Canceled Deal Sets Back Reforms in India the Scrapping of the Biggest Foreign-Investment Project Here May Scare off Potential Investors

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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. …

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