GMR’s Loss in Maldives: It’s All Country Risk, Baby!

In 2010 when the Bangalore-headquartered GMR Infrastructure won a $529 million bid to modernize the Ibrahim Naseer International Airport in Male into a global standard airport by the year 2014 and run it for 25 years, everyone associated with the bidding—the company, its bankers, its business partners, technical collaborators—felt jubilant, of course for obvious reasons.

Although the bidding process was carried out under the banner of the International Finance Corporation, a constituent of World Bank, that ensured no wrongdoing in granting the bid, the political debate in the country ran much against the GMR contract, particularly, ever since the Maldives court struck down the imposition of the airport development charge of $25 per every departing passenger. The issue came into more prominence once Mohammed Nasheed, the first elected President of the Maldives, was dethroned and his deputy, Mohamed Waheed, came to power.

In the meanwhile, the company is reported to have so far spent around $230 million on the development of the airport. But the current coalition setup headed by Waheed found it beneficial to kick out GMR as it could buttress the anti-India flank and thereby help him keep the Islamist groups to his side in his bid to win the next elections. The result is: cancellation of the contract, directing GMR to hand over the airport management to the government-owned company.  And with the Singapore Court of Appeals pronouncing its ruling to the effect that the Maldives has the right to annul the contract entered into by the previous government with the company, the handing over of the airport to the Maldives government-appointed company and exiting the country has become a mere formality for GMR.

What does this episode teach Indian businesses, particularly those companies which, as Ratan Tata recently observed, bitten by delays and obstacles in getting approvals in the domestic market, are contemplating to go global in search of better growth prospects? First things first: these companies must learn to factor ‘country risk’—a mixture of  political risk, exchange rate risk, economic risk, sovereign risk, and transfer risk associated with every overseas investment—that is known to lock up or freeze the capital invested in a country by governmental action, into their investment appraisal.

They must realize that country risk is high in investments that are meant for longer periods. This phenomenon becomes much more critical if the country’s political stability is questionable. These two factors assume greater significance in defining the safety of investment in a country that is in political transition, say, from autocracy to democracy.  Similarly, the risk associated with investment in countries with poor political and economic history is certainly high.

Corporates must also know that there is hardly any hedge against country risk. Even if there is any kind of insurance available against, say, political risk, the premium will be expensive. And if insurance premium is factored into project appraisals, they will, no doubt, turn out to be unviable. The other important factor to be borne in mind is that however careful one might be in foreseeing the hidden risks of a project, it is not always possible to draft agreements that can take care of every eventuality.

Above all, risk being dynamic, companies must essentially focus on “areas of change”—change in the market, change in the environment, and change in the political scenario of a country in which it is operating. Simply put, businesses must watch out for anything new and address it with vigor and sensitivity so that it does not paralyze them later. Incidentally, in the instant case, these fundamentals appear to have been given less importance, perhaps in their haste to enter a new market or strike a profitable deal; or they had simply got carried away by the prevailing good relations between the two countries, particularly under the regime of the then President, Nasheed.

While talking about country-risk management, one cannot but wonder why GMR, seeing the way resentment against its agreement was mounting up under the new political regime, didn’t attempt to renegotiate the deal with the new regime? They might have had their own reasons, but the point is that unless the top management perceives the change and the threat posed by it well in time and puts in place, with agility, a well-drafted counterstrategy, there is the likelihood of a business landing in a crisis.  

Lastly, with cross-boarder investments and the law governing them still being in the process of developing, there is nothing that can stop a country once it decides to annul a contract.  International law accepts the fact that whenever a sovereign wants to nationalize a business or cancel a contract, there is no law that can come to the rescue of a company and protect its commercial interests. Even agencies such as World Bank’s Multilateral Investment Guarantee Agency can at best soften the blow but cannot eliminate it fully.

Yes, there is one force that can deter a country from doing what the Maldives did to India’s GMR and that is: the economic and political power and influence of a nation.  Intrusive governmental actions have indeed become an integral part of the global economic scene. For example: the British Chancellor’s taking up the case of Vodafone with India, China’s penetration into Africa and West Asia, and even the recent outcry in France against Arcelor Mittal. But the Indian diplomatic, political and economic influence being what it is, it is not difficult for Indian businesses to foresee what they can expect from it.   

That said, it doesn’t mean that the government should remain a mute spectator; instead, keeping in view the way Indian companies are going global and the quantum of investments being made abroad, it is time for the government to cultivate the habit of exercising its diplomatic clout to whatever extent it could—but start, it must.

Whether the government learns to exercise its clout or not, the GMR episode makes one thing clear to out-bound Indian businesses: businesses must evaluate ‘country risk’ and put in place appropriate strategies to manage it. And they must always bear in mind that risk management decision is strictly binary: “Over the longer term, the only alternative to risk management is crisis management, and crisis management is much more embracing, expensive and time-consuming.” 

In conclusion, it’s worth recalling here what Felix Kloman said about risk management: “We can never know the future. We can only prepare for it more intelligently.” And that’s what the corporate leaders must aim at while focusing on the growth of their businesses.

It’s as simple as that!