Friends of Enron: A Powerful Lobby

hammer1.gif (1140 bytes) People’s Democracy

(Weekly Organ of the Communist Party of
India (Marxist)


No. 27

July 08, 2001

Friends of Enron:
A Powerful Lobby

Prabir Purkayastha

THE Enron case
is taking a curious turn indeed. From the US Ambassador to Bal Thakeray, from Dick Cheney
to Sonia Gandhi, all are now talking of the need to solve the Dabhol-Enron issue amicably.
We are told that this is to ensure Foreign Direct Investments (FDIs) for India, which
otherwise might dry up. The question that needs to be asked is how much foreign exchange
did Enron actually bring into India?


The conventional
wisdom is that Dabhol represents the largest FDI in the country till date and therefore
how we deal with this kindly investor, who has brought billions into India, is important
for others. At the same time, we are also told that Indian Financial Institutions (FIs)
have lent 1.3 billion dollars to the Dabhol project. In addition, they have guaranteed
another 600 million dollars to other foreign lenders. In other words, if Dabhol goes
bankrupt, the exposure of the Indian financial institutions is to the tune of 1.9 billion
dollars or Rs 8,900 crore at current exchange rate!

Some preliminary
observations are in order here. A project of this size – of about 2200 MW –
would cost about Rs 6,600 crore at Rs 3 crore per MW. This is not a figure pulled out of
thin air. This was the cost – Rs 3.18 crore per MW – that NTPC incurred while
building the Kayamkulam project. In other words, the Indian financial institutions have
lent more money to the project than what would have been spent if the project had been
done by an Indian agency such as NTPC or the Maharashtra State Electricity Board (MSEB).
If Enron has brought in foreign exchange, it is merely the recycled project funds taken as
loan from Indian and other financial institutions.

For those
unfamiliar with the operations of capitalism, there is the fond belief that capitalists
bring in capital and therefore should be treated with kid gloves, lest they become unhappy
and leave with their moneybags. The reality, as Enron has brought out, is quite otherwise.
The capitalist starts with an inflated cost of a project, goes to financial institutions
which have hard-earned savings of the people and get loans for 70 to 80 per cent of the
project cost. Since this is well above the actual cost of the project, the capitalist can
bring back a part of these loan amounts — through over-invoicing — as their equity. Not
only is the equity thus generated gratis, they even make a tidy sum of profit even before
the project has produced anything.

The Independent
Power projects (IPP) are even one better. Normally, the banks or FIs ask for various
guarantees for ensuring repayment. This could be land or other property that needs to be
mortgaged. For power projects however, the loans are given as “non-recourse”
lending. In such a case, only the project assets are available as security for the loan.
If Enron walks away from the project, the Indian financial institutions have no other
recourse except theses project assets. Enron has not hocked a cent of their assets to the
Indian banks and cannot be touched if the project fails.

If the financial
institutions had no security against which they gave loans to Enron, why did they give
loan to Enron at all? By their own admission, the only “due diligence” they did,
was to look at the Power Purchase Agreement (PPA). If the PPA showed that Dabhol would
have a healthy balance sheet and would be able to pay the FIs, they were not interested to
know whether the project cost was justified or it was a viable project. The sovereign
guarantee to Enron on the PPAs was enough for the FIs. The Enron scam now becomes clear.
In the first stage, get a PPA signed using various forms of “education”. Once
you have an educated Salve and a Sharad Pawar (later Bal Thakeray, Munde, Jaswant Singh
and Vajpayee), a PPA is signed. Based on this PPA, loans are raised from Indian and
foreign financial institutions. With loans, Enron then has money, which can be brought
back as its equity share. Only money that Enron had to spend was “dubious development
charges” or “educational fees”. By now, the country has been educated by
the Tehalka tapes what development charges and educational fees really mean. Sounds
remarkably like the operation of East India Company, does it not?

It is not there
was no resistance in the financial institutions. IDBI, one of the major lenders had
objected to the inflated costs of the project. The intervention of Montek Singh Ahluwalia,
the then Secretary, Finance to “overlook” such small irritants is well
documented. Finally, IDBI and other FIs caved in and handed over the bloated project funds
for Enron.


Let us see the
record of the people involved in the sordid set of events of the Dahbol project. First is
the dynamic duo, N K P Salve, the then union power minister and Sharad Pawar, the then
chief minister of Maharashtra. They cleared the first stage of the project consisting of
695 MW. Salve brought out vituperative booklets, calling people opposing the Enron project
all kinds of names. He even toured the United States and gave statements on how Communists
and fellow travellers were opposing foreign investments in the power sector while he stood
for such investments. Now he claims he was against the Dhabol project! Sharad Pawar is
consistent; he was a friend of Enron then and is a friend even now. He has even threatened
to take to streets if the Enron project is cancelled. Thakeray now claims that nobody told
him there was second stage of another 1400 MW, that he supported this project only because
it would do away with power cuts in Maharashtra. Of course a Dabhol project would do away
with all power cuts in Maharastra ; power would become so expensive that very few people
would then be able to afford it. The record of Jaswant Singh and Vajpayee is even
murkier. The counter guarantee was cleared during the lunch break of the Lok Sabha, the
day the 13-day ministry of Vajpayee was set to fall. Without this counter guarantee,
Dabhol would have been hard put to raise the necessary finances and effect a financial
closure (tie up the finances).

Why are Sonia
Gandhi and Dick Cheney discussing Enron? To understand this, we must look at American
politics. George Bush has been the biggest benefactor of the Texas oil and gas companies.
He has done away with various environmental regulations that were forcing the oil
companies not to pollute in Texas. In his reign, Texas became the most polluted state in
the US earning for him the sobriquet “the Toxic Texan”. Amongst all the Texas
companies, Enron has provided George Bush with the heftiest contributions to his election
kitty, even given their corporate jet to fly Bush all over the US and is well known to be
particularly close to the Bush administration. Recently, the Enron chief, Kenneth Lay was
in the news for “interviewing” a future chairman of the Federal Energy
Regulatory Commission. To get Lay’s nod, of course he was expected to tow the Enron
line such as no price caps in California, etc. It is widely accepted that the Bush
administration will go by what Enron wants in the energy sector. It is not surprising that
Dick Cheney therefore thought that this was the most important topic for discussions with
Sonia Gandhi. Jaswant Singh and Vajpayee are already on board on Enron. The Congress,
which has been threatening to rock the boat in Maharashtra – witness Vilasrao
Deshmukh talking about a judicial probe — also needed to be brought to heel. And Sonia
Gandhi’s assurance that Enron issue should be settled amicably brings out clearly
that she has been now brought to heel.


The problem with
Enron is that the issue cannot be settled amicably even if the parties want to do so. The
choices are stark. If the PPA is modified marginally, the state of Maharashtra will sink;
it will not be able to pay even its salaries let alone incur any development expenditure.
If it really wants to drastically alter the terms of the PPA, it has to find ways and
means of scrapping the existing PPA. This leaves little room for an amicable solution.

For those who
have argued that the state needs to get out of the power sector and induct private sector
in through IPPs so that it has funds for the social sector, should now realise the folly
of their position. With one IPP, not only can Maharashtra not pay the subsidies for
agriculture, it cannot pay even its employees, schoolteachers, doctors and nurses.
Privatising infrastructure does not release funds for other sectors; on the contrary it
eats up all the resources of the state. Instead of capital expenditure that the state was
earlier incurring, the state now incurs revenue expenditure in paying for the costly
private power it has to buy. And as Enron shows, the revenue expenditure of just two to
three years can pay for one Enron!

The problem that
the people of Maharashtra have is that the two dominant parties – the Congress and
the BJP — sold the interest of the people down the river. Their game plan is now to get
out of the Enron imbroglio by letting NTPC or the Power Grid split the power bill of Enron
with Maharashtra. The centre is now arm-twisting various states with active help from
the Congress so that these states all pool in to bail Maharashtra out of the Dabhol mess.
If the mess is shared, it will be less noticeable; this is the belief that those arguing
for an “amicable settlement”. What they forget is that not only have they have
received “education” from Enron, so have the people. They have learnt the hard
way what the IPP route and the PPAs actually mean in terms of their electricity bills. It
might have been possible in 1994-95 to argue that Enron power will cost only Rs 2.40 per
unit; today, anybody advancing such arguments will be laughed out completely. It is time
that the rulers learn the old adage that all people cannot be fooled for all times. Enron
cannot be foisted on the people of Maharashtra and other states once again. Enron PPA
needs to be scrapped if Maharashtra is to be saved from financial bankruptcy.

There is no other recourse.

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