Once again, it seems that Chinese public sector companies have bested an Indian public sector company when bidding overseas. The State Grid Corp. of China has won the bid for the right to operate the Philippines’ national power transmission grid for a 25-year concession, with a winning bid of $3.95 billion. There were news reports that Power Grid Corp. was considering bidding around $1.5 billion, though the company denies having submitted a bid.
This was not the first time that we have been pipped at the post by Chinese government companies. Earlier, Chinese companies have outbid Indian competitors for oil exploration rights.
As their economies developed, Japan and South Korea tried to control energy and raw material resources, but without too much success. The Chinese have been much more successful because they have tried to avoid the mistakes of the Japanese and the South Koreans.
China uses both political and financial power with the nations where it plans to bid. First, it builds political bridges by giving aid and economic support to build infrastructure and, where necessary, assistance in international forums such as the United Nations (in cases of countries such as Myanmar and Sudan).
Then, global bids are treated as a national priority, which means that they get the full support of China’s state-owned banks. With these banks now ranking among the top 10 in the world by market capitalization, writing a cheque or raising additional capital is not an issue.
Of late, following the example of Singapore’s Temasek, the Chinese government is also using its sovereign wealth fund and an entity called the China Investment Corporation to team up with third parties such as Blackstone to make investments. It has, through a listed entity, China CITIC Bank, invested in mining companies in Britain and South Africa and timber plantations in New Zealand.
Perhaps it is time for the Indian government to review the areas our public sector companies should be bidding for overseas and which of the ratnas should have the mandate to do so. The focus should be on backward or forward integration, either for raw materials or for markets. Portfolio investments for small minority positions should be discouraged. Once the decision is made, the government should wholeheartedly support the chosen bidders. They should receive support with behind–the-scenes political lobbying and financial back-up.
While we had political goodwill in Africa in the 1950s and 1960s, when we supported its several independence movements, there has since been a generational change and we now need to build bridges with the new generation of African leaders. China has been laying the political and economic groundwork in these countries for the past 5-10 years. Even in the Commonwealth of Independent States (CIS), we are losing ground to the deeper pockets of China, despite our close links to the former Soviet Union. Like the US, Russia, France and China, we need to put our national interest first and not be swayed by external pressure, as we appear to be doing in Myanmar.
In most of these countries, there are generally large Indian business communities who have thrived and part of the reason for their success is their insight into the local political scene. If we have not already done so, we should take advantage of them, see if and how they can assist.
We should also contrast the public sector experience with the private sector’s significantly more successful track record in large and small overseas acquisitions. The private sector has also dealt with politically-sensitive issues and succeeded. With the size of the acquisitions getting larger, the ratnas should be allowed to seek commercial financing, if necessary. While there might be a temporary global credit squeeze, the windows will reopen by the second quarter of next year.
However, the government should anticipate that foreign banks will directly or indirectly try to seek support from the government. The other approach might be for the public sector companies in energy to get together and set up an independent energy fund, or for mining companies to set up a mining fund, supplemented or supported by the government, to bid for these opportunities with the clear understanding that the offtake will be by these companies. This will assist in obtaining financing from the commercial market. They can also tie up with third-party private equity funds to bid.
If we are to maintain our growth rate of close to double digits, we cannot allow ourselves to be left behind in the race for raw materials. We cannot become like Japan, which in spite of not being able to gain control over natural resources, has become extremely wealthy. Japan has cut its energy consumption and set up manufacturing plants across the globe. Its population is on a decline. We have the opposite problem—of sustaining growth and creating jobs for the flood of people reaching working age.
Avinder Bindra is CEO of Arx Analytics and Advisory Pvt. Ltd, a financial research and consulting firm. Comments are welcome at theirview@livemint.com