The structure is also an innovative one. Each city would cost Rs 40,000-50,000 crore, so financing this the conventional way is pretty much a non-starter. DMICDC, a joint venture between the Government of India and infrastructure firms IL&FS and IDFC, plans to do it differently. It will do the complete master plan of the city and, to begin with, start work on part of the trunk infrastructure, say a power plant or the beginnings of a BRT corridorit has asked the government to give it around Rs 3,000 crore per city for this purpose. Once this is done, the land values in the vicinity of the infrastructure will rise, the SPV that is to develop the city (this SPV wont have DMICDC in it, but will be a 50:50 venture between the Centre and the state government) will sell part of the land and monetise the increased value. This will then be given to DMICDC to do some more development of the trunk infrastructure the cycle goes on.
So far, so good. The way DMICDC has been structured, however, is likely to create problems and this is something the government needs to fix. When DMICDC was first conceived in 2007, the Cabinet cleared a proposal to have a Rs 10 crore equity, which would be 49% subscribed by the Government of India and the rest to be owned by FIs and infrastructure entities like IDFC, IL&FS, Hudco and IIFCL. By the time the Department of Industrial Policy & Promotion (DIPP) got around to forming DMICDC, there was some rethinking and in September DMIC advisor Ajay Dua was proposing a company in which GoI would hold a 49% share, the six DMIC states 25% and the balance held by three private promoters who would be infrastructure firms; a little later this proposal was changed with 23% (from the GoI share) to be given to IIFCL.
The reason for wanting the states was obvious since development of the new projects would require the states cooperation; the government owned infrastructure finance firm IIFCL was to be given a share since a sizeable Japanese government concessional loan for DMICDC would be routed through itthe government would guarantee IIFCL would repay the loan and interest to the Japanese, but IIFCL would need to figure out how to ensure it secured its interests vis--vis DMICDC. An Apex Monitoring Committee was also planned and this was to be headed by the finance minister.
The way things developed, however, not too much of this happened, and by November 2007 the DIPP secretary was writing to IL&FS offering it 41% of the equity with the proviso the government could ask it to come down to 11%; and offering 10% to IDFC.
By the end of 2008, DIPP officials were writing notes saying IL&FSs equity had to be reduced to 11% and more partners had to be brought in and that the states be given a 24% stake from the GoIs 49%. In January this year, a letter was written to DMICDC asking for it to identify other infrastructure firms who could take the 30% equity stake IL&FS would divest, but no action has been taken so far. Neither the
DIPP secretary, under whom DMICDC functions, nor DMICDC officials were able to explain whether this has to do with the fact that there is no shareholders agreement between the partners. Nor is there any explanation for why the Apex Monitoring Committee has not met to review/clear the progress made so far, or why the state governments have not been allotted their shares so far.
So heres the problem. If DMICDC is a private firm, as it is now, how does the government justify routing a concessional Japanese loan to it, a loan that is guaranteed by the government. If DMICDC is going to act as a project developer (it has already started off various SPVs for developing trunk infrastructure like power plants), will it retain a share in them if they are privatised; if it does not, will the monies paid by the winning firm be made to DMICDC or to the individual SPVs for each city many questions such as these need to be worked out, which is why the Apex Monitoring Committee is so important. If DMICDC is going to get a fantastic upside from the trunk infrastructure (the money for which will be provided by the government, either in the form of the guaranteed Japanese loan or from the Rs 3,000-odd crore that DMICDC is asking for each city), the question arises as to how the government decided on allotting its shares to just two firms instead of sticking to the original shareholding plan approved of by the Cabinet and later by the line ministry.
There is no clarity either on whether DMICDCs equity partners will be allowed, either directly or through affiliates/subsidiaries, to participate in the downstream work that will emerge, from either the trunk infrastructure or the larger city projects and in helping raising funds to finance them.
All of these are important questions involving corporate governance and have to be resolved at the earliest. The project has too many beneficial effects to let it go off track.