Banana republic?

By C. Rammanohar Reddy

IN THE early days of reform, the concerns about the liberalisation of the rules for foreign investment were often mocked with accusations that we still carried an ``East India Company'' mentality. This showed a lack of self-confidence, we were told, because the Indian economy was too large, too diversified and too resilient to be controlled by foreign investors. What does one say now when month after month the Dabhol Power Company has in its captivity the Maharashtra State Electricity Board, the Government of Maharashtra and the Government of India, in that order?

After two months of procrastination, the Government of Maharashtra has finally appointed a committee of experts to examine the project and other issues related to the electricity scenario in the State. The terms of reference of the committee have been so drawn up that a fundamental review of Dabhol, or Enron as it is more commonly ingrained in our consciousness, is out of the question. And such is the politics surrounding Enron in Maharashtra that while the committee has at least two members - the chairperson, Mr. Madhav Godbole, and Mr. E.A.S. Sarma, both former Secretaries to the Union Government - known for their independence, it includes Dr. Kirit Parikh, a member of the

1995 renegotiations committee which ended up saddling the State with a larger Enron project.

Much has been written about Dabhol and much more is waiting to be written. But there is one red herring that has to be set aside. Dabhol has not become a burden on Maharashtra because the MSEB is under a financial strain caused by electricity pilferage and subsidies to farmers. True, like other electricity boards the MSEB has to bear the financial cost of theft, losses in transmission and distribution and very low tariffs for agriculture. But the effects of these phenomena are distinct from those imposed by expensive DPC power. Contrary to what the apologists of the Enron project say, if there is a cause and effect it is that the cost of DPC electricity has worsened MSEB's financial plight. And not that MSEB's losses have made DPC power more expensive than it needs to be.

The spike in global petroleum prices and the depreciation of the rupee are not the only reasons for DPC pushing the MSEB to the situation where it has to go cap in hand to the State Government. The indisputable fact is that DPC power has always been far too expensive. It was so when the first projections were made in the mid-1990s, it was so when the project was supposedly ``renegotiated'', it is has been so since it went on stream in mid-1999 and it will remain so even after the switch in fuel from naphtha to liquefied natural gas (LNG) as planned in the second phase of the project.

There are two reasons for this. First, the capital cost of the Enron project was and is higher than it should have been. This is why even if the DPC plant were to operate at 90 per cent capacity (thereby reducing the burden of the fixed or capacity charge) the power it will generate will be more expensive than that produced by a comparable new power plant in the country. Second, while LNG-based power should be less expensive than one generated with naphtha, this may not be so for DPC. Prayas, a Pune-based group of energy analysts, has argued that the nature of the DPC's contract for LNG supply is such that unless the MSEB lifts more than 80 per cent of the power that the plant is capable of generating, the costs of each unit of electricity produced will have to include the LNG not used for power generation. (Interestingly, in a careful analysis a member of Prayas has recently demonstrated that because of the way the LNG market functions, electricity with LNG as fuel is likely to be more expensive than that produced by either domestic or even imported coal. This calls into question the entire thrust of the Government's fuel policy for private producers which has favoured LNG.) Given all these factors it is a sheer obfuscation of facts to argue that there would have been no problem and there will be none if only the MSEB was not saddled by theft, technical losses and farm subsidies. The latter are indeed problems that have to be addressed, but even if they are DPC would still drag MSEB down. The electricity sector in Maharashtra and the rest of the country is in desperate need of an overhaul but that task is completely different from dealing with the affliction of expensive DPC power.

In a peculiar twist, Mr. Jeffrey K. Shilling, now the Chief Executive Officer of the parent company Enron, recently said in the American press: ``We shouldn't be in there (India) building $ 2 billion power plants... Our cost of capital is too expensive for that''. The high capital costs were there for all to see and to be ignored between 1993 and 1996 by the galaxy of Indian political leaders, senior officials and economists at the Centre and in Maharashtra, none of whom has been made accountable for their mistakes.

There are now only three options. The first is nationalisation. But that is now a forbidden concept. (The U.S. Ambassador to India, Mr. Richard Celeste, gave as thinly-veiled a warning as is diplomatically possible when he said in Mumbai last month that Dabhol's ``predicament... feeds the concerns that India remains a less than reliable destination''.) The Central and State Governments could alternatively consider buying out Enron, which the latter may quite prefer given its current focus in the U.S. on energy trade and not production. However, the catch will be the price and Enron, as the country has learnt to its bitter cost, can be more than a hard bargainer. The second option is to renegotiate the terms of the contract. Since ``renegotiation'' is missing even from the terms of reference of the Maharashtra committee, the State Government (and the Centre) are obviously worried about how Enron and DPC would react to even the possibility of renegotiations. And Enron has tied up all the loose ends so repudiation of the contract will have expensive consequences once the case is taken for international arbitration as laid down in the contract. Sitting in London or Geneva, international arbitrators, as is their wont, are more likely to see the issue in narrow commercial terms than in terms of public policy.

But as energy analysts have pointed out, if the Government can change the very basis of the telecom licences why not that of Dabhol? Of course, the cellular operators wanted a change and in the case of Dabhol it is the country not DPC which wants one. The third option, which unfortunately seems most likely, is for DPC to sell its power outside Maharashtra: to other States, to the public sector utilities and to any entity which may want the most expensive electricity to be produced in the country. Since the National Thermal Power Corporation has (now) the resources to pay DPC it may be compelled to evacuate a part or all of the power that Dabhol produces. This may spare Maharashtra future pain. But at what cost? The burden will only be shifted from the MSEB to the NTPC.

``Banana Republic'' is a term of disdain (wrongly) used for countries which do not have working institutions and can be pushed aside at will. It has its roots in the 1950s when U.S. fruit companies were able to overthrow Governments in Central American countries whenever they wanted to because those economies were dependent on plantations owned by these multinationals. That has not yet happened in India. But difficult as it is to digest how else can one describe a situation where the Centre and Maharashtra act as if there is little that they can do about being potentially indebted for thousands of crores to a single foreign company over the next 20 years?

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