Consentia on Commerce and Economics

A TAP AND A FUMBLE: LESSONS FOR INDIA IN THE GMR-MALDIVES FIASCO

INTRODUCTION

The unilateral termination of the airport modernisation contract between the GMR-MAHB consortium and Maldivian Government once again raised the contention of propriety and legality of the conduct of sovereign parties in a contract with parties off the shore of the mainland. The whole hysteria started when there was a change of guard in the island nation of Maldives and Mohammed Waheed became the new President.The apple of discord between GMR and the Maldivian government was that GMR had imposed an airport development charge at $25 per passenger and $2 per passenger insurance surcharge. Before the charge could be levied a local civil court in Maldives nullified the proposal. The earlier government of Maldives, headed by Nasheed agreed to compensate GMR against the levy. However, the new government headed by president Mohammed Waheed, arguing that contract was signed under ‘dubious’ conditions and was ‘void,’ everted this decision of the previous regime.

The matter finally ended when Singapore Court of Appeal, which was acting as an arbitrator, superseded the Singapore High Court order and dictated that “the government of Maldives has the power to do what it wants, including expropriating the airport.” The court also acknowledged the fact that “the wrongful taking of the airport would amount to an act of expropriation for which the respondent (GMR-led consortium) would be entitled to be compensated in accordance with the agreement.”

Now the issue stands that Maldives is a small island country with population less than half a million and GDP of around a billion dollars. On the assumption that the legal issue of compensation is resolved quickly, the Maldives government would hardly have the wherewithal to pay the compensation at one go to GMR, however reasonable the compensation may be. And if the court decides to award $800 million which GMR is claiming – then one can be certain that Maldives government would be making EMI payments spread over a number of years.  So there are certain lessons for prospective investors.

Corporates must understand that the struggle for power and politics take precedence over markets and economics. So, they should not venture into countries where there is even some semblance of strife or even where there is the slightest possibility of same in the future. And if one is investing in such countries one should opt for political risk coverage insurance policy. In any case whatever be the levels of risks of operating in a foreign country, without exception the foreign operations must be insured against all political risks. In fact The Export Credit & Guarantee Corporation (ECGC) insurance policies are specifically designed for exporters for covering political risks.

As the GMR-Maldives story unfolds, this is a high time for Indian investors to think about how to manage political and regulatory risks in transnational investment projects. Investors need to understand that economic environment is an integral part of political environment, so in the lure of making profits they must not dilute the concern for managing various political risks. In fact exploiting business opportunities in challenging environments is easier when one is prepared for the risks involved. Steel Magnate Lakshmi Niwas Mittal said “Sometimes, the local governments may create a problem, but then we have to learn how to manage them.” In other words, investors must learn to manage the various political risks associated with investment in foreign country.

THE DISPUTE

In June 2010, a tripartite agreement between the Maldives government, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium was signed to develop and run the Ibrahim Nasir International Airport at Malé, the capital of Maldives. The process of privatisation of the Malé International Airport was conceptualised and implemented with MACL, being a 100% owned company of the government of Maldives, assuming the role of Grantor while the government remains as the Guarantor.[1] Six consortiums GMR+MAHB, Reliance +ASA, Zurich+GVK, ADPe, TAV, Vienna+SNC Lavlin were pre-qualified to participate in the bidding process, which was conducted by International Financial Corporation (IFC), the private sector arm of World Bank, and three bidders GMR+MAHB, Zurich + GVK and TAV+ADPe submitted their bids from whom the final bidder, GMR+MAHB consortium was chosen.[2] Under the terms of the contract GMR was allowed to levy an Airport Development Charge (ADC) on departing passengers, which was later turned illegal by the local Maldivian court order. In the absence of such charge the government allowed GMR to deduct the ADC revenues from the revenue share of the government. This charge would have been legalised if the countries Majlis would have approved the charge. But before this could happen, there was a change of guard in the island nation and Mohammed Waheed became the new President. The new government headed by president Mohammed Waheed, arguing that contract was signed under ‘dubious’ conditions and was ‘void,’ everted the decision of the previous regime of allowing GMR to deduct the ADC revenues from the revenue share of the  government. The matter went to the Singapore High Court, which was acting as an arbitrator under the contract, who granted injunctive relief to GMR and stayed the unilateral termination of the contract. However, the Singapore Court of Appeal superseded the Singapore High Court order and dictated that “the government of Maldives has the power to do what it wants, including expropriating the airport.” The court also acknowledged the fact that “the wrongful taking of the airport would amount to an act of expropriation for which the respondent (GMR-led consortium) would be entitled to be compensated in accordance with the agreement.

Now the issue stands that Maldives is a small island country with population less than half a million and GDP of around a billion dollars. On the assumption that the legal issue of compensation is resolved quickly, the Maldives government would hardly have the wherewithal to pay the compensation at one go to GMR, however reasonable the compensation may be. And if the court decides to award $800 million which GMR is claiming – then one can be certain that Maldives government would be making EMI payments spread over a number of years.[3]  So there are certain lessons for prospective investors which will help them to manage the political risks associated with investment in distant country.

GUIDELINES TO BE KEPT IN MIND BEFORE PLUNGING INTO A DISTANT COUNTRY

  • Bilateral Investment Treaties (BIT) has become a popular way of protecting the interest of the nationals of a country investing in another country. These are agreements between two Countries (States) for the reciprocal promotion and protection of investments in each other’s territories by individuals and companies situated in either State. The treaties generally provide the assurances concerning the protection of a state’s investors’ interests in the other state. BITs contain provisions of fair treatment and prohibit unlawful expropriation of investors’ assets. They may also provide for indirect expropriation or “regulatory expropriation”. The provision of dispute resolution in BITs as a measure of protection, or as a guarantee, of investor’s interests has also attracted considerable attention. So, investors should primarily invest in countries which have Bilateral Investment Treaties with the host countries and if not, they can structure the investment through a third country that has a BIT with the hosts. India signed its first BIT with the United Kingdom in the year 1994 and till now it has done the same with 82 other countries.[4] However, for the few countries that do not have BITs with any other country (e.g., Maldives), Political Risk Insurance Coverage and other protections are critical.[5]
  • Corporate must opt for Political Risk Insurance Cover Policy. It is an insurance policy bought by companies to cover losses arising out of adverse political developments in foreign countries where they have their projects or businesses. While premiums for PRI can be expensive, this provides coverage against risks such as expropriation, adverse regulatory changes, political violence, civil disturbance, licence cancellation, government frustration or repudiation of contracts, and currency inconvertibility. In any case whatever be the levels of risks of operating in a foreign country, without exception the foreign operations must be insured against all political risks. The benefit of political-risk cover is most evident when firms have long-term commitments in emerging markets: in project-finance loans, for instance, risk guarantees can reduce costs.[6] The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, is an international financial institution which offers political risk insurance guarantees to investors.  According to the 2012 report of Multilateral Investment Guarantee Agency (MIGA) on World Investment and Political Risk, demand for Political Risk Insurance has increased sharply since 2005. In India the Export Credit Guarantee Corporation, a government enterprise, provides political risk insurance cover, any company investing outside India can buy a risk cover from ECGC, it bears 85% of the loss, which is part of a comprehensive cover.[7] However, ECGC cannot provide cover to overseas companies investing in India as it cannot cover sovereign risk.
  • Corporates may take help of Political Risk Analysts, who may give there valuable advices and save investors from stacking their money in a volatile and probably crippling territory. The purpose of Political Risk Analysis is to identify, analyze and predict major risks before actual investment or commitment, and to offer risk-minimization strategies and options.[8] In India various organizations like Business Foundations[9] provide this service.
  • Before investing, corporates must examine the Public Relation of the foreign country with the host country. They should not invest into countries where the Public Relations between foreign country and host country are bitter, and even if they do they must beforehand opt for Political Risk Insurance so that their assets can be retrieved to some extent.
  • Corporates must show some diligence on the state’s assets before entering into a private contract.[10] They must seldom invest in countries which do not have the proficiency to pay back the legally decided compensation.
  • Corporates must understand that Politics and power strife take precedence over economic issues. So, they should not venture into countries where there is even some semblance of strife. No investment in banana republic should be made, howsoever commodity or mineral rich they may be. No one would have ever surmised that Maldivian government would boot out, that too unceremoniously, a company which had pumped in the highest FDI USD 530 million into their country.[11]
  • Provisions must be made, in the contract, for a neutral dispute resolution mechanism with the seat of arbitration outside the territory of the host country. Thought, the doctrine of sovereign immunity prohibits the national courts of one state from exercising jurisdiction over other states, as no state may exercise authority over another. But, the earlier view of absolute immunity of states stands diluted by the recent restrictive theory of sovereign immunity which prescribes that the immunity may not be available when a state engages in commercial activities that could be performed by private parties. Nevertheless, defence of sovereign immunity remains available to states against whom an execution of an arbitration award is brought before the courts of another state.[12]
  • Lastly, the contract should be drafted in such a manner that it is not perceived to be iniquitous by either party. It must be drafted in an articulate and coherent manner. In GMR case – the contract was perceived to be vicious both by the Maldivian government and its people. GMR was made to look more like a plundering party sucking out the resources from Maldives.[13]

CONCLUSION

Foreign Investment is widely viewed as beneficial for growth and development in destination countries as it finances domestic investment and can be a vehicle for productivity growth through the use and dissemination of advanced production techniques and management skills, but at the same time investors should take certain cautions and wariness beforehand so that they may remain protected from the cataclysms in foreign countries. In this paper, we have tried our best to give various considerations and guidelines to investors, who want to plunge into distant countries, so that they may not suffer any setback or bring down situations. So, investors should mainly invest in countries which have Bilateral Investment Treaties with the native country, and they should always, without exception, opt for Political Risk Coverage Policy so that whatever may be the case, they could be reimbursed to some extent. They may also take advices from Political Risk Analysts, who may tell about the prospective effects of their investment and thus save from investing into a volatile or probably crippling country. In India various organizations like Business Foundations[14] provide this service. Apart from these, they should always scrutinize and analyze about the foreign countries assets and its Public Relations with the host country, and must seldom venture into countries which do not have the adequate assets to pay back the cost of legally determined compensation or which have sour Public Relations with the host country. 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. They must keep in mind that political affairs take precedence over economic affairs, so they should not pursue their investments in banana republic’s or in countries where there is even a minuscule indication of strife.

Thus, investors must make proper assessment and research before investing in any country, so that they can be saved from barren or fruitless investments.a

By: Siddhartha Shrivastava

 

[1] Mihir Mishra, GMR-Maldives Row: Where the dispute lie, The Indian Express, December 07, 2012, Page no. 1, http://www.indianexpress.com/news/gmrmaldives-row-where-the-dispute-lies/1041498, accessed on October 17, 2013

[2] Ibid.

[3] Leoiyer, Lessons from GMR-Maldives Episode, 17th December 2012, http://www.logisticsaide.com/site/air14122012-1, accessed on October 18, 2013.

[4]Nandan Nelvigi & Aditya Singh, Perils of Investing Abroad: Take away from GMR-Maldives, The Economic Times, January 14, 2013, Page No. 5,  http://articles.economictimes.indiatimes.com/2013-01-14/news/36331848_1_indian-investors-investment-arbitration-political-risk, accessed on October 19, 2013.

[5]  Ibid.

 

[6] Satoshi Kambayashi, Of Coups and Coverage, April 4, 2007, http://www.economist.com/node/8967224?story_id=8967224, accessed on November 4, 2013.

[8] Official Website Business Foundations, http://www.indiastrategy.com/polrisk.htm, accessed on November 5, 2013.

[9] Official Website Business Foundations, http://www.indiastrategy.com/index.htm, accessed on November 5, 2013.

[10] Dhirendra Negi & Mayank Mishra, Lessons from GMR- Maldives episode, The Hindu Business Line, January 2, 2013, Page No. 7, http://www.thehindubusinessline.com/opinion/lessons-from-gmrs-maldives-episode/article4265775.ece , accessed on November 4, 2013.

[11] Supra 3

[12] Supra 7

[13] Supra 3

[14] Supra 10

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