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It’s the policy, stupid

The worst fears of 1992 have come home to roost. Indeed, much like Gaston Leroux' Phantom of the Opera, Enron makes its appearance on national news every few years. Only this time, fear is reality. For the first time in eight years, the Maharashtra Government has come close to admitting that Enron was perhaps a mistake.

Personally, the sense of déjà vu couldn't be more severe. Eight years ago, I wrote (along with Raghu Nandan Dhar) the first article questioning the rationale behind the policy inviting investment in the power sector. Since the subject was new, the article landed up on my editor Prabhu Chawla's table. For two days we argued back and forth before Prabhu released the piece for publication. Every argument of the piece rings true today.

We had argued that:

• Dollar denominated tariff was an invitation to disaster given the rupee's average depreciation of 11 per cent per annum.
  
• Avoid imported fuel (whether naptha or LNG) as it would impact the tariff both in terms of fuel and exchange rate fluctuations.
  
• Investors and promoters of power projects should bear all the risks and the SEBs should only be concerned with the final tariff.
  
• No conditions about capacity utilisation should be accepted, as free market principles should determine investment.
  
• That counter-guarantees should not be given unless SEBs were reformed, as the burden would have to be borne by the exchequer.

Neither the Sharad Pawar regime in Maharashtra nor the Rao regime in Delhi was convinced of the arguments. Neither were the courts that handled 16 PILs. Others who followed with objections to DPC unfortunately focused more on corruption (difficult to prove in the best of times) and environmental impact. Even the Finance Ministry's standing committee failed to read the writing on the wall.

When the BJP-SS government pulled out the plug in 1995, it seemed to be a good opportunity to correct the course of the project. I remember a discussion with Pramod Mahajan, the architect of the coalition government, on the terms for renegotiating the project. I simply repeated what we had been writing for three years—dollar denominated tariff, capacity charges, fuel linkage to tariff etc. I also remember suggesting that the Maharashtra government should set a viable range for tariff (pegged around Rs 2.90) and not get into unnecessary details of the project or its financing.

For a while the government seemed to comprehend the way out. But Rebecca Mark tripped all and sundry by connecting directly with Bal Thackeray. The rest—the review committee, the clearing of the second phase and rest of the bla—is history. Today, as MSEB (once the only profitable SEB and now in the red) is forced to pay upwards of Rs 7 per kwhr, consumers and some policymakers seem to have woken up to the truth. Tragically though, the perception is that it is Enron that is the villain. Sure, Enron is the villain but only to the extent that it used the system. The truth is that Enron, rather the Dhabol Power Company, now symbolises everything that is wrong with the way reforms were handled by M/s Rao & Manmohan.

To start with, reforms in the power sector began at the wrong end. With over Rs 12,000 crore recoverable the primary task should have been to rationalise tariff and recover from those not paying. While India has an installed capacity of around 1 lakh MW, only 60,000 MW is generated (Avg. PLF being 62 per cent). With 45 per cent of generated power evaporating (in theft and transmission) cutting down transmission and distribution losses should have been the priority. Thirty per cent of the power generated is supplied free to the agricultural sector and recovering at least the cost should have been the priority.

However, all that would necessarily mean biting the bullet. So government after government—not just at the Centre but at state levels too—found inviting foreign investment to set up new power plants was much easier. In a sense, the fact that other fast-track projects have got stuck in the rut is a sort of blessing in disguise. The Enron saga is the beginning of what will be a long and arduous (remember the power shutdown in Uttar Pradesh some months ago?) battle that politicians and policymakers will have to fight. And the fight will have to be led by Maharashtra. It will have to get its SEB back on its feet. To that end floating rumours about asking Ms Mark (who has left Enron) to negotiate for Maharashtra is a pointless exercise. The Deshmukh regime will have to deal with the devil in the Enron deal.

The Maharashtra Government once crowed about bagging the single largest foreign direct investment. It also bragged about hosting the first private power producer in the country. It has the opportunity to be the first—once again. As per the agreement, MSEB is not obliged to buy any power from DPC as long as it pays the capacity charges. MSEB should tell DPC that it cannot afford and doesn't need Enron power. It should just pay the capacity charges of Rs 85 crore per month over the next 12 months till such time Enron comes back to the table. Then it should do what it could not and did not in 1995.

Maharashtra can yet show the way.

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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