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Wednesday, Oct 05, 2022
Outlook.com
Outlook.com
Enron

The Montek Connection

How Montek Singh Ahluwalia, as Finance Secretary, worked to bypass the financial examination of the Enron project by the Central Electricity Authority, ignoring even the World Bank's financially prudent advice on the project.

The Montek Connection
The Montek Connection
outlookindia.com
-0001-11-30T00:00:00+05:53

The character of the WB/IMF in terms of who controls them and the financial interests that they push has been laid bare by Professor Joseph Stiglitz in his book "Globalisation and its discontents". And one cannot have better credentials than Stiglitz to comment on such matters. A Nobel Laureate in Economics, Stiglitz was earlier chairman of President Clinton’s council of economic advisors and then the Chief Economist of the World Bank. Stiglitz points out that,

"underlying the problems of the IMF and other international economic institutions is the problem of governance: who decides what they do. The institutions are dominated not just by the wealthiest industrial countries but by commercial and financial interests in those countries and the policies of the institutions naturally reflect this."

Stiglitz goes on to add:

"the IMF’s behaviour should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests. As we have noted before, many of its key personnel came from the financial community, and many of its key personnel, having served these interests well, left to well paying jobs in the financial community."

As the Revenue Secretary and then Finance Secretary through most of the nineties, it is Ahluwalia who can be credited with having spearheaded the neoliberal economic policies in India, exactly according to the prescriptions of the WB/IMF. But as we will see, his enthusiasm for privatization went beyond the most basic financial prudence that even the World Bank observed.

Thus when Ahluwalia sought World Bank funding for the privatised Enron power project, the World Bank, despite being a strong votary of privatization of the power sector, found it impossible to support the project. The World Bank found the project to be too large to be run as a baseload plant and was very doubtful of the absorbtion of 2000 MW of power during the off peak hours. It also did not like the idea of using imported LNG as a fuel (in which Enron was particularly interested, being mainly a gas trader). It concluded that this was definitely not the least cost option for Maharashtra. Enron’s cavalier response to the World Bank report was expressed by their Vice President, Joseph Sutton, who wrote to the Chairman MSEB,

"I feel that the World Bank opinion can be changed." Responding to the recent media criticism of the project, he added, "We will engage a PR firm during the next trip and hopefully manage the media from here on". And that is precisely what Enron proceeded to do. But the media was not the only institution that they managed. A senior Enron official later told the Congress that they had spent 20 Millon dollar (Rs. 70 Crores), in educating Indians, prompting many to wonder which Indian officials had been educated at Enron’s school of business.

Things thereafter proceeded briskly for Enron despite the severe WB report. They received clearance after clearance, but were frustrated by the Central Electricity Authority, which had the statutory duty under the Electricity Supply Act to evaluate the project from the technical and financial angles. They were finding the capital cost of the project much too high (Rs. 4.49 Crores/MW as opposed to between Rs. 1.81 Crores and Rs. 1.91 Crores/MW which they considered reasonable for a Gas Turbine Combined Cycle project). 

They also found that even if one admitted such inflated capital costs, Enron’s return on equity worked out to be 26% in the fifth year, going upto 52% in the 15th year, as opposed to a Maximum of 16% allowable under the Indian Law. They also estimated that MSEB would have back down 408 MW of its own generating capacity which cost them 50 to 80 paisa a unit to accommodate 695 MW of Enron’s power (of Phase 1) @Rs. 3.47 a unit. While Enron’s response to the CEA was an arrogant, "Capital costs are irrelevant to the CEA". The response to CEA’s request for a break up of the Capital costs was, "Your request for more detailed project costs of equipment/system/works other than those provided in the capital cost summary cannot be supported and is not deemed necessary". 

Annoyed by the CEA’s intransigence, Enron’s President, Rebecca Mark wrote to the then CM of Maharashtra, Sharad Pawar, 

"The remaining concern seems to reside with Mr. Beg, Member-Planning for Thermal projects (CEA). He continues to hold up project approval based on demand for power in Maharashtra. No one from the Ministry of Power in Delhi has given direction to Mr. Beg to move forward on this issue."(Letter dt. 26/8/93)

But it seems that the CEA with the statutory responsibility to grant or withhold techno-economic clearance to the project was not willing to take "directions" on the issue. An elaborate plan was then devised to bypass the CEA. Mr. Ahluwalia, the then Finance Secretary appears to have been the linchpin of this plan. On 3/11/93 he called a meeting specifically to discuss the financial aspects of Enron. This meeting was attended among others by the Chairman MSEB, the Financial Advisor MSEB R. Mathrani (who happened to be Ahluwalia’s college friend) and the Secretary Power. 

Though Enron officials were not present at this meeting, their advocacy for the project could scarcely have matched Ahluwalia’s. When a concern was raised about assuring even domestic investors in the project a guaranteed return in dollars, the 

"Finance Secretary observed that the Indian Company law does not allow such differentiation in treatment of investors". When the issue of capital cost was raised, the financial advisor of MSEB stated the while "they were not competent to comment on the capital costs, but generally felt that they were not out of line." Ahluwalia noted that "in general power projects had substantial cost overruns over the original PIB approved estimates. There was advantage therefore, in a proposal such as that of Enron where the construction costs and risks were undertaken by the company."

Two days later, on 5/11/93, a few days before the CEA was to meet to consider the techno-economic approval for the Enron project, Ahluwalia called a meeting of the Foreign Investment promotion board, in which he reported that 

"the question of cost of power had been looked into and it had been found that it was more or less in line with other projects being put up in Maharashtra". Thus MSEB’s financial advisor’s casual observation that "though they were not competent to comment on the capital costs, but generally felt that they were not out of line", was 2 days later elevated to "the costs of power had been looked into and that it was more or less in line with other similar projects being put up in Maharashtra"! Never mind that far from any examination of other projects in Maharashtra, there was in fact no other remotely similar project being put up in Maharashtra or anywhere else in the country.

But the deed had been done. On 11/11/93, the day before the CEA meeting, it received a letter from the Ministry of Power quoting the above statement of Ahluwalia from the minutes of the FIPB meeting and effectively asking the CEA not to examine the project from the financial angle. At this point the CEA capitulated and abdicated its duty to examine the financial aspects of the project. The Chairman observed that, 

"the Dabhol tariff was a negotiated one and a communication was received from the Ministry of power informing that the cost of power had been looked into by the Ministry of Finance and found to be more or less in line with other projects being put up in Maharashtra. As such, Tariff aspects and deviations with reference to GOI notification and cost estimates could not be examined by the CEA." 

This is how the CEA was persuaded to grant technical (as opposed to techno-economic) clearance to the project, which was then treated as the Statutory clearance of the CEA.

Ahluwalia however prevaricated when examined on this issue by the Parliamentary Standing committee on Energy. The 26th report of the Standing Committee observes as follows about Ahluwalia’s role: 

"The Finance Secretary claimed to have been "consistently stating" that cost per unit rather than cost per MW needed to be defined. He went on to state that, "We (the Ministry of Finance), do "not do that" (look at the cost per unit) since "we do not have any experts". He went on further to state that the scrutiny of the cost per unit had to be done by the CEA. The Finance Secretary presumably forgot his role in the FIPB meeting of November 1993 where he had decisively come to the definite conclusion about the reasonableness of the cost of power from the Dabhol project."

It is now a historical fact that MSEB had to stop taking power from the Enron plant soon after it started producing, since the cost of power was so high that it was about to Bankrupt MSEB which till then was one of the healthy State Electricity boards. MSEB, the State of Maharashtra and the Government of India are now saddled with arbitration claims from Enron and its successors in interest, in excess of Rs. 20,000 Crores. It is an interesting aside that even after Enron had become a four letter word in India, Ahluwalia was still seen cosying up with Kenneth Lay, the Chairman of Enron at the 1996 World bank summit in Washington.

Though Ahluwalia may not have been the beneficiary of Enron’s $20 million educational expenses, and was interested in the Enron project as he hoped that it would create a "favourable psychological impact for foreign investment in the power sector", it is clear that he was eager to push the IMF/WB privatization and globalization agenda in India even at the risk of serious financial imprudence. To this end he not only appears to have participated in the conspiracy to bypass the financial examination of the project by the CEA, he even ignored the financially prudent advice on this project of the World Bank itself. Alas, to such men we have entrusted the economic policies of the country. That is the misfortune of this country.

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