Investors wary in wake of Enron plant revival

Investors wary in wake of Enron plant revival

By Clarence Fernandez

BOMBAY (Reuter): The revival of Enron Corp's multibillion dollar power plant in western India has rescued the country's largest foreign investment project but leaves as many uncertainties for investors as it resolves.

Analysts said on Tuesday the end of the tug-of-war between the government of western Maharashtra state and the U.S. multinational over the giant power project was unlikely to trigger new capital inflows into the country, with investors remaining wary ahead of general elections in April.

"Everybody more or less knew it was going to go through," said Iain Allison, head of research at securities house Marlin Partners. "And when it finally did it was a total damp squib as far as foreign investment is concerned."

Caught in a tussle for nearly a year between Indian political parties, the 2,450 MW project -- scrapped last August as too costly -- is the country's single largest foreign investment at over $2.0 billion.

The Maharashtra government, headed by a right-wing coalition of the Bharatiya Janata Party (BJP) and the Shiva Sena, canceled the project soon after it came to power. The project had been approved by the previous state government, headed by the Congress party.

The state administration said on Monday the deal was being resurrected after Enron cut costs and the price it would charge per unit of electricity generated.

Investors have watched the on-again, off-again, on-again saga closely as a pointer to the success of India's reform program, but when the project won final approval on Monday, many were clearly tired.

"The decision will have absolutely no impact," said David Kadarauch, head of research at broking firm Jardine Fleming India Ltd. "Most foreign investors understood at a very early stage that Enron was purely a political game."

Analysts said the Maharashtra government had used the issue to show that although it was bent on extracting the best deal for the consumer, it did not oppose foreign investment.

"We were opposed to the earlier agreement, and got it canceled, but worked with equal dedication to get a world class competitive deal from Enron," BJP leader Atal Behari Vajpayee said at a recent meeting with Indian business leaders.

"The new deal, I am confident, will be the benchmark for future power projects," he said.

But the revised Enron deal also set a dangerous precedent, said Paul McKenzie, head of research of Credit Lyonnais Securities. It showed state governments could tear up contracts signed and sealed by predecessor governments, he said.

"India needs to be careful. Once signed and sealed, contracts should not be reopened," he said.

Others saw the impact as limited.

"I don't think India got seriously hurt. There is no question of too much turn-around. It is a clear positive step," said industrialist Rahul Bajaj.

Analysts took the view that going ahead with the Enron project was the most pragmatic step for both parties.

"In the grand scheme of things it's a small positive," said McKenzie. "There's a fair amount of foreign investment waiting in the wings. But the elections represent uncertainty to the investor and they will delay investment coming to India."

The BJP and the Congress are seen as the main contenders for power in the April elections, and analysts say it is unlikely either will win a clear majority.

Inflows of investment could be delayed still longer if the polls had no certain result, the analysts said.

"Foreign investment as a whole has taken a beating," said a director of one of India's largest private sector power firms, who did not want to be identified.