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White elephant profits from global forays

Indian private companies are not the only ones going global. India?s public sector enterprises (PSEs) are aggressively embarking on a spate of cross border M&As.

india Updated: Sep 18, 2006 02:53 IST

Indian private companies are not the only ones going global. India’s public sector enterprises (PSEs) are aggressively embarking on a spate of cross border M&As. Overseas investments by PSEs have mainly been in strategically important natural resource projects.

Leveraging their core strengths, these Indian giants are shopping overseas, after slugging it out in an increasingly competitive domestic market. A number of PSEs have entered into mutually beneficial arrangements with both domestic and international players for acquiring an array of assets, privileges and contracts overseas.

Leading the pack is the oil and gas sector, piloted by ONGC’s overseas investment arm ONGC Videsh Limited (OVL) and GAIL. According to an August 2006 report by FICCI, ONGC’s overseas deals alone account for about 40 per cent of $5.2 bn that India Inc has spent on cross-border M&As in 2006. During Jan 2000 to July 2006, 14 global acquisitions were made by India Inc. in this sector, constituting 5 per cent of total cross border M&A activity.

OVL has made large investments in oil fields across the globe, primarily in the African continent, but also in Russia, Cuba, Australia, Latin America and Vietnam, where most of these expensive new assets come attached with a huge risk premium. GAIL has acquired stakes in gas companies in Egypt and China in 2004-05, with an exploration and production (E&P) foray into Myanmar. SAIL is actively negotiating to acquire coal blocks in Australia, Canada and Russia.

The overseas bug has bitten the Indian public sector banks too. Pioneering the trend, SBI acquired a majority stake in a bank each in Kenya (76 per cent), Indonesia (76 per cent) and Mauritius (51 per cent) in 2005. Indian banks have an advantage in their competitive low cost base due to cheap technology and labour, massive domestic operations and a network of overseas branches.

To counter competition from China, Indian PSEs are tying up with prominent international players for mutual gains. OVL has entered into a joint venture with the LN Mittal group and ONGC Mittal Energy Ltd. has recently signed a pact with Nigeria for lifting rights for 32.5 million metric tonnes of crude oil per year, which is equal to India’s current annual production. Given the India-China rivalry in the acquisition of oil assets abroad, the PSEs of the two have begun to collaborate, with ONGC jointly buying an oil block in Syria with CNPC and half an oil company in Colombia with the Sinopec Group.

ONGC has also tied up with local players, like Russia’s Rosneft, signed a MoU with PetroEcuador for oil exploration in that country, and is seeking an alliance with Venezuela’s state-owned oil company PDVSA. In November 2005, the government permitted OIL and IOC to set up a project-specific special purpose vehicle (SPV) for undertaking overseas projects, including for acquisition of E&P ventures. Similarly, MMTC and BPCL have recently tied up for entering international trading in petro products.

RITES has institutional tie-ups with foreign players, bagging contracts for rehabilitation projects in Afghanistan, Mozambique, Colombia and Angola, and has been allowed to invest equity in a Tanzanian Railway Corporation project. CONCOR and IRCON are planning joint bids for rail lines and container depots in Jordan, Nigeria, Mozambique and Saudi Arabia. NTPC has entered into a unique gas-for-power barter arrangement in the UAE, to undertake its largest power plant project ever, in exchange for gas for its power plants.

Long perceived as a ‘white elephant’ the Indian public sector is acquiring a global footprint. In its search for crucial resources and markets abroad, some of which are vital for India’s strategic interests, it looks set to give private players a run for their money.

First Published: Sep 04, 2006 03:06 IST