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AIIB’sInvestmentintheNationalInfrastructureInvestmentFund:WhyisitaRiskyVenture?ByAnuradhaMunshiandKateGeary

TheNationalInvestmentandInfrastructureFund(NIIF),wasestablishedin2015bytheGovernmentofIndiatoaddresstheinfrastructure-financinggapinthecountry,particularlyontheequityfront.Itwassetupasanalternativeinvestmentfund(AIF)withaplannedcorpusofRs40,000crore(USD6billion).1

1http://pib.nic.in/newsite/mbErel.aspx?relid=133324

BriefingNotelJuly2019

AccordingtotheEconomic Survey 2017 – 2018, India needs US$ 4.5 trillion worth of investments till 2040 to develop infrastructure to improve economic growth and community well-being. Photo: Mint

CentreforFinancialAccountability:R-21,GroundFloor,SouthEx-II,NewDelhi,Indiahttps://www.cenfa.org/BICEurope:Sarphatistraat30,1018GLAmsterdam,Netherlandshttps://www.bic-europe.org/

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TheGovernmentofIndiawillcommitupto49percentofNIIF’stargetcapitalisationwiththebalance51percentofcommitmentsexpectedtoberaisedfrominstitutionalinvestors,includingsovereignwealthfunds,quasi-sovereignwealthfunds,andinternationalanddomesticinvestors.

NIIFisenvisagedasaplatformthatcanattractnationalandinternationalinvestorskeenoninvestingincommerciallyviableIndianinfrastructureprojects.NIIFhasthreeinvestmentplatforms,namelytheMasterFund,FundofFunds(FoF)andStrategicInvestmentsFund.

AIIB’sInvestmentinNIIF

TheAsianInfrastructureInvestmentBank(AIIB),whichbeganoperationsinJanuary2016,describesitselfas“amultilateraldevelopmentbankconceivedforthe21stcentury,”andstatesthatitscorepurposeistofundinfrastructuredevelopmentprojectsintheAsia-Pacificregion.

AIIB’scoreprinciplesareopenness,transparency,

independenceandaccountability,andthemodeofoperationis“Clean,Lean,andGreen.”

WithitsinvestmentNationalInvestmentandInfrastructureFundPhaseI,AIIBhasparticipatedasaninvestorintheFoF.TheAIIB’sprojectsummaryinformationdocumentclaimsthisprovidesauniqueandstrongpositiontoprovideafilliptothefundsdedicatedtoinfrastructureandrelatedsectorsinIndia.TheFoFwilldeployinvestmentsintoPortfolio(or

InauguralMeetingoftheBoardofGovernorsoftheAIIB.Photo:GovernmentofChina

InvestmentPlatformsofNIIF

MasterFundwillprimarilyinvestinoperatingassetsincoreinfrastructuresectorssuchasroads,ports,airports,poweretc.TheMasterFundislikelytofollowastrategyofestablishingsector-specificoperatingcompanies,inpartnershipwithmarketleadingandlike-mindedfinancialandstrategicpartnerswithcomplementarycapabilities,andaggregateassetstobuildastrongdiversifiedportfolio.

FundofFundsseekstoinvestwithexperiencedfundmanagerswithanexpectationtoenablethemtoattractinstitutionalinvestorstoinvestintheirfunds.Thisfundisopentoformjointventureswithfundmanagersselectively.TheFoFinvestsacrossinfrastructureservicesandalliedsectors,productstrategies,andinvestmentstyles.

StrategicFundisaimedatgrowthanddevelopmentstageinvestmentsinprojects/companiesinabroadrangeofsectorsthatareofeconomicandcommercialimportanceandarelikelytobenefitfromIndia’sgrowthtrajectoryoverthemediumtolong-term.

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Sub)-FundsdedicatedtoIndianinfrastructureandrelatedsectors,whichwillenablethecommittedcapitaltobediversifiedintovarioussectors.

TheinitialclosingofFoFisplannedatUSD600million,whichisbeingsharedbyAIIB(USD100millioninPhaseI)andGovernmentofIndia(USD500million).ThisfundismarkedasFinancialIntermediaryproject.Furthermore,AIIBisalsoconsideringaninvestmentofUSD100millionintheFoFFinalClosing(PhaseII),whichmaybepresentedforBoardapprovalatalaterdate.2

AspertheAIIB’sprojectdocument3,theFoFwillundertakeitsinvestmentspursuanttoaninvestmentstrategyandguidelinestobeagreedwithitskeyinvestors.TheAIIBhasdelegatedtotheFoFthedecision-makingontheuseofBankfunds,includingtheselection,appraisal,approval,andmonitoringofSub-FundsandtheoversightoftheirrespectiveinvestmentsinPortfolioCompanies.TheAIIBwillcontinuouslyreviewtheselectionoffurtherinvestmentsbytheFoFagainstthedefinedInvestmentGuidelinesthatarebeingpreparedandshallbeagreedbetweentheBankandNIIF.TheInvestmentGuidelineswillreflecttheAIIB’sESP,EnvironmentalandSocialExclusionList,whererelevanttheEnvironmentalandSocialStandards(ESS)andtheBank’sEnergySectorStrategy:SustainableEnergyforAsia.

ProjectConcerns:

LackofInformation:Thereisnoinformationonanyofthesub-projectsbeingfundedthroughtheinvestment.Thisisdespitealonghistoryofcontroversyaroundfinancialintermediaryinvestments,includinginIndia–forexampletheGMRKamalangacase4,wheretheIFCfundedacoalbasedthermalpowerprojectthroughFIinvestment.ThefirstphaseoftheinvestmentwasapprovedinJune2018andyet,evenaftermorethanayear,thereisnoinformationonanyofthesubprojects.Thereisacompletelackoftransparencyorinformationasfarasthisinvestmentisconcerned.

AsignificantriskassociatedwiththeNIIFisitsmandatetorestart‘stalled’projects.5ThisisinlinewithPrimeMinisterNarendraModi’svowtorevivelong-stalledinfrastructureprojects,2https://www.aiib.org/en/projects/approved/2018/_download/india-infrastructure-fund/project-summary-information-NIIF.pdf

3https://www.aiib.org/en/projects/approved/2018/_download/india-infrastructure-fund/project-summary-information-NIIF.pdf4http://www.cao-ombudsman.org/cases/case_detail.aspx?id=1655https://economictimes.indiatimes.com/news/economy/infrastructure/niif-may-move-to-acquire-stressed-infrastructure-projects/articleshow/64925223.cms

PMNarendraModiinauguratingtheMoudaSuperThermalPowerProjectStage-1(1000MW)onAugust21,2014.Photo:PMOIndia

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especiallyinthecoal,power,petroleum,railwaysandroadsectors.Raisingfinancetorestartstalledprojectsbringswithithighsocialandenvironmentalrisks.Thereasonmanyprojectsarestalledoftenrelatetoland,andenvironmentalandsocialrestrictionsinplace.Inotherwords,localresistancehasstalledprojects-suchascoalminesandpowerplants-becauseoftheirpotentialimpacts:threateningtodisplaceandimpoverishcommunities,destroyforestsorpolluterivers.AreporttitledLandDisputesandStalledInvestmentsinIndiadonebyBhartiInstituteofPublicPolicy,IndianSchoolofBusinessandTheRightsandResourcesInitiativein20166stressestherolethatdisputesoverlandandresourceshaveplayedindelayingprojects.Restartingsuchprojectsbringswithitahostofrisks,notleastthereputationalrisktoanyfinancierinvolved.

TheBhartireportalsoindicatedthatmanyofthelanddisputesrelatedtothestalledprojectsarelinkedtoperceivedenvironmentalimpactsoftheseprojectsandalmost80percentoflandconflictsariseoutofdevelopmentandindustrialisationprocesses,withinfrastructurebeingthesinglelargestcause.Adetailedinvestigationof21projectsinvolvedindisputesrelatedtothepossessionandacquiringoflandrevealedthemajorreasonstobelanddisputesandresistancebylocalcommunitiestotheprojects.Themajorcausesfortheseconflictswerelossofcommons,dissatisfactionwiththecompensationofferedfortheland,andconcernovertheenvironmentalimpactsoftheproject.TheseareseriousconcernsanditisessentialthattheFI,itsclients,aswellasAIIBpubliclydiscloseitsinvestmentssothattheaffectedcommunitiesandotherstakeholdersareawareabouttheprojectsandoftheirimpacts.ThiswillhelpaffectedcommunitiestoapproachtheFIorAIIB’saccountabilitymechanismoritsBoardtoensurethatthesubprojectscomplywithitsenvironmentalandsocialstandards.

InvestmentsintheEnergySector:Theissueofenergyinvestmentdeservesparticularattentionintheeraoftheclimatechangecrisis.Today,Indiaisatenergycrossroadswithaburgeoningsolarindustryandmassiveuntappedrenewablepotential;however,atthesametime,Indiaishistoricallydependentoncoal.InSeptember2018,SingaporeaninstitutionalinvestorTemasekinvestedUSD400millioninIndia’sNationalInvestmentInfrastructureFund(NIIF),whichwillfinancebothgreenfieldandbrownfieldprojects.7Thoughthisinvestmentisforthemasterfund,thisraisesconcernsoverNIIF’scommitmenttocleanenergyinvestments.ThisinvestmentalsoraisesconcernsregardingAIIBwantingtofundinstitutionssupportingbrownfieldprojects.

InOctober2018,fourmonthsaftertheAIIB’sinvestmentintoNIIF,NIIFacquiredacontrollingstakeinIDFCInfrastructureFinanceLimited(IDFC-IFL).NIIF’sStrategicFundhasacquired59percentequitystakeinIDFC-IFL,8whichisengagedinthebusinessofrefinancingoperatinginfrastructureprojectsthathavecompletedatleastoneyearof6http://rightsandresources.org/wp-content/uploads/2016/11/Land-Disputes-and-Stalled-Investments-in-India_November-2016.pdf7https://www.aiib.org/en/news-events/asian-infrastructure-finance/common/base/download/AIIB-Asian-Infrastructure-Finance-2019-Report.pdf8https://niifindia.in/niif-to-acquire-idfc-infrastructure-finance-limited-from-idfc/

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satisfactorycommercialoperations.Itsloanportfoliocontinuestobewelldiversifiedacross49assetswithexposuresacrossPublicPrivatePartnership(PPP)projectsincludingroads,powertransmissionaswellasnon-PPPprojectsincludingrenewablepower,hospitals,education,captivepower,airportcargoterminalandITSEZs.9TheIDFChasacontroversialhistoryinIndia(seeBoxgivenbelow),duetoitsinvolvementintheGMRKamalangacoalpowerproject.ThequestionthatarisestheniswhatisAIIB'sexposuretoIDFC'sportfolioofprojectsthroughsupporttoNIIF?

9IDFC2017-18AnnualReport

GMRKamalanga:ADisastrousFI-FundedProject

In2008,theInternationalFinanceCororation(IFC)–theprivatesectorlendingarmoftheWorldBankGroup,madeanequityinvestmentintheIndiaInfrastructureFund(“theFund”),aprivateequityfundestablishedandmanagedbytheInfrastructureDevelopmentFinanceCompany(IDFC)ofIndia.1TheFundwasestablishedtomakeinvestmentsinlargeinfrastructureprojectsofanatureandscalethatIFCrecognizedashavingpotentialsignificantE&Simpactsonlocalcommunities.1In2009theFundinvestedinGMRKamalangaEnergyLtd,acompanysetuptodevelopandoperatealargecoal-firedpowerplantnearKamalangavillageinOdishastate,India(“theKamalangaproject.”)

In2011,CAO(IFC’saccountabilityMechanism)receiveditsfirst-everFIcomplaintabouttheenvironmentalandsocial(E&S)impactsoftheproject.1Thecomplaintcamefromproject-affectedcommunitieswiththesupportoftwoNGOs.Thecomplainantsraisedconcernsabouttheproject’simpacts,whichtheyclaimedposedathreattotheirhealth,livelihoodsandhumanrights.

Initsinvestigation,theCAOfoundthattheIFChadbreacheditsstandardsandwasinnon-complianceonthefollowing:

a) IFC’spre-investmentEnvironmentandSocialduediligenceb) thestructurethatwasdevelopedforthemanagementofE&Sriskaroundthe

investmentc) IFC’ssupervisionoftheinvestment

Eightyearsafterthecomplaintwasfiled,thecaseisstillinthemonitoringstagewiththesituationoftheaffectedcommunityisworsethanbefore.ThiscomplaintfocusedonhighlyproblematicissueswithFIinvestments,whichdemonstratetheutterabsenceoffundamentalstandardstoensuretransparency,communityengagement,humanrightsprotectionandenvironmentalsustainability.Owingtotheopaque,almostinvisible,andunregulateddesignandimplementationoftheFI-subproject,theprojects’developmenteffectivenessishighlyquestionable.

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RenewableEnergy:Evenwithregardtorenewableenergyprojects,itiscrucialthatsub-projectinformationisdisclosed.ThevastmajorityofsolarpowerinIndiacomesnotfromdecentralisedrooftoppanelsbutexpansiveparks.Indianauthoritieshaveenticed

developersbyacquiringlargetractsofland,buildingtransmissionlinksandofferingupbuyersforthenewpower,usuallystate-ownedcompanieswithlowdefaultrisk.10

Thesemega-projectsnecessitatetheacquisitionofenormouslandareas.Therearealreadythreerecordedconflictsrelatedtolandacquisitionforrenewableenergyprojects.Onesuchultra-megasolarparkwithacapacityof500MWormoreisinAnantapurdistrictinwesternAndhraPradesh,accordingtoLandConflictWatch,anonlinerepositoryoflandconflictsacrossIndia.11Evenwithrenewableenergyprojects,thereare

concernsaroundthescaleofenvironmentalandsocialimpactsastheyresembleothermegaprojectsintheirimpactsonlocalcommunitiesandrequirethesametransparencyandriskmanagement.

ThisbecomesmorerelevantwithNIIF’sandEversourceCapital(ajointventurebetweenEverstoneCapitalandLightsourceBP)havingdecidedtoinvestinAyana,therenewableenergyplatformfoundedbyUK'sdevelopmentfinanceinstitutionCDC.12Ayanawaslaunchedtodeveloputility-scalesolarandwindgenerationprojectsacrossstatesinIndia.Itiscurrentlyconstructing500MWofsolargenerationcapacitywithastrongfuturepipelineofrenewableenergyopportunities.

Itisessentialthatatatimewheninvestmentsintherenewableenergysectorarerightlybeingcalledfor,wedonotfallinthesametrapoffossilfuel-basedprojects,whichrequiredmassivelandacquisitions,displacementresultinginlandconflicts,lossofthelivelihoodsanddestructionofecosystems.

DrivingForcesforsettingthedirectionofNIIF:TherearemajorconcernsregardingthedrivingforcesbehindNIIF’sinvestmentpriorities.In2017,NIIFsignedaninvestment

10https://enewspaper.latimes.com/infinity/article_share.aspx?guid=83b5c829-4b7b-4b3e-b3a0-6b7734a76a2811https://www.landconflictwatch.org/research/ananthapuramu-ultra-mega-solar-park

12https://niifindia.in/eversource-capital-and-niif-announce-partnership-with-cdc-to-invest-in-its-renewable-energy-platform-ayanaall-three-partners-to-invest-usd-330-million-cumulatively/

AviewoftheUltraMegaSolarParkatN.P.KuntainAnantapurdistrict.Photo:TheHindu

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agreementworthUSD1billionwiththeAbuDhabiInvestmentAuthority(ADIA).13ADIAwillbecomethefirstinstitutionalinvestorinNIIF'sMasterFundandashareholderinNationalInvestmentandInfrastructureLimited,theNIIF'sinvestmentmanagementcompany.

InMarch2018,HindustanInfralogPrivateLimited(HIPL),ajointventurebetweenDPWorld(aglobalportoperatorformedin2005bythemergerofDubaiPortsAuthorityandDubaiPortsInternational)andNIIF,announcedtheacquisitionofa90percentstakeinContinentalWarehousingCorporation(NhavaSeva)Ltd(CWCNSL),anintegratedmultimodallogisticsplayerinIndia.14DPWorldiscurrentlypresentatsixlocationsinIndiawithover6millionTEUofgrosscapacity.Italsooperatescontainertrainsconnectingportstoinland.TheacquisitionofCWCNSLwillfurtherDPWorld’spresenceintheentirelogisticschaininIndia.

InApril2019,lenderstofailedJetAirwaysselectedNIIFalongwithEtihadAirways,TPGCapitalandIndigoPartnersasqualifiedbiddersforJetAirways,whichisonthevergeofatotalshutdownofoperations.ADIAisapartnerinNIIFandiscrucialhereasEtihadAirways(aUAEairline)isa24percentequitypartnerinJetAirways.15AIDA’sfundingthroughNIIFcouldbringforEtihadthecrucialsayinrunningtheIndianairlinesinceEtihad,aforeignentity,onitsowncannotholdamajorstakeinJet.SeniorJournalistandcolumnistS.Murlidharan,inanarticleinFirstpostarguesthatEtihadwantstohedgeitsbetsbyropingintheNIIFasthenewjointpromoter.NIIF,obviously,wouldplaysecondfiddletoEtihadevenwhileputtinginmoremoney.16

Also,Infrastructureconglomerate,GVKPower&Infrastructurehassignedanagreementtosella49percentstakeinitsairportsbusinesstotheADIAandNIIF.17TheADIAandtheNIIFwillinvestinGVKAirportHoldingsbyacquiringnewshares.NIIFandADIAarelikelytoinfusethefundsthroughacombinationofequityanddebt.

TheseinvestmentsclearlyshowUAE’sinterestinsettingthedirectionofthefund.Also,investmentsinfailingairlinesandexistingairportswillhardlyqualifyasnewinfrastructureInvestments,despitethefactthatNIIFwasspecificallycreatedtofinancetheinfrastructuregapinthecountry.18

AIIBisamultilateraldevelopmentbankwithamissiontoimprovesocialandeconomicoutcomesbyinvestinginsustainableinfrastructureandotherproductivesectorsinAsiaandbeyond.BeingaAAAcredit-ratedbankwhichhasinfluenceoverotherinvestors,itisalso

13https://niifindia.in/niif-and-abu-dhabi-investment-authority-finalise-investment-agreement-worth-us1-billion/14https://niifindia.in/wp-content/uploads/2018/06/2017_05_04_DP_World_India_MoU_Eng.pdf 15 https://www.firstpost.com/business/jet-airways-revival-etihad-airways-bids-for-minority-stake-in-beleaguered-airline-sbi-led-lenders-consortium-niif-to-get-hit-6623171.html 16https://www.firstpost.com/business/jet-airways-revival-etihad-airways-bids-for-minority-stake-in-beleaguered-airline-sbi-led-lenders-consortium-niif-to-get-hit-6623171.html17 https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/gvk-taps-niif-adia-for-rs-6500-crore-to-prevent-adanis-landing-at-mial/articleshow/68771071.cms

18 https://www.business-standard.com/article/opinion/niif-gets-aggressive-119031000647_1.html

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importantforAIIBtobemoreresponsibleinprioritizingitsassociationswithfundmanagers.NIIFatthisjunctureseemstohaveitsprioritiesfarfromsustainableinfrastructuredevelopment.ItisimportantfortheAIIBtobecautiousofsuchprojectsandalsotoprioritisewhereitwantstouseitsinfluencethroughitsinvestments.

NIIF’sinvestmentinlargeinfrastructure

In2018,thecentralgovernmentofIndiaintroducedthetoll-operate-transfermodelfornationalhighwaysasparttomonetisepublicinfrastructureandbuildnewassetsunderprogrammessuchasBharatmala(centrally-sponsoredandfundedroadandhighwaysprojectoftheGovernmentofIndia).TheimplementationofBharatmaladependsonthefast-trackingoflandacquisitions,clearancesfromtheMinistryofEnvironment,ForestandClimateChangeandotherclearances.19Therehavealreadybeenconcernsfromtheagriculturalcommunities,whohavebeenworsthitbytheaggressivepushforinfrastructureprojectsinIndia,onaccountoflandacquisitionandthemannerinwhichitisbeingexecuted.20

InApril2018,InfrastructureinvestmentcompanyRoadisandNIIFannouncedthecreationofaplatformtoinvestinroadprojectsinIndia.21TheplatformwillinvestuptoUSD2billionofequitytotargettoll-operate-transfermodels,acquisitionofexistingroadconcessionsandinvestmentopportunitiesintheroadsectorwithanaimofcreatingalargeroadsplatforminthecountry.22RoadisisawhollyownedsubsidiaryofthePublicSectorPensionInvestmentBoard(PSPInvestments),oneofCanada’slargestpensionfunds.

Withlargeinfrastructureprojectsatthecoreofitsinvestmentsupportstrategy,itisessentialfortheAIIBtoensurethattheirfundsaredirectedtosustainableinvestments.InacountrylikeIndia,wherelandremainsthemainsourceoflivelihoodforthemajorityofthepopulation,itisincumbentuponAIIBtoensurethatitsinvestments,andtheprojectsupportedbyitsFIclients,meetitsenvironmentalandsocialframeworkstringently.

TheAIIBmayarguethatitsinvestmentintotheNIIFFundofFundsdoesnotexposeittotheinvestmentsmadebytheNIIFMasterFundorStrategicFund.However,itcanbearguedthattheveryfactthattheAIIB–aAAAcredit-ratedbank–investedintheNIIFhashelpedtomakethewholeofNIIFamoreattractiveinvestmentvehicleforothers.ThisraisesquestionsabouthowtheAIIBcanhelptoinfluencethewiderportfoliooftheNIIFtowardsmoresustainableinfrastructure,andhowfarthebank’sultimateresponsibilityandexposuretotherestofNIIF’sactivitiesextend.

19https://www.business-standard.com/article/pti-stories/land-acquisition-for-infra-projects-worries-farmers-in-navsari-valsad-119042201127_1.html20https://www.downtoearth.org.in/news/governance/rewind-2018-the-land-debate-6262121https://niifindia.in/niif-and-roadis-partner-to-create-platform-for-investment-in-road-sector/22https://niifindia.in/niif-and-roadis-partner-to-create-platform-for-investment-in-road-sector/