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'I think there will not be many takers for Enron's stake in DPC'

P Abraham considers himself a very lucky man. The former power secretary to the Government of India and the chairman of the Maharashtra State Electricity Board has spent 15 years as a bureaucrat in the power sector.

But, between 1992 and 1994 -- the time when the Enron deal was inked -- Abraham was out of the sector on a posting as the special secretary in the Ministry of Defence.

When he returned as the power secretary to the Government of India in 1994, the power purchase agreement (PPA) with Enron was already through.

"It is my good luck that I was not in when the Enron deal was signed, else I might have been embroiled in the controversy," he laughs.

However, Abraham could not dissociate himself completely. In his tenure as the power secretary, he conceived the counter-guarantee given by the Government of India to Enron.

Today, as a member, Union Public Services Commission, Abraham interviews civil services aspirants and officers. But he still keeps in touch with the goings-on at MSEB and in the power sector. "Maharashtra is my karmabhoomi," he says.

He discusses with Priya Ganapati the circumstances under which the Enron deal was etched and the reasons for MSEB's current plight. Excerpts:

What were the circumstances that needed the power sector to be thrown open to private investors?

The private power sector policy was decided in 1991-92 and the resolution authorising the private power sector was passed in March 1992. Then, when the government was talking of privatisation, we have to look at the national conditions, as well as those in the power sector.

At the national level, our economy was not doing well at all. Our foreign exchange reserves were very poor and dwindling, our inflation rate was very high. In fact, that was the first time that our gold reserves were pledged to foreign banks. By and large, the national economy was not doing well.

In the power sector, the gap between the demand and supply was widening. And the government didn't have adequate funds to invest in this sector, as power is a very capital-intensive sector. The national credibility extremely low in terms of economy. The general financial condition of the state electricity boards was not too good either.

Many of the boards were struggling to learn the minimum rate of return of 3 per cent. The state government's finances too then were in dire straits. You should understand that whatever are the funds that were invested in the power sector were state government loans. And the state government has other priorities too like health and infrastructure.

The choice then was between the power sector -- which is very capital intensive -- or to invest in other sectors where no private investors would come -- like health and rural education.

You will be surprised to know at one time, 40 per cent of state government's funds were going into the power sector for years and years. So, we thought then that world over liberalisation is taking place, private sector is being encouraged, restructuring is taking place so we should follow that route too.

But when we thought of privatisation, we did not mean only foreign investment. Though we wanted it because of our dwindling foreign reserves, we also wanted the private sector in India to step in. So in March 1992, the private sector policy was announced.

What were the circumstances under which the deal with Enron was struck?

I do not know much about that. Because during the period, between 1990 and 1992 when the actual power purchase agreement was signed I was out of the power department.

When I came on the scene again in April 1994, the counter-guarantee to be given by the Government of India was under consideration, not the PPA. The PPA and the guarantee were already signed by the Government of Maharashtra. Based on the guarantee of the Government of Maharashtra, the Indian government only had to given a counter-guarantee.

That is where I came into the picture. I certainly finalised the terms of the counter-guarantee: what should be the amount of payment to be made, what is to be guaranteed and in case the counter-guarantee is invoked we have to pay first and then get it from RBI. That has not come under dispute now.

Consider the nature of the counter-guarantees. The Indian government staked all its assets (including those abroad, except diplomatic and military) as surety for the payments due to Enron. How could the government agree to be a signatory to this kind of agreement?

Frankly, at that point in time, the credibility of the government on the economic front was slightly low. Second, for any foreign investor India is not the only destination. He can go to China or any of the other developing countries. He can go to South American countries.

When our credibility is low and for an investor alternatives are available you have to basically give him some incentive to come to you.

At that time, the government said we would give guarantees for the first few projects -- not all -- provided the state government first gives the guarantee.

The entire mechanism was that the electricity boards were first supposed to pay. If they default, then the state government would pay. If the state does not pay, then the Government of India comes into the picture.

And after the Government of India makes the payment, it recovers the principal amount and the interest from the state government.

There were sufficient safeguards built in to the mechanism. And all this was primarily given because we really wanted to attract an investor to the state.

Coming to the other point -- that we pledged our assets. Normally, the legal system is such that if you borrow only a certain amount, they will pledge all the assets.

This happened in my case. I borrowed some money for building a house in Hyderabad. I borrowed only Rs 400,000, but had to pledge my house in Bombay that must be worth a lot more than that and some ancestral property in Vijayawada. This is a universal practice.

And even if I pledge the whole country though I need only a certain amount, he can only take that certain amount I owe him and not the whole country.

But what about our pride that was staked?

India is not the only country that has given such guarantees. Suppose we borrow funds from the World Bank, the Government of India has to guarantee those funds.

What happens to pride then? It is not an unnatural process. The only thing is that it was decided the Government of India would guarantee only the first few projects and not all of them.

You say that credibility was low and so the government had to offer incentives to investors. But why was there the desperation to offer such incentives?

In the power sector, even in early nineties -- except for a few electricity boards -- most were not doing well.

They were not getting their minimum rate of return, primarily because of their subsidies and other things. The financial position of the Government of India and the state was not too good either.

So all this was done only to primarily instil confidence, this being one of the first projects to show interest. We wanted to give the message: 'Come. Your money will be safe. Don't worry. If the state electricity boards don't pay, the state government or the Government of India will'. I don't feel there is anything wrong with that.

Anti-Enron activists allege that power generated by Enron is not required at all as Maharashtra only faces a shortage of power for a few hours during peak demand and this can be overcome by better management of the existing generated power. Do you agree with this?

Maharashtra is a highly industrialised, commercialised and semi-urbanised state. The growth rate for power in Maharashtra has been the highest in the country, around 8-10 per cent. To say that you have only peak shortage is not really correct.

In Maharashtra, you have both energy and peak shortage. Obviously, energy shortage is less and peak shortage is more. You can manage the peak shortage only if you have adequate hydro-power and more of gas power, which we don't.

Maharashtra has a hydro-thermal mix. If you are projecting growth, you need to add capacity. Whether Enron does it or MSEB itself manages it is just a matter of detail. In fact, even when I was there, MSEB itself was trying to start new projects.

The power plant at Chandrapur was being expanded. Then you should have said, "Look, why are you putting up your own power projects?" While there is some merit in the other argument (that better management of existing power will help), only improving your performance will not meet the growth in demand.

You have to keep on adding capacity. It is not that only Enron is being allowed and not the MSEB. In fact, MSEB recently expanded it projects in Chandrapur and Khaparkheda.

However, I think that growth projections made earlier have not materialised.

One of the reasons why people now say that we don't require this power is because the growth rate of 8-10 per cent has not taken place. That growth rate is linked to the overall economy itself is undeniable.

There is a general sluggishness in the industry. Overall demand has not grown in the expected manner.

My own analysis shows that industrial consumption in Maharashtra has actually fallen, while we were expecting it to grow. That also has affected demand.

Despite the reservations about tariffs and the public outcry against the deal, why did the Centre, Maharashtra and the MSEB go ahead with it?

Right from the beginning, the private power policy has been faulted by the public and well-informed people.

There were a few items on which the policy was faulted. One, they felt that as a policy it encourages people to take the memorandum of understanding route. That means I sign an agreement with you without really going into the bidding process.

So what is the right way? In the government's scheme of things, I will get quotations for whatever I want to buy.

When, in projects of such huge dimensions, bidding process is not undertaken, there will indeed be some outcry. This is one thing that has been criticized, and I agree fully with it.

When I became the power secretary in 1995, I said that whatever projects come up in the country henceforth would only be through competitive bidding.

This particular case is a negotiation between two parties. You do not have a comparative bid to refer to, with the result that you are not sure about how well has the deal been negotiated. You cannot compare unless you have comparable offers.

The second is that because of the MoU (memorandum of understanding) route you are not able to know the real cost of the project. The consequence of the MoU is that the cost is high. Then the tariff is bound to be high and there can also be lack of transparency.

The conception in the country is that cannot set up a project without some money exchanging hands. It puts a big question mark on everything. Whatever you do, people will be suspicious.

At that point in time, we are talking of the PPA signed in 1993. It was one of the first projects to come into Maharashtra, in fact, into the country.

It was a totally uncharted course. We were trying to do something with a lot of enthusiasm because we were trying to attract private investors.

Though the whole project was 2000 MW in the MoU, they restricted themselves to the first phase as an experiment. When you are taking a new course you may make some mistakes. It is a grey area to everybody.

After the MoU was extended to include phase-II, the Government of Maharashtra appointed a committee of experts who have lived with the power sector for years.

They are people who have been considered the frontrunners in running the country's power sector.

They negotiated and said the project is all right. What more do you expect from a government? When the experts say this is all right, obviously the government would accept it.

Was this because the government was desperate to prove the reform credentials?

No. That was not really a package for the reforms. Reform is a much wider area.

One of the reasons why the MSEB cannot pay Enron is because it is cash-strapped. What are the reasons for the current financial crisis of MSEB?

MSEB was supposed to be one of the best-run electricity boards in the country. We have always been ensuring that we get the minimum rate of return of 3 per cent. We never defaulted on any payment.

To really assess how financially sound an electricity board is there are three factors: One is the overall rate of return. The second is the receivables -- that is whether you are receiving your payments on time. Third is pay-ups.

Another parameter is T&D losses. If they are high you will never be able to recover your money for the power supplied.

From 1992-1995 ,the MSEB could achieve a RoR of nearly 4.5, which means our fundamentals were very strong. But around 1996-97, we found that we were not able to achieve the target. The deterioration began from 1995.

This is because of slackness in supervision and control. The receivables are supposed to be collected within two-and-a-half months and now it is collected in about 5 months, which translates to about Rs 50 billion.

This means that Rs 50 billion of your money is with the consumers. They are using the MSEB as banker. They are taking power but are not paying you. This shows the effectiveness in the recovery of money due to you is lost.

This could be because of some interference from the government. But I cannot accept that the government will say don't recover the whole amount. In case of domestic connections, the government will never say don't disconnect.

Strictness in implementation and using our own powers of disconnection could have led to better results.

So who is responsible for this slackness?

The board. While there could have be some interference from the government in a few cases that might have affected their recovery, I cannot find a plausible reason for the domestic arrears to go up to five months and the commercial arrears to go up to six months.

I find that there is slackness in the working of the electricity board. That is my feeling.

Anti-Enron activists allege that despite high T&D losses, MSEB reported a surplus of Rs 3.76 billion in '98-'99, the year before DPC Phase-I was turned on. So is only the DPC responsible for the mess MSEB is in today?

The MSEB installed capacity is 9000 MW. And it is buying roughly 2000 MW from NTPC, which makes a total of 11,000 MW. The DPC Phase I is only 750 MW, which is less than 7 per cent of the total capacity. A company which has 11,000 MW, whatever is the price, if it cannot absorb 750 MW, there is something wrong with the company and not with the Enron project.

Even if MSEB puts up a project today, it will have the same tariff -- around Rs 4. The NTPC put up a 330-MW power project in Kairkodam, Kerala, which has the same fuel as Enron. The tariff is around Rs 4.50 and it is billing that. But Kerala says it does not money to pay that and will pay only Rs 2.50.

Nobody talks about that because it is between two governments. I cannot agree that a company with a Rs 10-billion monthly revenue cannot honour a small amount of Rs 1.50 billion. The problem lies in bad management -- as I said, their receivables are very bad.

Normally, when you sit as the chairman of this board, you always know whom to pay and whom not to pay. Sometimes, I will not pay a fellow immediately. But when there is a legal agreement I will honour that first and then go to the rest of the fellows.

That is the normal traditional thing done by everybody. I have done it too when I was the chairman of the board.

What the Enron project has highlighted is the bad financial status of the MSEB. But the reasons for the bad fiscal position were not highlighted. The board will have to find out means by which it can recover more.

If the arrears from customers is Rs 50 billion, then the Rs 1.50 billion due to Enron can be paid from the receivables for five years -- not just today or tomorrow, but for five years!

How can the revenues of the board be improved?

More emphasis should be given to commercial operations and meter readings. I do know that many meters do not function or are made not to function. Our meter readers do not go regularly. They go once in a while. So, you must have good meter reading, bill delivery and bill collection. This will give tremendous boost to the board's resources.

Then there is energy theft. You must be ruthless in curbing such theft. I have suggested that just like the government of Andhra Pradesh, Maharashtra too should pass a law against this and punish the offenders harshly.

The board should be allowed to function as an autonomous body. If the government allows it to function without interference, with targets set for everything, monitors only the targets and makes people accountable for these, half the battle would be won.

What do you think is the way out of the current impasse with Enron?

There have been various alternatives suggested. One is to sell power to NTPC. Second is to sell power to the trading corporation. Third is to sell it to the railways. In my considered view all these options will be very tough and difficult. The buyers' argument could be that if Maharashtra cannot afford this power, how does it expect us to buy it. I feel that none of these three options are feasible.

Today, the entire project is promoted in terms of foreign currency, very little from Indian money. At that time we wanted more foreign currency, that was the national policy. So we encouraged them to come with foreign currency. But that is costing us very dearly because of devaluation and increase in international fuel prices.

The feasible option here is that the financial package of this company can be re-negotiated and converted into Indian rupees. If converted into Indian rupees at least the depreciation or the devaluation part can be taken care of. So, if the tariff is Rs 2.00, it won't go to Rs 2.80 one fine morning because of foreign exchange fluctuations.

The financial package, loans, the capital and shareholding whether it can be re-negotiated to have more of the Indian currency component is the option.

This is a complex situation for all -- Enron, the Government of Maharashtra and MSEB. I think they should re-negotiate the capital base, etc.

There are rumours that Enron might sell off the Dabhol power project. If Enron makes the move and gets out of the project, what do you see as the fallout?

Frankly, I don't know. I feel that there many not be many takers for the plant. If somebody else buys it he still has to sell the power. Considering the high tariff, who will he sell it to?

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