Hard learned lessons learned by India Jindal’s Bolivian Mine investment failure on what not to do when investing in South America
Lessons from India Jindal’s Bolivian Mine 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.
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 at Gateway 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.