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Lessons from the Volkswagen case

Saturday 13 August 2005, by JAYANTH*V.

In their eagerness to secure new projects, State Governments may be going too far and too fast without getting a clear commitment from the foreign investors.

THE RECENT controversy over the Volkswagen project in Andhra Pradesh has once again brought to the fore the problems State Governments face in attracting major industrial ventures, particularly by foreign investors. In its desire to be more competitive, each State Government is trying to outwit the other in terms of concessions, equity stake, and hand-holding operations to bag projects. So much so, like the buyers’ market for consumer goods and mobile phones, it has become an investors’ market when it comes to setting up major industrial projects.

Over the last decade, a host of multinational companies and foreign investors have turned to India or other Asian countries to locate manufacturing facilities. Be it automobile majors, computer hardware firms or just BPOs, foreign companies are looking at drastic reduction in costs. Most times this means off-shore operations from places where labour costs are cheaper.

Considering the availability of infrastructure, skilled and cheap manpower, Government responsiveness, and access to raw materials, industries have tended to look to the southern States of Karnataka, Tamil Nadu, and Andhra Pradesh.

The western States of Maharashtra and Gujarat, and the northern triangle of Delhi-Haryana-Punjab are other investor destinations. For political reasons, Uttar Pradesh has gained a few major industries. West Bengal too has its attractions.

In the case of Volkswagen, the German auto major was supposed to be looking at Andhra Pradesh, Tamil Nadu, Karnataka, and Maharashtra in particular. As is to be expected in such an investors-are-welcome scenario, a Volkswagen delegation visited the States, looked at specific locations on offer, and discussed the proposal with the State Governments.

Seeking the best bargain

Officials say the practice among major investors now is to obtain a concrete offer from one State, go to a second to seek more concessions and incentives, and move to a third for the best bargain.

As for automobile projects, Tamil Nadu and Maharashtra seem to have an edge, primarily because of the growth of the auto sector and the automotive components divisions, besides the air and sea connectivity for exports. But Andhra Pradesh was keen on a major project as there was a feeling that its manufacturing base was not broad enough. So since 2002, the State Government has been pursuing the Volkswagen project.

But what has happened over the past six to eight months should be an eye-opener to all States. In their eagerness to secure new projects and woo foreign investors, State Governments may be going too far and too fast, without getting a clear commitment from the investors.

Where, for instance, was the need to "export" funds for equity participation when the German auto major has not even signed a Memorandum of Understanding and provided a written commitment to set up the venture in Andhra Pradesh? Fortunately for the Y.S. Rajasekhara Reddy Government, Volkswagen has agreed to return the Rs.11 crore involved. Now efforts are on to set up the project in Andhra Pradesh itself, if possible.

Foreign investors do demand a certain confidentiality in negotiations till they are ready to sign the deal and announce the project.

But it is incumbent on the States to secure a clear commitment and to minute every discussion that has taken place. Just as the investor wants to get the best deal, a State must ensure that its part of the deal is protected and the transactions are transparent and legal.

When there is room for suspicion, as in the case of the Indian agents who claimed to represent Volkswagen, it may be imperative to get back to the parent company and confirm the negotiations. There are obvious lessons in this for other States and the investors too.

See online : The Hindu

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