EU asks India not to scrap bilateral investment treaties with member states

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Road contracts are spread across India

Business Standard | 28 November 2016

EU asks India not to scrap bilateral investment treaties with member states

by Subhayan Chakraborty

Expressing grave concern about India’s ‘unilateral’ decision to terminate bilateral investment treaties (BIT) with 23 European countries, the European Union (EU) has warned that investments from its member countries to India would stop. It asked India to keep these individual agreements in force until a new agreement is signed.

India plans to replace these 23 treaties with a pan-EU treaty as part of its aim to attract and safe guard foreign investment while protecting public interest.

In a letter to Finance Minister Arun Jaitley on November 15, European Commission Vice- President Jyrki Katainen expressed concern about the lack of any legal protection for investors from EU nations.

The letter, reviewed by Business Standard, termed the move by India ‘unilateral’ and pointed to rising capital costs and legal uncertainty as concerns that will keep away investors. About 8,600-crore worth of national highway projects undertaken by key construction players such as Larsen & Toubro, Gammon and Era are stalled after partial progress. The government is struggling to break a gridlock and get these restarted.

These include 10 highway contracts totalling 787 km and valued at 8,661.37 crore. Officials said though they cannot give up on the efforts to revive the projects, these had become “chronic” cases. The projects have been impacted by issues such as land acquisition, lack of environment and forest clearance and other local issues. Some also blame overzealous companies.

The companies that bagged these projects “overestimated” the revenue potential and they “overextended” their balance sheets for these contracts, an analyst who did not wish to be named told Business Standard.

These road contracts are spread across Andhra Pradesh, Haryana, Karnataka, Odisha, Rajasthan, Tamil Nadu, Uttarakhand and West Bengal.

For instance, L&T Infrastructure Development Private Ltd, a subsidiary of Larsen & Toubro, is constructing a 43.4-km Chennai-Tada highway that is being funded by the Canada Pension Plan Investment Board. The project, part of the Golden Quadrilateral project between Chennai and Kolkata, has been delayed on account of land acquisition issues. Rating agency ICRA downgraded the loan for the 419-crore project after concessionaire L&T Chennai Tada Tollway.

India has been pushing for the new model BIT, released in 2015. This is expected to pro‐ vide the framework based on which individual agreements will be negotiated with other nations. However, the hitch lies in the fact that most negotiations are not time-bound whereas the existing treaties themselves would end over the coming year.

In a process that started during the United Progressive Alliance regime, the finance ministry in 2015 had served notice to 57 nations of its intent to terminate and re-negotiate the existing BITs. Already, the country has reportedly terminated several treaties. The urgent letter from the EU comes at a time when India’s treaty with the Netherlands is set to be terminated this month. The country has been a steady investor and is the sixth largest source of foreign direct investment into India, accounting for $18.92 billion between 2000 and 2016. The EU has asked the validity of the treaty be revised for a period of six months, to be renewed if needed.

The total investments from the EU stands at $64.07 billion or 26.78 per cent of the cumulative inflows (a special purpose vehicle executing the project) defaulted on loan payment.

Another project that has been languishing for a while and has missed several deadlines is the Gurgaon-Kotputli-Jaipur National Highway 8. Road Minister Nitin Gadkari had said the project was delayed by at least five years due to land acquisition issues and poor planning. Pink City Expressway Pvt Ltd is engaged in the construction and upgrade of the four-lane highway into a six-lane one. It is a special purpose vehicle incorporated by KMC Constructions Ltd, Emirates Trading Agency LLC and IKSHU Infrastructure Private Limited.

The 1,896.25-crore project is being executed on a build-operate-transfer basis. IDBI Bank is the lender to the project connecting Delhi and Jaipur.

Experts said as there wasn’t enough liquidity in the system, the companies that bagged these projects were finding it extremely difficult to execute these.
The Haridwar-Dehradun highway expansion in Uttarakhand, despite being a tourist circuit, is also languishing. The concessionaire for the project is Era Infra Engineering. The project is on a public-private partnership.

In some cases, the National Highways Authority of India has been able to replace contractors. Last year, it approved the substitution of Gammon Infrastructure Private Limited by Brookfield India Holding Pvt Ltd for the stalled Vijayawada-Gundugolanu road project in Andhra Pradesh and Telangana, after a policy initiative of the government. 2000-14 4.52 2010 15.26 2011 6.35 2012 8.61 8.34 2013 2014 received by the country between 2000 and 2014. The EU, whose member countries have significant business interest in India, has shown willing‐ ness to sit down for talks in the coming weeks provided the Dutch treaty is extended.

However, negotiations will take time owing to differences over crucial provisions of the model BIT, a senior government official said under condition of anonymity.
One of these is the Investor-State Dispute Settlement Mechanism, which allows companies to seek international arbitration only when all domestic legal options have been exhausted. A number of countries including the US and Canada have made clear their concerns with the provision. Notably, the EU has placed the resolution of the BIT issue as a condition for starting talks on trade, as is evident from a similar letter by Cecilia Malmström, EU trade commissioner to commerce minister Nirmala Sitharaman in September.

Katainen, who visited India earlier this month, had also pointed to it as a sore sticking point in trade negotiations. On the Bilateral Trade and Investment Agreement (BTIA) — the official free trade pact with the EU — which has been pending since 2007 on account of a number of bottlenecks, he had said the EU was awaiting India’s signal.

Negotiations on BTIA had seen 16 rounds of talks at the level of chief negotiators till 2013, after which talks had stopped till July this year. The deadlock has continued due to differences on greater market access sought by both sides for merchandise exports. Commerce ministry officials said the EU has consistently sought lower import duties on a range of commodities such as automobiles and wine products.

Other than being one of India’s largest trading partner and its biggest export destination, the bloc has also been New Delhi’s ‘strategic partner’ since 2004. Two-way commerce dropped to $88.4 billion in 2015-16, from $98.52 billion in the previous year.

The EU’s share in India’s total trade has also progressively shrunk in recent years. While Indian exports to the bloc constituted 22.52 per cent of all outbound trade in 2005-06, the figure had come down to 16.95 per cent in 2015-16. Imports have witnessed a similar slide over the same period, going down from 17.42 per cent to 11.52 per cent.