Canceled Deal Sets Back Reforms in India

The scrapping of the biggest foreign-investment project here may scare off potential investors

ASTATE government's decision to scrap a $2.8 billion power project - the largest single foreign investment in India - has renewed a spirited debate over the role of foreign companies in India's economic reforms. The decision has shaken investor confidence, analysts here say, and may set back India's attempts to transform its socialist-style economy into yet another Asian tiger.

Last Thursday, officials in the western state of Maharashtra, India's industrial heartland, decided to cancel an electrical power project being built by the American firm Enron, along with General Electric and Bechtel. "The project is against the interest of Maharashtra and its people," Manohar Joshi, the state's chief minister, said in a speech to legislators. "The negotiations were one-sided and whatever Enron wanted was granted," he said. The contract with Enron was negotiated by a previous state government, headed by the ruling Congress Party.

Officials in the newly elected state government say they canceled the project because it was negotiated in secret without any competitive bidding. Enron also failed to assess the environmental impact of the huge power project, they say, and Indian consumers would pay inflated prices for Enron's electricity. To go ahead with the project, said Chief Minister Joshi, "would betray the trust of the people."

Sending the wrong signals

Many Indians applauded the decision to cancel the project, but financial analysts say it represents a setback for India's economic reforms.

"This will send wrong signals to potential foreign investors," says Baldev Lal, co-chairman of the American Business Council, a group representing American companies that do business in India. Already, one other US power company, CMS Generation Corporation, says it may put two of its Indian power projects on hold. The projects, in the state of West Bengal, are worth $1.5 billion.

India began reforming its economy in 1991, openly inviting foreign investment for the first time. American investment there has since increased dramatically. The United States Commerce Department considers India one of the world's 10 largest emerging markets.

Manmohan Singh, India's finance minister and architect of the country's economic reforms, conceded that the decision to scrap the project "might have its impact on the investment climate in the country," but he added, "We will somehow manage."

Foreign companies investing in India may find it difficult to persuade banks to loan them money for projects in India. In their competition with China for foreign investment, Indian officials have often argued that their country offers a Western-based legal system where contracts are honored - a claim that may be harder to make in light of the Enron decision.

Critics say the Bharatiya Janata Party (BJP), India's largest opposition party and half of the right-wing governing coalition in Maharashtra, is exploiting India's traditional suspicion of foreign firms. They say the BJP's policies will hold back India's economic progress. India has been trying to attract foreign investment, especially large infrastructure projects. It has streamlined its cumbersome bidding process and signed seven "fast track" agreements with foreign power companies.

"Some shortcuts may have been taken, but with all good intentions," says Mr. Lal.

L.K. Advani, president of the BJP, accused Enron executives of doling out bribes and kickbacks to Maharashtra state politicians in order to secure the power project. Enron denies these charges, insisting the company has conducted business "in full compliance with all Indian and US laws." The Foreign Corrupt Practices Act, enacted by the US Congress in 1977, makes it illegal for an American company to pay bribes in a foreign country.

Enron already has begun work on the project in the town of Dahbol, 60 miles south of Bombay. Company executives say they have sought arbitration in order to recover the $300 million they've already spent on the project. They announced the appointment of Andrew John Roger, a former chief judge of the commercial division of the Supreme Court in New South Wales, Australia, to challenge last week's decision, the Times of India reported yesterday.

In a statement, Enron said it was "deeply disappointed" with the decision but added that it "remains hopeful of reaching a mutually acceptable solution with the government of Maharashtra."

Indian Prime Minister P.V. Narasimha Rao said "a solution will be found," but did not provide any details. It will be difficult, analysts say, for Mr. Rao to play a mediator role in such a highly charged case.

First salvo in 1996 election

The decision has set the stage for India's general elections, due before next April. By boldly scrapping the Enron project, the party has fired the first salvo in what many here predict will be a brutal election campaign in which the question of economic reforms will dominate the debate. The BJP has been trying to paint the ruling Congress Party as corrupt and partial to foreign companies.

BJP officials, for their part, insist the party is not opposed to foreign investment, but wants to ensure that India's "economic sovereignty" is not undermined. "Foreign companies should not take advantage of these reforms," says Jay Dubashi, economic adviser to the BJP. "We don't want reforms to be exploited for narrow financial purposes." If the party comes to power next year, it has pledged to review all foreign investment in India.

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