Enron has last laugh on India project

Enron has last laugh on India project

By Clarence Fernandez

BOMBAY (Reuter): Manohar Joshi, the chief minister of India's
wealthiest state, seems an unlikely cowboy. He successfully took
on the Texans and won. Or so it seemed.

When Maharashtra's right-wing alliance government forced U.S.
energy company Enron Corp to make almost $600 million worth of
cost cuts on India's largest foreign investment project in
January, Joshi was riding high.

"This is an historic moment in the industrial life of
Maharashtra," Joshi said when he announced the final approval
after a six-month stand-off closely watched by foreign investors
for a clue to the success of Indian economic reforms.

But as the clouds of political rhetoric slowly dissipate, many
analysts say it is becoming evident that Enron won.

"The government has only got minor concessions which could
have been renegotiated without canceling the deal," said R.K.
Pachauri, director of the Tata Energy Research Institute (TERI).
Canceled last August after a government panel ruled that the
tariff rates and project costs for Enron's 2,450 MW plant were
too high, the project was revived later in negotiations to stave
off the prospect of huge compensation payments to Enron.

A slump in the electrical machinery industry enabled Enron to
shave $330 million off the capital costs of the plant. It also
agreed to raise plant capacity from the original 2,015 megawatts
(MW), a concession worth $223 million, according to Kirit Parikh,
an economist on the state's negotiation panel.

"We have set a new benchmark for power projects in the
country," Parikh told Reuters. "The renegotiated price is lower
than that of any other plant now being considered in the
country."

Among the earliest critics of the renegotiated deal was Indian
power minister N.K.P. Salve, who argued that the original
cancellation of the deal had a knock-on effect that scared off
many foreign investors.

"India needs power investments in hundreds of billions of
dollars," he said. "If the Maharashtra government had not passed
the deal, perhaps no private investment would have come to
Maharashtra and perhaps also the whole nation."

India is critically short of the infrastructure it requires to
maintain the momentum of the economic reforms launched by Prime
Minister P.V. Narasimha Rao's Congress government in 1991.

The power ministry estimates that 147,000 MW of new capacity
will be have to be installed by 2007 to meet the demand, at a
cost of $150 billion.

"Neither political strength nor political acumen has enabled
the reduction of costs on the Enron deal," Salve said. "It is
entirely economic factors."

Salve said hardware costs had dropped 22 percent worldwide.
"Plants now being erected are put up at less than in 1994/95,
when Enron was negotiated," he said.

But the changes to the original contract, agreed by a Congress
state government as one of a series of fast-track projects
designed to draw foreign investment into the power sector, were
not worth the damage done by the delay, Salve said.

"They were certainly not worth repudiating the project for,
and forcing a ten-month delay that affected investor sentiment,"
he said.

"Enron has come out of it very well," said an analyst at a
Bombay securities firm who asked not to be named.

"With the first phase almost unchanged and the augmentation of
capacity, they end up with a handsome profit on the internal rate
of return."

Originally envisaged in two parts, a first phase of 695 MW at
a cost of $918 million, which would increase to 2,015 MW in the
second phase at a total cost of $2.8 billion, the new deal
provides for the Enron plant to generate an additional 435 MW.
"But the Enron rates are not a significant benchmark at all," the
analyst said.

"This process has happened in other Asian nations before, in
Malaysia and Indonesia. In the initial stages of economic
reforms, power projects always have higher costs and higher
tariffs, which fall later as new players come in and the
government gain more experience at negotiating."

Enron officials appeared to agree with this view. "The country
has changed substantially from what it was when Enron came to
India," said one of them. "Salve had no position at that time to
negotiate a better deal."

Other analysts believe the cancellation process did not
address the questions at the heart of the issue.

"The original objections about transparency and the public
right to know have not been answered," said R.K. Pachauri,
director of the Tata Energy Research Institute.

One of the major objections to the original deal was that it
had not been offered for public tender. This defect has been
remedied somewhat in the renegotiated deal with the provision
that all new supply contracts will be competitively bid.

"The competitive bidding provision for phase two is a further
gain," said G.V. Ramakrishna of India's Planning Commission. "It
means that the tariff for phase two could be still lower."

Pachauri said the delay caused by the cancellation and
renegotiation was unjustified.

"It has had a harmful effect on people's intentions," he said.
"The rest of the world treated it as a signal of what would
happen if they came into the power sector too soon."

"In deals of this kind, one is not arriving at the optimal
solution, but the second best solution," Pachauri added. "It
often happens that the best solution is unaffordable. One can
flog a project of this nature to death in trying to get the best
possible deal."