invests in sectors adjacent to infrastructure such as logistics, industrial parks and special situations.
  • NIIF has a unique business model that leverages its partnership with the Government of India (GoI), which holds a 49% stake in each fund and acts as a minority shareholder. The remaining 51% is held by leading global and domestic institutional investors such as pension funds, sovereign wealth funds, insurance companies and banks. NIIF also partners with experienced operators and developers to access high-quality projects and assets.

Significances of NIIF

Bridging the Infrastructure Financing Gap

  • NIIF plays a crucial role in addressing the substantial infrastructure financing gap in India, by mobilizing long-term capital from both domestic and international sources, NIIF helps provide stable and patient financing for infrastructure development projects in the country. This is essential for addressing the infrastructure deficit and supporting India's economic growth.

Economic Growth

  • Infrastructure development is a key driver of economic growth. NIIF's investments in infrastructure projects contribute to economic expansion by creating new avenues for business activities, improving connectivity, and increasing overall productivity. This, in turn, can lead to higher GDP growth rates and improved living standards for the population.

Employment Generation

  • Infrastructure projects often require a significant labour force, both skilled and unskilled. NIIF's investments in infrastructure contribute to employment generation, benefiting the Indian workforce and addressing unemployment challenges. The creation of jobs across various sectors, such as construction, manufacturing, and services, helps reduce poverty and improve the standard of living.

Social Welfare

  • Improved infrastructure has a direct impact on the quality of life for citizens. Better transportation networks, access to clean water, sanitation facilities, and reliable energy sources are all outcomes of infrastructure development. NIIF's investments in these sectors help enhance social welfare by providing essential services to the population.

Attracting Foreign Direct Investment (FDI)

  • NIIF serves as a catalyst for attracting more foreign direct investment into India's infrastructure sector. Historically, the infrastructure sector in India has lagged behind other sectors in terms of FDI inflows.
  • NIIF's ability to offer attractive returns, risk mitigation strategies, and co-investment opportunities enhances the confidence and interest of foreign investors in India's infrastructure potential. This increased FDI can bring in much-needed capital and expertise to support large-scale infrastructure projects.

Knowledge and Technology Transfer

  • NIIF collaborates with global partners, and through these partnerships, it facilitates the transfer of knowledge and technology to its Indian portfolio companies. This helps bridge the technology and expertise gaps that may exist in India's infrastructure sector, ensuring that projects are developed using best practices and state-of-the-art technology.

Steps taken to make NIIF a credible platform for infrastructure financing

  • Providing tax benefits to NIIF such as exemption from dividend distribution tax, capital gains tax and income tax for its offshore investors.
  • Providing sovereign guarantees to NIIF's borrowings up to 49% of its total commitments.
  • Providing budgetary support to NIIF for meeting its operational expenses and initial corpus.
  • Appointing a professional and independent board of directors and management team for NIIF with representation from the Government of India, investors and experts.
  • Signing memorandum of understanding (MoUs) with various countries such as UAE, UK, Russia, Singapore, Canada and Japan for cooperation and investment in NIIF.
  • Launching new funds under NIIF such as the India-Japan Fund, which focuses on environmental sustainability and low carbon emission strategies.

Challenges that need to be addressed

  • Finding bankable projects that meet the investment criteria and return expectations of NIIF and its investors.
  • Ensuring timely execution and completion of projects without cost overruns or delays.
  • Managing environmental, social and governance (ESG) risks associated with infrastructure projects.
  • Dealing with regulatory uncertainties and policy changes that may affect the viability or profitability of projects.
  • Competing with other sources of financing such as multilateral development banks, private equity funds and bond markets.

Way forward to overcome these challenges and realize its full potential

  • Developing a robust pipeline of projects through proactive engagement with central and state governments, public sector enterprises and private sector players.
  • Adopting best practices in project appraisal, due diligence, monitoring and evaluation to ensure the quality and efficiency of investments.
  • Strengthening its ESG framework and standards to align with international norms and expectations of investors.
  • Advocating for policy reforms and regulatory clarity to create a conducive environment for infrastructure development in India.
  • Diversifying its portfolio across sectors, geographies, stages and instruments to optimize risk-return profile and create value for investors.

Conclusion

  • The India-Japan Fund is a significant initiative aimed at attracting investments in sustainable infrastructure projects in India. By partnering with JBIC and leveraging the expertise of NIIFL, this fund seeks to boost economic ties between India and Japan while contributing to global environmental and climate goals. Its focus on sustainability aligns with the growing global emphasis on green investments and carbon reduction strategies.

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PRACTICE QUESTION

Q. What are the primary objectives and key roles of the National Investment and Infrastructure Fund (NIIF), and how does it contribute to addressing the country's infrastructure financing gap and promoting economic growth?

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