Enron Imbroglio & Foreign Investors

IT WAS PERHAPS inevitable that the raging controversy over the Dabhol Power Company (DPC) would be recognised by the new American administration as a problem, big enough to cloud the flow of foreign direct investment into India. Enron's investment in the DPC and hence in the capital-starved power sector of the country has been noteworthy. It has been till date the single largest foreign direct investment in the country. Moreover, when no other power project of a similar size is anywhere near completion, the DPC has been on the verge of commissioning its second phase. However, recent and continuing wrangles between the DPC on the one side and the Maharashtra State Electricity Board (MSEB) and the State Government on the other show that the large investment in the most critical infrastructure sector has come at a stiff price, with the final bill for a fair and mutually acceptable resolution likely to be huge. Forming a large percentage of that bill would be the fallout of the legal conundrum the project has been pushed into.

The Enron controversy, as it is better known, represents all that could go wrong, even though the original intentions on both sides of the present divide might have been above board. Right from its formulation and its cost estimates, to the choice of fuel and of course the power purchase agreement (PPA), the project has been highly controversial. Even though two successive State Governments have signed and reworked the PPA, the Godbole committee has found a complete abdication of governance. The controversy reached a boiling point last month when Enron, the chief promoter, invoked the force majeure clause and set in motion a train of events that indicated its intent to quit. The reason cited then - its inability to make the MSEB and the State Government meet their contractual obligations - is the central point of the whole dispute. Subsequent defaults by the Board and the tough posturing of both sides have inevitably lessened the chances of reconciliation without rancour. Another round of renegotiation that is going on is perhaps the last hope but the parallel recourse to legal remedies has clouded its outcome, to say the least.

For a country that is in keen competition with China and others to attract foreign investment, the legal troubles over Enron are most unwelcome. For long projected as having a superior legal system, the likely delay will negate one of the country's principal selling points to foreign investors. More fundamental, of course, is the bad publicity in the wake of the reneging on contracts by the State Government and the MSEB, with the Central Government also drawn in through the counter-guarantees. Whatever be the merits of a recent proposal to strike at the basis of the original contracts - citing incompetence or even malfeasance on the Indian side - it is evident that plenty of damage has already been done to the interests of India in relation to foreign investors.

That point would certainly weigh with the Government as it tries to mobilise considerably more FDI than the $4 billions to $4.5 billions that have come in each of the past two years. While facilitating policy changes are contemplated, it would be necessary to project the Enron fiasco as one of a kind, never to be repeated in future contracts. In turn, that suggests a much higher level of competence, legal acumen and political governance than what was seen here. Reinforcing that point is the fact that the new FDI flows are more through mergers and acquisitions and less in greenfield ventures. The country's familiarity with deal making and its capacity to evaluate the associated costs of this route will be put to test.

Send this article to Friends by E-Mail

Section  : Opinion
Previous : India's diplomatic outreach
Next     : Indo-Russian military cooperation