Sanctity of contracts is key for Indian renewable projects: FMO CEO

Peter van Mierlo
Dutch development finance institution FMO is in India for the long haul. Its chief executive Peter van Mierlo tells Abhijit Lele that the liquidity crunch and slowdown will not last long. While prospects for Indian economy are bright, the sanctity of contracts is important for projects in renewable energy, a sector looking for foreign money.    

You are visiting India at a time when the economy is experiencing a slowdown. How do you see the situation as an external observer?

I am very positive and believe that 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 United States). It is important for the world to have G3 where India plays its role. It may happen in a decade’s time. 

 
What are your investment plans and focus in India?

We always have pipeline of investments. At present our investments in India are over Euro 700 million, making it the biggest country in our portfolio of about Euro 10 billion. FMO works on four focus areas – agriculture, food and water (taken as one), energy, financial institutions and Dutch business. We expect India to grow at eight per cent in three industries – clean energy, financial institutions and agriculture-plus-food. There is still a lot to be done in India.

First of all, we need to be "additional", meaning the normal commercial market does not do it in the same way. Secondly, we want businesses 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.

What are your priorities in India's energy sector?

We do lot of solar power. There are challenges, but they are all over the world. For instance, technology will change in the next 10 years. What will the cost be then? The good thing about solar is that it is off the grid, so it can reach villages more easily.

Across the globe we do lot of wind and geo-thermal energy. And in 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 perspectives).

In the renewable energy space, at the state-level there are projects that are facing challenges over the sanctity of contracts (PPAs) in India. How you see that shaping decisions for long-term investment?

As long as financing is on a project-by-project basis, other market conditions during the period don’t have to affect the whole industry. The current price level is completely different frpmwhat it was 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 slowdown but also due to issues of liquidity and solvency and governance in the financial sector. What is your reading of the situation?

We are long-term investors, so we do look at 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. Because when things are very easy, nobody needs us. That is why we exist as development financial institution (DFI).

We can’t walk away when things turn sour. The difficult days won't last forever. But we need to be more careful in that sort of situation. That is where 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\parameters does FMO consider while making investment decisions?

We always have a wishlist when we invest. That becomes a contract for improvement in terms of quality of governance, social and environmental concerns. Diversity in the board room is also an important consideration while investing. We are alive to cultural diversity and can’t translate European values into India as we are working across cultures.