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Home >Opinion >Views >Gujarat’s solar flip ups the risk of a larger flop

Right from currency notes, which are payment promises or IOUs issued by a central bank, to complex commitments made by corporations in the course of business, an economy can hum along only if there is a consensus among all commercial actors on one thing: that agreements are inviolable. But what if there is a significant player, one armed with rule-making authority, that starts playing fast and loose with its obligations? It would spell trouble. This being so, it is hard to fathom why state governments in India show such few qualms about going back on their word and tearing up contracts awarded by them. The latest example of a state having reneged on its own deals is Gujarat. In one fell swoop, its power procurement agency cancelled tenders for 700 MW of solar power generation given to a clutch of energy producers, citing lower tariff bids in a subsequent auction. The companies left staring at Letters of Award (LoAs) that might no longer be worth the ink they bear include Vena Energy, Tata Power, ReNew Power and O2 Power.

Last August, these firms had won contracts to put up facilities in Gujarat’s Dholera Solar Park through an auction process that yielded 2.78 per unit as the lowest bid for the supply of electric energy to a state-run power grid. In October, Gujarat Urja Vikas Nigam Ltd gave out duly-signed LoAs. The final power purchase pacts were to be inked in January. But that was not to be. In December, an auction for another solar project threw up 1.99 per unit as the lowest bid. The gap between the two was presumably too much for the state to live with, and, in a travesty of due process, it nullified the Dholera tenders. Some of the aggrieved firms now look set to challenge the state’s decision at the Appellate Tribunal for Electricity, even as the Union ministry of new and renewable energy is reported to be looking into the matter.

Apart from the damage done to global perceptions among investors of India’s reliability as a safe investment destination, the episode reflects poorly on the country’s ethos of governance. It was always marked by the issuance of arbitrary orders, even exercises of political whimsy, but recent patterns suggest a turn for the worse. Despite proclamations of policy predictability, private ventures remain vulnerable to about-turns that raise the overall risk of doing business in the country. In the past, it was typically a shift in a state’s political dispensation that saw contracts unduly terminated. In 2019, Andhra Pradesh spiked 21 power- purchase deals signed by the previous regime. The new government wanted cheaper supplies. No less brazenly, it also torpedoed a set of infrastructure projects, some of them for its upcoming capital Amaravati. This turn of events had prompted the World Bank and Asian Infrastructure Investment Bank to quit an arrangement to fund Amaravati’s development. While Gujarat’s action on Dholera may look less consequential, it was taken by the same administration that held the original auction. The country’s reputation for honouring commitments cannot afford to get battered so frequently by such poor judgement calls at the state level. We need to evolve a national framework for governance that shields contracts from abuse. The aim of this exercise should be to sensitize all administrative officials and their political bosses to the value of going strictly by the book—and not, say, to score cosmetic gains on Ease of Doing Business charts.

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