U.S.-India: High-Energy Cooperation

Wednesday, September 16, 2015 - 08:02

The U.S. and India have a long history of commercial cooperation. Now, with the election of a vigorously pro-business government, there are high hopes of a surge in business activity between the two countries. This is especially true in the energy sector, where there is a heightened focus on alternative power sources to supplement the subcontinent’s traditional reliance on nuclear and fossil fuels. Akin Gump partners Anurag Varma and Shubi Arora discuss the state of the India energy sector below, along with other issues related to U.S.-India economic cooperation. 

MCC: The history of energy cooperation between the U.S. and India goes back to at least the 1950s and includes landmarks such as USAID’s support of India’s first nuclear power plant at Tarapur in 1969. From your varying perspectives, Mr. Varma as an advisor to sovereigns, including India, on U.S. policy, and Mr. Arora as a dealmaker with key experience in India energy transactions, tell us about this history of cooperation and where it’s going today.

Varma: It is correct that a premier early milestone in U.S.-India energy cooperation was U.S. support in 1969 for the nuclear energy installation in Tarapur. This support was provided with technology, parts and know-how. However, to best understand how far U.S.-India cooperation has come is to take into consideration the backwards steps that the relationship took after Tarapur. In 1974, after India tested its first nuclear weapon, the U.S. immediately withdrew all support of India’s nuclear energy ambitions unless the Indians committed to forswear their nuclear weapons program and sign the Nuclear Non-Proliferation Treaty. The Indians could not agree to do so, especially knowing that the U.S. and others would allow China to maintain its nuclear arsenal. Accordingly, the U.S. and India found each other on opposite sides of the seminal issue that would chill relations between the countries through the latter 20th century.

Despite this impasse between the governments of these two countries, the U.S.-India relationship began blossoming again in the post-Cold War era thanks to the will of the commercial sector in both countries and the large and active India diaspora community in the U.S. In fact, since nuclear energy cooperation restarted with the passage of the U.S.-India Civil Nuclear Agreement in 2008, two-way trade between the countries has quadrupled from less than $25 billion to more than $100 billion today.

Arora: India and the U.S. have a long history of cooperation, including a very close economic relationship. Today, the U.S. is one of India’s largest direct investors and trading partners. With respect to energy, one key area in which the U.S. and India are currently working together is climate change. In January of this year, India memorialized its goal to increase India’s solar capacity to 100 GW by 2022. This goal builds upon the U.S. and India’s Partnership to Advance Clean Energy (PACE) umbrella program, under which clean energy conversations will continue. The U.S. and India currently have agreements (but with no hard targets) regarding the acceleration of clean energy finance, the start of technical cooperation concerning heavy-duty vehicles and transportation fuels, and the demonstration of clean energy initiatives on the ground. I believe these clean energy initiatives may create new investment opportunities within India’s energy economy and decrease regulatory hurdles for foreign companies looking to invest in India. In the private sector, many Indian energy companies have invested in U.S. energy assets, not only with hopes of financial profits, but also as an avenue toward learning the business and gaining exposure in the necessary technologies.

MCC: The election of the Modi government just over a year ago was greeted with euphoria by business interests in India, the U.S. and around the world. What impact is this having, and do you expect any major changes in U.S.-India energy cooperation – and economic cooperation in general – as a result?

Arora: Since his election, Prime Minister Narendra Modi has prioritized growing India’s energy sector and obtaining increased foreign investment in India. This summer, Modi has travelled to a number of energy rich countries (Kazakhstan, Turkmenistan, Kyrgyzstan, Tajikistan, Myanmar and the UAE) to discuss energy cooperation with regard to gas, oil, uranium and foreign investment in India’s energy economy. Modi’s regime has expressed a clear intent to liberalize India’s economy and increase energy investment and infrastructure within India’s borders, and I think that cooperation between the U.S. and India will continue to grow, especially as India's historically close ties to Russia have waned.

Varma: The optimism accompanying Modi’s arrival into office was immediately followed with a number of steps to loosen foreign investment restrictions in key sectors, to increase the effectiveness of the central government’s bureaucracy and to encourage and empower individual states to actively solicit economically beneficial investments and partnerships from abroad. In addition, the visits of Modi and President Obama to each other’s capital cities within the first year of Modi’s term in office have made clear that the U.S. is a priority relationship for India.

MCC: Nuclear power has long been a major element of India’s energy policy. Mr. Varma, you played a key role in the historic U.S.-India Civil Nuclear Agreement a decade ago as lead U.S. policy counsel for the U.S.-India Business Council. What’s the status of nuclear power in India? Has the nuclear deal with Iran had any impact on India’s plans for expansion of its nuclear energy capacity?

Varma: Since the U.S.-India nuclear agreement received final signatures from both countries in 2008, one stumbling block to its final implementation has been India’s refusal to adopt a policy that limits liability on technology suppliers as is the case in the U.S. and other parts of the world. U.S. nuclear technology suppliers have indicated that, without such a liability policy, the costs and risks associated with entering the Indian market would be prohibitive. Although there had been little movement on this issue between 2008 and 2014, it is now believed that the Modi and Obama administrations are close to developing a mutually acceptable solution to this dilemma.

Arora: Before heavy Iranian sanctions, India leaned upon Iran as a key energy supplier. With Iran’s nuclear deal and the belief that sanctions will be lifted, India is looking to renew an energy trade relationship with Iran and has already begun investment in the Chabahar port. As far as India’s development of its own nuclear energy program, India aims to have 14,600 MWe nuclear capacity on line by 2020 and supply 25 percent of its electricity needs with nuclear power by 2050. With India’s increasing population, Modi is prioritizing the establishment of a sufficient energy supply and an appropriate infrastructure to support India’s future growth. Such a plan includes safely increasing India’s nuclear capacity as well as the importation and domestic exploration of hydrocarbons and alternative resources. 

MCC: The U.S. and India have cooperated for many years on sustainable energy and trade. One element of this is the U.S.-India Energy Dialogue, which was launched 10 years ago this past May. In November 2009, Prime Minister Singh and President Obama agreed to strengthen U.S.-India energy cooperation through a new Partnership to Advance Clean Energy (PACE) under the U.S.-India Energy Dialogue. Tell us what impact the Dialogue and PACE have had, and continue to have, on policy and technical cooperation.

Arora: Under the PACE umbrella, the United States and India have worked to increase innovative financing mechanisms for renewable energy infrastructure in India. For example, under PACE-driven initiatives, USAID signed a 40 percent credit guarantee in connection with Northern Light Capital Group's $100 million limited partner commitment to Nereus Capital, with the hopes that such an investment can bring 300-500 MW of Indian clean energy generation. Proposals have also been submitted for the implementation of green bonds, high-net-worth individual products, a technical insurance products fund and an energy savings insurance facility. For example, HSBC India recently announced they will begin the issuance of green bonds, and the Indian Export-Import Bank has already issued $500 million of India’s first dollar-denominated green bonds.

MCC: India is one of the world's biggest and fastest-growing energy markets. Given its limited domestic fossil fuel reserves, the country has ambitious plans to expand its renewable capabilities, particularly solar and wind, and its nuclear power industry. What’s the status of these efforts, and what impact is India’s commitment to more sustainable energy sources having on your practices?

Arora: Although there is still a robust opportunity to invest in India’s oil and gas infrastructure, opportunities to invest in India’s renewable sector are burgeoning as well. We have seen a number of investors and other players begin to take a look at opportunities in this sector in India and expect more of the same in the future.

MCC: Let’s talk a bit about India’s traditional energy resources – oil, gas, coal. Mr. Arora, according to your bio, you’ve represented GAIL (India) Limited, the country’s largest natural gas company, in a major LNG transaction. What are the legal, business, regulatory and practical challenges of doing deals in India, particularly given the barriers to practicing law the government historically has maintained for foreign lawyers and law firms?

Arora: The challenges of doing deals, especially energy deals, in India are generally similar to doing energy deals in any foreign jurisdiction. Potential reluctance to work with outsiders and bureaucratic resistance tend to be especially thorny in the context of the law and natural resources because of the historical, political and symbolic significance of those areas. Furthermore, because the Indian government does not allow foreign law firms to have offices in India, it is necessary for foreign lawyers to have strong, well-established offices close to India, such as we have in Singapore, and to possess a network of experienced and talented local counsel that can assist with any transaction. Even with experienced local counsel, however, coordination, logistics, regulatory ambiguities and other bureaucratic challenges can present a significant barrier to closing a transaction.

MCC: Recent signals from the Indian government, as well as information coming out of the ABA and the ACC, suggest we may be closer than ever to lowering, and even eliminating, some of those barriers to practicing law in India. What’s the outlook, and what impact, if any, do you expect for Akin’s various India-related practices?

Varma: It is clear that the Modi administration is serious about liberalizing the Indian legal market. It remains to be seen, however, if Modi and his supporters have the political capital necessary to get the appropriate legislation passed and then blessed by the judicial branch. For example, within the past month, the Supreme Court of India granted leave in two appeals dealing with the entry of foreign law firms into India. However, if these barriers are lowered, I would expect Akin’s various India-related practices to accelerate and prioritize their plans for growth and investment in the region. In particular, I would expect our Singapore office to continue to expand its already strong India presence and to serve as a launching pad for a physical office in India if needed.

At the same time, however, what remains unaffected by the liberalization of the Indian legal market is Akin Gump’s ongoing efforts to work with Indian entities who are entering the U.S. and other global markets, especially in circumstances where business interests intersect with government. In the U.S., for example, we will continue to work with Indian companies who have to, proactively or reactively, navigate the U.S. regulatory agencies or the U.S. Congress in order to achieve their corporate objectives in this market.

MCC: The U.S.-India Business Council has long played a major role in facilitating cooperation between the two countries. Tell us about the council, your involvement with it, and how its role continues to evolve.

Varma: The USIBC is the premier business advocacy organization dedicated to strengthening the economic and commercial relationship between the United States and India. While the mission of the USIBC – to advance U.S.-India commercial ties – has remained the same since the council’s inception, Akin Gump has found the council to be a valuable ally for our clients who seek – or, in certain cases, wish to prevent – modifications of Indian laws, regulations and other policy measures across a number of sectors. Equally important, the USIBC is a partner to Akin Gump’s clients in their efforts to enter the Indian market and, ultimately, further U.S.-India commercial relations.

MCC: So-called compulsory licensing of clean energy technologies seems to have been a stumbling block in the development of these industries, including in India. What is compulsory licensing, and what impact does it have on IP rights and the development and proliferation of clean technologies?

Varma: Compulsory licensing is when a government authorizes a party other than the patent owner to produce the patented product or process, without the patent owner's consent. The patent owner typically receives a fee, set by the government, as compensation for the compulsory license. Compulsory licensing makes IP rights less valuable, in some ways similar to how uses of eminent domain can make real property rights less valuable. In general, the Indian perspective on compulsory licensing is that, in a country where more than two-thirds of the population lives below any standard poverty line, there will be some very limited occasions where the common good must be served over proprietary technology rights.

The Indian compulsory license regime has historically caused international controversy with respect to the production of generic drugs, whereby on a few occasions the IP rights of certain widely used pharmaceuticals have been trumped by a government-initiated compulsory license. There are also competing theories as to whether or not compulsory licensing will or will not chill the development and proliferation of clean technologies in India. Some argue the relatively permissive Indian compulsory licensing regime would discourage clean-tech companies from introducing their innovations into India, while others argue such fears are exaggerated, either because clean tech, unlike life-saving medicine, is not a likely target for compulsory licensing or because the economic value of creating clean-tech innovations nonetheless outweighs the risk of a compulsory license.

MCC: Both of you work in areas that extend beyond India and energy. Mr. Varma, you provide strategic trade advice to an array of sovereigns and across numerous sectors, including pharma and healthcare. Mr. Arora, your energy transactions practice includes experience with shale and other energy projects, and you advise various sovereign wealth funds and private equity investors on their energy and natural resource deals. Clearly, however, the common denominator for both of your practices is their heavy international flavor. Given recent economic and market developments in China, what’s your outlook for the global economy, particularly trade, and what impact do you anticipate for your practices?

Varma: In some sectors such as pharma and manufacturing overall, the quality and effectiveness of Indian and Chinese-made products are viewed with a heavy dose of skepticism. This general perspective, formed by U.S. lawmakers, regulators and consumer groups, is based upon certain high-profile cases featuring egregious missteps from suppliers from these countries. Unfortunately, we have seen that the more rigorous standard set for these bad actors is often transferred to manufacturers from India with unblemished track records or even those who have overhauled and corrected previously flawed practices and procedures. For such companies, Akin Gump has been effective in working on short, medium and long-term strategies to engage and educate both government and non-government stakeholders in a dialogue, using factual and company-specific information for the purpose of easing the entry of their products into the U.S. market.

Arora: Recent volatility in Chinese equity markets, reports of slower-than-expected growth in the world’s second-largest economy, and the relatively low commodity price environment have cooled some of the more bullish prognostications for the global economy, but we remain positive with respect to the long-term outlook of the global economy and continue to see significant interest from investors and operators in doing international deals and trade. While there has been somewhat of a shift in the types of transactions as a result of these recent events, the demand for good investments is still strong. So while the road may be rough at times, given all of the positives on the horizon and the opportunities we see for our clients, for those with a long-term view, we are still very much expecting a bright future.

 

 

Anurag Varma, a Washington, D.C.-based Akin Gump partner, develops and executes strategies to help sovereign clients, multinational corporations and trade associations utilize the U.S. Congress, the administration, non-governmental organizations, think-tanks and others to further their business objectives in the United States. He can be reached at avarma@akingump.com

Shubi Arora, a member of the firm’s global energy and transactions practice resident in Houston, works primarily with clients in the energy industry on mergers, acquisitions and divestitures; private equity investments; and joint ventures. He can be reached at sarora@akingump.com.