Philip Hurst is a partner at the Energy & Major Projects Group and country partner for India at Ashurst Morris Crisp, London.
For the last two or three years, India has been the emerging market in the view of many Western and East Asian investors. In particular, the independent power sector has attracted the interest of most of the world's major players, including National Power, Power-Gen, AES, Enron, Hopewell, Mission, Toshiba and National Grid. The potential investment the 100 or so proposed independent power projects would generate in India is huge, probably greater than the capacity of the world's debt and capital markets, though only a small number of the mooted projects are likely to see completion.
Even on the seven fast-track projects nominated by the Indian government progress has been slow, but the one flagship project, Enron's Dabhol project in Maharashtra State worth US$950 million in the first phase, reached financial close and construction started.
Then, earlier this year, there was a change of government in Maharashtra, in which the Congress Party went into opposition and the Hindu nationalist BJP assumed power. One of the BJP's electoral promises was that it would review the Dabhol project, claiming there had been corruption, that the project was a sweetheart deal for Enron and was not in the interests of the people of Maharashtra.
After assuming government, the BJP did commission a review, and last month the Chief Minister announced the Dabhol project was cancelled, reneging on the contracts signed between the previous state government and the sponsors of the project. Of course, there is widespread speculation that the BJP is putting its political agenda first and that the project is being used as a scapegoat to vilify the previous government and advance the aims of the BJP.
What is not yet clear is whether the project is indeed cancelled or whether the Maharashtra government is using this as a ruse to force the renegotiation of the terms of the power purchase contract and tariff.
Not surprisingly, this has sent a shiver through the other potential investors. When a sponsor signs a contract with a government anywhere in the world it does not expect to have that contract summarily repudiated after the next election.
The power purchase agreement between the Maharashtra State Electricity Board and the Enron/GE/Bechtel group provides for international arbitration in the event of a dispute and for compensation for a governmental act which has the effect of expropriating the power station or terminating the contract. It has been reported that Enron is to start arbitration in London to seek compensation for the loss of the project.
It will be a serious enough problem for the Indian government if through its counter-guarantee of Enron's Dabhol project it is required to pay out hundreds of millions of dollars in compensation to Enron, GE and Bechtel. In other states, long-standing projects are being reviewed and in some cases put out to competitive tender as elections loom in 1996.
Clearly, some state governments are worried that they might also be accused of getting too close to foreign investors. What is more worrying, however, is the effect this fiasco may have on the willingness of major Western and East Asian investors to do business in India. Already, several of the developer consortia have adopted a 'wait and see' attitude, wanting to watch how the Enron and AES projects fare before committing money to India.