Chennai: Speculation and question marks have greeted finance minister P Chidambaram's announcement of setting up a special purpose vehicle (SPV) for channeling finance for infrastructure projects using $2 billion of the $132 billion foreign exchange reserves.

Since the finance minister restricted himself to merely announcing the setting up of the SPV without talking of other equity holders, some presume the new outfit could be a wholly owned government development institution.

Already, queries have been raised about the adequacy of the $2-billion allotment for infrastructure projects as the requirements are huge. However, the finance minister has yet to elaborate crucial aspects of the SPV, such as equity capital and its shareholders.

More interestingly, with the announcement of a SPV for funding infrastructure projects, what happens to the Chennai-headquartered Infrastructure Development Finance Company Limited (IDFC), which was created precisely for this purpose? It may be recalled that IDFC materialised out of Chidambaram's idea of a specialised institution to finance infrastructure projects and he himself had wanted Chennai to house at least one financial institution.

Does the government still nurture the plan of merging the company with some other financial institution(s) to form a mega development financial institution ? It should be noted that there are already a couple of financial institutions that need support. And a couple of them were considered prime suitors for being brought under the IDFC umbrella since it boasts an excellent balance sheet.

In 2003, plans to force a merger of IDFC with State Bank of India had to be when five top IDFC's top five executives submitting their resignations in protest.

The government may consider the availability of funds as the major roadblock for infrastructure projects taking off. However, as is well known that it is policy faults that deter investors from undertaking infrastructure projects, says an industry official.

"There are enough funds in the system for infrastructure projects, only bankable projects are absent," remarks Nasser Munjee, senior advisor, KPMG. Nor does Munjee favour a mega development financial institution, since prudence demands that risks need to be spread out instead of being concentrated with one institution. Moreover, risks vary at different stages of the project life cycle.

"The first question that needs to be asked is 'what is the problem we are trying to solve?'. If that is done ways and means for sorting out issues could be easily found," he adds. Perhaps, the SPV concept is fine for public-private projects where some pilot projects have been identified Munjee opines.