India has now moved away from its hands-off approach towards projects under lines of credit to foreign countries, the outcome of which is yet to be seen.

In 2012, India offered a loan of $250 million to Mozambique to improve the  electricity supply to its capital, Maputo. Five years on, the project is in limbo as New Delhi has quietly urged the host government to remove the existing Indian contractor and float a new tender.

This is one of a handful of projects across Africa being executed with Indian soft loans where the Indian government has communicated its disquiet over the work of current contractors.

These projects are seen within the Ministry of External Affairs (MEA) mainly as ‘legacy’ problems from the previous system of issuing lines of credit – or loans at concessional rates – to developing countries.

For the past one year, the ministry’s development project assistance (DPA) division has been putting in place a new method of streamlining the completion of projects under lines of credit. This was also, effectively, a much-required spring cleaning. The aim, according of MEA officials, was to get out of the previous system – which they said awarded contracts to only a handful of Indian firms, especially in Africa.

It is important for India to ensure that lines of credit are used effectively – they have been the principal instrument for New Delhi’s aid diplomacy, adopted systematically since 2003. Largely administered by the MEA’s territorial divisions in the first decade, an Indian development aid project once even led to the controversial transfer of a joint secretary who was allegedly being forced to accommodate the whims of a ministerial aide.

After the DPA division was carved out in 2012, it was given charge of administering all lines of credit that India offered to foreign countries.

At stake, 1% of Indian GDP

The total amount of soft loans that India has committed in the past 14 years is about $24.2 billion, in over 60 developing countries.

As per government figures, India’s lines of credit stood at about $10 billion as of April 2014. Since then, another $14.2 billion has been added with 52 new lines of credit.

This amount of $24.2 billion, however, does not include the $10-billon soft loan that Prime Minister Narendra Modi offered to African countries at the third India Africa Forum Summit in 2015.

The fact that India has loaned out capital amounting to nearly 1% of its current GDP is a clear indicator of  the primacy of ‘aid’ as a diplomatic tool.

“If you are seen by most people as playing a benign developmental role, then you strengthen your credentials of contributing to global good…If you want to be seen as a leader, then you must act like one,” said a senior MEA official.

Opening up doors for Indian firms is another reason for distributing soft loans – whether it is to get access to new markets or resources. Procurement rules stipulate that about 70% of the goods to be used in projects under lines of credit have to be sourced from India or Indian companies.

“Many of India’s investments are in extractive sectors, where they face problems of infrastructure, logistics or the regulatory system is weak. We provide aid which will improve those sectors like build a rail line for offloading coal – which would obviously help Indian companies,” the official said.

With China’s Belt and Road Initiative snaking its way around the world with its $1-trillion purse, Indian officials feel the need to diplomatically leverage India’s lines of credit even more intensively.

Though India started to seriously deploy lines of credit from 2003, New Delhi has had a rather hands-off approach to the process itself. “The borrowing government identifies a project in accordance with its own development plan. We don’t try and impose and say that we will do this or for that, like what the Chinese do,” said a MEA official.

Once a proposal comes through, it is examined by the MEA and the finance ministry’s Department of Economic Affairs, before getting another layer of scrutiny from a standing committee.

However, after the approval process, the Indian government had been taking the path of least supervision, giving a very long leash to the borrowing country.

“We realised that the success of the project depends on a good DPR [detailed project report]. When you don’t have a good DPR or it is vague or not a detailed one, then the project would be delayed and have cost overruns,” said a senior MEA official.

A quality DPR is at the heart of smooth, efficient implementation of a project. However, most foreign projects did not have one when they were offered to the Indian government.

The process of converting a soft loan to a complete project should ideally be simple. However, more often than not, delays start occurring at the DPR level, after the Indian government has signed off on the loan.

When a borrowing country doesn’t have the capacity or technical capability to come up with a DPR, there are a number of options that can be taken. For one, India’s Exim Bank can float a tender asking for various private parties to come up with a DPR. Or the Indian government has in the past handed the responsibility of creating a DPR to a public-sector enterprise or undertaking (PSE/PSU) without floating a tender.

However, the practice of appointing a PSU for creating a DPR has been problematic in the past. According to a number of MEA officials, Indian PSUs often tweak project specifications to benefit certain private-sector contractors. “We could not overrule them as we are not technically equipped, but we know that there is something dubious,” explained a diplomat.

This suspected nexus has resulted not just in higher costs, but poor execution quality. “We found that projects which didn’t go well at the implementation stage  started to unravel once we handed them over,” said an official. A few years ago in Afghanistan, local authorities refused to hand over a completion certificate for two mini hydel projects because of how botched the project ended up being. India then had to lean on the authorities to get this certificate, an official recounted.

This article was first published by The Wire. Read the full article here.