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5 December 2012, Gateway House

The Maldives: Geopolitics trumps geoeconomics

The move by the Maldives to renege on Bangalore-based GMR’s $500 million investment is a classic case of geopolitics trumping geoeconomics. This is an appropriate time for India to boost its diplomatic efforts by including the Ministry of Commerce in initiatives taken by the Ministry of External Affairs.

Former Director of Research

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The 27th November decision by the Maldives to terminate the Bangalore-based GMR group’s contract to develop the Male International Airport, saying that it was conceived “under dubious circumstances,” is a set back to the business and foreign policy community in India.

The Male airport contract, won by GMR in June 2010, was hailed as an emerging model of foreign engagement for India, one in which our commercial and strategic interests coincided.GMR, a $2.9 billion, publicly-listed infrastructure conglomerate in India with businesses in Indonesia, Turkey, and South Africa, has been expanding its global footprint. Maldives is a member of SAARC and a strategically important country for India given its geographic positioning in the Indian Ocean, its large Indian diaspora and a strong bilateral defence partnership. India has always been the first to respond to calls for aid from Male, as in 1988 when we sent our Special Forces to save President Maumoon Abdul Gayoom’s government from an attempted coup d’état, and in 2004 when the tsunami devastated the Maldives.

Yet the swiftness with which Male has moved on GMR has surprised everyone and shows what little importance the Maldives gives to history or geo-economics. At $500 million, GMR’s is the largest foreign investment in the Maldives. The country has already benefitted from the $78 million it received from GMR as an upfront fee and the additional $13 million awarded to local contractors. GMR estimates it will pay close to $2.5 billion over the next 25 years in concession fees alone – almost equal to the size of the country’s GDP. The International Finance Corporation (a member of the World Bank group), which conducted the bidding process, awarded the contract to GMR over five other global alliances; obviously, GMR offered the best returns.

Clearly, economic gain is not guiding the Maldivian decision. GMR seems to have fallen victim to the simultaneous conflicting geopolitical interests of various groups in the Maldives. It is possible that Islamic fundamentalists in the new government led by President Mohamed Waheed, and some outside of parliament, could have instigated the review of the existing contract due to their anti-India, pro-local business convictions. Also, the contract was won under the previous government led by Mohamed Nasheed, who was overthrown in a coup in February 2012; having the new administration unwind it is not surprising.

Whatever the reason, India is now faced with a multi-dimensional challenge: that the new decision-makers in Maldives may not be restricted to its government alone.

A tweet by the Adhaalat Party, an opposition party, calling for the project to be given to China has fuelled speculation that the decision to terminate may have been influenced by the Chinese. If this is so, it will be naïveté on the part of the Maldivians to think that Chinese commercial engagement will come without political strings attached. They only need look at Myanmar. After decades of an exclusive relationship with China, Myanmar is now actively seeking partnerships with democracies such as India and those in Europe to diversify their options in building major infrastructure projects such as the Sittwe and Dawei ports.

With the Maldives, it seems more likely to be a classic case of geopolitics trumping geoeconomics – one in which neither India nor GMR has many options. Both diplomatic pressure by New Delhi and legal appeal by GMR have been tried but without much success.

It is important that India continues to push the Maldivian government to respect the contract and to negotiate a reconciliation. The Maldives could have legitimate reasons to review the terms, but no progress can be made unless the two sides talk. Without a Bilateral Investment Protection Agreement in place – as India has signed with 82 countries, including neighbours like Bangladesh – it is unclear whose judicial jurisdiction this agreement falls under. So far, the Maldives has sought advice from the U.K. while GMR has appealed to courts in Singapore. On December 3rd, the Singapore High Court stayed the Maldivian decision – to no effect on Male which claims the court’s order as invalid, the contract to be null, and has offered to compensate GMR for its losses.

Unfortunately, India’s Foreign Minister Salman Khurshid’s repeated calls to persuade Male has not rescued the deal. Neither has the alleged threat to withhold some of the $300 million of Indian aid pledged to the Maldives since 2009, had any impact.

This is an appropriate time for India to boost its diplomatic efforts by including the Ministry of Commerce in initiatives taken by the Ministry of External Affairs (MEA), especially in those that are politically and economically sensitive. As our diplomats make political space to create opportunities and build relationships, the commercial counsellors can execute the deals with legal, economic and soft benefits that work to our advantage. Commerce Minister Anand Sharma’s network and expertise in this particular case could have lowered temperatures and provided support to foreign minister Khurshid.

There is also a lesson here for Indian business, which has been venturing overseas with great confidence: Diplomacy can open doors and help some negotiations, but the country cannot always be held hostage to execution issues and legal ramifications faced by one company at the expense of historic and strategically important bilateral relations. Manoeuvring the complex world of geopolitics and nationally-sensitive industrial sectors abroad will require Indian business to revise its approach to international engagement. From designing a pure market-entry strategy for a country, it must now step up its game by first formulating a more cogent strategy with diplomats, commercial counsellors, and policy think tanks at home. Only then can it become a truly savvy international player.

Akshay Mathur is Head of Research at Gateway House: Indian Council on Global Relations.

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