Bilateral treaties between countries are not foolproof and Indian companies must increasingly recognise the risks of governments reneging on such treaties to safeguard their economic interests,a Financial Express panel discussion of industry experts concluded.
Speaking from recent experience in Indonesia,Tata Power managing director Anil Sardana said increasing the price of a natural resource by a government may not tantamount to reneging a bilateral agreement.
The bilateral arrangement are basically to say that unfavorable conditions wont be made for exporters. But it does not deny a country the right to change the rate and make that rate valid for exports. The bilateral arrangement still is valid, Sardana said. In September 2011,Indonesia enforced a regulation by which coal producers and exporters in that country are required to sell fuel only at the prices notified by the government based on international prices of coal of equivalent calorific value.
This has made coal far more expensive for Indian power companies like Tata Power.
India and Indonesia have a bilateral agreement under ASEAN free trade agreements that call for economic co-operation for more trade.
Legal expert Nishith Desai argued that political risks,such as current governments reneging on bilateral agreements,are real and Indian companies must manage such risks. Taking insurance protection against such risks is a good way to protect the companies,according to Miles Johnstone,who looks after political risks in Asia at insurance company AON Global.
However,insurance cannot be treated as a substitute for a legal bilateral agreement. It is a final safety behind these agreements, Johnstone said,adding that insurers must also be able to predict such political risk events besides other risks.
Experts agreed that in the case of the Maldives government taking back the Male airport control from GMR Infrastructure,the Indian government could have been more forceful in its diplomatic exercise. In November last year,the Maldives government terminated a $500-million contract given to the GMR Group to develop the Male airport. The GMR Group got a reprieve after a Singapore high court issued a stay order.
Risks of political instability are not new to companies and have been observed in many countries,both developed and developing,experts said.
Citibanks head of corporate banking Rahul Shukla said the policies of the current government in any country matter more than any bilateral agreements and companies must take cognisance of the risk. You can sign any number of treaties but if the government comes out and takes a stance,you are a prisoner to that, he said.
Shukla said that given the strong demand in the Indian economy,companies need to have valid economic reasons to expand abroad. Tata Steels Sardana called for a comprehensive energy security policy to take care of the countrys needs for the next 10 years. He warned that India has to plan its imports of energy resources to manage costs and availability. If imports are not decided today,then we would not get those resources blocked today itself. And energy is not abundant internationally either, he said. Desai observed that Indian companies must quickly learn how bilateral agreements work and the risks involved and the government must negotiate for fair bilateral treaties.