Saturday, July 20th 2013 - 05:07 UTC

Lessons from India Jindal’s Bolivian investment failure

Jindal’s integrated mining and steel project in Bolivia was the largest contract secured by an Indian company in Latin America. The project, which ultimately became a victim of the country's domestic politics, has lessons for Indian companies venturing into Latin America.

Bolivian President Evo Morales greeted Indian investor Naveen Jindal (L) saying ‘I’m also Indian’

By Ambassador R. Viswanathan (*) - ¨Hermano… Yo tambien soy Indio¨ (…Brother …I am also an Indian”). This is how Bolivian President Evo Morales greeted Naveen Jindal, when they first met in 2006. The two “Indians” signed an agreement in July 2007 for an integrated mining and steel project in eastern Bolivia. The iron ore was to be mined from “El Mutun” which has one of the biggest iron ore reserves (40 billion tonnes) in the world. Jindal was allowed to exploit 50% of the reserves and export annually over 10 million tons for a lease period of 40 years. The company agreed to set up a pellet plant of 10 million tons per annum, a 6 million tons sponge iron unit, a 1.7 million tons steel plant and a 450-MW power plant. The total investment was 2.1 billion dollars, spread over a period of eight years.

This was the largest foreign investment contract signed in the history of Bolivia. The government was to earn 200 million annually from it, and generate 12,000 jobs. It was also the biggest ever contract secured by an Indian company in Latin America. The project held the promise of other spin-off opportunities in gas, railways, infrastructure, and export opportunities for Indian companies. Naturally it assumed a high profile in India’s rapidly developing economic relations with Latin America.

But in July 2012, the contract was terminated by Jindal after the Bolivian government encashed the guarantee of 18 million dollars, saying that the company failed to adhere to its investment commitment. Jindal blamed Bolivia of not honouring its commitment to supply natural gas for the project. Negotiations broke down and the Bolivian government took some high-handed measures including ordering the arrest of key Jindal employees, who managed to leave the country in time. Now the matter is under arbitration. There is absolutely no hope for Jindal to revive the project.

What happened? The most fundamental problem is that Jindal did not conduct a proper political risk analysis before venturing into this project, and ended up becoming the victim of a local power tussle. In 2006, Evo Morales became the first-ever native Indian president in the history of Bolivia, wresting power from the European-origin oligarchs who controlled politics, business and media till then. Morales had an agenda empowering the native Indians and he show-cased the first-ever steel plant project as a monument of his glorious Indian government. His opponents and vested interests instead decided to sabotage the project and use the failure to bring Morales down and return to power. The Jindal project thus became a high stakes game and was caught in the crossfire.

Understandably, Morales attached great personal importance to the project and its completion during his term. Its slow progress frustrated him. Initially the falling price of iron ore was thought to be the reason for the delay. But later, as time went on with very little to show for it, he suspected the Indian company of not being serious about the investment commitment. When asked, Jindal had no convincing explanations. Instead, the company made the mistake of blaming Morales publicly for not providing gas, land and other infrastructural support. This played right into the hands of the opposition who gleefully exploited the controversy. Instead of a triumph, President Morales realized that the project might end up as his graveyard. Thereafter, limiting the damage by terminating the contract and hence the project, became a priority.

The Jindal project may have lived up to its potential, had the company done its homework on four counts:

1. Ascertain the politics of the area. The El Mutun mine is located in the Santa Cruz province, fertile ground for the tug of war between the federal government of Morales in La Paz and the provincial government of Santa Cruz, the latter controlled by the European-origin elite. Prosperous Santa Cruz which produces 35% of Bolivia’s GDP and attracts 40% of foreign direct investment, had long been threatening to secede from the centre and its new government dominated by the poorer native Indians who comprise 60% of Bolivia’s population. The Santa Cruz politicians and businessmen used every opportunity to attack Morales and manipulated and used the Jindal project. Had the mine been located in an Indian-dominated province, it would not have had this fate.

2. Understand the leadership. Jindal underestimated Evo Morales, who rose from a poor coca farming background with very little education and understanding of the world before becoming President. Jindal assumed a superior knowledge of iron ore and steel, and that it would snare the contract by initially waving the billion-dollar figure but later find a way to get out of the excessive investment commitment. Morales, however, is different from the politicians in New Delhi that Jindal is used to. He is incorrupt and deeply committed to his people and the country. The nationalistic-leftist Morales was aware of the manner in which foreign companies had managed to get sweetheart deals from the previous corrupt regimes in his country, and that modus was unacceptable to him. He had already shown astuteness in picking an Indian company for the project rather than a large western multinational or a Brazilian or Venezuelan company which would inevitably bring their superior bargaining strength and the political influence of their governments, to the project. He also understood that unlike western governments, New Delhi did not have a track record of supporting or rescuing Indian companies abroad. In any case, Morales was already disappointed with the Indian government which had failed to honour its commitment of providing a line of credit for the supply of Dhruv helicopters.

3. Size the investment wisely. The proposed investment of 2.1 billion in the poorest country of the region (pop. 10 million, GDP 18 billion dollars in 2007) was too much. It raised expectations all around, becoming the target of intense public focus and media scrutiny in the politically charged and polarized atmosphere of Bolivia. Had Jindal committed to a few hundred million dollars of investment, the controversy may not have been outsize. The project would have been better broken into two parts: first, just mining and exports with a reasonable royalty to the government, then expanding into the steel plant and other facilities, if feasible.

4. Ask the obvious question. In their eagerness to get the contract, Jindal didn’t ask the obvious question: If El Mutun with its massive reserves, was such a prize, how did it stay so long without being captured by the established global players such as Rio Tinto, BHP and Vale – which operates iron ore mines across the border in Brazil? Or equally significant what about the Chinese who have been acquiring mining assets around the world? There are no answers yet, though some Bolivians whisper about a conspiracy by Vale and Brazil to prevent competition from Mutun.

The first lesson for the Indian companies is that a brilliant business plan is not enough when venturing into Latin America, a continent where people matter more than systems, rules and regulations. Political and cultural understanding and sensitivity are equally important. A thorough political risk analysis is necessary.

Jindal was not the first Indian company to fail in Latin America. Dr. Reddy’s Laboratories’ joint venture in Brazil – the very first Indian venture in Latin America in the nineties – failed because of a poor understanding of Brazilian management culture. They made up for the loss by managing better their entry into Mexico with a 60 million dollars investment which is now doing well. TCS failed in Brazil during the same period; its contract with a local bank was terminated for alleged unsatisfactory execution. TCS too learnt from its mistake, and is now a success story in Latin America. Its key learning: hiring the right regional manager from Latin America who understood well both the Latino and Indian mindset. Transporting Indian managerial talent, as many Indian companies do, often fails; they do adjust well to the region and are unable to get the best out of their investment as talented and skilled Latin American staff. Understanding local politics and culture is critical.

The second lesson: don’t announce disproportionately large investments in small countries. London-based Indian metals commodity entrepreneur Pramod Agarwal is learning the hard way: he made the mistake of announcing with big fanfare, a 2 billion dollars iron ore project in Uruguay, a small country of 3 million people. His project has, unsurprisingly, run into a storm of controversy between government, opposition, environment activists, farmers and vested interests. At one stage Uruguayan President Mujica even talked of holding a referendum on the project but fortunately did not. The company is now working with the government on the environmental impact. Rumours swirled that Agarwal wanted to sell his project to Jindal, but the latter, burned from Bolivia, has wisely declined the offer.

(*) Ambassador Viswanathan is a Distinguished Fellow atGateway House, an expert on Latin America, having served as India’s Ambassador to Argentina, Uruguay and Paraguay and also to Venezuela, and as Consul General in Sao Paulo.
This article is part of the Ambassadors’ views section, a collection of articles featuring eminent Indian diplomats written for Gateway House: Indian Council on Global Relations.

 

26 comments Feed

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1 Think (#) Jul 20th, 2013 - 06:00 am Report abuse
To MercoPress (And TWIMC)

A sharp, perceptive & insightful article from a “New Thinker” that KNOWS what he is talking about!

I quote from Mr. Rengaraj Viswanathan own webpage….:
“I am a believer in the New Latin America which has a new paradigm of sustainable political stability, economic growth and autonomy in foreign policy based on a new mindset and market.
The region has found its own development model in the “Brasilia Consensus” of equilibrium between pro-poor and pro-business policies.
The macroeconomic fundamentals have become stronger and the economies have become more resilient and resistant to external shocks.
The Latin American countries are moving in the direction of regional and sub-regional integration which reinforce their political and economic stability while at the same time the groups have become like firewalls against external interference….. Exceptions are there, of course.
www.rviswanathan.com/profile.html

Keep the good work, MercoPress…. Articles like this one add real value to your product.
El Think
Chubut, Patagonia, Argentina
2 Pytangua (#) Jul 20th, 2013 - 10:03 am Report abuse
What a thoughtful and honest article - a pleasure to read.
3 reality check (#) Jul 20th, 2013 - 10:29 am Report abuse
So what is this guy saying?

These people failed for not doing business the Latam way, instead of the way that everyone else does business, by honouring contracts?

Sounds like that to me.

Sounds like, if you want to do business down there, keep quiet about the details and be prepared to be ferked about!
4 Think (#) Jul 20th, 2013 - 11:40 am Report abuse
(2) Pytangua

I fully agree. This man really knows South America!
Just of curiosity, I checked Mr. Rengaraj Viswanathan opinion on the current Paraguayan situation.

That’s what he wrote:
”Colorado Party comes back to power making Paraguay a politically landlocked country again
The Colorados had ruled the country continuously for 61 years in a one-party dictatorship until 2008 when Fernando Lugo, the leftist ”Bishop of the Poor“ defeated the Colorado candidate and made history…

Eventually the Colorados in collusion with Vice President Franco from the Liberal party ousted President Lugo through impeachment in an ugly congressional coup in June 2012…

The return of the Colorados means ” business as usual” with the government agenda driven by the rich and powerful. The President-elect Cartes is one of the richest businessmen with interests in 25 companies…

The governance is opaque and the institutions are weak. They are not based on rules or systems. Even the economy is mostly informal. Unofficial foreign trade is much more than the official one. One of the biggest businesses in the country is to smuggle electronic and other goods to Brazil and Argentina from the border city of Ciudad del Este…

There is no proper merit-based transparent system for recruitment to government jobs. There are very few avenues for upward mobility of the bottom of the pyramid given the poor educational and socio economic conditions. There are over a million (one sixth of the total population) Paraguayans who have moved to work as maids and laborers in Argentina…

Paraguay has not changed much from the portrayal of the country by Graham Greene in his novel “Honorary Consul”. Greene describes the country as a corrupt, decadent and backward. Even today, visitors to the country are likely to feel as though they have entered the nineteenth century…”
www.latinamericanaffairs.blogspot.dk/2013/04/colorado-party-comes-back-to-power-in.html
5 ChrisR (#) Jul 20th, 2013 - 04:27 pm Report abuse
Ambassador Viswanathan has great hindsight!

Why oh why, if he had all this 'nous' and experience of the Latino psyche did he not advise his fellow countryman to steer clear of the Cowpat and his leftist traits?

Another defeat snatched by an ‘Indian’ from the jaws of victory. Well done Cowpat.

“Simples”.
6 Swedish (#) Jul 20th, 2013 - 09:18 pm Report abuse
I am a Swedish academic living in Bolivia for long time. I appreciate and commend your article. Your description and analysis is absolutely correct. Thank you!
7 Anglotino (#) Jul 21st, 2013 - 03:21 am Report abuse
An Indian lecturing others on corruption, oligarchs and dominant party politics.

Now I've seen it all!

With Indians it is always someone else's fault.
8 Stevie (#) Jul 21st, 2013 - 08:38 am Report abuse
So, every Indian company will think twice about investing in Latin America because one Indian company had a bad experience in Argentina...

Welcome to MP logic, you guys seriously think investors give a darn about other companies failures?
9 reality check (#) Jul 21st, 2013 - 09:55 am Report abuse
Let's see?

I am interested in starting a business in an area where other businesses have failed or investing in those businesses.

I do not concern myself with the reasons why they failed or what those failures might mean for my business or investment.

I must be a brainless moron with money to burn!
10 ChrisR (#) Jul 21st, 2013 - 12:08 pm Report abuse
8 Stevie

When I worked for a very large multinational company HQd in britain I was co-opted to the Due Diligence Team because of my technical ability.

Guess what we always considered first when we looked at a company we were thinking of acquiring: YES, you have guessed it- the 'track record' of the governments of that country and how they treated international businesses who owned 'their' companies.

AND, don't forget the local example of The Dark Country and Repsol! Who in their right mind would recommend to their Main Board that they buy into argieland: unless they are used to dealing with snake oil salesmen like Chevron are.

Chevron however may have ‘overlooked’ the thing that we all know about The Dark Country: they NEVER keep their word.
11 Think (#) Jul 21st, 2013 - 02:28 pm Report abuse
Turnip at (10)

Guess who's doing good business in Argentina since 1919?
www.ge.com/ar/
12 Stevie (#) Jul 21st, 2013 - 03:44 pm Report abuse
Well Chris, if you too disqualified a whole continent for having a bad experience in a single country, I most surely understand why you are not in that position anymore...
13 reality check (#) Jul 21st, 2013 - 03:46 pm Report abuse
Bad experience in a single country!

Lol. Thats a good one.
14 ChrisR (#) Jul 21st, 2013 - 04:10 pm Report abuse
@11 Suicide In Waiting (never forget my offer to help you with this)

Yes, but have you bothered to analyse the performance?

Extract from the 2012 GE report

www.ge.com/ar2012/pdf/GE_AR12.pdf it runs to 150 pages and you need to read the Notes.

Return on Capital Invested by Region. (Percentage) Calculated by ChrisR

U.S..........................20.2
Europe....................14.3
Pacific Basin...........43.4
Americas.................39.3*
Mid. East & Africa...21.7

Comment by ChrisR:
Interestingly, although there are $13,982 MILLION of funds written to Discounted cash flow (and Collateral value) and is comparable to £13,864 of CONSOLIDATED NET EARNINGS, there is no breakdown by regions.

This has not been flagged by the press! Readers should be aware that this represents a LOSS of $118 MILLION of CNE! Not helpful to the future performance.

From the Notes to the Report:
$1.8 billion of GE cash and equivalents is held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S.

NOW I WONDER WHO HAS MOST OF THAT.

Of course things were MUCH better for businesses in The Dark Country in 1919 and it has been downhill since then. The report for 2012 does its best at clouding the fact that overall performance has suffered and continues to suffer due toi the global problems. GE Capital still provides a massive share of profits by lending money made in previous years to the present regional businesses: nothing like keeping it in the family.
15 Think (#) Jul 21st, 2013 - 07:44 pm Report abuse
Ex-employee and shareholder I can see......
16 ChrisR (#) Jul 21st, 2013 - 09:46 pm Report abuse
15 I Don't Think

Close, but Director and shareholder of a company of the General Electric Company Limited.

Give you a clue: it's NOT the same company but I helped check our GEC Company Report and know where the bad news will be buried.
17 Think (#) Jul 21st, 2013 - 10:09 pm Report abuse
Ain't directors employees nowadays?
Ain't ex-directors ex-employees nowadays?
18 ChrisR (#) Jul 22nd, 2013 - 04:20 pm Report abuse
17 I Don't Think

Not in the UK, there is something called the Corporations Act 2001 which superseded the Companies Act 1985. The Corporations Act imposes legal requirements on 'Directors' as to their behaviour, especially in relation to concert parties and insider trading among others.

Personal taxation is also very different when you are a Director, basically you pay more, just as if you were a Sole Trader under UK Tax Law.

But once the relationship with the company ceases many directors have contracts which must be adhered to otherwise an action for breach can be brought under contract law.

I also have a lifelong confidentiality agreement which precludes me for the rest of my life from disclosing or discussing with others or otherwise transmitting information expressly forbidden in the contract without the written permission of the other party of the contract.
19 Think (#) Jul 22nd, 2013 - 04:32 pm Report abuse
Turnip at (18)

As I said at (15) then........, “ex-employee and shareholder”......
20 ChrisR (#) Jul 22nd, 2013 - 06:27 pm Report abuse
19 I Don't Think

If you are referring to the time after I left the business, then NO, you are incorrect.

I had thought I had explained the situation as lucidly as possible.

A Director is not an employee so can never be an ex-employee, he is in fact a retired Director or, if he moves to another company or starts his own business like I did he is a 'former Director of...and is now a Director / Executive of whatever.

I do realise you only exist to wind the Brits up but I had mistakenly thought that you were actually interested for once.

Oh dear.
21 Think (#) Jul 22nd, 2013 - 09:41 pm Report abuse
Turnip at (20)

Why on Earth would I be the least interested in an old English Psychopath that repeatedly breaks English and International laws by issuing death threats online to the Argentinean President, diverse MercoPress’ posters and god knows whom else…….

Why on Earth would I be the least interested in an old grumpy English ex-pat pensioner, persistently insulting friends and foes online and “bragging” about being an ex-employee of a Yankee multinational?

There are a fantasyllion things in South-America more interesting than the likes of you…..

Do us (and yourself) a favour…….. Return to your beloved England…… Nobody needs an Old English Turnip like you down here…
22 bushpilot (#) Jul 23rd, 2013 - 03:17 am Report abuse
So, Winky Dink, what do you do for a living?

You work in the UK don't you?
23 ChrisR (#) Jul 23rd, 2013 - 11:33 am Report abuse
21 Think aka AND I ALSO NEED READING GLASSES OR A NEW BRAIN

You stupid bitter old sod, the General Electric Company Ltd. is BRITISH.

BTW I am not down there, I am in the civilised country of Uruguay.

That's TREE times I have had to correct you on the same post, dementia onset or worse?

What a twat.
24 bushpilot (#) Jul 23rd, 2013 - 02:44 pm Report abuse
“when venturing into Latin America, a continent where people matter more than systems, rules and regulations. ”

And therein lies the problem, and the great deception.

If people matter more than systems, rules, and regulations, which they obviously do, then don't go outside the system, rules, & regulations. Doing so, only hurts the people, the ones that really matter.

“People matter more than systems”, so we have perfect justification for working outside the system and doing whatever we see fit. Until the next guy, or gal, gets to do things their way.

One needs to be real careful with the above deceiving rhetoric. That thinking doesn't serve the people at all. Stand back from that fantasy and look at the real world around you down there. Rule-of-law is important for a people.
25 Think (#) Jul 23rd, 2013 - 06:01 pm Report abuse
Turnip at (23)

Ahhhhhh.... G E C plc.
That English based, German-Italian failed company.....

Soooooo..........
You are an ex-employee of a not longer existing company then......
Not much to brag about....................... is it?
26 ChrisR (#) Jul 23rd, 2013 - 10:10 pm Report abuse
@ 21 Think aka AND I ALSO NEED READING GLASSES OR A NEW BRAIN

Wrong again. FOURTH time AND I know you need glasses: read my last post when I deliberately left the H out of THREE so it read TREE! But you NEVER saw it!

Guess who crashed the company, the lazy Italians of Caserta, who were lovely people but completely lazy and workshy: just like you!

That was after Lord Weinstock had retired and I had already left the company five years before for a better paying position elsewhere.

Still, you never have had a good job have you, not unless you count the one working for the wealthier side of your family in Chile but even they couldn’t stomach your griping and ‘the world owes me a living’ attitude, could they?

Try again, perhaps, just perhaps, one day you will get something right. Mind you I suspect the ‘next’ time might be your first.

Be honest with yourself, even when I cut you a break, you still manage to snatch defeat from the jaws of victory.

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