Political Uncertainty Pushes Up Energy Investment Costs

Political instability and perceived economic risks in India are pushing up the cost of investment in the countrys energy sector, analysts say.

Indian officials, who last week attended an investors conference in Indias energy sector, admit that some major investors are turning away because of political uncertainties.

A growing perception that weak policies will mean harder bargains was shared by managers from more than 100 companies who attended the energy meeting. Those attending included representatives from ANZ Investment Bank, British Gas, British Petroleum, Cairn Energy, Chase Manhattan, Deutsche Morgan Grenfell, European Investment Bank, Gaz de France, JP Morgan, Lloyds Bank, Merril Lynch, PowerGen and Shell.

 

The investor is more interested in policy stability than political stability, said Gerry Grove-White, general manager in India for the British firm PowerGen which has made a long-term commitment to investing in India.

Grove-White spoke of risks arising from the lack of a framework to make clear policies. Investors made it clear that these are risks that India is paying for, not them.

The investors dilemma was typified by the former high commissioner to India, Sir Robert Wade-Gary, now vice-chairman of Barclays Capital. If the risks in India are great, build them into the price, Sir Robert said. Risks are there, risks cost money, and weve got to be paid for them, he said.

Unless the investor is paid for risks, he will take his investment elsewhere, he warned.

To what extent the investor is paid by the consumer or the taxpayer is an internal policy decision for India to take, he said. But investors will raise prices because of the risks, and unless you pay it, you wont get the money, that is all we can tell you.

Barclays is looking for more clients to advise on investment in energy worth a potential $300 billion investment. Barclays Capital acted as financial adviser for the Dabhol power project. It is currently adviser for two other power projects under negotiation and also some oil projects. Investors are not turning away, they are just bargaining harder, one Indian official said.

If you are a global player, India is just not a market you can afford to ignore, Peter Fowler from Cairn Energy said.

Fowler said, There is no investment without risk, and the straight talk about risk is more likely to reassure the investor than put him off.

But Indian officials present at the meeting say that a collective concurrence on risks is bound to push up prices by foreign firms across the board.

The new hard talk has been bolstered by the admission by former finance minister Manmohan Singh at length at a lecture in London in November that the pace of reforms has slowed down in recent years because of a weak government and its inability to push through clear policies.

Economic growth cannot take place in a political vacuum, Singh said at the lecture attended by practically every investor and potential investor in India. The underlying situation is favourable, he said, but India needs a strong and purposeful political leadership.

Indian representatives have sought to reassure investors that all parties are agreed on the fundamental economic reforms. But the Dabhol experience of Enron and the doubts over any political or policy certainties have meant that investors are now using the political situation in India to bargain for greater gains.