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"Guess the state and country!" international finance lawyer Martin Klepper challenged a classroom full of participants at this year's Asia Business Conference at HBS. Like a law professor presenting a hypothetical set of circumstances to a crowd of eager students, Klepper made point after point in a scenario bearing striking similarities to events in recent headlines.
"The largest state in the country faces an energy crisis," he said. "There are power shortages and blackouts. The utility in this state faces imminent bankruptcy, and seeks a state bailout. The politicians claim that power costs are too high, and they blame foreign power generators from Houston. Politicians refuse to raise the power rates to reflect the cost of power; instead, they threaten to take over the power generators and, in effect, nationalize them. The federal government claims this is a state problem, and they refuse to intervene."
If you guessed California in 2001, you would be only partially right. This picture actually illustrates the economic and political environment faced by Klepper's client, Houston-based Enron Corp., a decade earlier in Maharashtra, the largest state in India.
Maharashtra was to become a case study in Western infrastructure investment in a developing country. In the early 1990s, Enron was among a handful of energy companies that entered India after trade barriers to foreign power providers fell. According to Klepper, a partner in the international law firm Skadden, Arps, Slate, Meagher & Flom LLP, what followed was "a story of intrigue: it's a story of charges of corruption, and of nuclear testing, of bombs, and riots." And all that happened even before construction of a power plant began.
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| Good contracts make good neighbors, but good economics make better neighbors. | |
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| —Martin Klepper, Skadden, Arps |
According to William D. Gathmann, the executive vice president of Enron India and also the company's managing director of global finance, it took more than two dozen people over a year to obtain the estimated 250 clearances and approvals necessary for an Enron-led partnership to begin construction on its flagship project in India: a two-phase electric generating facility in Dabhol, with a price tag of $3 billion. It is Enron's largest international project and India's largest foreign investment. Phase I went online in 1999; Phase II is scheduled to begin service later this year.
However, the Dabhol project was fraught with stumbling blocks. In March 1993, there was a bomb blast in the Bombay hotel where Enron's staff was preparing the regulatory paperwork. It forced them to continue working into the night by candlelight. Among other setbacks: a change in government; Enron's expulsion from the country by nationalist interests; an 18-month construction shutdown; charges of bribery, corruption, and mismanagement; and 40 lawsuits filed by political, environmental, and economic interests. "In my ten years in Asia, this is the worst case I've ever seen," said Klepper.
Jamieson Logie, a partner in the corporate law firm Sullivan & Cromwell, was one panelist who still saw the glass as half full. Despite Enron's difficulties in India, he emphasized the positive factors of doing business there: stability of local currencies and favorable exchange rates. Logie added that there continue to be opportunities in Asia, especially if economies are dynamic enough to withstand the current downturn in securities markets.
Solid funding and knowledgeable management can make a dramatic difference in the viability of Asian investments. The keys to the Dabhol project's success, for instance, were finance arrangements involving foreign credit agencies and banks and a four-tier security structure that spread risk among national and state governments, the local utility, and a fund comprised of proceeds from electricity sales.
Nonetheless, Gathmann said, during the past ten years many companies have found India to be a less-attractive playing field. "They packed up and left the country," he said.
Financial safeguards cannot guarantee a stable political or economic climate. Indeed, Klepper pointed out, ongoing nationalism movements and a lack of creditworthy customers are among the most visible risk factors in doing business in emerging markets.
"Good contracts make good neighbors, but good economics make better neighbors," said Klepper, adding, "And you need patience. Patience, patience, patience."
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