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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

POWER DOWN

A Major Blow to Rao's Reform Drive


PRIME MINISTER P.V. NARASIMHA RAO made an unusually candid comment about the state of India's economy while on a visit to Malaysia last week. "The lack of infrastructure facilities of international standard has become a major impediment to rapid growth," Rao told businessmen at a luncheon meeting in Kuala Lumpur. "India's liberalization program still has some way to go."

Perhaps Rao knew what was coming. Barely a few hours after he uttered those words, Manohar Joshi, chief minister of Maharashtra, India's richest state, scrapped a controversial $2.9 billion power project by the U.S. multinational, Enron Corp. Joshi, whose two-party Hindu nationalist alliance defeated Rao's Congress (I) party in state elections in March, said his government was canceling the second phase of the project and rejecting the first-phase contract already in force. According to Joshi, the project was too expensive, environmentally hazardous and "militated against the self-esteem of the people of Maharashtra."

The repeal of the Enron deal, India's largest foreign investment project ever, was a major blow to Rao's four-year drive to open up India's economy. And it revealed just how vulnerable Rao's free- market reforms are to the nation's shifting political winds. Enron's 2,015-megawatt power plant was sanctioned in 1993 by a Maharashtra government headed by Sharad Pawar, a powerful Congress party satrap. The project was also approved by the Congress-led federal government, whose endorsement is mandatory by law.

But two weeks after construction began at the site 160 km south of Bombay, Congress suffered its defeat. The winning coalition consisted of the Hindu extremist Shiv Sena party and India's main opposition Bharatiya Janata Party (BJP), whose Hindu nationalist views have greatly enhanced its political standing in recent years. In the run-up to the elections, the Shiv Sena-BJP alliance had vowed to "throw Enron into the Arabian Sea."

The new government immediately ordered a review of the Enron deal, which was among eight "fast-track" schemes aimed at meeting the nation's growing demand for power. The state complained that the contract for the Enron plant had been awarded without open bidding. It alleged that Enron had offered bribes to the former Congress government in return for "undue and unusual" concessions, including an excessive annual rate of profit above the 16% norm. Further, the government charged Enron with inflating the project's capital costs by $645 million. It claimed the state would suffer losses of some $3.3 billion in future years.

Enron has denied these allegations, saying it had complied with U.S. and Indian laws in negotiating the project. However, an employee of Enron reportedly told a U.S. congressional committee that the company had spent $20 million in "educating" Indian politicians and bureaucrats about the power project. Last week, BJP president Lal Krishna Advani countered: "The country would certainly like to discover the names of the politicians and officials who thus graduated from the Enron School of Business."

Enron said that it was willing to renegotiate the contract with the Maharashtra government, but that it "has very strong legal defenses, and fully intended to pursue them." On Aug. 8, the company filed a suit in a London court demanding $300 million in compensation from Maharashtra. It also appealed to the state to appoint an arbitration board to resolve the dispute.

The project's cancellation raised fears that some of the remaining fast-track power projects under negotiation might be targeted by other state governments. One such proposal is the American AES Transpower project in Orissa, one of India's most backward states. AES, considered a high-cost project, was sanctioned by a non-Congress government no longer in power. Another power plant in West Bengal, proposed by CMS Energy of the U.S., is reportedly awaiting the final verdict on Enron before starting construction.

The controversy comes at a politically sensitive time. Parliamentary elections are due by next July, and the BJP will certainly make a campaign issue of the alleged corruption behind the Enron deal. Congress could also be hurt if Hindu nationalists succeed in whipping up mass support against multinationals.

They are already trying as hard as they can. Last week, activists of the Swadeshi Jagran Manch (SJM) or National Awakening Forum launched a nationwide campaign against U.S. soft drink giants Coca-Cola and Pepsi. Coke was forced to leave the country in 1977 by a coalition of centrist and leftist parties. It returned in 1993. Pepsi, its arch-rival, entered the Indian market in 1991. Their presence has weakened the oligopoly of two leading Indian soft drink firms.

The SJM had vigorously protested the Enron project. It is now planning similar campaigns against the American Cogentrix power generation project in Karnataka state - which has the backing of the state government - plus an oil exploration joint-venture between Enron and a state-owned company. The group also wants to drive out U.S. cereal maker Kellogg, which has successfully marketed its products in major cities across the nation.

Formed in 1990, the forum deems the marketing of Western consumer goods frivolous and wasteful, favoring swadeshi, or indigenous, products instead. Soft drinks and instant cereals "do not serve the mass of Indian people," says Anil Gachke, SJM's Bombay convener. "We are also not pleased with the way [Coke and Pepsi] are demolishing their rivals."

Gachke says the group is not against all forms of foreign investment: "We are opposed to multinationals taking control of core industries. We do not mind these foreigners entering into contractual agreements to provide know-how for a fee, but they must not be handed over management."

Clearly, these activists have little sympathy with Rao's economic program. The PM launched his reforms in 1991 to counter an acute balance of payments crisis and to strengthen infrastructure, particularly in the capital-intensive power sector, which accounts for more than half of the $4.5 billion in total approved foreign investment as of 1994.

A key reason why the federal government invited foreign power firms to India was because state-owned electricity boards suffered from chronic managerial, financial and operational problems. Power cuts were routine throughout the country. More remote areas had no power at all. India's current annual electrical generating capacity is 80,000 megawatts. Demand is expected to nearly triple by 2010.

The Houston-based Enron Corp. was the first foreign power company to venture into India. In partnership with Bechtel and General Electric, it was to build a generating station in the port town of Dabhol near Bombay. The plant would have supplied power to Maharashtra's burgeoning industrial sector, which is expected to consume some 25,000 megawatts of electricity by 2002. The increased demand is projected to create a shortfall of more than 5,000 megawatts. The Dabhol Power Co., as the Enron plant is called, was to have satisfied nearly half that deficit.

Given the project's massive capital requirements and the major politicians who backed it, the Enron dispute instantly became a cause clbre among multinationals. Shortly after the Maharashtra government began reviewing the project last May, the U.S. Department of Energy warned that failure to honor the contract would "jeopardize most, if not all, other private projects proposed for international financing" in India. More than a quarter of all foreign investment in India comes from the U.S. Maharashtra alone has attracted more than $1 billion in U.S. funds to date. More than half of all foreign projects in the nation are there.

A day after the cancellation, two heads of Bombay-based companies told Asiaweek that foreign firms with whom they were planning joint ventures had deferred their final decisions on the deals. "The enthusiasm that they showed just a month ago has evaporated," said the chairman of one of the firms. An investment analyst, Imran Contractor, predicted a "definite slowdown of direct investment."

But there is still a chance that Enron will make electricity. Reacting to the news of the project's cancellation in Malaysia, Prime Minister Rao said that a "way out can be found." That could mean relocating the plant to a state other than Maharashtra. If Enron is forced to leave India, Rao may find his reforms in trouble come election time. If Enron stays, he might find his party in the same dicey spot.


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