Lessons for Indian corporate entities overseas
Alam Srinivas | December 26, 2012
In retrospect, the Indian government may be as much responsible as the GMR Group for the latter’s ejection from the airport project in Maldives. The decision by the island neighbour had its roots in issues related to corporate governance (GMR’s decisions), local socio-politico-economic dynamics, and New Delhi’s diplomatic fiasco. Recently, Male terminated the Indian firm’s 25-year, $500 million deal to manage, modernise and expand its Ibrahim Nasir International Airport (INIA).
Days before GMR handed over the airport to Maldives at midnight December 7, 2012, an attempt was made to find a last-minute solution at the highest level. “Our president wrote a letter to India’s PM, Manmohan Singh, to ask for a meeting to clarify the issues. But there was no reply for several days. And time, as you know, waits for no one; it has never waited for anyone,” said Masood Imad, the media spokesperson for Maldives president Mohamed Waheed.
GMR tried aggressively to get New Delhi more involved in this politico-corporate cross-border battle. However, New Delhi’s reaction was lukewarm. All that India hinted through the local media was that it would stop the $25-million annual aid to Maldives, which was later denied. The foreign minister, Salman Khurshid, said that India did not intervene on behalf of commercial enterprises and if Male had taken a decision “properly as per laws there”, no one could object to it.
New Delhi’s blunders
For years, there have been anti-India sentiments simmering in the neighbour’s polity and society. These got accentuated when the former president, Mohamed Nasheed, took over power four years ago. His three-year regime was seen as being too pro-India, although Nasheed did try to balance his diplomatic act by aligning his country with the European Union, and against India, on specific issues like those related to global climate change at several international forums.
However, Nasheed’s government was projected as taking diktats from New Delhi by the island’s opposition parties, and this view somehow percolated down to many sections of the Maldivian society. India made matters worse as it supported Nasheed on several occasions, both publicly and privately. Between 2008 and 2011, the former Maldives president made five visits to India, including his first-ever visit abroad a month after he assumed office in November 2008.
Ever since it bagged the airport project in June 2010, GMR was somehow painted as a ‘foreign (Indian)’ villain. Most of opposition parties criticised the deal, and mass protests were held against it at regular intervals. Public emotions reached a frenzied level, not unlike what happened to Coke and IBM in India in the 1970s, and Enron in the 1990s. Imad confidently said that the contract was awarded to GMR only after a senior Maldives official made a trip to India.
Once president Waheed took over in February 2012 with the support of parties that were against Nasheed, the opposition against India, and particularly GMR, reached a new peak. By mid-2012, it was evident that GMR was in trouble, but New Delhi did not try to mediate. Its role remained ambivalent until the night of December 7, when GMR was finally thrown out. In fact, Maldives was angry with the role played by Dnyaneshwar Mulay, India’s high commissioner there.
In a controversial statement, a presidential spokesperson called Mulay a “traitor” and an “enemy of Maldives”. Later, Male tried to underplay it and apologised, but the resentment against New Delhi’s diplomatic representative was evident. At the time of going to the press, it seemed certain that India had accepted Maldives’ ongoing demand to replace Mulay. Khurshid’s plea that India did not interfere in business matters seemed lame since New Delhi had aggressively supported Ratan Tata and LN Mittal during their respective global takeovers in Europe.
The confidence, and subsequent arrogance, of GMR stemmed from the manner in which its contract was finalised, and a crucial clause that was included in it. In the run-up to the deal, inked in June 2010, the International Finance Corporation (IFC), a member of the World Bank Group, was the main advisor to Male. It ensured that the bidding process was open, transparent and fair to all the six bidders, including GMR, who were shortlisted. Thus, there was no cause for any controversies.
GMR emerged as the winner when the financial bids were opened. Its decision to ‘pay and earn’, rather than ‘earn and pay’, put it ahead of the others. In simple terms, GMR agreed to pay an upfront one-time fee of $78 million to Maldives, and subsequently share a percentage of annual airport revenues with the government. The other competitors decided to pay a much lower upfront fee, and share a higher percentage of the future revenues. This tilted the scale in GMR’s favour, as its overall bid was valued at $529 million, compared to the next highest of $483 million.
Despite this transparency, it was alleged that GMR was favoured. Critics said IFC got an office space in GMR’s special economic zone in India; GMR said that the IFC being referred to was International Finance Centre being built in India. It was charged that Halcrow, the global consultant which prepared the INIA masterplan, had done so to accommodate GMR’s bid. The Indian firm retorted that the plan was finalised before the bidding process and, thus, was available to all the six bidders.
What irked GMR’s critics was that under the 25-year contract, the Indian company agreed to share a mere 1 percent of the airport’s gross annual revenues between 2011 and 2014 with Maldives. Compare this to 31 percent of revenues that the next highest bidder had decided to pass on to the government in the same period. “Do you think the GMR contract was good? Which partner would agree to a 1-percent revenue share for a project that earned millions of dollars a year?” questioned media advisor Imad.
However, GMR remained unfazed; it was emboldened by a clause in the contract that was vetted by IFC. It stated that GMR could impose an airport development charge (ADC) of $25 on every passenger, who departed from Maldives, beginning January 1, 2012. GMR contended that this was included as a revenue stream in the bid documents. An ADC is a globally accepted charge to woo foreign investors to manage airports, and the figure of $25 is in line with similar charges by other international airports like Athens ($29.6), Mali ($55.3), Toronto ($24.6) and British Virgin Islands ($20).
This is where IFC failed in its responsibilities as an advisor, and GMR’s legal team did not apply its mind. As per Maldives’ Constitution, any new tax had to be ratified by its parliament (Majlis). This was proved when the Maldives civil court ruled on December 8, 2011, that this was indeed true. “Therefore, without the approval of Majlis, the ADC was illegal; since this was included in the GMR contract before the parliamentary okay, the agreement was void ab initio,” explained Imad.
He said this was like “You and I signed a deal to sell narcotics in New Delhi. Since the sale of drugs is illegal as per the Indian laws, the contract would be null and void. Also, one can question the credibility of the IFC, which approved the contentious ADC clause.” After the civil court ruling, the scenario turns a bit hazy with claims and counterclaims on either side.
First, no one — neither GMR nor the Nasheed government — contested the court order. Second, according to GMR, no attempts were made by the government to introduce the bill to impose the ADC in the Majlis. However, Imad said that Nasheed did try to force a bill, but failed. But the fact remains that within two weeks of the judgment, on December 22, 2011, GMR requested Maldives to allow it to deduct the ADC from the concession fees paid to the government every quarter. Male agreed.
Once Nasheed was gone in February 2012, and Waheed became the president with the support of parties that had opposed GMR, ADC and its deduction from quarterly payments, GMR’s overconfidence came to the fore. The Indian firm thought that its contract was iron-clad. It felt that it would receive New Delhi’s backing. It concluded that Male wouldn’t have the guts to cancel the deal, the largest FDI inflow in the country that was equivalent to 40-50 percent of Maldives’ GDP. After all, the cancellation would lead to a huge compensation to GMR, which the cash-starved Male government would be unable to pay.
Thus, when the new regime decided to renegotiate the ADC clauses, GMR put its foot down. As a conciliatory option, the company agreed to exempt Maldivian passport holders from ADC, but hiked the fee for foreigners from $25 to $28. In a second option, it agreed to exempt Maldivians travelling to SAARC nations, but raised the fee for others to $27. GMR was unwilling to reduce its revenues from the ADC; if it gave a concession, it made it up through a higher charge.
When Male threatened to terminate the deal, GMR opted for arbitration in Singapore as it was confident of a legal victory. Unfortunately, the Singapore Supreme Court ruled that Maldives had the right to reclaim the airport from GMR. Dismayed and frustrated by the order, as well as New Delhi’s stance, GMR agreed to hand over the airport peacefully to Maldives.
Local socio-politico-economic dynamics
Obviously, Maldives would not have taken such a belligerent stance if local sentiments had not been against GMR. This happened for several reasons, some of which could have been better handled by New Delhi and the Indian firm. One, the Male airport became a symbol of social and national pride. Almost every family in the capital felt that it had helped in the initial construction of the airport, which also characterised the locals’ fight for independence against the British.
Since the airport was the main entry and exit point for the nation, it acquired an image of national security. The common belief was that whoever would control the airport could exercise his/her power over the nation. Therefore, the politicians were able to whip up passions about a foreigner (GMR), who could prove to be a future threat to national security. Such feelings got exemplified because GMR was a company based in India, which had been seen as an interfering Big Brother.
Once critics spread rumours that GMR had sacked locals and hired foreigners, especially Indians, it fanned the anti-GMR emotions. Imad said GMR planned to build a huge shopping centre, which would put local shopkeepers out of their jobs. According to GMR, the number of Maldivians employed at the airport has gone up from 1,483 in November 2010 to 1,663 in December 2012 despite the obligation to retain the original lot only for the first two years of the contractual period.
Local politics too played its part. Once the parties, which had opposed GMR, came to power under Waheed, they were bound to act against the Indian company. Their priority was to throw out GMR to drum up local support, especially since the next presidential elections will be held in November 2013. In addition, GMR has alleged that these parties had vested interests since they were close to some of the other bidders, who had failed to bag the airport project in 2010.
As we go to the press, there are hints of diplomatic tussles. The Chinese, who have an interest to expand their presence in Indian Ocean like India, are ready to take over the Male airport from GMR and manage it at more attractive terms. If true, the role of New Delhi in La Affaire GMR is questionable. For, it would imply that the issue has turned into a corporate and diplomatic defeat.
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