February 11, 2000

Enron: The battle begins now

The review committee may find it worthwhile to examine the legal aspects to the deal before tackling the commercial terms of the PPA

The Maharashtra government has finally set up a review committee to go into the contract with Dabhol Power Company (DPC); but its mandate, far from being ‘sweeping’ is restricted to - finding a way out of the present payment crisis, reviewing the Power Purchase Agreement (PPA) or finding a way to foist the entire mess on to the central government. The review committee’s truncated mandate and the two-month wrangling over its composition indicates the pressure under which it will have to work. The committee is now a combination of independent and upright members, whose nomination was strongly opposed by the Sharad Pawar faction and opportunists who were supported by it.

If that were that not bad enough, there is also pressure to try and push the expensive project on to the Power Trading Corporation so that the high tariffs charged by Enron would be distributed across the country. This move would have plenty of political support. After all, Union Power Minister Suresh Prabhu, represents the Shiv Sena, which cancelled the project alleging corruption and re-negotiated it with thrice the capacity. Finally, there is the BJP led government which had controversially re-ratified the counter-guarantee during the dying moments of its 13-day reign, and after it was certain that it would lose the confidence vote. The extent of political support to Enron is obvious from the fact that even the Swadeshi lobby has maintained a stunning silence about this multinational and its shenanigans. The vested interests are heavily stacked in favour of Enron. Moreover, the MNC has a clear game plan for using this support to its advantage, while the State government has none - all it can do is bleat about how the Enron problem will affect foreign investment in India.

Enron’s game plan is smart and subtle. Having got the departing US Ambassador Richard Celeste to indulge in some sabre rattling on its behalf, it has now turned on the heat by invoking the sovereign guarantee and pushing the problem on to the Centre. Enron could easily invoke the Rs 135 crore Letter of Credit from the Maharshtra State Electricity Board (MSEB), but that would only have postponed the problem instead of allowing its supporters in Delhi to bail it out. Secondly, the invocation of the sovereign guarantee intensified the pressure on government by triggering off a two-notch downgrade by credit rating agencies and damaging the State’s ability to borrow funds through other government undertakings.

Thirdly, Enron has rid itself of every person associated with the initial project and its re-negotiation. Instead of the high profile and much photographed Rebecca Mark, there are some faceless, low profile executives speaking for the company. Sanjay Bhatnagar, who headed the Indian operations, has been strategically shunted out and even its public relations staff has changed. This again is a typical multinational maneouver to take the pressure off itself. The team which will deal with the review thus starts afresh with no embarrassing reminders about claims and promises made in the past. Finally, it has declared that there will be no one-way concessions. Any re-negotiation of the Power Purchase Agreement (PPA) will have to be accompanied by reforms at the bankrupt MSEB, say DPC officials.

If the payment crisis indeed forces the Maharshtra government to press ahead with MSEB reforms, it may be the single positive by-product of a bad deal. While Enron is working to an obvious plan, the Maharshtra Chief Minister Vilasrao Deshmukh has been raising the age-old bogey about how the controversy would affect foreign investment. That is a load of hogwash. The situation in 2001 is a far cry from 1994 when Enron managed to get the world to heap opprobrium on India for cancelling the project. Today, multinational companies in India are operating in every area of business from cosmetics to computer hardware, to liquor, clothes, consumer durables, food and bottled water. They have, without exception, gained a smooth entry to the large Indian market.

They are competing for their business without gold plated contracts and guarantees, face no persecution, and are loved by consumers. If Enron remained the most controversial MNC in India for the last 8 years, it is because there is substantial basis for the charges made against it. The review committee, may find it worthwhile to examine the legal aspects to the deal before tackling the commercial terms of the Power Purchase Agreement (PPA). Leading legal experts have already opined that the contract violates several statutory provisions of the Electricity Supply Act 1948. Since Enron has invoked a constitutional guarantee, it is important to examine the validity of such a comprehensive guarantee which eliminates all risk inherent to business.

On February 10, 1994, the Government of Maharashtra agreed to irrevocably and unconditionally guarantee payment to DPC and to indemnify it against any loss sustained by it by reason of the invalidity, illegality or unenforceablity of any of the provisions and ancillary agreements under the PPA. The government is constitutionally and statutorily bound to act in accordance with the law and simply cannot indemnify any contractor against all illegality. On September 16, 1994, a tripartite agreement was signed with the Reserve Bank of India which guaranteed payment of Rs 1,500 crore a year by the Union government if the Maharashtra defaulted on its payment obligation. The RBI would simply deduct all amounts and interest payable to Enron from the State government account into which the State share of central revenue is deposited.

If the review committee exposes the absurdity of the multiple guarantees then Enron would be far more likely to negotiate a sensible PPA with Maharashtra. However, Enron supporters seem worried that the review would unearth embarrassing details such as the precise calculation of the capital cost, heat rates, energy cost and the services provided under the fuel management agreement and the Operation & maintenance contracts. All this is in Phase I alone. Phase II is far more untenable and more easily repudiated. Spinning off the regassification plant, calculation of rupee-dollar parity and the division of rights and responsibilities between Enron, Metgas and MSEB are among the issues which may cause discomfort to the US company. If the review committee fails to force a sensible re-negotiation, there will be nothing to protect the people of Maharashtra from facing a steep increase in tariffs. It is up to them to ensure that political lobbyists do not vitiate the situation and prevent the committee from doing its job.
Author’s email: suchetadalal@yahoo.com

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The author's e-mail address is: suchetadalal@yahoo.com

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