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."