Sucheta Dalal :Moving on to an Indian battle for DPC
Sucheta Dalal

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Moving on to an Indian battle for DPC  

December 14, 2001

The business community across the world watched in shock and amazement the spectacular flameout of Enron Corporation, one of Wall Street's darling companies. Its shares hurtled from a peak of $90-plus to a low of 27 cents as hidden losses became public and within days it was forced to file for bankruptcy. But many of us in India were not surprised.

Those opposed to Enron have been alleging exactly what the rest of the world discovered in the aftermath of the biggest corporate burnout - lack of transparency, shadowy deals with related companies controlled by senior employees, hustling policy changes through powerful political connections, fudging of accounts and to top it all pugnacious arrogance.

In India, Enron had educated policy makers, academics and journalists into believing that expensive power projects backed by sovereign guarantees were better and simpler than the tougher job of reforming electricity distribution systems, reducing theft, dismantling state monopolies and increasing the operational efficiency of existing power utilities.

Enron's legacy is a modern and much-needed power utility capable of producing over 2,184 MW of power which is unfortunately so expensive that it is lying closed for several months. Its bankruptcy had fuelled the hope that Enron or its creditors would be in a tearing hurry to sell of its Indian operations for a fraction of the $1 billion it had originally demanded (to cover its equity investment) in order to get out of the country.

However, events have turned out to be a lot more complicated. First, the DPC was kept out of Enron's bankruptcy filing in the US and seems hell bent on pursuing its plans to issue its final termination notice on the MSEB.

At the same time, the misinformation campaign which has always marked Enron's entire negotiation since 1994 seems to have begun in right earnest.

Confusing and contradictory news reports emanating from all the parties involved have ensured that nobody really knows what is going on.

On the one hand, DPC is sacking most of its Indian employees and one section of the media has reported that it has barely $8 million in the kitty to fight its legal battles. On the other hand, one newspaper reports that it is optimistic about its chances of extracting as much as Rs 280 billion in damages from India.

The second report coincides with yet another notice from DPC to MSEB challenging the grounds for rescinding its contract.

Meanwhile, the negotiations for taking over Enron's stake in DPC seem headed for bumbledom with many basic issues remaining unclear and confused.

On the one hand we have the Indian financial institutions who are trapped with a massive Rs 62-billion exposure to DPC, entirely due to their own gullibility and poor appraisal skills. This exposure includes hefty guarantees extended to DPC's foreign lenders which, if classified as a bad loan, would badly damage the credit rating and borrowing capability of the FIs.

Although negotiating from an extremely weak position, the FIs will have some say in the negotiation, because most of the borrowing is backed by DPC's assets as well as a large chunk of equity.

Then there are the Indian bidders for DPC (the Tatas, the Reliance-backed BSES, and the Videocon group) who not only expect to acquire the equity at a huge discount but are also demanding distribution rights for specified geographical areas from the MSEB.

That is not all. According to one news report, the central government, which had so far stayed aloof from the DPC imbroglio, also wants a say.

According to a pink daily, the government plans to invite 'open bids' for Enron's stake and would also encourage the National Thermal Power Corporation to bid. This can only happen if the government makes DPC a central project and buys out MSEB's 15 per cent investment and arranges to rework the power purchase agreement. Otherwise, it has no business calling for any bids.

Ironically, neither DPC's lenders nor the potential bidders have thought it fit to talk to MSEB, which is a signatory to the DPC deal and its only buyer of power. Top level sources at MSEB point out that in the entire babble over taking over DPC, nobody has focussed on the all-important task of first making it viable.

Clearly, a new PPA will have to be negotiated; but the potential buyers seem to assume that they will simply purchase Enron's equity and takeover the operations on the same terms. It would be recalled that MSEB scrapped the DPC agreement because it was unable to ramp up its power generation from zero to peak capacity within the contracted three-hour period.

The failure to fulfil this requirement had a hefty penalty clause which was invoked by the MSEB to cancel the contract.

Even if the buyers hope that MSEB can be arm-twisted into dropping all litigation, viability remains a key issue. MSEB is bound by the Maharashtra State Electricity Regulatory Commission's ruling which forces it to prioritise purchase from the lowest cost power producers and so long as DPC remains the most expensive producer it will be last in the queue.

Also, nobody is discussing the Madhav Godbole committee recommendations, which have called for hefty sacrifices on the part of all parties to the deal - DPC, MSEB, the lenders and the government. Only then will DPC be able to produce power at an affordable Rs 3, or thereabouts, per unit.

If the new buyer expects to inherit Enron's gold-placed project, complete with sovereign guarantee, extortionate operation & maintenance contracts, and excess costs built in for other infrastructure such as the jetty or the existing fuel supply terms which were tailor made for Enron, it are wrong.

Unless they work out the basics of a new PPA with MSEB or convert it into a central project, their bids for Enron's equity seem rather premature.

Otherwise, MSEB's objection to DPC's expensive power will remain and the real battle will begin after Enron is out of the picture. The objections of anti-Enron NGOs to the high cost of power will also remain intact -- their agitation will merely target the new owners of DPC instead of Enron.

My suspicion is that the confusion and obfuscation over the sale of DPC and the confusing signals from all parties are probably deliberate. Our policy makers and bureaucrats thrive in confusion because it is ideal for covert deal making.

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-- Sucheta Dalal