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Enron Mail |
Ken, Mark, and Greg: a thoughtful piece regarding Dabhol by The Hindu. Jim
-----Original Message----- From: Leach, Doug Sent: Tuesday, October 16, 2001 9:21 AM To: Lundstrom, Bruce; Walls Jr., Rob; Derrick Jr., James Subject: FW: Article sent from The Hindu fyi -----Original Message----- From: thehindu@admin.hinduonnet.com@ENRON Sent: Tuesday, October 16, 2001 8:43 AM To: undisclosed-recipients:;@ENRON Subject: Article sent from The Hindu An interesting article. Could it happen? ============================================================= This article is emailed to you by tushar s. dhruv ( tushar.dhruv@enron.com ) ============================================================= Source: The Hindu (http://www.hinduonnet.com) Dabhol and the do nothing Government By Prem Shankar Jha Ever since the Vajpayee's Government came to power more than two and a half years ago, the economy has been sliding relentlessly into the deepest recession it has ever known. In the nine months since December industrial growth has averaged 1.7 per cent. The decade when it averaged 9 per cent and the months, only five years ago, when it touched 16.2 per cent, are now but a distant memory. Consumer demand was utterly flat before the September 11 terrorist strikes in the U.S. It has now shrunk dramatically - vehicle sales dropped by 20 percent in September and colour TV sets registered a growth of a measly 3 to 4 per cent. With no demand to power it, inflation, measured by the consumer price index, has fallen almost to zero. The share market is dead and there is no fresh investment. Employment in the organised sector is shrinking in absolute terms for the first time in human memory. In the past three years two million new job seekers have tried to find a place, however humble, in the organised sector of the economy but been turned away. By 2004, the number will have risen by another three million. But Mr. Yashwant Sinha is confident that a good monsoon will revive demand and by itself solve all of the country's problems. But one recent event highlights the government's paralysis more sharply than any ream of statisitcs can ever do. This is its failure to react to the defeat in a London Consumer court of the Maharashtra State Electricity Boards's attempt to foil Enron's bid to take it before an international arbitration court by claiming that a case was pending before an Indian court challenging the arbitration clause in the power purchase agreement. The London Court correctly maintained that just as a government's international obligations as defined by the Treaty or the agreement supercede its obligations under domestic law, proceedings in an international court must take precedence over those in a domestic court. The way has, therefore, been cleared for India to face the humiliation of being dragged before an international tribunal for a breach of it contractual obligations. Given the fearsome proficiency of Enron's lawyers, both those whom they retain and those who drafted the power purchase agreement, it is virtually a foregone conclusion that the MSEB will lose the case. If that happens, then by a conservative estimate, India will have to pay around $5 billion, in costs and damages. In addition it will have to spend a little more to complete phase II of the project. Thus in the end the project is likely to cost not $3 billion but more like $5.2 to 5.4 billion. For much of the year or more that this demeaning dispute has dragged on, the Centre played ostrich and pretended that this was simply a dispute between a State Government and a private company, and it had no say in the matter. That pretext in any case wore thin when New Delhi refused to honour its counter- guarantee after the MSEB stopped paying its monthly dues. But today it has been exposed for the hollow sham it was because neither the MSEB nor the Maharashtra Government is even capable, let alone willing, to pay such an enormous penalty. So the bill will, inevitably land at the Centre's door. And that means the taxpayer's door. The Centre will have no option but to pay. But having done so, will it then gift the project to the Maharashtra government? The answer, obviously, is no. What it will be forced to do is transfer it to the National Thermal Power Corporation to complete and operate. But since no one can possibly run a $5 billion power plant generating 2,100 MW of power profitably, the NTPC too will insist on the capital value of the project being substantially written down first. Judging from the offers that the Tata Electric Company and the Bombay Suburban Electricity Supply Company (BSES) were making to Enron, the written down value will not exceed $2 billion. Thus, whichever way we look at it, the country will end by paying for a Dabhol-size power plant ($3 billion) without getting a single watt of electricity or for that matter anything else) in return. None of the above criticism is intended to deny that Enron probably did gold plate the Dabhol project once the Narasimha Rao government agreed to price its power on a cost-plus basis. Nor is it intended to mitigate the criticism of the Rao government that had it only brought the Maharashtra government and more particularly the MSEB into the negotiations from the beginning the latter's inability under law to pay backup charges at more than twice the rate being demanded by public sector power plants would have been exposed long ago. But the mistakes of the past cannot in any circumstances justify even greater mistakes in the future. For better or for worse, the Enron deal was struck, and it was struck not once but twice. As a serious, responsible government that knows the importance of honouring one's word in a world where contract is king, the Vajpayee Government must honour the country's contractual obligations. This does not in any way preclude its trying to alter its terms by negotiation to avoid pitfalls that it did not see, but by definition all future changes must be by mutual consent. The changes that Enron will accept and will make Dabhol's power affordable, are known to all. As the 1995 Renegotiating Committee and the Godbole Committee recommended, the Government should buy the $800 million LNG regasification plant and turn it into a separate company that can supply gas to all the current and future users on the west coast. In fact, it could go one better and bring in a foreign strategic partner to invest in and manage the plant. This is entirely feasible because its installed capacity is more than twice what Dabhol is likely to need. This will bring down the capital cost, upon which backup charges and cost per unit of power will be calculated, to $2.2 billion. Second, the Central Government should buy 30 per cent of the equity in Dabhol from the promoters. This was negotiated with the 1995 committee but the MSEB could not raise the funds to do so. This will bring down the cost that has to be serviced in foreign exchange to $1.9 billion and the debt portion whose servicing represents a fixed charge in foreign exchange to $1.2 billion. The Centre could also follow up a suggestion made by the chairman of BSES to convert a part of the foreign exchange into rupee debt. That will reduce further the vulnerability of electricity tariffs to changes in the exchange rate. With the price of oil having fallen (for India) to around $20 a barrel, these changes will bring down the cost of Dabhol's power at 90 per cent capacity utilisation own to below Rs. 2.40 a unit. This will make it entirely viable, especially if Maharashtra and the neighbouring states agree to make a marginal increase in the average power tariff or are able to bring down power theft and reduce subsidies to the pseudo-rural sector. The right course for the centre even at this late stage will be to take over the project from the MSEB, renegotiate it with Enron, or if Enron wants to opt out, then buy the project from it at cost and make the above structural changes on its own before handing it over to the NTPC. Getting dragged to court will neither solve the problem of paying for Dabhol's power nor answer the more basic question - how can any electricity grid add new power plants to itself without raising the average tariff it charges for electricity. Copyrights: 1995 - 2001 The Hindu Republication or redissemination of the contents of this screen are expressly prohibited without the consent of The Hindu
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