Considering the importance of Lines of Credits in India's development cooperation programme, ORF has undertaken a study of the system and process of LOCs. Early results point to need for improvements in the system.
Considering the importance of Lines of Credit (LOCs) in India’s development cooperation programme, Observer Research Foundation has undertaken a study of the system and process of LOCs. The study looks both at the flow of multi-level decision making involved in granting LOCs as well as the socio-economic impact this development cooperation instrument is expected to achieve in the recipient countries.
In order to achieve its objectives, the study builds on field visits to Ethiopia and Mozambique -- two major LOC recipients. The aim of the study is to improve the impact and efficiency of Lines of Credit by suggesting possible improvisations or additions to the already existing LOC mechanism.
The early results of the study indicate the need for many improvements. It includes reducing the time required through the process of conceptualising, approving and granting the LOCs; increased focus to help manage risks for both partners through increased technical assistance at the prefeasibility, design and implementation stages to reduce costs overruns and delays and maximise impact from investments.
Early results also suggest increase in the outreach for: more comprehensive articulation of demand based on country priorities, mapping of data and evidence, capacity building, dispute management and informed engagement in the decision making process by all stakeholders concerned.
Another suggestion is putting in place publically available frameworks to improve knowledge on decision points in the LOC process and implementation and creating feedback loops to improve future policies and projects. Clear and transparent tendering process to improve access to contracts and market development by new Indian entrants, including SMEs.
The other need is for reconsidering the balance between sourcing from India (currently 75 per cent) and local sourcing in host countries - this could facilitate mitigate political economy risks arising from non-engagement from local, host country stakeholders, stimulate market development in host countries and help find innovative ways to leverage existing funds in the host country.
Improving monitoring and evaluation of projects through increased efforts on data collection throughout the data collection to enable map the overall impact and feed into the design of future projects is another recommendation in the study. It said this would also enable in early detection of issues and reduce the reputational risks.
The first draft report of the study was presented at the recently concluded 10th India-Africa Conclave with a panel discussion on "Indian Lines of Credit to East Africa: Enabling Development Transformations" among leading Indian and African stakeholders. The panellists included Ms. Gennet Zewide, Ambassador of the Federal Democratic Republic of Ethiopia; Mr. José Pacheco, Minister of Agriculture, Mozambique; Mr. Alok Kumar Sinha, Joint Secretary, Ministry of External Affairs, Government of India; Ms. Geeta Poojary, General Manager, Export-Import Bank of India; Mr. H.H.S Viswanathan, Distinguished Fellow, Observer Research Foundation and Mr. Rajrishi Singhal, Senior Economist.
Ethiopia story
Speaking about Ethiopia’s experience with Indian Lines of Credit and how they have helped the country in achieving some major development breakthroughs, Ethiopian Ambassador Gennet Zewide began her address by thanking Government of India for providing Ethiopia with LOCs. Illuminating the importance of LOCs to Ethiopia, she said that Ethiopian government has a clear policy to become a middle income country by 2023 and it makes five year development plans to move in that direction. In these programmes, Ethiopia has also included projects and plans for rural electrification and railway development and in both programmes Indian LOCs are going to be crucial in realising the final developmental goals. She added that Ethiopia took the first LOC of US$65 million for rural electrification.
Talking about how Indian LOCs have made a difference to her country, she said in one small area of Ethiopia today you will find students studying under electricity and taking evening classes because there is electricity available. There are hospitals which can function better now because of the availability of electricity. This has been possible because of the rural electrification programme financed with Indian LOCs. The Ambassador said that Ethiopian government has decided to undertake a complete survey of the impact of LOCs.
Speaking about Ethiopian sugar industry, she said that her country has been a net importer of sugar in the past. "Every year the government paid roughly about $2-3 million for sugar imports." Because of Indian Lines of Credit, Ethiopia today is no more a net importer of sugar and by 2015 the country aims to become net exporter of sugar. The sugar industry revitalization also helps the country in producing ethanol, an important biofuel. Her Excellency added that the new sugar factories built with LOC assistance have the capacity to employ about 50,000 people. Apart from this, farmers now have greater demand for their sugarcane crop due to increased sugar production in the country.
The Ambassador said the Indian government has also proposed that it will give Ethiopia US$600 million to build a rail line connecting Ethiopia to Djibouti. "This means a lot for us. You all understand the impact of railway on the society and economy. The only port Ethiopia uses is in Djibouti."
Speaking about the need for impact evaluation, the Ambassador added that Ethiopia has learned a lot from its previous experience with LOC funded projects. She said that Ethiopian government is now trying its best to update all data about the implementation of LOC projects and expressed hope that in near future this data will be available for impact assessment and project evaluation.
Mozambique experiences
Mozambique’s agriculture minister Jose Pacheco said that the relationship between Mozambique and India is not new and has been there for many, many years. "We all know that India strongly supported us during our anti-colonial struggles and is again with us today in a win-win relationship," he added. Lines of Credit to Mozambique are now going over US$500 million. They are helping Mozambique in building its energy resources, roads, and infrastructure, he said. Mr. Pacheco said if you take the example of energy, about 11 capital cities that include some 128 villages have electricity today because of Indian LOC assistance. Because of electricity, older people are able to take evening classes and educate themselves.
Mr. Pacheco added that Indian LOCs have also helped Mozambique build a new agro-processing industry and because of this Mozambique is today exporting many non-traditional food items. "We have also been able to increase our pulses export," he added. The Minister said that most important characteristic of LOCs is that the Indian government never imposes its priorities or conditions on us. "They respect our priorities," he said. The Minister added that other important benefit of LOCs is the technology transfer.
The Minister said that there is a need for deeper cooperation between India and recipient countries/Mozambique to further improve the impact of LOCs. "There is a difference between how we work and how you work; there is a bit of confusion," he added.
He added that in Mozambique more rural people today have access to clean drinking water and electricity because of projects financed through Indian LOCs. Mr. Pacheco also said that big investment is coming to Mozambique from Indian private sector companies in coal mines, gas etc. However, he emphasised that we must strengthen agriculture and in future Mozambique hopes to get more LOCs for improving its agriculture and food productivity.
India working closely with recipients
Mr. Alok Kumar Sinha, Ministry of External Affairs, Government of India, started by thanking ORF for undertaking the Lines of Credit study and organizing the event. "It is a very good effort and brings out many questions as well as answers," he said about the study. He added that India’s Development Cooperation is demand driven and Indian government tries its best to match the LOC assistance with the demands and priorities of recipient countries.
He also said that there is a need for capacity building. "Capacity building issues have to be addressed in host as well as LOC recipient countries," he added.
Mr. Sinha added that real boost for LOCs came during the first India-Africa conclave in 2008 where nearly US$5 billion LOCs were sanctioned. Now India’s LOC assistance values at over US$10 billion and about 60 per cent of this has been given to Africa, he said.
Regarding the impact assessment, Mr. Sinha said that Government of India is working closely with recipient countries in this direction and there is already progress. "I would like to share with you that our intention is to work together on projects that produce long term development impact for the recipient countries," he said.
Individual projects
The presentation of Ms Geeta Poojary, General Manager, Export-Import Bank of India, focused on the breadth and reach of Indian LOCs on the African continent. The presentation detailed distribution of Lines of Credit to India’s various partner countries around the world with a special emphasis on the LOC flow to African countries. Ms. Poojary talked about individual projects across different African countries that are being currently funded through LOCs. Keeping with the title of the event, Ms. Poojary talked in detail about the LOCs to East African countries. She talked about the LOC project examples in Burundi, Djibouti, Ethiopia, Kenya, Lesotho, Malawi, Mozambique, Tanzania, and Zambia.
The presentations by various panellists were followed by an open discussion with the audience wherein some interesting questions and issues were raised. After finishing her presentation Exim Bank General Manager, Ms. Poojary, said that she does not agree with what was pointed out by a panellist earlier—that there was delay in disbursement of LOCs in 2008 because EXIM Bank could not raise funds. She said 2008 was the period when India was having foreign currency deficit and that’s why the bank could not make disbursement in dollars but was making disbursement in rupees. She further said, under all LOCs letters of credit are opened under the contract and those letters of credit are guided by UCPDC regulations and under those regulations we have to make disbursement within a period of 7 days minimum. So, as per this there cannot be any delay unless and until documents are discrepant, she said.
This was followed by some important questioned raised by a conclave participant from Lesotho. She raised four important questions:
1. "From the presentations I understand that EXIM Bank cannot lend to the private sector unless there is a government guarantee. To me this is shifting the risk to the government. Most of African countries have weak private sector and countries that do provide guarantees for them, how do you ensure that such private sector honours its obligation?"
2. "The LOC financing has the criterion that 75 per cent of the equipment has to be sourced from India. I want to ask, what is the criterion behind the 75 per cent- 25 per cent divide? Why not a 50-50 per cent divide have so that we also have a chance to boost our private sector?"
3. "Why is it that the EXIM Bank strictly uses the letter of credit as a disbursement method and not other methods of disbursement?"
4. "In our case in Lesotho, the LOC we got from EXIM Bank has a grace period of 2 years. If you are financing a project of our size it needs more than two years for implementation. This means that you exhaust the grace period before the project is complete. Is this kind of grace period fair?"
Panellists’ responses
Responding to one of the questions, EXIM Bank director, Geeta Poojary, said that even though it is true that in the tendering process a company from India is selected, particularly for infrastructure projects, but there are ways in which private sector companies from recipient countries can take advantage of Indian Lines of Credit. Referring to the case of Lesotho, she said that if a project is coming up in Lesotho and an Indian company is capable and interested in undertaking that project then EXIM Bank provides LOC credit, called Suppliers Credit, to that Indian company. But she added that there are existing LOCs that have been already given to Preferential Trade Area (PTA) Bank which also covers Lesotho and private companies from Lesotho can approach the PTA Bank to take credit financed by Indian LOCs.
In his response to the questions, Mr. Alok Sinha said that there is a need to distinguish between concessional Lines of Credit and other forms of credit that EXIM Bank of India extends to India’s partner countries. He said that LOC grant element is in line with various international conventions and arrangements regarding concessionality. Every arrangement has its own set of guidelines, he added. He further added that initially the conditionality was to import 85 per cent worth of goods and services from India but the government of India later brought it down to 75 per cent. He said that 25 per cent has been kept to develop the local expertise for sustainability of LOC funded projects.
In her response to the questions, Her Excellency Ms. Gennet Zewide cited two Ethiopian examples in which local private sector companies benefited from LOCs. She said that in both cases private Ethiopian companies accrued benefits from LOCs even though the Ethiopian government did not give a sovereign guarantee on their behalf. Talking further about these examples, she said that a local textile company in Ethiopia was able to buy a local blanket company using the LOC funding provided by EXIM Bank of India. The Ambassador said that such local arrangements have facilitated Ethiopian government’s efforts to privatize its textile industry. She also gave an example of a steel manufacturing company in Ethiopia which has benefited from Lines of Credit. Responding to the question about 75 per cent import conditionality from India, Her Excellency said that such an arrangement is a very, very minor conditionality compared to conditions they usually face when they accept development assistance from other sources. Citing a personal example, Her Excellency said, "I used to negotiate with big international agencies and institutes (did not name them) for money. They were forcing us even to change the structure of our education system from grade 8th to grade 6th saying that you are a poor country, why do you need 8 years of education. This is how far they tried to infringe on our sovereignty. So, I would say this 75 per cent condition is nothing as compared to those demands."
The event ended with panellists giving their views on how a better impact assessment for evaluating socio-economic impact of LOC projects can be put into place. Ambassador Gennet Zewide said that there is indeed a need for conducting a thorough impact assessment of LOC funded projects and Ethiopian government has already taken steps in this direction. Mr. Pacheco proposed formation of a joint team including members from government of India and representatives from Mozambique to evaluate the impact of Lines of Credit in Mozambique. He did not rule out the possibility of including external consultants in the process. Mr. Alok Sinha also voiced his concern for the need of impact assessment, adding that it has to be a joint exercise between India and recipient countries. He said the stakeholders must work together to achieve the full developmental potential of LOCs as well as in efforts directed at measuring their impact. Ms. Geeta Poojary added that impact analysis is part of the LOC guidelines issued by Government of India. She said that as soon as the LOC project is over, Government of India starts following up with recipient country government for socioeconomic impact analysis report. She said even though they take some time in submitting such reports but many have been already submitted. The question of whether these reports will be made public in near future will be decided by the Government of India, she added.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
PREV
