‘Sanctity of contracts cardinal for renewable projects’
FMO, a Dutch development financial institution (DFI), is in India for the long haul. Its Chief Executive PETER VAN MIERLO tells that the liquidity crunch and slowdown will not last long. According to Mierlo, while prospects for the Indian economy are bright, the sanctity of contracts is important for projects in renewable energy, a sector looking for foreign money. Edited excerpts:
You are visiting India at a time when the economy is experiencing a slowdown. How do you see the situation as an external observer and the prospects in India?
I am a positive person and at the end of the day, I believe the world has to address two important issues — inequality and climate. If you look from a distance, India’s prospects are very good with a huge work force combined with highly educated people. I do not see any reason why you are not well set (for growth) being the biggest democracy.
Is India one of the most challenging markets?
No I do not think so. African markets are more challenging. India is uniquely positioned. The world moved from G7 to G2 almost (China and the United States). It is important for the world to have G3 where Indian plays its role. It may happen in a
decade’s time. FMO has four focus areas — agriculture, food and water; energy; financial institutions; and its Dutch business.
What are your investment plans and focus for activities in India?
We always have investments in pipeline. At present, our investments in India are over ^700 million. It is the biggest country in our portfolio of about ^10 billion. We expect India to grow at 8 per cent in these three industries – clean energy, financial institutions and agriculture plus food. There is still lot to be done in India. First of all, we will work to facilitate entry of business or investment. Secondly, we want business to contribute to jobs, do some work in climate area and decrease inequality. It is important for us to work with long-term partners having the same vision and mission.
Regarding the energy sector, what are your priorities in India?
We do a lot of solar power. There are challenges but they are across the world like what technology change will happen in the next 10 years and what the cost will be. The good thing about solar is that it is off grid and if you want to reach villages, it is easy. Across the globe, we do a lot of wind. Next to wind, we do geo-thermal energy. And in the most fragile states, we will also do gas. We do not do oil or coal. We do natural gas only if that is necessary for base load in fragile nations (from economic, political and social perspective).
In the renewable energy space, at the state level, there are projects facing challenges such as for the sanctity of contracts (power purchases) in India. How do you see that shaping decisions for long-term investment?
As long as financing is on project-by-project basis, other market conditions during the period don’t affect the industry. The current price level is completely different compared to a few years ago. But that doesn’t have to be harmful. It depends on how you structure contracts. Predictability of contracts is critical for projects. Respecting contracts and intellectual property rights are important for any industry.
India is going through hard times not just due to the slowdown but also due to issues of liquidity, solvency and governance in the financial sector. What is your reading of the situation?
We are long-term investors, so we do see current issues. The liquidity crunch increases the risk profile. But it is not going to stay. We are also an institution that likes to be there when things are difficult. This is because when things are very easy, then no body needs us. That is the reason why we exist as a DFI. We can’t walk away when things are going sour. The difficult days will not be forever. But we need to be more careful in that sort of situation. That is where the distinction between DFI and commercial banking becomes clear. We are investing to make decent returns as it will create market opportunities for commercial enterprises.
What factors or parameters does FMO consider while making investment decisions?
We always have a wish list when we invest. That becomes a contract for improvement, in terms of environmental and social aspects. The diversity in the board room is also an important consideration while making an investment. We are alive to cultural diversity and can’t translate European culture into Indian culture as we are working across cultures.