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The Enron crisis reaches a flash point

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.

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SUCHETA DALAL'S PREVIOUS COLUMNS ON ENRON
Enron: Does the government have the guts?
The Enron fiasco

Sucheta Dalal

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