US embassy cable - 05CHENNAI2075

UNCLAS SECTION 01 OF 03 CHENNAI 002075 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: ETRD, PGOV, IN, Indian Domestic Politics 
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