Reed & Priest is known to be a law firm with expertise in Asia Pacific. It started operations in India in the late-eighties and is known to attach significant importance to business potential here. Siddhartha Shankar Ray was grabbed by the firm after his stint as Indias ambassador to the US. Excerpts from an interview with Josey Puliyenthuruthel and Kandula Subramaniam.
Q: What are the hurdles or issues for foreign investors from a legal point of view?
A: One of the major impediments here is the inability to honour existing contracts. That is very difficult for a foreign business to get used to. The ability to stay with a contract once it is executed is one of the fundamental tenets of common law (and India has a common law system). It is something that foreign business expects to be in place. Not only are contracts to be honoured, once you reach the point of signing them, you dont reopen or renegotiate it. The contract is a sacred document and you have to honour it.
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The other related problem is that if you have signed a contract after you have negotiated it under certain rules that are in place, you should not be opening up the contract if there is a policy change. That should be left to the concerned parties if they want to amend the contract. There should not be any requirement that a contract must be renegotiated just because of a change in policy. Or there should be some kind of a commercially reasonable time frame in which to begin to comply with the new policy.
Q: Can you put Enron in this perspective? When the contract was reopened by the Maharashtra government, we were told it is an absolute no-no; foreign investment will be affected. Has that happened?
A: Yes, it has. One thing India needs to do is listen to what foreign investors are saying. We have several Indian officials coming to the US to attend conferences. They give their speech, present a paper and then they are gone. They dont stay to listen to what people have to say. They come back and say, Everything went well; I didnt hear any problems. But, Ive been to several conferences in the last two years where people talked negatively about India because of the impediments in the business system here.
Also, several companies which are not actually coming to India hear horror stories from (independent power) developers who have taken four or five years to get somewhere, while in other countries you could do that in a fraction of the time. As a result, the next wave of business that could have come in would rather take their business to some other country.
India has to appreciate that the US has undergone a corporate revolution in the last 10 years. We have a very strong board of directors and really impatient shareholders. Power developers who would like to stay in countries for a long period of time are forced to show profitability quickly, which means that you have to get your project up fast. It doesnt leave much margin for error because infrastructure projects have such long gestation periods that things have to work very quickly. Shareholders want to see their returns immediately and chairmen are dismissed by the outside board of directors if they do not deliver.
Its a fact of life. If companies can access different markets and deliver results quicker, they are going to be pushed by their board and shareholders to move their operations that way. You have to be careful that you dont miss a group of potential investors by sending the wrong signals.
Q: Would you say that India has actually lost out because of such breach of faith?
A: Well, I think there are several major companies that put off operations in the last few years and have reached out to markets such as Latin America. It is just next to the United States and it is less expensive to put a team there than move it across the world. Brazil is a country with vast resources and offers huge opportunities. It is also beginning to open up fairly quickly and the American developer community is spending a lot of time there.
The other thing that India should keep in mind is that the US infrastructure is getting old. When we have a water main break or a gas pipeline break, opportunites open up to work in the US. In the next few years we will need to address and rebuild our aging infrastructure. The American developer community will have to focus efforts there and weigh it against risks that are attached to working internationally. That is another fact of life facing developers while deciding to work in one country versus another.
Q: Can we focus more specifically on sectors like power? What are the problem areas here when compared to other countries like, say, Pakistan?
A: Pakistan went through the Hub river project and they took a long time too to understand private sector financing. They made a lot of mistakes which they got over in the 1994 power policy. Since then they have financially closed 15 power projects on a project finance basis.
However, India, which started the process simultaneously or later than the Hub river project, did not learn from Pakistans mistakes. They tried to draft laws in a vacuum instead of allowing international developers to help develop a policy. One of the biggest problems in power, telecom and other infrastructure industries is that the government views the foreign investor with fear when they shouldnt. They should be asking them to give help in drafting laws from the beginning. In the US, we bring together people to talk it out before we start drafting our laws. What India could try to do is put together some kind of a structure where they could invite people with experience and draft laws which could help India move ahead.
Further, India does not have a long-term energy policy act. Something that could deal with not just power but the entire energy industry. There needs to be a one-stop shop for developers. Like the Foreign Investment Promotion Board. A developer should be able to walk in there and ask, I need to start a power project; how many clearances will I need for the project. You would be given some kind of a roadmap how many clearances you need at the central level and how many at each one of the states. All the required applications could be put in some kind of a package. Then you can go out and do it. It would be better to have a single-window concept for central government clearances.
The other problem relates to competitive bidding. Right now, competitive bidding is different in every state. Theres a need for uniformity. In addition to that, you need to pre-package the competitive bid proposal before you put it on request for proposal. It allows you to come up with better numbers. Without this, at the end of the bidding process you are no better than a negotiating process. For instance, why should the Central Electricity Authority question a project that has gone through a transparent process of competitive bidding.
Q: From the financiers point of view, what are the glitches that remain in power projects?
A: One is the foreign exchange risk. Many states wont put in place protection against foreign exchange risk. Another is that some states dont allow for cost escalation to account for changes occurring year after year. Yet another area is guarantees, particularly when one state electricity board has committed itself to several IPPs (independent power producers) through escrow accounts. The possibility of a domino effect is very high if one PPA collapses.
A way out is to move an IPP from the general escrow account to a particular client account. This cant be done very often. Another thing I suggested to the finance ministry is to have some kind of an insurance to the escrow account. This would act as some kind of a back-up which would be drawn upon only if the SEB failed to pay up. The developer would pay the guaranteeing bank a fee for the facility. With this, banks which would not earn interest income on loans (because of a low demand for loans due to high interest costs) have an avenue for investment. Also, the government allows banks 40 per cent tax deduction on interest income from infrastructure projects. This should be raised to 100 per cent. That would encourage banks to lend to such projects.