India looks to reclaim neighbourhood from China

Discussion in 'China' started by TrueSpirit, Jun 30, 2013.

  1. TrueSpirit

    TrueSpirit Senior Member Senior Member

    Jun 17, 2009
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    When Sri Lanka wanted to build a big ticket power project, it was perfectly natural to go to China. China not only built the project, it also helped out with an attractive financing deal.

    The first phase of the Norachcholai power project was supposed to add 900 mw to Sri Lanka's power grid. China's Exim Bank gave $455 million in buyer's credit and preferential buyer's credit for the first phase and $891 million for the second.

    Since it was commissioned in March 2011, the Norachcholai project has functioned at an average of barely one-fourth capacity. Beset with technical problems, the project has been plagued by allegations of use of sub-standard equipment by the Chinese, leading to inferior performance. If the Lankan government was looking at affordability, the cost of the project turned out to be astonishingly high — at $1.5 million per mw (at 2006 prices).

    Compare that with NTPC's power project at Sampur, also in Sri Lanka, which, at $1 million per mw, is a veritable steal.

    Champika Ranawaka, Sri Lanka's power minister, was quoted as saying, "We did not get it at the right time, nor get the best price and also did not get the best technology."

    This story is repeated over and over again in other neighbouring countries like Bangladesh, Nepal and Maldives.

    But these countries continue to go to China for such projects, rather than India. The reason, Indian officials say, is they get a co-financing package along with the project that makes it not only cheap but very easy. Second, it gives India's neighbours some degree of strategic autonomy as well to be seen to be acting as independent of Indian pressures.

    But the Indians are fighting back. Having demonstrated that India-executed projects could be more efficient, there is a sense in the government that they don't have to cede the neighbourhood to China.

    Financial minds in the commerce and finance ministries have designed new financing tools to create packages for neighbouring countries that are making Indian projects as competitive as the Chinese. The Chinese lend at very low rates ((Libor+250 basis points) largely courtesy the trillions of dollars in forex reserves, while the Indian Exim Bank can only do it at Libor+500. Indian financing cannot possibly match such low rates.

    "We have designed numerous schemes which make it easy for exporters and foreign governments to access financing and export support on easy terms," said Arvind Mehta of the commerce ministry, one of the brains behind these initiatives. He credited former commerce secretary Rahul Khullar with taking the lead on this.

    "We can either continue to complain about the Chinese or we can do something about it," he said. There are several ways of doing this. The foreign government which has given a contract to an Indian company can avail of funds from Exim Bank at China-like rates. The Indian government, through a series of mechanisms, absorbs the difference in interest from Exim Bank, so its books can stay clear of debt.

    The government is also reworking existing mechanisms like export credit guarantee schemes through ECHC, as well as the National Export Insurance Account. Basically, it means the Indian government is ready to subvent interest and insurance in order to facilitate market access in foreign countries where the Indian private sector can get a foothold.

    India has started rolling these mechanisms out in bite-sized projects. The first project to be done under these new schemes is a drinking water project in Sri Lanka. Despite the Mahinda Rajapakse government's other problems with India, this pilot has been a success to the extent that Sri Lanka has asked for more.

    Both Bangladesh and Nepal have expressed interest in these new financing models. This is interesting because for the past few years, Indian officials have noticed a distinct trend in these countries. While PM Manmohan Singh's neighbourhood outreach has been successful in many different ways, these countries continue to favour Chinese investment more than India.

    India looks to reclaim neighbourhood from China - Times Of India

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