Re Enron & India: You didn't read this then, don't expect you to now, but some might want to....
The Enron crisis reaches a flash point
February 8, 2001
rediff.com
It has been an eventful week for the financially strapped Maharashtra
government. Having decided not to help the Maharashtra State Electricity
Board pay for Enron's expensive power, the consequent default led to a
two-notch downgrade in the state's credit rating. It also led to Enron
invoking its sovereign guarantee and asking the central government to pay
the controversial Dabhol Power Company.
Not paying DPC's extortionate bills is a good idea, but it has to be
followed up with a tough and credible action plan to free the government
from its commitment and the political will to follow it through. The DPC
project is one of the worst examples of political greed and naiveté - right
from the negotiation of a one-sided contract by one political party, to its
cancellation and re-negotiation of a much larger project by another set of
political parties. A third political formation is now left to clean up the
mess and face the political consequences of paying steep power bills to it.
The danger is, that instead of working on a plan to deal with the Enron
problem, the only news emanating from the state secretariat is the constant
wrangling between Sharad Pawar, leader of the Nationalist Congress Party and
the ruling Congress and its allies. Mr Pawar, who first brought Enron into
India, has mounted enormous pressure to keep it going, no matter what the
consequences. A government appointed independent Review Committee was
delayed for over two months because of the tussle between the Pawar faction
and the Congress allies over its composition.
The committee, which was announced on Thursday, is a combination of
Pawar-nominees and those who would be truly independent and put the state
before their individual agendas.
I have written in my earlier columns about how most developing nations,
which were bamboozled into signing expensive power projects by multinational
corporations have successfully repudiated or re-negotiated their contracts
with no serious financial consequences. As India begins to review the
project once again, the eco-political situation today is dramatically
different from 1994 when Enron, with US government support and other MNCs
mounted enormous political pressure against the cancellation and heaped
ignominy on India.
Unlike Enron, scores of top MNCs have gained a smooth entry into the Indian
market place and are doing business without any fuss or controversy -- from
food to pharmaceuticals, consumer products to fizzy drinks, information
technology to clothes and cosmetics -- no company has faced the allegations
that Enron has.
Additionally, the huge mess in California, where ill-conceived deregulation
caused electricity bills to soar and leading to power blackouts can only
help India's cause. The message from California is that power generation
companies have no problems using every legal infirmity to rip off consumers
in their own country. The US government has launched an investigation into
all power utilities, especially Enron (in fact, a CNN anchor interviewing
the Enron boss last week said that Enron seems to have been singled out as
the villain of the mess -- a charge that the Enron chief predictably
denied).
Further, the fact that Frank Wisner, the aggressive and high profile former
US ambassador to India, promptly joined the Enron Corporation board of
directors after leaving the country, has done nothing to enhance the power
company's credibility. If that were not enough, Wisner's successor Richard
Celeste chose to emulate his predecessor and used a farewell visit to Bombay
to openly lobby for Enron and threaten the state government. Enron's clout
with the present US government stems from its large donations to the Bush
campaign and the proximity of its chairman to the president of the last
remaining superpower.
Since, yet another committee is set to review the Enron project, it is time
to refresh public memory with some facts.
1. The payment terms to Enron and the guarantees are unprecedented anywhere
in the world. A combination of a letter of credit, a state commitment and a
sovereign guarantee which is backed by a tripartite agreement between the
Union government, the Maharashtra government and the Reserve Bank of India,
ensures payment to Enron's subsidiary. The terms of the guarantee are such,
that Enron is insulated from even a modicum of commercial risk, which is
inherent to any business enterprise around the world.
Also, payment is guaranteed even if the Power Purchase Agreement and other
ancillary agreements are found to be illegal or unenforceable under law. The
government has waived its sovereign immunity as well as claims on all assets
that may be covered if an action was brought under the provisions of the
guarantee.
2. Contrary to Enron's claim that the cost of power has risen only because
of the depreciation of the Indian rupee and the increase in world fuel
prices, sane voices in government had warned against the high cost of the
project but were either silenced or over-ruled. For instance, in a letter
dated August 24, 1994, the Union finance secretary had written to the power
secretary that that the size of "the potential liability for a 1000 MW
plant, was around Rs 3,000 crore per year (around $900 million per year for
1000 MW)?" The department of economic affairs had expressed a fear that the
"...risk of the counter guarantees being invoked was not unreal given that
SEBs had been defaulting in payments..."
3. Even an academic like Dr Kirit Parikh, who has since helped Enron treble
its project in India without any significant reduction in charges, had
written to the prime minister in 1994 expressing serious reservations about
the guarantees. He wrote that "The risk of these guarantees being invoked is
not too farfetched..." He also warned the prime minister that there would be
a "serious financial crisis" if "all seven fast track projects are given 90
per cent load factor guarantee and a price of 7 US cents per unit." Parikh
now forms part of the review committee at Sharad Pawar's insistence.
4. Under the guarantee, the government has staked all its assets, including
those abroad, (save diplomatic and military) in surety of the payments due
to DPC. The total exposure is to the tune of at least Rs 350 billion plus US
$ 300 million for the addition of 695 MW of power.
5. The question is -- is the central government empowered to issue such
comprehensive guarantees which, on the face of it seem ultra vires and
illegal? The issue of signing such guarantees has not been examined by any
Indian court even though 26 odd cases were lodged against Enron and
subsequently dismissed.
Today, the best course of action is to look at the legal issues before
scrutinising the commercial terms. However, this will happen only if there
is enormous public pressure on the review committee to work independently
and in the interest of the nation. If the central government had exceeded
its powers and the power purchase agreement itself obtained by
misrepresentation of facts then the entire agreement can be declared invalid
in a court of law. The entire payment structure can then be negotiated in
line with other power projects in the country. |
