Britain India Infrastructure Group 

The second Britain India Infrastructure Group(BIIG) bilateral meeting took place in London on Saturday 26^th November, the day after the Indian High Commission’s Infrastructure Finance conference at Mansion House, held in collaboration with the City of London. It proved to be a very successful session, with constructive discussion around PPP, skills for infrastructure, infrastructure  finance, urban infrastructure developments - both regeneration and development.

Participants were from the public and private sectors. Leading for the Government of India was Shri R Gopalan, Secretary Department of Economic Affairs (DEA), with Martin Donnelly, Permanent Secretary, Department for Business Innovation and Skills in the Chair. Other officials from India included: Mr Rajesh Khullar, Joint Secretary Infrastructure & Investment at the DEA; Mr Gajendra Haldea, Adviser to Deputy Chairman and Pricipal Adviser (infrastructure) at the Planning Commission (Mr Haldea drafted the PPP master concession agreement which has been widely adopted and used in PPP contracts); Dr Sudhir Krishna, Secretary,Ministry of Urban Development  and Mr A.K. Upadhyay, Secretary, Ministry of Road Transport & Highways. In addition, there were senior officials from the states of Haryana, Maharashtra, Madhya Pradesh, Andhra Pradesh, and Odisha.  Mr Dilip Chenoy, Chief Executive & Managing Director of the National Skills Development Corporation and Mr Amitabh Kant, Chief Executive Officer & Managing Director, Delhi Mumbai Industrial Corridor Development  Corporation,  also participated.

The Indian business figures were drawn from the Haryana State Industrial & infrastructure Development Corporation, Aon Hewitt, GMR, IDFC, Lanco Power Ltd, Tata Realty & Infrastructure, and Larsen & Toubro. UK attendees included representatives from Arup, A4E, Herbert Smith, JCB, Pinsent Masons, PricewaterhouseCoopers, together with UKTI and Infrastructure UK (HM Treasury) officials and representatives from UKIBC.
 
Urban Infrastructure Opportunities
Officials from the respective State Governments and Delhi Mumbai Industrial Corridor Development Corridor set out the specific infrastructure opportunities, their priorities, and encouraged UK and India businesses to deepen the collaboration in the development and financing of urban infrastructure. They appreciated the UKTI and UKIBC’s efforts, and were particularly pleased to hear about the British urban regeneration mission to three Indian cities – Kolkata, Mumbai and Bhopal - departing that night.

PPP
Infrastructure UK provided feedback on India’s new draft national PPP policy (see below), and shared insights on the UK’s PPP experience. There was also a discussion on standardisation of PPP project clauses.  India intends to scale up PPP, and the new draft policy includes social infrastructure: education and healthcare.

Infrastructure Debt Funds
A key element of the Infrastructure finance session was a presentation on Infrastructure Debt Funds (IDF), in which PricewaterhouseCoopers provided insight into the terms and conditions that would attract long term institutional investors to invest in such an asset class.

It was widely agreed that IDFs are a positive step in the right direction. There was a lively debate around market appetite for IDFs in India, and it was agreed that pockets of interest do exist if correctly structured.  The lack of many precedents in the UK, Europe and the US was noted and, given the current Eurozone turmoil, this was not expected to change soon.

Export Finance
UK Export Finance (previously the Export Credit & Guarantees Department) emphasised its substantial risk appetite for India and set out how its loan guarantee products can support the financing of infrastructure in India.

Skills in infrastructure
Presentations were made by Aon Hewitt on the skills gap in infrastructure, a major challenge to be overcome if India is to achieve its infrastructure investment plans. An estimated 6% of the population will need to be employed in the construction sector by 2022. Currently the sector employs 32 million and this will need to increase to 87 million in the next 10 years. Dilip Chenoy, Chief Executive & Managing Director of the National Skills Development Corporation outlined possible structures to help bridge the skills gap including training organisations on a “scaleable hub and spoke model” within Special Economic Zones to provide skills training for the sector.

The new USD 150 million PPP skills initiative led by the Ministry of Finance, through the National Skills Development Fund, was outlined, which is structured to coordinate across central government ministries. Remarking on the excellent private sector Britain India skills initiatives he urged more UK skills providers to participate, recognising the huge need to scale up skills training. The UK’s response was led by the chair of the UK India Skills Forurm (UKISF), who set out how UKISF’s unique consortium approach can and is supporting India in its skill capacity training across various sectors. There was a presentation from JCB on its training model in India, where 18,000 people have been trained since the programme started, demonstrating that much of the skills training in India is industry / private sector led.

The shortage of skilled and unskilled labour in the construction industry is a problem across the country, though more acute in some places. According to a recent article in the Times of India titled “Kolkata realty market feels labour pangs, shortfall 50%” which is partly attributed to lower wages in West Bengal compared to the South and West meaning the City fails to compete for migrant workers from Orissa and Bihar read more: Times of India, 11^th November 2011 here

As reported in September here, the UKIBC signed an MoU with the Federation of Indian Chambers of Commerce and Industry to work with them and the Government of West Bengal to bridge the skills gap in the State.

Delhi Mumbai Industrial Corridor
There was a very interesting presentation by Delhi Mumbai Industrial Corridor Development Corporation (DMICDC). This USD 90 billion project is currently in the planning stage. The Indian Cabinet has recently approved the restructuring and refinancing of the DMICDC. This is good news for this ambitious project, which has a financing and technical partnership with the Government of Japan.

The DMIC will include a 1,843 Km dedicated rail and freight corridor across six states: Uttar Pradesh, the National Capital Region (NCR) of Delhi, Haryana, Rajasthan, Gujarat and Maharashtra. It starts at Dadri in NCR and ends at Jawarharlal Nehru Port in Mumbai. The project also envisages the creation of 7 new industrial cities along the route.
 
Many UK companies are already involved in this exciting project, and others are keenly following it. (Read more in the UKIBC sector view dated 4^th October 2011 here
 
 
Kamal Nath, Union Minister of Urban Development and Rt. Hon Greg Clark, UK Minister for Decentralisation & Cities agree to work towards an MoU

At a meeting in London on 14^th October, Greg Clark and Kamal Nath agreed to work towards signing a Memorandum of Understanding in the area of Urban Regeneration and Development. India’s cities are growing and, recognising the UK’s expertise in the development of infrastructure globally, Kamal Nath encouraged more collaboration between Indian and UK businesses.  
Kamal Nath's office immediately issued a press release on their return to New Delhi (read more: follow the link to India Express article “UK and India to Sign an MoU in the areas of Urban Infrastructure dated” 16th October here

UK India Urban Infrastructure Group’s Urban Infrastructure Proposal Welcomed by Kamal
Nath
Representatives from the UKIBC and UKTI’s UK India Urban Infrastructure Group (UKIURG), including Arup, JCB, Mott MacDonald, Biwater KPMG, Clifford Chance had a very positive meeting with Minister Nath, Munish Kumar Garg, Director JNNURM, Ministry of Urban Development and senior High Commission of India officials in London on 14th October 2011.
 
UKIURG presented its two stage proposal to work with Kolkata to conduct an urban regeneration and development scoping study, and then to follow that up with a sustainable master plan to support the development of satellite cities across West Bengal. Kolkata/West Bengal has emerged as the initial focus, due to the number of opportunities which play to the UK's strengths, and the strong political will and desire to cooperate at State Government level. Whilst Kolkata has emerged as the initial focus, the idea is that the proposal can be replicated in the future across other town and cities. The proposal is backed by UKTI’s High Value Opportunity programme. Stage one will be funded by UKTI and the private sector. Stage II is a much larger undertaking, and financing options to be explored include the State and Central Government through the JNNURM scheme.

The proposal was very well received by Mr Nath. He offered his full support to take forward the initiative, and invited the group to New Delhi to meet him, JNNURM officials and relevant ministries in early December after their next visit to Kolkata. In a letter to Richard Heald, UKIBC Chief Executive, Kamal Nath said that he has instructed his ministry to explore funding routes for the sustainable master plan proposal, and to move forward the MoU agreed upon when he met Greg Clark. 
 
Acknowledging the UK's "profound" strengths in urban regeneration and development - which was reinforced by the impressive dockland's setting of Clifford Chance's offices - Nath expressed an interest in learning more about the model for the London Docklands Development Authority, which was instrumental in getting the docklands off the ground.
 
Speaking at the UKIBC seminar titled "Opportunities for UK companies in Eastern India", Nath said that India needed an “infrastructure revolution” and he urged the UK to participate. He emphasised that capacity building in urban planning at State and Municipal level is required as a priority, and that this must go on concurrently with the building of urban infrastructure.
 
He said that central government funding for JNNURM Phase II, which is currently being considered, would increase to $25 billion (£16 billion) from approximately $15 billion (£9 billion) in Phase 1, and that a significant chunk would be allocated for a capacity building fund.
 
This positive engagement in the UK was mirrored in subsequent meetings in Kolkata and New Delhi. Representatives from UKIURG, UKTI and British Deputy High Commission officials visited Kolkata at the end of November where they met Mr Firhad Hakim, West Bengal’s Minister in Charge of Urban Development, the Mayor of Kolkata and other municipal officials to discuss the priority municipal projects including the riverside development and the “Mint Project”.

Mr Hakim in principal supported the proposal of a Memorandum of Understanding, acknowledging that it would serve to further enhance cooperation and collaboration including capacity building, land economics, heritage management, sustainable master planning and transport planning, amongst others.
Since the meetings in London, there have been positive exchanges between UKIBC, UKTI and Minister Nath, with the Minister personally supporting plans.
 
Urban Regeneration Mission to Kolkata, Mumbai and Bhopal
The urban regeneration and development opportunities across Tier I and Tier II cities were witnessed first hand by a 20 plus delegation, led by UKTI and supported by the UKIBC, when they visited Kolkata, Mumbai and Bhopal last week. The delegation, managed by British Expertise, comprised architects civil engineering firms, including representatives from Arup, Balfour Beatty, Broadway Malyan Architects, Clasis Law, Mott MacDonald and Serco plc 

The Kolkata leg advanced and deepened the relationship discussed above with the State government and the business community. The Bhopal programme demonstrated the opportunity that exists for UK infrastructure companies in India’s Tier 2 cities, particularly in the area of heritage, transportation, water and waste water. The Mumbai leg illustrated the challenges and opportunities in regenerating elements of a major city.
 
Infrastructure Debt Funds
The Ministry of Finance approved the setting up of Infrastructure Debt Funds (IDFs) in the summer to facilitate the flow of long-term debt into infrastructure projects.

On 21^st November the Reserve Bank of India (RBI) issued a Notification Read Notification RBI/2011-12/268 here with detailed guidelines setting out the regulatory framework for Non Banking Financial Companies (NBFCs) to sponsor Infrastructure Debt Funds, which can be established as Mutual Funds (MFs) and Non-Banking Financial Company (NBFCs).

The guidelines set out the Tripartite Agreement to be signed between the Concessionaire, the Project Authority and IDF-NBFC and also  the eligibility criteria.

In its earlier press release dated 23^rd September, the RBI set out the broad parameters for IDFs. For an IDF – NBFC the following criteria must be fulfiled:

• The IDF should be assigned a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, and ICRA
• Tier II capital cannot exceed Tier I capital
• The IDF shall invest only in PPP and post construction infrastructure projects which have completed at least 1 year of commercial operation
• Bonds shall be assigned a risk weight of 50%.

Read more here

As mentioned earlier in this report, IDFs were discussed at the Britain India Infrastructure Group meeting in London on 26^th November. During this session, PricewaterhouseCoopers on behalf of the small working group formed by UKIBC, which included Herbert Smith, presented the outline terms for a rupee denominated IDF, with an offshore component.

The IDF NBFC, which was the main focus of discussions, is designed specifically to refinance PPP projects which have completed one year of successful commercial operation.

Based on current available guidelines, the outline terms and structure also factored in feedback from potential investors including fund managers, investment banks, and pension funds. The presentation set out the terms that would be necessary to attract long term sources of finance from international institutional investors, primarily pension funds, insurance companies and international capital market institutions.

IDFs are a hugely positive step. The general consensus is that there could be appetite from international investors for a well structured IDFs but certainly in the initial stages it would need to be backed by Government / a strong sponsor, with possibly guarantees at the fund in addition to the project level. Liquidity and return is of equal importance to investors, with the most important question for them being: how will I get my money back? 

At the BIIG meeting the Ministry of Finance and RBI indicated that guidelines have been left suitably broad and detailed structuring will be left to the market to decide. Apparently the first IDFC NBFC is imminent so it will be interesting to learn more about that.
 
National PPP Policy 2011 to Include Social Infrastructure
The draft National Public Private Partnership Policy 2011, prepared by the Department of Economic Affairs, Ministry of Finance is positive news, setting out, as it does, a comprehensive policy to be used by Central and State Governments to scale up Public Private Partnerships (PPP) to support the development of both economic and social infrastructure projects.

PPP has been successful in the roads, ports, and aviation sectors and, to a lesser extent, in urban services. The Government is therefore keen to extend it to healthcare and education, to contribute help secure the inclusive growth aspirations of the country.

The draft policy (http://www.pppinindia.com/Preamble.php) sets out the principles governing the implementation of PPP projects across both “economic” and “non economic” sectors, the PPP Process, Enabling Frameworks, and the institutional and governance mechansim.

The Government of India is committed to PPP as a way of attracting private sector investment and also to achieve operational efficiencies in the provision of public assets and services.

With £600 billion investment in infrastructure expected in the next five year plan, the government aims to attract 50% from the private sector. Getting the PPP policy right is therefore critical.

Positive elements within the new policy include optimal risk sharing in project structuring, with risks being borne by the party best able to manage them over the life of the asset. It also puts the onus of land acquisition on the government agency involved. This responsibility is not as clear cut in the draft land acquisition bill (see link to UKIBC sector view dated August 2011 http://www.ukibc.com/key-sectors/infrastructure/members-only/1108-sector-view.aspx).The policy envisages institutional strengthening through the establishment of a PPP advisory unit.
 
Ports Sector Opportunities in India
The opportunities for UK consultants and infrastructure companies in the ports sector were showcased at UKTI / Port Terminals Group major ports seminar in London on 8^th November 2011, when some of India’s leading port operators urged UK companies to participate.

The audience heard case studies from Mr Rajeev Sinh, Director of Mundra Port and Special Economic Zone, Rohit Modi, Joint Managing Director, Gammon India, and Mr Y. S. Prasad, Chief Executive Officer of Kakinada Seaports Ltd. 

Mundra Port and Special Economic Zone Ltd (owned by Adani Group) on the west coast of India has developed and now manages the country’s largest privately-operated port. It is the first listed port company in India with a market capital of $ 6 billion. This year cargo handled will be 73 MT and by 2012-2013 it is expected to reach 100MT. Mundra Port has 28kms of water front and offers excellent access to the North West.

Gammon India, is part of the SPV that constructed and now operates and manages Visakhapatnam Port in the State of Andhra Pradesh, together with the UK’s Portia Management Services Ltd, the international arm of Peel Ports Ltd.  The concession is for a period of 30 years Rohit Modi, Joint Managing Director, Gammon India, said UK companies had to visit India and take a long term view. Encouraging the UK to move early, he cautioned against waiting until everything is perfect as the opportunity is here and now. He emphasized that growth is coming form much wider places, citing  Bihar and Orissa showing growth in GDP in excess of 10%.

There are of course challenges to be overcome, for which patience and a long term view is necessary. The case study from Gordon Rankine from marine consulting engineers Becket Rankine,  demonstrated this. From initial design work on a “roll on roll off” ferry terminal project in the Gulf of Cambay  to the go ahead being given for construction took almost 15 years. Positive things are, though, happening. For example, the constructionof two terminals at Dahej and Gogha has now been approved by the Gujarat Maritime Board, which is hugely positive news for the region as it will dramatically decrease the time to get to Saurashtra and South Gujarat.

Mr Rankine advised that they are now looking for ferry operators and a workshop will be held shortly.

The following table sets some key information on the Indian ports sector.