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Ambitious plans in India? Good luck to Foxconn's Terry Gou

August 13, 2015 15:47 IST
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Like Enron and Posco, Foxconn's Terry Gou may just discover that when it comes to doing big business in India, it's better to stay under the radar, notes Kanika Datta. 

Devendra Fadnavis and Terry Gou are entitled to their moment in the sun after signing an agreement for a $5 billion investment in a factory to make iPhones, BlackBerrys, Kindles and PlayStations in Maharashtra and generate 50,000 jobs. 

For Mr Fadnavis, the announcement rounds off a week that saw General Motors shift its production from the plant it inherited from Hindustan Motors in Halol, Gujarat to Talegaon in Maharashtra.

And Mr Gou of Foxconn has bravely said he plans to set up 10 to 12 plants in India by 2020. Both, however, may find it politic to tone down the triumphalism. Here's why. 

The Foxconn investment, though spread over 10 years, represents the largest commitment of foreign direct investment (FDI) under Prime Minister Narendra Modi and is seen as a vindication of his "Make in India" desires. 

The trouble is "largest FDI projects" in India have had a tragic history. Exhibits A and B are the defunct Dabhol Power Company's project in Maharashtra (vintage 1992) and Posco's non-starter steel plant in Odisha (vintage 2005). 

Both were feted as signature projects and failed because they demanded exceptional support structures and policies that the Indian state was ultimately unable to deliver. 

At an initial investment of $2.5 billion, Dabhol Power Company, majority owned by Houston-based Enron, now extinct, then a brash luminary in the global corporate firmament, was a product of the first flush of economic liberalisation, a showpiece "fast-track project" that was a sincere if naïve attempt to solve India's chronic power shortage. 

The project was the most glamorous thing in Indian business then, from its hard-nosed, eye-catchingly dressed chief executive Rebecca Mark meeting officials on Raisina Hill to the introduction of new concepts into the Indian economic lexicon - Power Purchase Agreements (PPAs), Counter-Guarantees, Independent Power Producers (IPPs), International Arbitration were first heard by us aam aadmi journalists then. 

Sober analyses, however, raised many misgivings about this two-phase project. Chief among them was the fact that Dabhol would be selling power initially generated from expensive naphtha to the state electricity board (SEB), the monopolist power distributor, under a 20-year PPA that carried state and central guarantees. 

Then as now, SEBs were scarcely stable economic entities since political compulsions forced them to sell power at tariffs free or below cost. But the Maharashtra SEB was profitable then and it agreed to pay a higher tariff for a guaranteed off-take. 

The consequences of this flawed agreement were postponed only because the Bharatiya Janata Party came to power in the state in 1995.

The regime objected to the Dabhol project on ideological grounds: it saw FDI as a "sell-out" (how the public discourse has changed since!) but raised valid objections. Among them were higher costs and tariffs, environment concerns and lack of competitive bids. 

After complex developments that involved the project being cancelled, international arbitration invoked, the agreement was reworked and the tariff lowered - yet it was still 45 per cent higher than the average unit cost at which the MSEB bought power from other generators.

Inevitably, allegations of shenanigans arose, including the $20 million "education fund", reportedly paid to government officials. Unsurprisingly, the MSEB reneged on its payments to Dabhol in 2001. More arbitration followed and Enron, in free fall in the US, pulled out and so did its minority partners GE and Bechtel. 

The government fell back on an age-old solution to sort out the mess: chivvy two public sector firms - GAIL and NTPC - to tie up and create Ratnagiri Gas and Power Private Ltd (RGPPL) in 2006.

Poor RGPPL; after about three years of operations that even saw it make modest profits, it has been closed since 2013, one of the many victims of the convoluted politics over the price of gas from Reliance Industries' basin off the Andhra coast. 

The agreement between the Korean chaebol Posco and the Odisha government for a $12 billion, 12 million tonne integrated steel plant looked kosher enough had it not been for a curious clause: an iron ore linkage that would allow Posco to mostly export high quality iron ore and import lower quality ore for local steel production. 

This blatant resource play was never put to the test owing to Indian governance systems. Posco has experienced the full range of India's democracy at work: politically fuelled local protests that briefly involved kidnapping company officials and resulted in land acquisition delays, flip-flops on environmental approvals, and a rework of the project to reduce its size and scrap the ore-swapping clause (it never got a captive mining lease, then the rules changed to mandate auctioning mines, which could send project costs out of whack). Along the way, it also jettisoned an alternate plan for a plant in Karnataka. 

Posco has gamely hung in there for decade, with processing units in Maharashtra to serve its Korean clients (Hyundai, Daewoo, Samsung). On Tuesday it announced a tie-up with Uttam Galva for a $3 billion integrated steel plant in Maharashtra. Uttam Galva, it should be noted, is the same company in which ArcelorMittal took a stake in 2009-10 after frustrated attempts to set up steel plants in Odisha and Karnataka. 

Mr Gou's experience in India has scarcely been model, with controversies over workers' health and pay and labour laws dogging Foxconn's Tamil Nadu factory which closed after Microsoft bought Nokia's handset business.

He, too, appears to be banking on special dispensations from ruling regimes for the success of his mega contract manufacturing plans.

Good luck to him. Like Enron and Posco, he may just discover that when it comes to doing big business in India, it's better to stay under the radar.

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