Corporate: Another Quit India Movement

INFRASTRUCTURE
Another Quit India Movement

Dogged by policy hurdles and lured by emerging opportunities elsewhere, 'infrastructure' transnationals are exiting India.

By Team BT

They're gone. Since August, 1999, a rush of transnational infrastructure or utility companies have packed their bags and departed the country. Some, like French power major EDF have left quietly, just stating the facts for their exit. Others-notable example: Cogentrix-have voiced their bitterness before catching a one-way flight back home. At last count, four telecom companies had exited the country too. And the keenness of the companies that have stayed back to invest in India has waned perceptibly. Did someone say roads? Admits a senior official in the Ministry of Surface Transport: ''We receive a lot of enquiries from foreign investors, but these don't result in concrete proposals.'' There's a pattern to this phenomenon (exodus, diffidence, or whatever else one may choose to call it). It is restricted to businesses where the State (in any of its forms) plays a significant role: as a policy-maker, competitor, or customer.

There's more cause for worry. Most transnationals that have switched from the investment mode to the resignation one believe it isn't a question of when India's second-generation reforms will take off, but if. Says Harry Dhaul, 49, President, Independent Power Producers Association of India (IPPAI): ''Many transnationals believe the second-generation reforms will not happen. They think it is a waste of their time to just hang around.'' Seconds Harish Prabhu, 35, Vice-President (Investment Banking), Chase Manhattan: ''Merely opening up the power sector won't do. The mess (at the state-level) needs to be cleaned up. And that will take another three to four years.''

The numbers paint a dismal picture. According to the Foreign Investment Promotion Board (FIPB), between August, 1991, and May, 2000, Foreign Direct Investments (FDI) constituted just over six per cent of the total value of the projects sanctioned in the oil and power sectors, and 11 per cent of those in the telecom sector. The figures for food-processing, textiles, electrical equipment, and software stood at 29 per cent, 25 per cent, and 34 per cent, respectively.

It isn't just policy-level muddles that cause the companies to retreat. It's the inability to achieve financial closure-a serious impediment in big-ticket infrastructure projects, which is, in at least a few cases, a fall-out of regulatory snafus. And it is also the emergence of far more attractive business opportunities in other parts of the world.

Tapping New Opportunities

Some power and telecom transnationals have shifted their attention to other markets, developed or otherwise. For instance, UK major PowerGen, has decided to focus exclusively on North America. So have a number of other players like National Power and Alstom. Says I.M. Shahi, 63, a former CEO of Power Finance Corporation (PFC) and now an independent consultant: ''The American market is witnessing another round of de-regulation. And each round revives an interest in that market.'' Thus, PowerGen has decided to acquire the Kentucky-based LG&E Energy Corp for $3.2 billion. A release put out by the company says: ''The acquisition will be funded entirely from borrowings and to reduce (its existing debt), PowerGen will pursue selective asset disposals.'' The company's two power projects in India-despite its claims about not exiting the country-are likely to be part of this 'asset-disposal'. In contrast, EDF takes no pains to mask its decision to withdraw from India. the 1,082-mw Bhadrawati Project in strategic-speak. Says Rajendra Shrivastav, 45, General Delegate, EDF India: ''The process of maturing a greenfield project has already taken seven years, which is unacceptably high, and therefore, we have withdrawn from the project.''

Delays, though are only one reason. In the absence of an escrow facility (the revenues of the State Electricity Boards which buy power from IPPs goes into an account which the latter can tap when the former default on payments) FIs aren't willing to fund projects. That apart, with many states setting up electricity regulatory authorities, the Power Purchase Agreements (PPAs) signed by some IPPs could become meaningless and the SEBs will have to buy maximum power from the lowest-cost producers. This means all new projects will have to sell competitively, irrespectively of the PPA.

Likewise, in the telecommunications sector, other Asian countries like China, Hong Kong, South Korea, Taiwan, and even Vietnam are seen to be more promising than India. Australian telecom major Telstra, which walked out of its cellular joint venture with the B.K. Modi Group this month, is scouting around for possible acquisitions in the Asia-Pacific region. Opportunities aren't in short-supply either: Taiwan has finally lifted the monopoly of the state-owned Chunghwa Telecommunications in fixed-line telephony, and China-with a cellular subscriber base of 45 million as opposed to India's 2.1 million-is in the process of opening up its mobile telephony market to foreign investors. Says Arun Seth, Managing Director (India & SAARC), BT (Worldwide): ''We have to look at investment opportunities available across the world, before taking a decision to invest. The opening up of China's cellular industry is definitely a threat to India.''

The Indian market may be larger, but foreign investors don't evaluate the investment potential of a country by returns alone. Instead, they look at the risk-adjusted rate of return. So, even if real returns in markets like the US (average real internal rate of return in the power sector: 12-13 per cent) is the same as India, the risk is much lower. In contrast, the risks, especially those related to payments from the state electricity boards and implementation delays are much high in India. Says Sanjeev Mohan Kapoor, 27, Securities Analyst, First Global: ''Power transnationals don't want to take risks as long as they can get decent returns in their home markets.''

Making Ends Meet

Most transnationals operating in the infrastructure sector in India haven't been able to achieve financial closure too. Reason? Lenders are unwilling to fund these projects, courtesy regulatory risks. It is to lessen these risks to an extent that companies operating in the power sector expect multiple layers of payment security. Says V.P. Sharma, Managing Director, Mangalore Power Company: ''The solution is to create escrow accounts for payments, get guarantees from the respective state governments, which, in turn, are backed by guarantees from the Central Government.'' The desire to cover one's bases isn't surprising. After all, the main customers of any power company are the State-owned electricity transmission and distribution companies which boast a long history of not paying their dues on time.

Guarantees and other payment mechanisms, though, are, as a report prepared by CRISIL and the US-based Haggler Bailly Consulting, states: ''...only short-term solutions because they imply finite amount of deals.'' The real solution lies in taking the reforms process to its logical denouement.

That isn't easy. The recent history of state-level reforms isn't something transnationals operating in the country can e-mail HQ about. Power tariffs cannot be upped without upsetting one populist political group or the other; nor can toll be levied on roads.

Living With Policy Paradoxes

The Centre is not without its share of blame. Its concerns do not exactly mirror those of investors'. Thus, in roads there is no clear policy on the issue of indexing toll charges to exchange rate fluctuations-the one thing foreign investors want, as it protects their revenue-streams. The Ministry of Surface Transport will consider the demand only on a case-to-case basis. Nor is it willing to consider offering traffic guarantees or allowing controlled access for expressways. And the Ministry of Communication is not losing sleep over the lack of clarity about the role of the Telecom Regulatory Authority of India (TRAI), or the dot's draconian inter-connect regime. As the Planning Commission observes in its draft mid-term appraisal of the telecom sector: ''Private sector participation failed to take off as desired due to several constraints, the more important one being artificially high license-fee liabilities.''

Today, the issues facing telecom companies include clarity over the role of the TRAI, details of the migration to the revenue-sharing regime, and an effective implementation of the recently announced domestic long-distance policy.

Even as the transnationals try to come to grips with these challenges, the Central and the State governments, and the regulators have suddenly re-discovered the customer. The Maharashtra Electricity Regulatory Commission, for instance, has asked the MSEB to stop buying power from Enron's Dabhol project because of the high tariff (Rs 4.15 per unit). And the Andhra Pradesh government has decided to re-negotiate existing power purchase agreements between the MSEB and private power companies. Reveals V.S. Rao, 62, the state's Agricultural Minister and a close aide of the Chief minister: ''The problem is that most of our PPAs have been based on the Enron model. And the Enron experience has convinced us that the consumers will end up paying higher tariffs for power sold as per those PPAs.'' The motives are above-board, but the fall-out includes a further delay in already delayed projects. And in some cases, as experience shows, that is all it takes for a transnational to decide that it isn't quite worth the trouble. Exit, stage left.

Reported by Ranju Sarkar, Seetha, Nita Jatar Kulkarni, Suveen K. Sinha, and Dilip Maitra

Issue Contents Write to us Subscriptions Syndication

� Living Media India Ltd