Sucheta Dalal :Don't just stop at throwing Enron out
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal

 

MoneyLife
You are here: Home » Column Topics » The Rediff columns » Don't just stop at throwing Enron out
                       Previous           Next

Don't just stop at throwing Enron out  



Se[tember 20, 2001

A few weeks ago, this column wrote about how a combination of circumstances and a few right-thinking people had finally given India a fighting chance to find the right solution to India's most controversial power project. But it is not so easy.

I had underestimated the Indian politicians' incredible ability to confuse, confound and damage our own case. After all, the American multinational did not negotiate a sweetheart deal (provision to indemnify it against violations of Indian laws) without the collusion and collaboration of large sections of our political establishment.

Parts of the ruling coalition in Maharashtra, a.k.a. Sharad Pawar's Nationalist Congress Party, are working hard to derail investigations. First, they are trying to force Chief Minister Vilasrao Deshmukh to scrap the judicial commission which is to inquire into the Enron deal.

Secondly, they are working through the bureaucracy to weaken our case by charging the US multinational with misrepresentation instead of fraud in the arbitration cases filed in connection with repudiating the contract.

Finally, in the most brazen display of Enron's powerful connections with George Bush, its CEO Kenneth Lay has written to Prime Minister Atal Bihari Vajpayee saying that if the issue is not resolved urgently (and to Enron's satisfaction) it would be construed as an expropriation of US assets and lead to the imposition of sanctions by the US government against India.

But before we analyse how our own government is letting us down, let us do a quick recap.

  • The left parties in Maharashtra scored their first victory by forcing the government to appoint a commission under Madhav Godbole to re-evaluate the Dabhol Power Company project. Although the committee also comprised chosen representatives of other political interests, Godbole with the support of EAS Sarma (former finance secretary) managed to call the shots and produce a bold report which pointed to the enormous over-billing and loading of unnecessary costs on to the Dabhol Power Company.
  • Godbole and Sarma even exceed their brief by recommending a judicial inquiry into the manner in which various laws and statutes were flouted to facilitate Enron's expensive entry into India. Several other 'eminent' members of the committee had chosen distanced themselves from this suggestion through a dissent note.
  • Enron has maintained a thundering silence over the Godbole Committee report, choosing not dispute even one of its findings.
  • Meanwhile, the Maharashtra State Electricity Board, under Vinay Bansal's chairmanship, gave the state a big breakthrough. Bansal and his team established that Enron's much touted project had tied up every loose end and plugged all possible loopholes, but failed on one important criterion - the inability to deliver to technical specifications. DPC was unable to ramp up the power generation to peak levels within the contracted time and in fact fell far short of specification. This carried a whopping penalty of Rs 4 billion on each occasion. And Enron was unable to deliver several times. This too was being quietly covered up by the MSEB before Bansal came in.

This breakthrough implies that we now have legitimate grounds to cancel the project. Enron also owes us big money in penalties and the termination demand to the tune of Rs 300 billion that was written into Enron's sweetheart agreement, looks far-fetched.

So how does the multinational react to the changed situation?

It is clearly working on three fronts: agree to get out of India with only its investment in the project returned to it. Simultaneously, it has abandoned most of its investment plans in India. Having made its decisions, Enron is in a hurry to get its money and go away. Hence, Kenneth Lay's threatening letter to Prime Minister Vajpayee, seeking a quick resolution.

Kenneth Lay may be in a hurry, but there are plenty of issues that need to be resolved before deciding how much to pay Enron.

Finding a buyer for the Enron-promoted Dabhol Power Company is India's first priority. After all, in this shining example of foreign investment, Rs 25 billion of Indian banks and financial institutions are stuck, including guarantees, and we could do with the additional power generation, provided the price is right.

The renegotiations committee headed by Madhav Godbole is expected to provide a financial basis for seeking bids for the project. Several Indian companies are in the race to acquire Dabhol Power Company and their offers would depend on Godbole's recommendations.

Business Standard has reported on Monday that the Godbole committee has said that the government would have to take a Rs 56.63-billion hit in order to ensure a significant tariff reduction to around Rs 2.35-2.40 per KW. This includes a Rs 25-billion cash infusion and custom duty and other waivers.

Interestingly, the committee, according to Business Standard has also recommended that Enron and its partners -- General Electric and Bechtel -- should forgo 75 per cent of their investment in the project involving a loss of Rs 28.35 billion.

In fairness, Godbole has also recommended that MSEB and the Maharashtra government should also take a hit of as much as Rs 10.62 billion.

Is it any surprise then that Enron was in such a big hurry that Kenneth Lay was threatening India with sanctions?

We wonder whether Superpower US is currently in any position to threaten anybody - especially when it is making dubious compromises with countries in the neighbourhood of Afghanistan.

The full details of the Godbole committee are not yet in public domain, but it seems clear that MSEB can invite bids to acquire DPC on the basis of these findings.

However, a financial hit should not be the end of the story. Enron's gold-plated project cost and its ability to get Indian policy-makers to bend every rule in the book need to be probed through a judicial inquiry.

We also need some clarity on the powers of policy-makers to sign commercial deals, to what extent they can bind us to certain commercial terms or grant others immunity from violation of laws.

There were aspects of the Enron deal that were truly preposterous. The sovereign guarantee bound the country to unconscionable terms and safeguarded it from even the most basic business risks.

Enron almost got away with it, too, but for the dogged fight put up by a few activists and the fact that the terms were so favourable to Enron that every other independent power project demanded similar terms, throwing the entire power sector development programme into disarray.

So lets not stop at throwing Enron out, but let us, for the first time take things to their logical conclusion by fixing accountability for the whopping financial loss caused to the nation and also some ground rules to avoid a repeat performance.


-- Sucheta Dalal



 



Recent Comments