One government proposes, the next disposes

Newly-elected regimes have the right to review potentially unjust contracts and projects — but only with good reasons

January 18, 2020 12:02 am | Updated 02:59 am IST

Since sweeping to power in Andhra Pradesh last May, Chief Minister Y.S. Jagan Mohan Reddy and his YSR Congress Party (YSRCP) government have cancelled or put on hold a number of high-profile State contracts and projects, many involving foreign partners who now face huge losses. Officials say reviewing commitments made by the previous government will increase accountability and decrease corruption in the State, but outside critics fear that the goal is to refashion deals to benefit new government officials and their supporters. Analysts caution that it will be extremely hard for the State to attract foreign investors in future.

The fallout

Other newly elected State governments (most recently Maharashtra) are also considering cancelling public work commitments made by their predecessors. However, is it prudent to risk alienating current and potential investors? In the case of Andhra Pradesh, potentially at risk is the reputation of what has been considered one of the most business-friendly States in India. Without investments, it will be harder for the State to raise the revenues it needs for social programmes and economic development. Further, if more States follow suit, the dependability of India as a foreign direct investment destination may be negatively affected.

The case of Amaravati

On their face, some of the Jagan government’s actions have merit, most notably in the case of planning for Amaravati, the proposed new State capital city, by Mr. Jagan’s predecessor, N. Chandrababu Naidu and President of the Telugu Desam Party. The project of Mr. Naidu, the then-Chief Minister, was always exceedingly ambitious and never without controversy. As Chief Minister from 1995-2004, Mr. Naidu oversaw the growth of the then-united Andhra Pradesh capital of Hyderabad into a major information technology and pharma centre. But Hyderabad was already a functioning metropolis.

For Amaravati, Mr. Naidu was trying to transform a rural area into a massive, advanced greenfield city. In doing so, he rejected recommendations from a Central government expert committee to expand an existing city in the State, instead choosing a reportedly flood-prone area well away from the nearest significant population centre. Funding was never assured, even with Central government money, private bonds, and loan pledges by the World Bank and Indian government building authorities. There were rumours too of slow decision-making and lack of focus by the then-State government, and disagreements with two prominent architectural firms working on the project. Today, over four years after Prime Minister Narendra Modi laid Amaravati’s foundation stone, little is there save a number of temporary government office buildings.

The cancellation, by Andhra Pradesh, of a convention and hotel complex in Visakhapatnam awarded to the Lulu Group (United Arab Emirates) at allegedly uncompetitive pricing was even praised by the head of the State’s Bharatiya Janata Party (BJP). Nor is Andhra Pradesh the only Indian State to attempt to renegotiate existing power purchase agreements in the light of falling power prices and consumption: Karnataka and Gujarat have done the same.

The new Chief Minister and his government also face external hurdles to attracting investment. As Mr. Jagan himself has noted, the Central government reneged on a previous promise to grant Andhra Pradesh “Special Category Status”, which would have enabled the State to provide tax holidays to new investors. Another issue is the State’s lack of a sizeable metropolitan centre for the foreseeable future, with or without Amaravati. Neighbouring business-friendly Hyderabad has attracted many ambitious Andhra Pradesh residents and foreign investors. These obstacles also made the Naidu government’s schemes to attract investment fall short, with few notable exceptions such as the Sri City manufacturing hub. Many investments announced during the Naidu era, such as a Tesla-created energy grid, failed to materialise.

During my last year in India, I was fortunate to have met Mr. Jagan. I was struck by the seriousness with which he said he planned to create a better future for all people in Andhra Pradesh. However, were I able to advise him today I would suggest that cancelling multiple high-profile public projects may imperil his ability to deliver on his most important goal: to create new jobs and opportunities in the State.

A checklist

First, cancellations risk exposing the State to potentially costly and damaging legal challenges. The relative lack of information about how the reviews are being made, and whether stakeholders have a real voice in the outcome, will likely be a concern to investors.

Second, investors look to the overall commercial environment before deciding whether to commit funds. In addition to project cancellations, the YSRCP government has made other reversals, including challenging the contracts awarded towards the massive national Polavaram dam project, sacking a large number of Naidu-era State bureaucrats, and restricting liquor licences and sales. Investors may regard the number and fast pace of dismantling prior government policies and programmes, no matter how justified, as signals that Andhra Pradesh is changing from an ease of doing business leader to a less transparent, predictable, and open economy. Andhra Pradesh and other States should rather create governing rules and bureaucracies that are more durable than any one leader or administration. Establishing procurement regimes that allow for open tendering, stakeholder engagement, and outside audits would reassure domestic and foreign investors that governments are fair and open to all for business.

Third, any new Indian State government must take into account the Modi government’s encouragement of competitive federalism. Increased numbers of potential Indian business destinations mean that investors can look elsewhere if things in any State get tough. Granted, there is room for improvement in how the Central government encourages more States to liberalise commerce. The government could for example provide fiscal rewards to States that reduce investment barriers, even if the State is not BJP-led.

Newly-elected governments certainly have the right to review potentially unjust or unwarranted deals. However, a State must be careful to provide explicit and clear evidence when making its case to trigger such reviews; it must also make clear which prior projects were reviewed and found to be sound. Recent events in Andhra Pradesh and Maharashtra — two of India’s largest State economies — have chilled investor enthusiasm just as the Indian economy slows. Indian States and the Central government have a shared interest in reversing this trend.

Katherine B. Hadda is a prior senior diplomat who most recently served as U.S. Consul General in Hyderabad. She is now Adjunct Fellow (Non-resident), Wadhwani Chair in U.S.-India Policy Studies, Center for Strategic and International Studies. The opinions and characterisations in this piece are those of the author and do not necessarily represent those of the U.S. government

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