New Delhi: State-run transport engineering consultant RITES Ltd and construction company Ircon Ltd have decided to start arbitration proceedings against Mozambique over a railway project that was taken away from them by the African nation’s government in an example of the political risks of doing business in countries prone to regulatory and regime changes.
RITES and Ircon were part of a joint venture known as Companhia Dos Caminhos De Ferro Da Beira, S.A.R.L., (CCFB) which won the $230 million Biera rail project in 2004 after outbidding Chinese rivals. The venture was responsible for running the Beira Rail corridor concession, which it was deprived of in December 2011.
RITES and Ircon, which come under the ministry of railways, had a 51% share in Companhia Dos Caminhos, and the balance was held by the Mozambique government. The Indian firms injected $30 million of equity into the project.
“We are going to do the arbitration. There is no other way as the land is already taken over by them,” said Rajeev Mehrotra, chairman and managing director of RITES.
The decision to launch arbitration proceedings against Mozambique follows the Maldivian government’s termination of GMR Group’s contract to run the Male airport in November last year. Arbitration proceedings in Singapore over the Maldives’ decision ended with a ruling in favour of the island’s government in a case that illustrated potential setbacks investors face when regimes and regulations change.
“Political risk is something one should account for when one enters into such business agreements in international markets,” said R. Sivadasan, former financial commissioner, ministry of railways. “The degree of political risks for the Indian companies doing business abroad is the same as that for foreign companies doing business in India.”
An official in India’s ministry of external affairs, on condition of anonymity, confirmed that RITES and Ircon were preparing the grounds for arbitration.
Queries emailed in the last week of January to spokespersons for the ministry of external affairs and the World Bank, Ircon, and the commercial counsellor at Mozambique’s embassy in New Delhi were unanswered.
The rehabilitation of Mozambique’s civil war-ravaged railway system was to be completed by September 2009, but the Indian partners managed to finish the project only in January 2011. The project was taken away from CCFB just as it had started collecting tariffs by running the rail network. The concession was for a period of 25 years.
“Now when the line was ready and the trains were run for couple of months then they realized that there was delay in construction and therefore terminated it,” Mehrotra said. “This is illegal termination and we are going to protect our rights with the process in the contract which is international arbitration. This will be governed by ICC (International Chamber of Commerce) rules. They will appoint the seat of the arbitration. We are in the process of appointing our arbitrator,” said Mehrotra.
Beira is one of the three rail corridors in Mozambique and is responsible for coal transportation to the port. It starts from Beira Port in Central Mozambique and has two railway links which connect to the railways of Zimbabwe (Machinpanda line) and Malawi (Sena line). The Sena link also connects the Moatize coal mines.
“The Beira Rail Concession involves investment of US$152 million of which US$104.50 million will be funded through credit provided by IDA (International Development Association), the soft loan arm of World Bank. The balance funding will be through the equity of shareholders and the commercial borrowings,” according to a press statement dated 12 December 2004.
According to RITES, the project was delayed by around 14 months because of land mine explosions that led to the uprooting of the railway tracks.
“For such a big project in such a difficult area, a few months here and there was not really out of the (question)..,” said Mehrotra.
RITES is no stranger to such setbacks. Mint reported on 14 July 2011 that RITES lost a contract to operate the newly constructed north-south railway system of the Saudi Railway Co. following differences over how to run the railroad network. In February 2010, the government of Tanzania revoked a contract the company won to refurbish and operate a significant portion of the African nation’s rail network.
“Most of our PSUs (public sector undertakings) don’t have the experience of working in a competitive environment overseas. This should be a wake-up call for them,” said the foreign ministry official cited above.
The Tanzanian contract, awarded in September 2007, was for a 25-year period. RITES held a 51% stake in a venture with the Tanzania Railway Corp. Tanzanian Railway had cancelled the contract claiming that RITES could not get the rail network in working order. The two sides had concluded the final set of talks in January this year to chalk out the modalities of repatriating RITES’ stake in the venture.
“The stakeholders did have some issues there but they have been amicably settled and we have exited from there...We took over the railways in 2007. There were some disputes amongst the shareholders which were commercial in nature and had impact on the viability of the operations. Since we found we were not going to get along we came to an amicable settlement. We have recovered our money of $8.32 million,” said Mehrotra.
“Whatever packaging we did from here we have recovered our money. There is no loss to the company. We sold it to the government of Tanzania....The Tanzania story is amicably closed. We don’t have any disputes with them,” he said.
Since 2007, Indian companies have rapidly scaled up their global presence, investing at least $45 billion in companies in overseas entities.
“Our experience is that there must be adequate protection against termination of concessions because once you complete the project and then if there are illegal terminations, that has to be very well protected against such events,” said Mehrotra.