Empowering Enron

- Dasu Krishnamoorty

The Enron deal and its expensive aftermath have triggered a belated rethink not only on future power agreements but also on the second phase of the Dabhol power project designed to generate 2,184 MW of power. What detonated a nationwide furore on power deals is the failure of the Maharashtra State Electricity Board (MSEB) to pay up arrears of a three-month bill for the supply of Dabhol power and the consequent transfer of payments burden to Maharashtra and central governments. When the state government began dithering on its obligations, the Dabhol Power Corporation (DBC) invoked a counter-guarantee signed by the central government in 1996. In the final analysis, people saw the entire episode not simply as a breach of contract but as a conspiracy of foreign and domestic forces to swindle the nation's resources. A deeper probe would reveal that the principal accused in this epic fraud is not the Enron corporation but rapacious and unprincipled bureaucrats and politicians. As V. Ranganathan and Vijay Kumar, of the Indian Institute of Management, Bangalore, say "at the heart of the problem is the bureaucracy that has arrogated to itself the lead role in ushering in the market reforms."

Enron and the MSEB first signed a memorandum of understanding in 1992, keeping their victims in the dark about the details of the power purchase agreement and fuel purchase agreement. But NGOs such as the National Working Group on Power Sector, the Indira Gandhi Institute of Development Research, Indranet and Prayas widely circulated information which highlighted the negative aspects of the power project on Mahrashtra's economy, local population and environment besides indicating cost-efficient and effective alternatives to the Enron project. How one-sided the MOU was evident from the following facts:

There was no competitive bidding for the project which was exclusively negotiated between the Maharashtra government and Enron. The power tariffs and project costs quoted by Enron were higher than other power projects in the country. MSEB promised to buy all the high-priced power produced by Enron, whether there was demand for it or not, and even if cheaper power were available from its own generating plants. DPC was assured of a 16% post-tax return on capital investment, and there was no limit on the capital expenditure Enron could make. Indian economists calculated that the rate of return would actually be 32%, three times the average rate in the United States. There were counter-guarantees from the state and the central governments for payments which would have been due to DPC from the MSEB. Arbitration in the event of a dispute over the counter-guarantee would be under English law.

The Maharashtra government cancelled the 1992 agreement in August 1995 following popular unrest and advice by a committee set up by the Shiv Sena-BJP government. This committee was headed by deputy chief minister Gopinath Munde who had earlier vowed to throw the project into the Arabian Sea. As a result, work on the first phase was stopped as a first step and Chief Minister Manohar Joshi ordered the cancellation of the second phase in August 1995. Shiv Sena and the BJP made the cancellation of the agreement an election issue and returned to power. But in a bizarre political volte face in November of the same year, Shiv Sena supremo Bal Thakaray received Rebecca Mark, Enron's boss at that time, and resurrected the agreement. The counter-guarantees offered by a previous Congress government were signed on the last day of the 13-day Vajpayee-led government in 1996. Defending this u-turn, Thakaray said that the project had to be revived under pressure from the American administration which, according to him, threatened to stop all aid not only to Maharashtra but also to the entire country. Thakaray's defence is unconvincing because just a few months after the cancellation of the project, Manohar Joshi toured the United States and returned with offers of 400 crores US$ in investment.

The media and economists funded by the industry have to share the bulk of the blame for whipping up an FDI frenzy in the country. True, Enron's 2,100 MW DPC has brought into the country the largest foreign direct investment to-date. However, FDI cannot be a pretext to exonerate every crime short of murder. Maharashtra CM Vilasrao Deshmukh says that if a viable solution to the Dabhol crisis was not found, it would have an adverse effect on the central government's policy of encouraging foreign direct investment. On the contrary, because the country offered a continental size market, foreign investors would have trooped in gladly if our World Bank-trained bureaucrats and their political masters had not colluded with prospective investors to push the country into unviable projects such as Enron.

A few aspects of the agreement clearly indicate that the team of negotiators representing the Maharashtra government knew the colossal cost of the agreement both to the state and the people. The contract stipulates that MSEB has to buy 90% of Dabhol's installed capacity of 740 MW. at a tariff that guarantees a 16% return to Enron, regardless of the status of demand for power in the state. But there were times when the MSEB could buy only 33% of the power generated by DPC and paid a staggering Rs. 7.80 per unit.

Quoting from a 1995-96 report of Parliament's standing committee on energy, Rajesh Ramachandran points out the primary flaws in the project: "Maharashtra has surplus electricity in the night, with a 'backing down' (shutting down of generation due to lack of demand) of 700 crore units after office hours in the western region of the state alone. Hence demand was for 'peaking power' and not 'baseload' which is the constant demand round the clock.' A former chairman of the Central Electricity Authority S.N.Roy had warned at that time that "there is no question of Enron designing Dabhol as a baseload station. If Enron is there, they (MSEB) will have to close down most of their thermal stations at night.'' The parliamentary standing committee also had said that "plant availability at levels significantly greater than the peak load demand for power (implies) that the existing power generation plants will have to 'back down' well beyond present rates, thereby making them inefficient and financially non-viable. This alone would increase the average cost of power to the consumer." Despite this, Dabhol was allowed to design the project as a baseload station. Who gave the DBC permission to do so? S.R.Paranjpe, a former director of the Indira Gandhi Atomic Research Commission, answers the question in a petition to the Maharashtra Electricity Regulatory Commission. He prayed the commission to penalise all high-ranking MSEB officials and engineers for having misled the commission and flouting its rules.

Not only there was no competitive bidding but there was no scrutiny of the basis of cost claims made by Enron. The standing committee found this cost as the highest in comparison with other private projects. The cost hike was explained by the standing committee in these words: "Guaranteed rate of return is tempting the investors to inflate their costs to ensure better returns; lack of competitive bidding has led to significant padding in the investment costs." Regardless, the 13-day Vajpayee government went ahead with the counter-guarantee of 16% return covering 90% of the power generated by Dabhol. The cost of Dabhol power is on the high side because it was naphtha-driven and also because the agreement included a cover for price hike of naphtha and depreciation of Indian currency. The project inflicted a body-blow to Maharashtra's economy because, in the words of its Chief Minister, certain assumptions made then were not borne by subsequent unanticipated developments like currency fluctuation and oil price hike. Anybody with a minimum knowledge of world affairs knows that the rupee is on a downward slide and that oil prices are dictated by a cartel which determines production quotas and are pegged to demand-supply interactions. Enron now has agreed to reduce the price for power in the wake of a sharp fall of 60% in naphtha prices in international markets. The good news now is that it will buy the fuel from the Indian Oil Corporation.

As a powerful and experienced MNC, Enron has negotiated and won extremely advantageous terms including counter-guarantees and shield against currency fluctuations. Even this does not seem to be the real reason for the bankruptcy of the MSEB. As Ranganathan and Vijay Kumar say: "Having defaulted on payments, the MSEB is trying to project itself as the victim of Enron's high prices. Enron power represents less than 5% of the total demand in the state. Therefore, it is hard to believe that Enron is the cause of MSEB's financial distress. After all, the regulatory commission had already factored MSEB's payments to Enron even at higher prices, corresponding to its mandated purchases from 50% plant load factor. The real reason then is MSEB's high transmission and distribution losses (read theft in collusion with its staff) claimed at 30%.'' Senior columnist Prem Shnkar Jha adds; "As if this was not bad enough, the government repeatedly declared an amnesty for consumers who had not paid their bills."

Addressing a conference of Chief Ministers and power ministers of the states, Prime Minister Vajpayee deplored that only "40% of the power supply is billed. And not all those billed are made to pay. There are so many other categories of users who get electricity either free or at highly subsidised rates in the name of agriculture. The combined effect of all this is stupendous losses of our SEBs, which now stand at an unsustainable level of Rs. 24,000 crores each year. These losses have further worsened the fiscal health of many state governments." Bureaucracy shows these losses as transmission and distribution losses. Add to this a lot of un-metered power supply. This saga of failure and incompetence has led to some introspection at the highest level from which have emerged solutions such as the central government buying all the Enron-generated power and distributing it countrywide. The DPC is willing to consider a change of buyer. Chief Minister Vilasrao Deshmukh wrote to the Prime Minister to direct the central government to ask its power entities to buy power from the Enron project, pool its higher costs with what is generated elsewhere and sell it to other deficit states. According to reports appearing in Maharshtra media, the state government is exploring three avenues: first, asking the central government to take over DPC; second, the state government itself taking over DPC and third, forming a new company which will take over DPC with the help of financial institutions. Such solutions as take-overs surely will frustrate the central goal of economic reform, i.e., throwing open the economy to the process of globalisation.

What is happening in Maharashtra is happening in all the states. The state electricity boards are sick and inefficient by design with costly consequences for development. Offering solutions like privatisation is an admission of inefficiency and dishonesty and an unreserved acceptance of the softest option that is available. Poor collections are an evidence of the breakdown of the legal machinery or unwillingness of officials to bring it into play. If the boards can prevent power pilferages and collect every rupee that is due to them, Enron would be the lost humiliation the country would see. This can happen only when the politicians and bureaucrats stop seeing even crime as a milch cow.

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