SEASON OF SCANDALS: PARTIES SQUIRM IN AP AND

UNCLAS SECTION 01 OF 03 CHENNAI 002075

SIPDIS

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: ETRD PGOV IN
SUBJECT: SEASON OF SCANDALS: PARTIES SQUIRM IN AP AND
KERALA



1. (SBU) SUMMARY: The Volkswagen scandal in Andhra Pradesh
and Canada's SNC Lavalin scandal in Kerala continue to make
headlines. The former involves the questionable transfer
of government funds to a dubious company that featured the
VW initials but no further relationship with Volkswagen, in
an effort to secure Volkswagen FDI for AP. The latter
revolves around the Comptroller and Auditor General's
reported criticism that Canadian company SNC Lavalin
reneged on its promise to grant $23 million aid to a Kerala
Cancer hospital in return for a power project secured
without competitive bidding. The companies involved have
reacted very differently to the outbreak of scandals: VW
quickly took corrective actions, while Lavalin remains
inexplicably quiet. END SUMMARY.

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WHEN GOVERNMENT FILES MOVED FAST...
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2. (U) The Congress government of Andhra Pradesh (GoAP) has
come under opposition fire for the transfer of $2.7 million
to a dubious company, Vasishta Wahan, apparently set up by
the company's India project head, Helmut Schuster and his
associates. This transfer of money took place in the
context of the VW's four-year-long negotiations with GoAP
to set up a car plant in Vishakapatanam. Ostensibly as
equity participation in a joint venture, the GoAP ordered
the transfer of money from Andhra Pradesh Industrial
Investment Corporation to Vasishta Wahan's Indian bank
account in January 2005. The deal, without even a
Memorandum of Understanding or formal approval from the
Volkswagen board, hit the headlines in July following
exposes in German newspapers. Shuster soon after lost his
dual job as Chief of Human Resources at Skoda and VW's
India project head.

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WE WERE DECEIVED, SAYS AP CHIEF MINISTER
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3. (U) On June 22, when VW headquarters officially informed
GoAP of the exit of Shuster and VW's India Advisor Ashok
Jain from the company, GoAP began frantic efforts to
recover the money and escape embarrassment. It was too
late. The government soon discovered that the money was no
longer with the bank and VW's official spokesmen denied any
VW links with Vasishta Wahan. "It is now clear that
Schuster deceived my government", Chief Minister Y.S.
Rajashekhara Reddy told a private TV channel, "I am
confident that the probes in Germany and by the CBI
(Central Bureau of Investigation) will confirm this fact."

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RESPONSIVE VW HELPS AP'S DAMAGE CONTROL
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4. (U) VW's quick and effective assistance to GoAP's damage
control efforts helped. On July 21, Volkswagen issued a
public statement that the company will repay the two
million Euros to AP. "The company is thus assuming
responsibility for the damages caused by the suspected
illegal dealings of the former Head of Human Resources at
Skoda, Helmut Schuster," the statement said. The statement
added that the group will "call to account those
responsible for the damage both inside and outside the
company." VW sent former German Ambassador to India, Frank
Elbe, as the company's special envoy. Elbe met Chief
Minister Reddy in Hyderabad on August 1, reassuring the
state of the company's continued interest in Andhra
Pradesh.


5. (U) Chief Minister Reddy's decision to leave the
investigation to the federal agency, CBI, and to shift
Industry Minister Botcha Satyanarayana to another
department also helped mitigate the damage. The CBI has
arrested Ashok Jain and conducted searches at associated
premises. Chief Minister Reddy's political colleagues,
meanwhile, keep harping on the Opposition's attempted deals
with the VW while they were in power. Senior Congress
leader and Municipal Administration Minister Koneru Ranga
Rao told Post that Telugu Desam Party leader Chandrababu
Naidu had promised to buy 50 ambulances from Volkswagen at
five million rupees ($120,000) a piece to secure the $400
million car project.

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QUESTIONS REMAIN ON THE 'HOAXWAGEN STORY'
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6. (U) All these efforts, however, are unlikely to absolve
GoAP of what the media calls, the 'Hoaxwagen story' in the
minds of the public. It is widely believed that the money
was probably paid to Vasishta Wahan as "facilitation
charges", euphemism for bribe, and not as equity
participation. Newspapers have also raised allegations on
the shunted minister Satyanarayana's and his brother
Muralikrishna's private real estate and other business
deals in connection with Volkswagen investment. The
Frontline magazine of July 30 raised several questions for
the CBI to answer: "Was the government conned by a glib
operator? Why did the government release the money to
Vasishta Wahan and not to Volkswagen, and that too, without
an MOU? Could such a payment be made to a company whose
authorized share capital is just Rupees 100,000 and which
operates from a one-room office in Delhi?"

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A CANADIAN DEAL THREATENS KERALA COMMUNIST LEADER
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7. (SBU) If it is the ruling party that is facing the
allegations in AP, it is the Opposition Communist Party of
India Marxist (CPI-M) that is on trial in Kerala. The
Party State Secretary Pinarayi Vijayan is caught in the
middle of a controversy involving a contract awarded to SNC
Lavalin of Canada in 1996-97, when he was the state Energy
Minister. In the context of an ongoing power struggle
within the CPI(M),Post's journalist contacts believe that
the allegations might threaten Vijayan's Chief Ministerial
prospects. Vijayan is widely considered to be relatively
more open to FDI and private sector activity than CPI-M
alternatives.

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BIGGEST SCAM IN KERALA'S HISTORY, SAYS CONGRESS
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8. (SBU) Congress party leaders allege that Vijayan, after
a 1996 visit to Canada, converted a previous consultancy
service agreement with SNC Lavalin for the modernization of
three hydroelectric projects (Pallivasal, Chengulam and
Panniyar) into a Rupees 3.74 billion fixed price contract
without global tenders. Senior Congress leader and
legislator M.M. Hassan told Post that that Comptroller and
Auditor General in his draft report has mentioned that the
entire expenditure in this project was wasteful as it
failed to enhance production. According to Hassan, the CAG
also pointed out that Lavalin had gone back on its promise
to provide a grant of Rupees 983 million $23 million) for
Malabar Cancer Center in return for the contract, and gave
only Rupees 89.8 million ($2.1 million). Hassan believes
that SNC Lavalin might have paid all the money, which the
intermediaries probably siphoned off. He hinted to Post
that the money might have gone into the launching of the
CPI(M)'s private TV channel company, Kairaly. Hassan
described the SNC Lavalin deal as the biggest scam in the
history of the state.

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COMMUNIST PARTY INFIGHTING PROVIDES AMMUNITION
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9. (SBU) CPI(M) Central Committee Member and prominent
Kerala leader M.A. Baby (Protect) told Post that his leader
Vijayan is being pilloried for taking a proactive role in
solving the energy problems of the state. "All he wanted
was to go fast in solving serious energy crisis", Baby
said. Ranji Kuriakose, a Kerala journalist who regularly
writes on the scam, explained to Post that the issue has
grown sensational in the context of the internecine power
struggle within the CPI(M). "Vijayan's diehard opponent in
the party, Achuthanandan, is helping his enemies in
exposing the deal," says Ranji. Chief Minister Oommen
Chandy has ordered a vigilance enquiry into the affair.
Ranji, however, believes that the vigilance enquiry is not
proceeding fast, perhaps to shield the ruling Congress
party's former Energy Minister, Karthikeyan, who also might
have had a part in the deal.


10. (SBU) Unlike Volkswagen, SNC Lavalin has taken no
initiative in clearing its name. Hassan pointed out that
SNC Lavalin is remaining silent, even as the controversy is
raging in Kerala. Ranji has heard rumors that the Canadian
High Commission has written to the GoK saying that the
company has paid all it owes, but without going into the
details of the payment.

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COMMON LACK OF TRANSPARENCY; DIFFERENT REACTIONS
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11. (SBU) COMMENT: Both the VW and SNC Lavalin episodes
show how a lack of transparency in deals between multi-
national corporations and state governments can lead to
serious issues of corruption. The companies have reacted
differently. While VW's proactive steps clearly helped
salvage its reputation, SNC Lavalin's silence, probably out
of helplessness, could lead to a total loss of market in
the region. In the case of VW, local politicians have
learned another lesson too: In the eagerness to compete
with neighboring states in securing FDI, one needs to be
careful not to go too fast. END COMMENT
CANDADAI