Columns: Kautilya

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India Today, June 7, 1999
June 7, 1999

KAUTILYA
So Enroff is On

After years of heat Enron will now generate light.

By Jairam Ramesh

Finally, India's most written about foreign investment has taken off. On May 25, the first phase of the Enron power project at Dabhol in the Konkan region of Maharashtra was "dedicated" to the nation. The project has had a controversial and tortuous history. Conceived in June-July 1992, work on the ground commenced in March 1995. But in August 1995, the project was cancelled by the newly elected Shiv Sena-BJP Government in Mumbai, which during the election campaign had vowed to drown the project in the Arabian Sea. After protracted renegotiations, the project recommenced in January 1997.

Personally, Kautilya was never excited by Enron and disagreed with the approach to foreign investment in power formulated and executed by then prime minister P.V. Narasimha Rao's advisers like N.K.P. Salve, A.N. Varma and S. Rajagopal, who exercised greater influence in the matter of power policy than Manmohan Singh himself. Kautilya left the Rao government in December 1994 and went public on his arguments against Enron. Apart from Enron's abrasive style and breathtaking arrogance, Kautilya's reservations were fivefold.

India's power policy must be based on coal and hydel resources and not on petroleum fuels like naphtha.

Enron was really into natural gas transportation, whose installed power capacity was just 2 per cent of India's.

Enron had negotiated a sweetheart deal for itself; the state has to fork out Rs 140 crore a month, which is roughly 5 per cent of its expenditure.

Enron was bringing in no great technological or managerial capability that companies like NTPC, BSES and Tata Electric could not mobilise if given the freedom.

The deep-rooted structural problems of our power industry would not get addressed if we had quick-fix solutions in the form of Enron.

Ironically, these arguments against the project were picked up by L.K. Advani to justify the ending of the contract. Kautilya, who had left the government by then, had also applauded the decision to cancel the project as an opportunity to carry out "real" reforms -- the financial and organisational restructuring of the state electricity boards, minimum tariffs in agriculture and an end to the supply of free power, the privatisation of distribution, the building of regional grids and so on.

But all this is history. The Enron episode became a long learning experience, a model of both what to do and more crucially of what not to do. Now it is Kautilya's turn to applaud Enron's sheer tenacity and perseverance. It successfully fought 26 cases in various high courts and in the Supreme Court in a span of four years. It has been lobbying aggressively in the US even while facing hurdles and criticism here. Kautilya himself was present in Houston in October 1996, when both foreign and NRI investors were bad-mouthing India only to have the Enron CEO get up and put up a stout and eloquent defence of India.

For the first phase 740 mw Dabhol project, whose cost is slightly over a billion dollars, Enron and its partners, GE and Bechtel, have brought in about $280 million of equity. Enron's share is 80 per cent. When taken together with the approximately $250 million that it has brought in over the past four years for its oil and gas joint ventures with Reliance and ONGC, the Enron Group has emerged as the single largest foreign investor in the country.

The second phase of the project, which will add 1,440 mw to the grid, will cost about $1.9 billion. It will come on stream in about 24 months from now. Enron and its partners will bring in over $450 million of equity.

But this has generated fears that Enron will raise money in India from Indian financial institutions (FIs) whereas the whole objective of having Enron is to get it to bring money from outside. Out of the $1.4 billion loan component, Indian FIs are providing rupee loans equivalent to about $333 million, which is a little over 20 per cent of the total loan component.

This apart, Enron has taken guarantees from Indian FIs like ICICI for its overseas borrowings. This could be legitimately criticised but we should not forget the poor ratings for India in global markets in 1998, what with the Pokhran II sanctions, Yashwant Sinha's lacklustre first budget and an indifferently performing economy. And it is not as if Indian companies were denied funding. It just so happened that Enron was a lower credit risk than many Indian companies who were (ad)venturing into power without the resources and the single-minded sense of purpose as Enron.

What next? Enron's next project will in all probability be a 513 mw power plant in Kerala, exposing the hypocrisy of the Left parties. Other investments in Tamil Nadu and Karnataka are also on the anvil. Given the difficulties Indian entrepreneurs have got themselves into with profligate and unfocused expansion, it makes sense for Enron (and for the country) to invest in existing projects that are stuck for want of funds. This will add to generating capacity quickly.

One good example of this is Essar's power plant in Hazira. Indian FIs want Essar to sell its stake in that plant as a pre-condition for bailing out the financially strapped group. Given Enron's long-term plans for developing the liquefied natural gas market along the western and southern coast, it would make perfect sense for Essar to bring in Enron. More such investments could follow.

The author is secretary of the AICC's Economic Affairs Department.
The views expressed here are his own.

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