For last ten years, Indian companies have been scouting for coal and iron-ore mines across the globe to feed a ravenous appetite for these raw materials back home. While initial searches were focused more on Australia, South Africa and Indonesia, the rising valuation of these assets has forced Indian companies to switch to looking for these in African and Latin American countries. Others have simply gone abroad, prospecting for new business opportunities.
Yet, whether it is a result of business naiveté, poor due diligence, or just plain bad luck, some of these companies have recently experienced an unprecedented wave of business reversals, which have dented their plans, that too at a time when the global economy is reeling with another slowdown.
Bolivian bungle
None embodies this trend better than billionaire Naveen Jindal-promoted Jindal Steel & Power’s (JSPL’s) recent experiences in Bolivia. In 2007, JSPL had announced a $2.1-billion investment in the Latin American country, with the aim of developing an iron-ore mine and setting up a steel plant. A few weeks ago, the company called off the contract due to non-fulfilment of conditions, by the Bolivian government, related to the supply of natural gas required for the project and an assurance — not offered, to date — that the Bolivian government would not nationalise the project. This was followed by the government slapping criminal cases on the company for apparently not honouring its side of the deal, which included investing $600 million by March. It also arrested two employees and confiscated company properties. JSPL maintains the government did not provide the promised infrastructure for a gas pipeline, and the space for storing minerals.
Eventually, the company was forced to write off $100 million of its investment. “We have learned the hard way,” says Sushil Maroo, joint managing director, Jindal Steel & Power. “We will ensure proper scrutiny of government systems for our future overseas ventures now,” he adds.
JSPL has company in upstream oil giant Oil & Natural Gas Corporation (ONGC), which is facing a similar fate with its projects in Sudan, Syria and Libya — all countries that have either recently experienced, or are enduring, protracted civil conflicts. Earlier, the company also got caught in the crossfire between Vietnam and China concerning its two oil blocks in the South China Sea — an area contested by both the countries — eventually abandoning them because of ‘insufficient reserves.’
Cases like these have one glaring similarity. “Most companies end up doing contractual-level assessments, which works only in mature markets,” says Kameswara Rao, leader, energy, utility and mining practice at management consultancy firm, PWC India.
Risky business
Rao also mentions an Indian company which got into a contractual agreement with a foreign government to develop mines that had a clause that required consent from an indigenous community. “Now this cannot be accepted in the contract on face value. One needs to assess the ability of the government to deliver,” he says.
ONGC’s setback is significant for an oil company that has big plans—namely, to boost its annual production of oil from 62 million tonne (mt) today to 130 mt by 2030 in order to maintain its current production levels of 73 and 50 per cent of the country's oil and gas output. This requires the company to grow at three per cent annually, which can be achieved only through acquiring overseas assets, necessitating ONGC Videsh, the company's subsidiary for operations abroad, to expand to six times its current size—an unenviable game plan, considering the success of its recent foreign forays.
The ONGC chairman and managing director, Sudhir Vasudeva, speaking to Business Standard, admitted to the difficulties in acquiring overseas assets and helplessness while working in uncertain environments that have geopolitical risks and volatile prices. Yet, he seemed committed to continuing chasing such deals and hoped to sign a few new ones soon.
“Such political downsides are the way of the business in the energy sector and companies are doing acquisitions of such assets more out of compulsion than choice,” says Dayanand Mittal, an analyst with Mumbai-based brokerage Ambit Capital. “One of the ways to de-risk such investments is to bid for projects in a global consortium in order to bring the power of global diplomacy to the negotiation table,” he says, offering the recent example of ONGC tying up with China Natural Offshore Oil Corporation, and bidding for assets in Sudan and Syria as a joint team.
There has also been learning from last year's bitter experience in Indonesia, when most of the Indian power producers, including Tata Power, Reliance Power and Adani Power, suffered losses when the local government stipulated that coal prices be pegged to the prevailing international ones. The companies had set up power plants in India and bought coal mines in Indonesia to source coal. Their tariff agreements with distribution companies in India did not factor in such price increases, and the price hike by the Indonesian government compelled them to book losses.
“It is a tough time for all global importers,” says a senior executive at one of these three firms, wanting neither his nor his firm's name to be identified. “Local governments will try to extract as much as possible out of their resources, so companies have to now be prepared to face such downsides,” he says. These companies are now lobbying for tariff increase with the government-controlled distribution companies amidst rising losses.
Once bitten, twice shy
This means a steep — and often brutal — learning curve for power companies doing business abroad who are now extremely wary of getting into the same bind again. “With the Indonesian experience, companies are now planning to bring a common clause in the bidding arrangements to accommodate fuel pass-through in tariff,” says Rohit Singh, a power industry analyst with Mumbai-based brokerage IDBI Capital.
Sometimes, chasing natural resource assets abroad without safeguards is not the only way to run into overseas trouble.
Infrastructure company GMR had signed a 25-year concession agreement with Maldives to upgrade and manage the airport, under which an airport development charge (ADC) of $25 was to be levied on all outgoing passengers. The ADC was later successfully challenged in court by the then opposition party leaders, who are now in the government. The company has subsequently moved an arbitration court in Singapore over development charges. The company spokesperson did not comment on the issue.
Sometimes, the best way to learn an important business lesson is by surviving a fiasco. However, time will ultimately determine if Indian companies have actually learnt from their experiences over the past several years.
