New Delhi: In 2012, India offered a loan of $250 million to Mozambique to improve the electricity supply to its capital, Maputo. Five years on, the project is in limbo as New Delhi has quietly urged the host government to remove the existing Indian contractor and float a new tender.

This is one of a handful of projects across Africa being executed with Indian soft loans where the Indian government has communicated its disquiet over the work of current contractors.

These projects are seen within the Ministry of External Affairs (MEA) mainly as ‘legacy’ problems from the previous system of issuing lines of credit – or loans at concessional rates – to developing countries.

For the past one year, the ministry’s development project assistance (DPA) division has been putting in place a new method of streamlining the completion of projects under lines of credit. This was also, effectively, a much-required spring cleaning. The aim, according of MEA officials, was to get out of the previous system – which they said awarded contracts to only a handful of Indian firms, especially in Africa.

It is important for India to ensure that lines of credit are used effectively – they have been the principal instrument for New Delhi’s aid diplomacy, adopted systematically since 2003. Largely administered by the MEA’s territorial divisions in the first decade, an Indian development aid project once even led to the controversial transfer of a joint secretary who was allegedly being forced to accommodate the whims of a ministerial aide.

After the DPA division was carved out in 2012, it was given charge of administering all lines of credit that India offered to foreign countries.

At stake, 1% of Indian GDP

The total amount of soft loans that India has committed in the past 14 years is about $24.2 billion, in over 60 developing countries.

As per government figures, India’s lines of credit stood at about $10 billion as of April 2014. Since then, another $14.2 billion has been added with 52 new lines of credit.

This amount of $24.2 billion, however, does not include the $10-billon soft loan that Prime Minister Narendra Modi offered to African countries at the third India Africa Forum Summit in 2015.

The fact that India has loaned out capital amounting to nearly 1% of its current GDP is a clear indicator of the primacy of ‘aid’ as a diplomatic tool.

“If you are seen by most people as playing a benign developmental role, then you strengthen your credentials of contributing to global good…If you want to be seen as a leader, then you must act like one,” said a senior MEA official.

Opening up doors for Indian firms is another reason for distributing soft loans – whether it is to get access to new markets or resources. Procurement rules stipulate that about 70% of the goods to be used in projects under lines of credit have to be sourced from India or Indian companies.

“Many of India’s investments are in extractive sectors, where they face problems of infrastructure, logistics or the regulatory system is weak. We provide aid which will improve those sectors like build a rail line for offloading coal – which would obviously help Indian companies,” the official said.

With China’s Belt and Road Initiative snaking its way around the world with its $1-trillion purse, Indian officials feel the need to diplomatically leverage India’s lines of credit even more intensively.

Though India started to seriously deploy lines of credit from 2003, New Delhi has had a rather hands-off approach to the process itself. “The borrowing government identifies a project in accordance with its own development plan. We don’t try and impose and say that we will do this or for that, like what the Chinese do,” said a MEA official.

Once a proposal comes through, it is examined by the MEA and the finance ministry’s Department of Economic Affairs, before getting another layer of scrutiny from a standing committee.

However, after the approval process, the Indian government had been taking the path of least supervision, giving a very long leash to the borrowing country.

“We realised that the success of the project depends on a good DPR [detailed project report]. When you don’t have a good DPR or it is vague or not a detailed one, then the project would be delayed and have cost overruns,” said a senior MEA official.

A quality DPR is at the heart of smooth, efficient implementation of a project. However, most foreign projects did not have one when they were offered to the Indian government.

The process of converting a soft loan to a complete project should ideally be simple. However, more often than not, delays start occurring at the DPR level, after the Indian government has signed off on the loan.

When a borrowing country doesn’t have the capacity or technical capability to come up with a DPR, there are a number of options that can be taken. For one, India’s Exim Bank can float a tender asking for various private parties to come up with a DPR. Or the Indian government has in the past handed the responsibility of creating a DPR to a public-sector enterprise or undertaking (PSE/PSU) without floating a tender.

However, the practice of appointing a PSU for creating a DPR has been problematic in the past. According to a number of MEA officials, Indian PSUs often tweak project specifications to benefit certain private-sector contractors. “We could not overrule them as we are not technically equipped, but we know that there is something dubious,” explained a diplomat.

This suspected nexus has resulted not just in higher costs, but poor execution quality. “We found that projects which didn’t go well at the implementation stage started to unravel once we handed them over,” said an official. A few years ago in Afghanistan, local authorities refused to hand over a completion certificate for two mini hydel projects because of how botched the project ended up being. India then had to lean on the authorities to get this certificate, an official recounted.

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The drill has now changed, contended another senior official, with India insisting on a “proper” DPR. “In fact, we are telling governments that if you want fast execution, you give us projects in which the DPR is already done,” he told The Wire.

However, the problem remains that many nations in Africa and South Asia lack the capacity to prepare a proper DPR.

“If they can’t commission a DPR, Exim Bank now has a database of consulting firms from which they can select their consultant,” he said. As of now, 66 firms are listed as consultants for 15 sectors.

Pre-qualification is a running theme in the new workflow.

Earlier, once the DPR came in and was approved, the foreign government would issue a tender, get bids from Indian companies and appoint a contractor.

“Despite good intentions, basically problems arose because the choice of selecting the contractors was left entirely to the borrowing countries,” stated the senior MEA official.

The loans were being extended to countries, many of them small and vulnerable, with endemic problems of corruption.

According to an Exim Bank study, one firm alone, the Delhi-based Angelique International Ltd, had managed to get 62 projects worth $1.1 billion out of the 510 projects awarded between 2004 and 2014 under Indian lines of credit. In terms of value, this company had got around 16.8% of the total contracts worth $7.035 billion. The large number of deals going to just a handful of firms was first reported in October 2015 by the Indian Express.

Besides Angelique, three other companies – Overseas Infrastructure Alliance, Lucky Exports and Jaguar Overseas – had apparently got 110 projects all together.

Asked about the secret of his firm’s success, Angelique’s whole-time director and chief financial officer Pankaj Goyal told The Wire that while his firm was not well known in India as it had not taken up much work in India, it had a very strong legacy abroad.

“As far as the perception of Angelique getting a large number of projects is concerned, in any market there are always a few big players. No market domain of this nature is full of hundreds of small players,” he asserted.

Listing out some of Angelique’s 100 projects, Goyal felt that “early entry in Africa” also helped his company to get more business. “Our bids are industry benchmarks and we have delivered projects in such areas within Africa where our teams have sailed with alligators in swamp in canoes and have travelled in three-foot deep marshy lands, to cite some challenges. We have even worked in countries with politically unstable hostile environments. In several of these projects, Exim bank and Indian missions have appreciated us,” he asserted.

In February 2016, the Enforcement Directorate (ED) raided the premises of an Angelique pofficial and of a former Indian diplomat who had been associated with Angelique. A year later, the ED sent notices to Goyal and M.P. Gupta for the “transfer of funds to certain African countries allegedly in violation of the Foreign Exchange Management Act (FEMA)”.

The ED claimed that Angelique had made payments related to their overseas projects by “padding” up the cost of projects and “disguising” payments by including them under various categories. “These projects were financed by the government under Line of Credit and also by multilateral funding agencies like World Bank. Preliminary enquiries confirmed that M/s Angelique International Limited had indulged in sending large-scale money abroad under banking transactions in violation of FEMA,” the agency said on February 22.

In answer to The Wire’s query, Goyal said they had received show-cause notices from the ED. “However our counsels are of the opinion that the allegations raised, on various grounds, are not sustainable in law,” he said.

Incidentally, the comptroller and auditor general of India cannot audit the implementation of India’s lines of credit, as technically the money is not being spent from the exchequer is not being spent (the loan is supposed to be repaid). The only part that the CAG has scrutinised is the payment of interest equalisation from the MEA to the Exim Bank.

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It is now over one-and-a-half years since the finance ministry introduced new guidelines for lines of credit as part of the proposed overhaul to clean up the system.

Officials said that the rules were drawn up so as to avoid the previous domination of contracts by a few companies. “We had to find a way of preventing the same firms from bidding and winning contracts all the time,” an official told The Wire.

According to officials, many of the firms who were getting projects may have completed their execution with satisfactory results, but the situation was not ideal and delivery was inconsistent.

“These firms were doing projects across the board. It was not necessary that these were experts in those sectoral areas of the projects…They didn’t have the core competence. On winning a project, they outsourced everything and kept the margin,” explained an official.

That’s when the MEA decided that the hands-off approach was not working – and it wanted to do much more hand holding.

“If a project went belly up, the borrowing country will not just blame the contractor. However much we were out of the picture, it was seen as a failure of the Indian government,” said an Indian ambassador.

The radical departure is that the borrowing country can no longer just issue an open tender for Indian companies to apply. Instead, they can only choose from a bouquet of Indian firms who had been “pre-qualified” by the Exim Bank.

This was done in two stages – first, EPC companies were ‘empanelled’ in broad sectors by the Exim Bank. Then there was a ‘pre-qualification’ screening for specific projects.

Officials described the criteria set for selection as “reasonably tight”, to allow only firms with ‘core competence’ in the specific areas to be selected. For example, the companies have to show that they had proven general, as well as specific, expertise in a particular sector within India in the last seven years.

There is also a cap on how many projects a company can undertake. Instead, firms applying for projects have to show that the “aggregate annual residual value” of all ongoing contracts will not be more than 350% of the highest annual turnover in the last five years.

The ministry has also, for the first time, drafted criteria for ‘blacklisting’ companies, which is now pending final approval. “It won’t be a very long list, but idea is for it to be a deterrent,” the official said.

All these changes, according to officials, was not exactly welcomed with open arms by all stakeholders. There was some unhappiness about the implementation of the new guidelines among some diplomats of African countries posted in Delhi. “But they realised that we were going to go ahead with this. Now they are reconciled after seeing that good companies are getting shortlisted,” said an MEA official.

Some of the ‘ineligible’ firms also tried their luck in the new system by tying up as a joint venture with a smaller company which had specific expertise in a sector. “We insisted that even in joint ventures, both firms should have core competence,” he said.

Even the courts were used to the challenge the new Exim Bank rules through a public interest litigation in the first half of 2016. A petitioner, Gaurav Goel, raised technical issues over the appointment of a firm as a consultant to Exim Bank to help in empanelment of consultants and evaluation of contractors. However, the PIL specifically targeted the December 2015 guidelines of the Exim Bank by questioning its validity.

The PIL contended that the guidelines would lead to “restrictive competition” as it would limit “the choice of the borrowing country to award contract to the companies empanelled with the Exim Bank only and thus ousts the other companies from participating in the contract”.

On June 1, 2016, the Delhi high court dismissed the petition on all counts. “In the absence of any statutory prohibition, the provision for short-listing cannot be held to be either illegal or arbitrary on any ground whatsoever. The allegation that such short-listing would restrict the choice of borrowing Government is baseless and does not stand for any reasoning. At any rate, it is un-understandable as to how the same would result in loss to the public exchequer,” said the division bench order.

So far, the MEA and Exim Bank have used the new rules to process projects in ten countries, worth $1 billion. Another ten projects worth nearly $2 billion are in the pipeline.

Angelique, which had been the leading Indian contractor for projects in Africa under lines of credit, has not been empanelled or pre-qualified for any project processed under the new guidelines. Goyal claimed that his firm had not bid as “our order books are already up to the brim for next about four years”.

When asked specifically if Angelique felt that it was being targeted by the new rules, Goyal said, “No, we do not feel that way at all, and there is no reason to think like that.”

While OIA and Lucky Exports did not reply to the questionnaires, Jaguar Overseas Limited did.

Out of the ‘big four’, Jaguar is the only firm which has been empanelled and bid for projects under the new rules. It has already been pre-qualified in five sectors – twice on its own and in the rest as joint ventures. Jaguar also has no complaints with the new lines of credit rules. “The new guidelines are a good step by the government of India to improve the procedure and systems of lines of credit,” R.D. Lokhande, chief general manager, Jaguar Overseas told The Wire.

Asked for his views on the new lines of credit rules, Goyal stated that any policy framework should facilitate “quick risk proof business” and that his firm was “still struggling to understand and comprehend some of the guidelines”.

He specifically referred to the rule that funds for goods exported from India will be released only after authorisation from the borrowing country. “Now such requirements are against the principles of international trade and are not even prescribed by any other multilateral agencies across the world,” Goyal noted, claiming that new rules “like these will only put Indian exporters at huge risk and increase costs to a big extent”.

Goyal asserted that norms set by international development banks, from the Japan International Cooperation Agency to Asian Development Bank, should be the benchmark. “We should not forget China and other countries are far ahead than us. They undertake and deliver projects in almost half the time, and their policy framework helps them achieve this,” he contended.

A senior MEA official said this particular rule had been introduced by the ministry after some complaints. “Earlier, funds were quickly released against shipment. We have now stipulated that after getting a certificate that the goods have reached the site will the funds be released. This means that the payment is delayed by about 3-4 months compared to the earlier system,” he said.

There was also a tendency to export too much material at the same time. “Certain goods and equipment are required at only particular stages of the project. But they used to be all shipped at one time and sit rusting at the site, sometimes for years,” he added.

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Even as the MEA is now rolling out projects based on the new line of credit rules, officials continue to grapple with ‘legacy problems’ from the previous system.

After India signed an agreement for extending a $250 million soft loan to the Mozambican government for “improving the quality of power supply” to its capital in 2012, the east African country floated a tender. The $106 million contract – for part of the project – was won by Angelique International.

While both governments were talking about the need to expedite the implementation, MEA received a tip-off in 2015 from an international financial institution that the Mozambique deal had overtones of corruption.

The global financial body apparently came across this ‘information’ as part of its own investigation into corruption in an unrelated case.

This put the MEA into a quandary, since the information was handed over through informal channels. Besides, according to sources, it was not clear if it made for a water-tight case of corruption. However, the MEA ordered the Exim Bank to stop the disbursal of funds. Till then, Angelique had apparently claimed to have done work worth around $13 million.

A jittery India approached Mozambique to cancel the contract, but a puzzled Maputo then raised questions. “They asked us what would be the legal grounds for termination. Since we could not share what was passed to us, we could not really give them a solid answer on this,” said a senior government official.

Meanwhile, the new Mozambique government in the saddle had become restless about the implementation of the project. If India did not sponsor it, they were ready to approach other international donors. “Due to depressed commodity prices, the economy had slowed down a lot, so the power demand had not expanded and therefore there was not much urgency for a couple of years. But with the economy picking up, Mozambique wanted to move on with this project,” he said.

Mozambique was the first leg of Modi’s four-nation Africa itinerary in July 2016. According to sources, the status of the project figured in bilateral discussions.

The best-case scenario, from India’s perspective, would be to get Angelique to withdraw on its own from the project and to write off whatever had been paid so far. While officials told The Wire that Angelique had been asked to withdraw, this was officially denied by the company.

“Angelique was awarded a project of $106 million, by electricity company of the project, EDM, out of the line of credit of $250 million extended by the Exim Bank of India to the government of Mozambique. However, no disbursement was made out of this, in spite of post-award approval for this project by the Exim Bank of India. No reason was ever conveyed by the Exim Bank of India to Angelique, resulting in the project continuing to be on hold, to the deprivation of people of Mozambique,” Goyal said.

Since Mozambique was worried about being sued if it did not give proper legal grounds for terminating the contract, India gave assurance at the highest level that there would be no case for a challenge in the courts. But with no written guarantee, the Mozambican government is hesitant to take a call.

“We are stuck. This is now in limbo,” an official said, describing the current status of the project.

Mozambique, however, is not the only African government that India has approached for the termination of contracts of line of credit projects.

As per sources, in the last one year, India has advised that three other projects located in the Republic of Congo and the Democratic Republic of Congo should restart from scratch. So far, contracts for two projects have been terminated.

With Nigeria, the delay in finalising the contracts under a $100-million line of credit for power projects stretched out for a decade – as both sides went to and fro over conditions for the loan. “First 3-4 years, there was no movement from their side. Then, they asked for better term. We agreed and made an offer. Then there were two more years with no progress. Then they returned and negotiated more. We just recently cleared two of the projects,” said an MEA official.

Located on the Indian Ocean, Seychelles has high strategic importance for India. In 2013, India offered a third line of credit of a relatively modest amount of $10 million for the “procurement of goods as per the specified needs of the Government of the Republic of Seychelles”. However, India’s Department of Economic Affairs has now refused to release the money.

“Actually, this should not have been a line of credit, which are specifically for projects not for a vague title like this. We asked Seychelles to tell us what they want to utilise it for specifically. But we didn’t get an answer for a year. So now finance ministry is not releasing the money,” he said.

In Tanzania, India had offered a line of credit of $268.35 billion for a water pipeline from Lake Victoria.

In 2015-16, the East African nation did a pre-qualification process of its own. When the Tanzanian government shared the shortlisted bids with India, officials discovered the presence of some ‘objectionable’ firms who had applied through joint ventures. “We knew that if we gave a green light, one of the them would surely bag the contract with their influential networks. So we stopped it right there,” said a government official.

India handed over its own list of pre-qualified companies and Tanzania has finalised the contract with three of them recently.

The Tanzanian project was another example where the role of the Indian government – through the local Indian missions – has become very involved, even scrutinising local tenders. “Now we are helping the borrowing government to even draw and vet the tender document. Earlier, some companies used to help the countries to draw up the tenders themselves, so that they got selected,” he said.

The new rules, therefore, present a learning curve for MEA and Exim Bank officials. When a tender was issued for the $29.95-million project to upgrade Kenya’s Rift Valley textiles factory, only one company applied. In a handful of cases, officials could not find any suitable pre-qualified firms. “We are having this issue in 2-3 projects,” he said.

For example, India had extended a soft loan worth $41.96 million to Senegal to set up a “modern abattoir, Meat Processing, Cold Storage, Rendering and Tannery Plant”. However, the companies who applied were primarily petty-sized outfits, mainly run by small butchers. It was felt that the project was too large to give to them. Then officials had to approach the larger meat-processing companies to request them to join the fray. “We are also learning the ropes,” he said.

Even while officials claim that this intensive ‘handholding’ will lead to faster execution, others also pointed out that a lot of factors are out of India’s reach. “Since these are sovereign loans, the borrowing government have to complete their own procurement procedures. So even if we give a prequalified list, they to go through their tender, their evaluation because as they are also answerable to their taxpayers,” he said.

Then there are unpredictable developments. India had given a list of pre-qualified companies to Gambia for a project. But there was no movement for months after the president was forced to leave the country and there was no new government for several months.

With the Indian economy continuing to show faster signs of growth compared to its peers, MEA officials believe that lines of credit commitments will continue to rise. Therefore, putting the right policy in place at this time becomes crucial. The success of the new guidelines will only become apparent if the projects start to be finished as per schedule. “We want to actively promote our soft loans to more and more countries. But we need to be confident that we will get good companies and that our credibility to implement projects is not harmed,” said a senior official.