The Enron saga gets worse

If you’re one of those who feel there’ll to be a happy ending to the Dabhol saga once the Ambanis or the Tatas (or any of the five others who are bidding) buy Enron’s power plant, you’ve got another think coming. Fairy-tale endings to horror stories like Dabhol, where white knights emerge in the nick of time to slay ugly dragons, happen in only, well, fairy tales.

But before we get to why the Enron saga’s more complicated than those in the power ministry or financial institutions (FIs) think it is, a recap on why it’s vital to resolve the dispute quickly. First, Enron has an iron-clad contract with the Maharashtra government, which is partly counter-guaranteed (up to $300 million) by the Union government — so unless you can prove mala fide, and this hasn’t really been done yet, Enron can take you to the cleaners at the arbitration court. In that sense, Enron going bust was a godsend as it ensured Enron’s decisions got to be taken by its lenders, and so the Indian FIs have been able to push for the sale of Enron’s equity in Dabhol.

Equally important, each day of the plant not working costs the economy around a million dollars — that includes the interest cost on the debt, the penal interest on the overdues of Dabhol’s loans, as well as the re-starting costs when contractors finally agree to begin work again. Since Dabhol completely stopped generating power last May, that’s over $270 million lost already, and perhaps another $60 million more before we can realistically expect a bid from the firms who’ve evinced an interest in buying the plant.

Serious as this is, the real issue’s even worse. Clearly the question is why the Tatas or the Ambanis should buy Dabhol. To sell power from it, correct? But the only way they’ll be able to sell power is if this is reasonably priced. For that, the cost of the project has to be brought down considerably. Part of this will happen once Enron takes a hit on its equity — let’s say its $1 billion equity gets sold for $600 million. But unless the lenders (the Indian financial institutions have lent around Rs 6,000 crore to the project) also agree to take a hit on this — that is, they agree to write off part of their loan — the power cost can never become reasonable.

Problem is that with every political party out to play football, no government will allow the FIs to take a huge hit — so, all the FIs have agreed to do is to just lower the rate of interest and increase the repayment schedule of the loan. According to the calculations made by the FIs, this will bring down the cost of power to around Rs 3.5 per unit if the plant runs on naphtha as at present and by another 50 paise once it moves on to gas. Which means the cost of power will be in the region of Rs 4 to 4.5 per unit when it gets to the consumer — which consumer will pay this price is something quite unclear. All the bidders know this. So it doesn’t seem likely we’ll get high bids — and unless you get high enough bids, Enron won’t want to sell, and will prefer instead to go in for arbitration.

Let’s now assume, purely for the sake of keeping the argument and this column going, that this is taken care of with the FIs agreeing to take a hit on their loan, reducing the cost of power by another one rupee. Question then is, who’s going to buy the Dabhol power from the Ambanis-Tatas? Well, since the law still doesn’t allow firms to sell directly to consumers, it’ll have to be sold to the Maharashtra State Electricity Board which, like all other SEBs in other states, lives on the edge of bankruptcy. So, even if you’re selling power at one rupee less than Enron was, what’s the guarantee the MSEB will be able to pay what it owes you? Don’t forget, MSEB was not able to pay Enron even when it’s plant was a 695 MW one — how will it pay when the plant is a 2,400 MW one, even if the power is a fourth cheaper? It’s because the SEBs are bankrupt, by the way, that there’s been virtually no power project set up by the private sector in a very long time.

So, if the MSEB’s bankrupt, the way out is to ask for a kind of guarantee from either the state government or the Centre, the way Enron did. But with this not forthcoming, you need to think of different ways to compensate the firm that buys Dabhol. One suggestion made, by one of the firms interested in the project, is that the Pune distribution circle be handed over to it — that is, all consumers in the Pune area will buy power only from this company and not from the MSEB. But clearly the government can’t just hand over a distribution circle like that, without competitive bidding for it.

So if the government is serious about getting someone to take Dabhol off its hands, it needs to be a lot more pro-active — this includes getting the FIs to write off part of their loans, and completely freeing up the distribution business, to allow firms to sell power to anyone instead of to just the state electricity boards. Of course the most achievable option, and in the short run which is really all you have, is for the government to buy out Enron first, and then go about making the necessary structural changes. My fear is that, the way things are, Enron will just go on, and on, and on.

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