ENRON FLAP POINTS UP WEAKNESS OF INDIA'S CENTRAL GOVERNMENT STATES' POWERS CREATE PROBLEMS

ENRON FLAP POINTS UP WEAKNESS OF INDIA'S CENTRAL GOVERNMENT STATES' POWERS CREATE PROBLEMS

Amid swift and generally negative reaction to cancellation of a U.S. power deal, two key constituencies - the central government and its controlling Congress party of Prime Minister P.V. Narasimha Rao - were studiously mum, underscoring their helplessness.

The Maharashtra state government scrapped a US$2.8 billion agreement with Houston-based Enron Power Development Corp. for a gas-fired power station of 2,015 megawatts in the port city of Dhabol saying it was one-sided and that its output would be too expensive.Other big-ticket projects are "under review" in various parts of the country, and threats of physical attacks have been made against some foreign firms here.

The central government's helplessness arises from the constitutional system of a federal union of states.

As in the United States, the federal government controls a vast range of areas from foreign policy to defense to economic policy. States have control over law and order, local administration, power, industry, agriculture and roads.

Thus, while policy on foreign direct investment is laid down by the central government in Delhi, investors must go to states to set up projects.

In the case of Enron, the agreements were between Dhabol Power Co., a joint venture including Bechtel Group Inc. of San Francisco and General Electric Co., and the Maharashtra government.

The central government provided only a counter-guarantee on payment of bills in case the local electricity board failed to do so. Under the constitutional framework, Maharashtra had every right to review and scrap the project.

Maharashtra is now ruled by a coalition of the right-wing Bharatiya Janata party and Shiv Sena. Both made dumping Enron a key plank in the March elections that brought them to power, replacing a Congress party administration.

Scrapping the Enron project does not signify that Indian states oppose foreign investment per se.

Even Maharashtra Chief Minister (governor) Manohar Joshi said the battle was not "Maharashtra versus America," but limited to the Dhabol company. He said many U.S. and other foreign companies are investing in the state and he extended full cooperation.

"Maharashtra has many privatization plans, and I fervently request all to participate in them without reservation or fear," he said. The state is the No. 1 destination for foreign investors, attracting 20 percent of the total.

Significantly, West Bengal, which has a communist government, has moved to second spot. Chief ministers of other states with non-Congress governments, including Karnataka, Gujarat, Orissa and Bihar, all are aggressively wooing overseas investors.

Foreign direct investment approvals between August 1991, when economic reforms began, and March this year stood at 329.5 billion rupees ($10.6 billion), according to the Associated Chambers of Commerce and Industry. The United States was the largest investor with 30 percent.

Opinion is divided on whether the snub to Enron will have an impact on flows of foreign direct investment.

Rattan Singhania, chairman of the Delhi stock exchange, said the cancellation "sends wrong signals to investors and they will now think twice before putting their money into India.

"It will have a psychological impact on the investment pattern of foreign

financial investors and is certainly not a good move on the part of the state," he said.

Ambi Venkateshwaran, chief executive of Bank of America here, said the decision would "definitely have a negative effect" in the short-term. He said Enron has strong legal grounds to fight, a point also made quietly by the U.S. company.

Nitiya Krishna Goyal, chairman of the Federation of Indian Export Organizations, said the cancellation "will remain in people's minds when they deal with India. People will think that we do not believe in the sanctity of contracts."

Against that, "I don't foresee any adverse fallout on the flow of foreign investment into India," said F.T. Korakhiwala, president of the Indian Merchants Chamber based in Bombay, the Maharashtra state capital.

Options open to Enron include suing the Maharashtra government agencies with which it signed agreements. These agreements provide for arbitration in London.

Enron has spent $300 million on preliminary construction.

Nani Palkhiwala, chairman of Associated Cement Co. and Enron's lawyer for a time, said if the company does go to court, "a major amount would have to be paid out as compensation."