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!
No comments:
Post a Comment