If Indian cos have faced rough political weather abroad in setting up their businesses, regulatory issues in India have also been a deterrent for several foreign firms. Here?s the story from both sides of the fence
When it comes to business, politics is difficult to ignore, and going by the recent experience of many Indian companies hoping to set foot abroad, now, even more so.
On Friday, private infrastructure major GMR was forced to quit its $511-million project in the Maldives. The company?s desperate, last-minute attempts to stay invested in Male International Airport were run over by the Maldivian government, which blatantly refused to budge from its stand that the ?terminated contract was non-negotiable and irreversible?. GMR?s last hope of judicial intervention was also dashed when the highest court of Singapore ruled that the Maldives government had the right to take back the airport on payment of compensation.
The Naveen Jindal-led Jindal Steel and Power (JSPL) also met a similar fate in Bolivia. The company literally entered into mudslinging with the Bolivian government over its $2.1-billion project, which was secured in 2007 to develop the El Mutun mines that would have given JSPL access to about 20 billion tonnes of iron ore reserves. The company had accused the Bolivian government of anti-investor attitude and terminated the contract in July this year.
Others like Essar and Tata have similar stories to share. Essar, even after 17 months and a $50-million initial investment, is yet to take over Zimbabwe?s Ziscosteel for $750 million. The deal has been facing rough weather mainly because of red-tapism in the country.
Tata Steel?s joint venture with Vietnam Steel Corporation has been stalled for around four years due to a conflict with the local government over land acquisition costs.
Clearly, managing finances alone is not the critical challenge for Indian magnates investing abroad; political regulatory issues are emerging as a bigger obstacle before companies.
One of the richest men in the world, LN Mittal, has not been able to bypass this barrier. The ArcelorMittal chief locked horns with the French government recently. When the world?s largest steelmaker wanted to shut down two of its non-profitable blast furnaces at Florange, the plan drew ire from the French government, which not only resisted any such move by Mittal, but also went to the extent of saying that the steelmaker was no longer welcome in the country. This, despite Mittal having invested about euro 2 billion in the country since 2006?the biggest by any company in France.
The India story
However, things are not very hunky dory in India too. Not very long back, poor governance and regulatory issues were considered to be the biggest roadblocks for foreign investments in India. Kevin Taylor, president, BT, Asia-Pacific, had last year said that the ?only challenge in the Indian market is that there is no consistent business environment. We are happy to invest in India, but when we see an inconsistent government, it poses a challenge. But I am sure, they (Indian government) will work it out?. There is hardly any reason to refute his comment. Regulatory issues are definitely not new to the investment landscape back home, where foreign investors have faced similar wind-ups.
Take the case of the telecom sector. Even as the government goes on to hold a string of spectrum auctions one after the other (the recent spectrum auction was dubbed a failure, prompting another round), scars of the 2G scam are still fresh in the minds of foreign investors. Several firms, after having procured legal approval during the term of the previous UPA government, pumped in billions of dollars in the world?s fastest growing telecom market, only to be told three years later by the Supreme Court that they had bought illegal licences.
The result: Sistema of Russia, Telenor of Norway and Etisalat of the UAE faced a crisis. While the last one decided to hang up its Indian boots, the Norwegian firm was brave enough to once again invest in the Indian market (it won start-up spectrum in six circles in the spectrum auctions last month after having written off R14,000 crore from its books). However, Sistema has filed a curative petition in the Supreme Court, pleading how it had no role in the scam and should be allowed to carry on with its cancelled licences.
While the companies do go for rigorous due diligence before making an investment in the international market, there is no astrologer who can actually predict the future of the projects in a particular political scenario. The uncertain political regulatory norms not only make corporate biggies more vulnerable and wary of their global investments plans, they are also turning out to be game-changers in the world of economics.
Moreover, when it comes to the issue of compensation, there have not been any examples of successful settlement. Even in the case of GMR versus the Maldives government, it is now the issue of compensation that hangs in balance, and one that seems set for a long, protracted battle.
Clearly, the unceremonious exit of these companies signals a new area of concern that big corporates need to be (over) cautious about before they venture into unknown political territory.
Tossed in political arena
As Sidharth Kapur, GMR?s chief financial officer, said just two days before the company was made to leave Maldives: ?GMR has become a football in the political arena.? Ironically, even the present Maldivian government agrees that GMR has been a victim of poor policies of the previous government.
GMR, along with Malaysia Airports Holdings Berhad, had won the contract to run the Ibrahim Nasir International Airport in Male in 2010 during the regime of Mohamed Nasheed through an international bidding. The bidding process was overseen by World Bank-affiliated body International Finance Corporation. In February 2012, Nasheed was ousted from power and was replaced by Mohammed Waheed. The problems for GMR started when the new Maldivian government said that the contract for the airport was invalid and was signed under ?dubious? conditions.
It also accused the Nasheed government of favouring the private company by allowing it to levy an airport and insurance charge of $27 per passenger. Even when a Male court in 2011 called the fee illegal, the Nasheed government allowed GMR to make up for the losses incurred due to non-collection of airport development charges (ADC) from the revenue share of Male Airports Company.
As a result, the Maldives government?s revenue share from the venture fell drastically, so much so that the government had to pay more than what it was supposed to get from the project. The Maldives government has an outstanding bill of around $3.5 million to GMR to set off ADC. The government was wary that it might have to pay more than $2.5 billion, which was expected from the contract in the 25 years of concession period.
Masood Imad, the press secretary of Waheed?s office, maintains that the contract would have made the state-owned Male Airports Company bankrupt. ?Can any government allow that?? he asks. While it might not be right to point fingers at either of the parties, the moot lesson to be learnt for GMR and its other counterparts is ?not to rely on mere assurance of a particular government?.
The GMR CFO did say that for the airport development charges that were permitted to be levied without the Maldivian Parliament?s approval, the company went by the sheer assurance of the then government, which promised that it would get the Parliamentary approval for ADC.
Similarly, JSPL?s dreams to have developed the world?s largest untapped iron ore resources in Bolivia soured after the Bolivian government allegedly failed to meet the contractual obligations related to gas supplies for the project.
The company was supposed to develop the mine and also set up a 10 million tonne per annum (MTPA) iron ore pellet plant, a 6 MTPA DRI (direct-reduced iron) plant and a 1.7 MTPA steel plant.
As per the contract, the Bolivian government was to sign a pact, assuring the supply of 10 million standard cubic metres per day (mscmd) gas. However, according to JSPL, the government was willing to supply only 2.5 mscmd gas from 2012 due to non-availability of the gas in Bolivia. The Bolivian government, on the other hand, accused the Indian company of not making the committed investment.
Foreign woes for Indian cos
* GMR: Forced to quit $511-million airport project in the Maldives following a change in government
* JSPL: Terminated contract for $2.1-billion project secured in 2007 to develop the El Mutun mines in Bolivia
* Essar: Even after 17 months and $50-million initial investment yet to take over Zimbabwe?s Ziscosteel for $750 million
* Tata Steel: Joint venture with Vietnam Steel Corporation stalled for around four years due to conflict over land acquisition costs
Indian woes for foreign cos
* Sistema of Russia: Has filed a curative petition in the Supreme Court, pleading how it had no role in the 2G scam and should be allowed to carry on with its cancelled licences
* Telenor of Norway: Faced a loss of R14,000 crore after cancellation of licence; has again invested in the Indian market
* Etisalat of UAE: Wound up operations after cancellation of 2G licences by the Supreme Court
