Choice Before the Nation: Subsidise Enron or Nationalise Enron

As critics of Enron, we owe an apology to the nation for not bringing out the true nature of the Enron contract. Instead of Dhabol power costing Rs 4, and being a bad deal as we claimed, it is costing Maharashtra State Electricity Board (MSEB) more than Rs 7, and is a singular disaster for both MSEB and the Maharashtra government. The above figures must be seen in the context of average cost of power from MSEB’s own generation that is in the range of Rs 2, and the cost of purchased power from NTPC, Bombay Subarban, Tata Electric, etc., being in the range of Rs 1.80 to Rs 2.40. For the first phase of Enron alone, MSEB is suffering a loss of more than Rs 700 crore per year. With this amount, MSEB could have built an equivalent Dhabol plant (first stage of 748 MW) in three years.

Once the second stage of Enron comes on-stream, probably by end of 2001, MSEB will have to pay Enron more than Rs 600 crore per month against a current revenue base of a little more than Rs 900 crore. Not only will MSEB collapse due to this huge outflow, so will the Maharashtra government. The only way that they can pay for Enron power is by handing over to Enron MSEB’s assets in bits and pieces. This is what Uttar Pradesh State Electricity Board (UPSEB) is doing with its assets to settle NTPC’s outstanding dues. In other words, to pay for power from a 2,000 MW power station, Maharashtra will have to hand over its 10,000 MW generating and its other assets in the next five years.


What was wrong with the Enron contract? Was it just a case of bad contract by stupid governments of Maharashtra and the central governments? Successive governments in both the state and the centre have pushed the Enron project and have given guarantees and counter guarantees. The 13-day government of Vajpayee in its miniscule tenure in 1996 did only one thing of note: it gave Enron the counter guarantee without which it could not have reached a financial closure for the project. The Pawar-Salve power purchase agreements (PPA) or the Thakeray-Munde PPA both have identical features that have brought the Maharashtra government to its current pass. If we overlook either stupidity or chicanery as the causes for the current situation, there were three major mistakes in the Enron contract. First was to peg the cost of power against the dollar. If Coca Cola or Pepsi can sell colas in India in rupees, so can Enron. The second was to accept the hydrocarbon route –naphtha and Liquified Natural Gas (LNG) as the fuels for Dhabol and link our energy prices to the volatile international prices of oil. The third was to guarantee minimum off-take for paying fixed costs. These three factors taken together have ensured that Enron power today is three times MSEB’s average cost of power generation and more than twice of any other power producer in the state. Worse, it is likely to rise every year as the rupee continues to depreciate against the dollar. In other words, even if Maharashtra government can survive the steep hike in tariff required to pay Enron this year, their situation will worsen continuously as Enron’s price rises every


Maharashtra government’s plea that the centre should take over a part of Enron’s liabilities is a plea that the entire country including other states should now bail out the Maharashtra government. If the centre lifts this power, it will have to sell it to other states at a subsidised rate. Enron’s argument that it should be allowed to trade power with other states is a spurious one, as no state will buy Enron power at these prices. What Enron and the Maharashtra government is really asking is that instead of subsidising power for agriculture, we should now subsidise Enron.

Unlike when the Enron deal was originally signed, the figures for Enron power are no longer in question. At that time, the defenders of Enron claimed a tariff of Rs 2.40, which certainly did not seem as frightening as the current figure of Rs7.20 given by the power minister, Padamsinh Patil. The first stage of Enron deal – of 748 MW — was signed under the aegis of Sharad Pawar, the then chief minister of Maharshtra and N K P Salve, the union minister for Power. The BJP and Shiv Sena joined in the anti-Enron movement that erupted in Maharashtra then and even cancelled their contract after coming to power. However, after high level lobbying by Enron including crucial meetings with the Bal Thakery, the remote controller of Shiv Sena, and Gopinath Munde, the BJP deputy chief minister, not only was the first stage restored but Enron was rewarded by an even bigger second stage. The total project including the second stage is now 2,192 MW. Though the Shiv Sena-BJP government claimed that the cost per unit had been lowered to Rs 1.86, the reality was that the cost reduction was “achieved” by taking a lower value of the dollar against the rupee prevailing then and various other fudges. It is unfortunate that this exercise in window dressing was helped in no small measure by associating respected experts such as Kirit Parikh, Tata, Rao, etc, in an expert review committee.

When the second stage comes on-stream, the cost of electricity will drop somewhat as cheaper fuel than naphtha that is being currently used. The catch here is that LNG contracts are take or pay contracts, that is irrespective of whether you lift LNG or not, you still have to pay for it.Currently, as the cost of Enron power is very high, MSEB has been paying fixed costs to Enron and not drawing more than 40 per cent of its power as the variable cost of Enron power was higher than the cost of power from other sources including fixed costs. It is cheaper for MSEB to pay fixed costs to Enron and not draw full power from it. However, this option will not be open in the second stage. MSEB will have to pay both fixed and fuel charges up to 82 per cent of Enron’s capacity. In the first year alone, Enron’s power bill will eat up 60 per cent MSEB’s revenue if the current tariff levels are maintained. If MSEB has to survive and pay Enron, then the tariffs have to double or treble for domestic and agricultural consumers, creating an explosive political situation.


The Enron issue shows clearly the difference between textbook capitalism and the real thing. In economic texts, the capitalists take “risks” and earn profits as compensation for their risk taking. In the real world, they look for guaranteed profits and take no risks whatever. In the Enron case, the foreign exchange risk, the fuel price increase risk was assumed by MSEB. Even the off-take was guaranteed. If Enron was not taking any risk, why were they being paid prices that included internal rate of return of more than 28 per cent? Enron received sovereign guarantees from the Government of India, which made it possible for them to raise finances from the market. If the government had raised the same loans itself, the cost of the project would have been much lower, the domestic industry would have received orders for equipment and the subsequent tariffs much lower. This was the real alternative that the government had before it. If private capital wants to come in to the power sector, it has to take the normal risks of the market. Instead, the government decided to take all the risks and “award” Enron all the profits. It is this logic of carpet bagging capitalism that is driving MSEB and the Maharashtra government to bankruptcy.


The real issue that needs to be addressed is what can the people of Maharashtra now do after the earlier Congress and the Shiv Sena-BJP government have delivered them tied hand and foot to Enron? Whatever possibilities that existed in terms of modifying the contract seems to have been killed after the second stage was renegotiated by the Shiv Sena-BJP government. The only recourse that exists today is for nationalising Enron. This will go against the grain of the current ideology of both the government and the major oppsition party, the Congress, who have connived to foist this ruinous project on the people of Maharashtra . The economic orthodoxy of the day will argue that a contract is sacrosanct and cannot be aborted. For them, I will like to point out the telecom imbroglio. When the telecom companies argued that their contracts were unworkable, the government changed the terms of the contract to bail them out. If the contracts were not sacrosanct then, how is it that they are sacrosanct now when the people of Maharashtra have to be bailed out?