A Power Play India Can't Afford to Lose
By Manjeet Kripalani
On Jan. 22, a month before he was scheduled to leave India, U.S. Ambassador Richard Celeste delivered an impassioned farewell address to a group of high-powered businesspeople in Bombay. He talked of many things. But what took the audience by surprise was his lobbying pitch for Houston-based Enron Corp. Its $3 billion, 2,100 megawatt naphta and natural-gas power project in Dabhol has been at the center of controversy in India for the last four years. At issue: The prices Enron charges local users for power is about four times the going rate on the subcontinent.
Celeste warned Indians that the Enron project might become "a symbol of the impediments that still hinder even greater foreign direct investment. American businessmen are a cautious lot, and [this] regrettably feeds [their] concern that India remains a less-than-reliable destination for their investment dollars," Celeste said.
His words didn't go over well. The local press took his speech apart, questioning why a high-ranking U.S. government official would publicly take sides in the dispute. Enron wasn't too happy about Celeste calling attention to the dispute either. The company has been widely accused in India of bankrupting the local power authority, which can't afford its $400 million-a-year contract to buy power from Dabhol.
The ambassador's speech was soon followed by news that Sanjay Bhatnagar, Enron's chairman in India and one of the chief architects of the Dabhol project, had resigned. Two days later, Enron declared that because the state government would not pay a $53 million bill that has been outstanding since November, the company would require India's federal government to make good on its pledge to guarantee the project. That sparked rumors -- denied by the company -- that, once it gets reimbursed, Enron will pull out of India altogether.
The Dabhol project is Enron's largest investment in power generation anywhere in the world. It was supposed to be the showpiece of the Texas company's ability to quickly build first-rate power projects in developing countries. Enron also had huge plans to invest in broadband services and power- and gas-trading activities in India, the latter a business that makes it billions in the U.S.
But analysts say Enron now plans to focus its efforts on thoroughly deregulated, developed markets where the company can use its expertise in power and gas trading to maximize profits. Adds one exec familiar with the situation: "When your largest investment in a country is so mired in trouble, you say enough is enough and don't push further with your plans."
Perhaps. But the dispute has certainly cast a long shadow over both India and foreign investors. It has been a decade since India started dismantling its socialist economy and inviting foreign investment. But of the estimated two dozen foreign power players that initially came to invest in the country, only a handful are left. And the Enron drama has been discouraging to the remaining companies, which include Michigan's CMS Energy, Southern Electric, and Virginia's AES Corp. Their patience may finally be wearing thin with India's bewildering laws, venal politicians, and snail's-pace reform process.
Their problems have been compounded by the fact that U.S. diplomats have devoted most of their lobbying efforts to Dabhol, even though rival U.S. power companies say their projects would provide less expensive energy. But if Enron leaves India, the other companies say, they'll have a hard time convincing their bankers and boards back in the U.S. that it's still wise to persevere.
The sad truth is, if Enron goes, India will lose its allure as a place for foreign investment in the power sector, which it so badly needs. The country needs 10,000 Mw of new power annually. But only about 2,000 Mw, including the 750 Mw Enron project, have been added in the last decade. All told, pending projects would add an additional 80,000 Mw if the government allows them to go forward. And for India to prosper, they must go forward.
Building this infrastructure is key to India's growth and its dreams of getting out of the vicious cycle of poverty. The nation's burgeoning software industry also needs more power. Yes, nearly all of the tech companies in Bangalore -- home of India's Silicon Valley -- generate their own electricity, and so far, Bangalore's intermittant power outages haven't seemed to hurt them. But when the software engineers go home, they want to be able to flip a switch and see a light go on, or be able to work on their home computer.
DEMAND FOR BRAINS.
If India's talent can't have a quality of life that ensures staples like regular power, water, and good roads, then "in five years, the biggest export in the tech sector will not be software but people. There's plenty of demand in the world for Indian brains," warns a concerned software-industry consultant.
There are lessons for everyone involved. Foreign investors like Enron need to learn that investing in developing countries is more than a purely commercial decision. India is a patience play, not a get-rich-quick scheme. Celeste, the former governor of Ohio, committed a diplomatic gaffe in speaking up publicly for the company. The U.S. government, whose diplomats are increasingly having to lobby for U.S. business interests overseas, must also encourage American corporations to understand that they represent larger interests when they invest in other countries. It's not just Enron shareholders: In this globalized world, there are many more stakeholders than ever before.
The Indian government also has much to learn. Political venality and inexperience in dealing with private commerce have hurt India with many investors. Now, foreign investors will be watching closely how India handles the Enron crisis -- how fair, reasonable, and balanced its government is during the process, and what it is willing to do in the future to prevent such standoffs. How the government responds could be key in determining how much foreign investment India will be able to lure, and how quickly its high-tech economy will develop in the future. If all this wasn't clear before Celeste misspoke in Bombay, it certainly is now.
Kripalani is Bombay bureau chief for BusinessWeek
Edited by Thane Peterson