Enron fiasco: many lessons to be learnt

Economic considerations, including the creation of awareness of the Indian system, will dictate the course and speed at which the Enron mess is resolved.

By C. R. L. Narasimhan

To the more general concerns relating to the flow of foreign direct investments into the country, certain specific ones have been added recently. Two weeks ago, an important official of the new American administration, Mr. Alan Larson, expressed apprehension over the fallout of the Enron fiasco on future FDI flows into India. His statement is not surprising at all.

Furtherance of economic goals is topmost in today's foreign policy agenda of any country. Fortunes of companies such as Enron - an aggressive multinational if ever there was one - affect the American government's interests. Allegations of practising ``cowboy capitalism'' - incidentally made by responsible international business press against Enron - affect the studiously cultivated benign image of the multinationals in the globalisation era.

However, Enron has been among the few which ventured boldly into India and more importantly into the power sector. As everyone knows, the policy framework governing this critical sector has still not evolved to an extent considered satisfactory by large investors. For instance, there is the distribution problem. Now the monopoly of cash starved electricity boards, it is an area that cries out for reform. Yet, political will is not there for this as also for checking theft of electricity or providing it practically free to large sections. Enron's investment in Dabhol Power Company (DPC) is the largest of its kind in India till date.

Therefore, considering that the Enron problem is getting messier by the day and a proper resolution is far off, there cannot but be negative messages. The principal message to the overseas investor here is that India does not have the legal and administrative infrastructure to resolve a DPC type problem quickly. Speed is of the essence in matters relating to economic governance. Thus, single window clearance, immediate sanction of power, water and other utilities as also a legal system that will dispense justice swiftly are all dangled as incentives before the overseas investors. India's legal system is considered superior to those of competing countries including that of China's. Corporate law, for instance, has a long tradition here. Yet all those will be nullified if the Dabhol crisis lingers.

Renogotiation that is now on is a tenuous exercise even in the best of times. Today both the parties - DPC on the one side and the Maharashtra State Electicity Board (MSEB) and the State Government on the other - are at a game of competitive brinkmanship. That will further cloud the issue. It will be useful to reiterate that the dispute is over the non-performance of contracts by the MSEB and the State Government (with the Central Government too a party because of the counter guarantee). However flawed these contracts might have been - and the Godbole Committee has listed a number of new points in addition to those widely perceived earlier - there is no getting away from the fact that there have been defaults in violation of those. Unless some strong public relations work is undertaken by the Government there will be substantial damage to India's interests.

Over the longer term, of course, a speedy resolution of the problem plus a satisfactory explanation of the points that made for the resolution will help. Important legal and regulatory precedents that will be set ought to be codified so that prospective investors, domestic or foreign, understand them. Equally importantly the pressure to reform the domestic power sector will increase. After all the Enron matter is principally over the commercial viability of the agreements, which critics say were hopelessly flawed and one sided. Economic considerations, including creation of awareness about the Indian system more than anything else, dictate the course and speed at which the dispute is resolved. There may be some gain from the dispute after all.

Foreign direct investment, as a subject, has been in the news for a few more general reasons too. The Government is keen on stepping up the inflow from the current levels of $4 to 4.5 billion for each of the years 1999 and 2000. Particularly disconcerting is the fact that not many FDI sanctions have been converted into actual flows. Another development, very much part of global trends, is the increase in FDI flows through mergers and acquisitions (M&As) rather than through investment in greenfield ventures. According to a recent government paper on the subject, this development is undesirable in so far as technology transfers need not accompany M&As. In a broader sense too M&As, involving on occasions restructuring and even downsizing of the taken-over enterprise, may have far less benefits compared to the greenfield route.

Another related development is causing anxiety. Multinationals operating for long in India suddenly find merit in setting up brand new subsidiaries. Although there could be new investments, this development can affect the interests of the minority shareholders of the existing companies.

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