Sunday, February 24, 2013


INVOLVED PARTIES
*    GMR  
  • An Indian company dealing with infrastructure related business: airport  Management, coal mining, highways etc.
  • It operates the airports in Delhi, Hyderabad and Turkey.
  • Grandhi Mallikarjuna Rao founded this company, hence the name “GMR”.
*    Male International Airport/ Government of Maldives
  • Male=capital of Maldives.
  • Maldives is a tourism economy. Their annual GDP=$2 billion annual GDP.
  • About 1/5th (=20%), of that GDP comes from this Male Airport.
  • So far this Male Airport was managed by Maldives Airports Company Limited (MACL).
  • Maldives Airports Company Limited (MACL) = 100% Government owned company.
  • In 2009, Government decided to handover Management and control this airport to a private company.
  • Maldives Government itself did not have enough money to develop or modernize the airport, they were looking for some foreign private investment.
  • Therefore Government of Maldives (under President Nasheed) decided to invite “Biddings/tenders” for privatization of Male Airport: Whichever foreign company agreed to share maximum profit with the Government, will get the contract to run the airport.
  • But the bureaucrats of Maldives= had no prior experience of how to evaluate the financial, legal and technical worthiness of foreign bidders.
  • So, Government asked International Financial Corporation (IFC) to oversee the bidding process.
*    International Finance Corporation (IFC)
  • When foreign investor, wants to start business in developing country, IFC provides financing and technical advice and assistance, works as a catalyst.
  • So, Aim of IFC= boost private investment in developing countries.


GMR Deal Row

Ø  In June 2010, the Maldives government, the Maldives Airports Company Limited (MACL) and GMR-MAHB Consortium signed a tripartite concession agreement to develop and run the Ibrahim Nasir International Airport at Malé, the capital of the island nation. 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.
Ø  The Maldives government in 2009 asked the International Financial Corporation (IFC), the private sector arm of World Bank, to manage the bid process for privatisation of the airport to ensure fairness. IFC ran the bidding process in 10 months.
Ø  IFC in turn engaged a number of globally reputed consulting firms like E&Y, Halcrow, Gide Loyrette Novel and others to be involved at various stages. The bidding process itself was a typical three-stage process. In the stage of request for proposal, the bid was evaluated on three parameters — legal, technical and financial.
Ø  The last was the critical issue where the current dispute lies. To go back to the bidding process then, in the first two stages — legal and technical — there was only pass or fail criteria. Once the bidders qualified from these stages, the criteria for final selection of the winner was based on their financial bids. To evaluate the financial bids, a set formula was given to all the bidders after discussions between the privatization committee and IFC. The formula was based on the Net Present Value of the revenue (in US Dollars) the bidders will pay to the Maldives government. In other words, the key was who would pay the maximum revenue share to the nation.
Ø  Six consortiums — GMR+MAHB, Reliance+ASA, Zurich+GVK, ADPe, TAV, Vienna+SNC Lavlin — were pre-qualified to participate in the bidding process. Three bidders — GMR+MAHB, Zurich + GVK and TAV+ADPe — submitted the bids from whom the final bidder was chosen.
Ø  However, after the contract was signed, the Maldives government changed. President Nasheed was replaced by President Waheed in a coup. This government claimed the contract was invalid. The airport is very significant for the nation, as out of its $2 billion annual GDP, about a fifth is made up of revenues that are connected to the airport.
Ø  Under the terms of the contract, Maldives had decided to make a passenger service charge a pass through item from the airport. In other words, the sum earlier being earned by the MACL now goes to the government directly. Instead it had allowed GMR to levy an Airport Development Charge (ADC) on the departing passengers, which GMR claims is an international experience.
Ø  The ADC was later turned illegal by a local court and could have been legalised had the country's Majlis approved such a charge. Before this could happen, the government changed in the coup. In the absence of such a charge the earlier government had allowed GMR to deduct the ADC revenues from the revenue share of the government. Due to this offset, the government has to pay $3.5 million to GMR for the current calender year period till November.
Ø  This charge has got caught up in the national legislature which projected that MACL can instead earn a $4 billion in the term of the concession period i.e till the year 2035. But with GMR running the airport the revenue share for the nation will amount to $1. 4 billion. Against this argument, GMR has projected that Maldives will earn $2.1 billion. To buttress its point, the current government questioned the levy of the ADC as part of the revenue share model and moved to cancel the contract.
Ø  The Singapore court  allowed the Maldivian government to take over the airport from GMR.

Impact on India-Maldives Relations

  Ø  Though it’s inevitable for the move to “affect bilateral relations”, India has hoped that the controversy would not be “allowed to be used “by firing groups in that country to lead to deterioration in ties.
  Ø  Foreign Minister Salman Khurshid has stated that with GMR Infrastructure reaching a settlement with the Maldives government, the Indian government would not intervene in the matter.
  Ø  While New Delhi has been assured by the Maldivian government about the safety of Indians in the island country, India feels that the attitude of the Mohammad Waheed government will work as a deterrent for potential Indian and international investors.  
   
LESSON LEARNT

  Ø  The recent termination of GMR’s contract by the Government of Maldives has once again highlighted issues of propriety and legality of the conduct of sovereign parties to a contract in their dealing with foreign investors. Plenty of Indian companies now have large global footprint and similar issues are bound to crop up periodically.

  Ø  Very often, states, and particularly developing countries, require capital and technical expertise from nationals of other states. States enter into concession or other agreements for development of their natural resources or infrastructure by foreign investors.

  Ø  However, many a time, states have repudiated their contractual obligations, “expropriated” the foreign investor’s property or otherwise caused diminution in the value of such property. The question then is, how does the investor recover its investments and the projected returns?

The investor may consider certain precautions at the stage of negotiating and concluding the agreement. Some of these precautions are :

   ·         Bilateral investment treaties are a defence against arbitrary state 

   ·         Diligence on the state’s assets by the investor before entering into a private contract.


   ·         Make provision for a neutral dispute resolution mechanism with the seat of arbitration outside the territory of the host country.
    ·  Appropriate investment backing, for example, through Multilateral Investment Guarantee Agency.                                                                                    


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