Political Risk in India - Essay Example

Part of the perceptible bias among foreign investors in India in regard to the issue of expropriation was the Dabhol Project experience of Enron Corporation. For researchers studying Indian business climate, this demonstrated a risk that is caused by state action. In 1995, an affiliate of Enron Corporation suffered a severe loss when the Indian state of Maharashtra breached a long-term power purchase agreement. Scott Hoffman (2008) provided us an account: In that project, the state of Maharashtra agreed to purchase electrical power produced at the US2.

8 billion facility at a negotiated rate, and to assume the foreign exchange risk. Enron was promised a 16 percent rate of return on its investment in the facility… Soon after a power purchase agreement was negotiated and signed, the financial closing occurred… the makeup of the government of Maharashtra changed… The new government justified the action by asserting that the prior government had negotiated a bad deal. (p. 220) There is a widespread belief that the revocation of the Enron power contract was a politically motivated move wherein the infrastructure needs of India were subordinated to short-term political gains.

Whether the action by the Indian state was valid or not – it is still subject to debate. What has been demonstrated by this experience however is a lesson for foreign investors in regard to how the government of India sees the sanctity of contracts and the risk tolerance of project finance. It also underscored the perennial crises of governance as a consequence of the rate of the change in leadership. According to Robert Wirsing, the record of longevity compiled by India’s government – in particular its coalition governments – over the past decades or so was not one to inspire much hope for the regular emergence of full-term government anytime in the future. (p. 67) Other issues tagged to the Enron experience