That the Enron-led Dabhol Power Project (DPP) was an enormous blunder is now obvious to all. Not only has the Maharashtra State Electricity Board (MSEB) been driven to near-bankruptcy, but a shadow hangs over the completion of the $1.87 billion Phase II of the project. According to reports, lenders meeting at New York may have threatened to stop disbursement of $400 million in debt needed to complete the dominantly credit-financed second phase. Their reticence stems from the crisis facing the MSEB, leading to non-payment of dues totaling Rs. 262 crore to the Dabhol Power Company (DPC).
 
MSEB's inability to pay stems primarily from the fact that the revenue it earns from sale of Enron power is far less than what it pays out to DPC. According to one estimate, DPC accounts for just 6 per cent of power sold by the MSEB, for which the latter pays as much as 33 per cent of its revenues. According to the terms specified in the power purchase agreement signed with Enron, the price the MSEB pays amounts to the value of power that can be generated by DPC at 90 per cent capacity utilization, with the price of each unit of such power being computed on a cost-plus basis, where the plus is a predetermined rate of return in dollar terms. The price (which includes a capacity charge and a variable cost companent) equals at current costs Rs. 4.80 per unit compared with the Rs.2.03 figure worked out in 1993, with 1995 as base year. This increase is partly due to the fact that the price of naphtha, which is the fuel used by the project to generate electricity, currently stands at around $300 a tonne as compared with the $180 price which prevailed at the time when the PPA was signed. Further, the rupee has also depreciated during the interim from Rs. 32 to the dollar to close to Rs.47 to the dollar. Since these cost increases can, as per the PPA, be passed through to the price, the burden falls completely on the MSEB.
 
But that is not all. The MSEB has not been lifting the full complement of power that can be generated by the DPC at 90 per cent capacity utilization. That is because there are cheaper sources from which it can acquire the power to service the demands placed on it currently. In fact, the Maharashtra Electricity Regulatory Commission has issued a directive requiring the MSEB to source power from the cheapest suppliers first and then move on to others producers in order of cost. In the event, estimates of the amount of power being lifted by the MSEB from Dahbol vary between 35 and 60 per cent of the power generated by the DPC. This has meant that the actual price payable per unit of power sourced is much higher than the Rs. 4.80 mentioned above. For example, the price per unit paid in October last year has been estimated at Rs. 7.80. In that month, MSEB's dues to the DPC stood at Rs. 300 crore, while its revenues amounted to around Rs. 900 crore. In December, the state's Electricty Minister informed the Legislative Council that the MSEB had purchased power from the MSEB at Rs. 6.91 per unit between May 1999 and September 2000. Not surprisingly the Board has found itself in a position where it is unable to meet its financial commitment to DPC, precipitating a crisis situation.
 
The Dabhol crisis, which makes the central government accountable for MSEB's dues to DPC, has forced the government to reconsider its plan to provide sovereign guarantees for three other power projects – the 3960 MW Reliance-SEAP promoted Hirma project, the 1800 MW LNG-fired Ennore project and the 2000 MW Pipavav project. But it is not just the system of providing guarantees that has been challenged. The encouragement given by the PPA system to the use of fuels other than the much cheaper coal is also proving unsustainable. The National Thermal Power Corporation (NTPC) has shelved its plan to set up a 2000 MW liquefied natural gas (LNG) power station in Mangalore, since the tariff for power generated by the project is likely to be in excess of Rs. 4 per unit, making it unaffordable, in the view of NTPC, for the State-owned Karnataka Power Transmission Corporation Ltd. Interestingly, Enron has argued that the cost of power supplied by it would fall substantially in the wake of the switch over to LNG as fuel, when a terminal for the purpose and a regassification plant are commissioned at the end of 2002. In short, the government's policy of pushing through a dominantly private-led expansion of power generation based on fuels other than coal with the aid of a range of unprecedented concessions to private operators has collapsed.
 
This failure is however not just a reflection of an erroneous power policy, but an indictment of economic reform itself. We must recall that the terms on which the Enron-project was launched involved the provision of a sovereign guarantee that protected the group of investors led by Enron against three adverse consequences: first, the likelihood that demand for power produced by it would fall short of levels warranted by the size of the project; second, the likelihood that costs could rise, as they have in the wake of recent increases in oil prices; and third, the likelihood of a depreciation of the rupee against the dollar.
 
Opposition to the project stemmed from the sheer absurdity of this arrangement. A sovereign guarantee of this kind, it was argued, went against the very logic of private initiative, which presumes that private investors would make their investments based on an assessment of likely returns and the risks associated with realizing them. This would ensure that investments are directed into activities, projects and technologies where risk-adjusted returns appeared to be the maximum. They would also ensure that the risks involved in choosing between alternative scales, technologies and fuels would be taken into account when investment decisions are made. Given that the ‘Enron terms', which foreclosed such influences on the investment decision, were being given the okay by a Congress-government that had launched on a reform programme in which investment decisions were to be influenced not by state support and subsidy but by market forces, the whole exercise seemed to be suspect. Allegations that non-economic considerations were entering into the making of the decision and that Enron was using the opportunity to inflate capital costs and earn an even higher return were other arguments advanced against the project.
 
Such allegations were used by the BJP-Shiv Sena combine to oust the Congress through an election fought, inter alia, on the promise that the Enron deal would be scrapped. When voted to power, however, the committee of ‘experts' set up the BJP-Shiv Sena government, and subsequently the government itself, not only ensured that the project would go through, but added a second phase which would take the size of the project from 740 MW to 2184 MW. The terms for purchase of power from both phases of the project were worked out in advance.
 
It is now clear that other considerations aside, the BJP's desire to go along with Enron, despite its early opposition, was related to its effort to present itself as reform-friendly. It was clear then and has remained so since, that projects like Enron were a part of the reform agenda, and would have been pushed even if non-economic considerations did not play a role. This emerges from the arguments advanced in favour of the project and the terms being offered to it by different governments and by economists outside government supporting the reform agenda. First, since a limit on capital expenditures by the State in order to restrict the fiscal deficit was seen as imperative, a much larger role for the private sector in financing investment in the country was seen as inevitable. Second, it was argued, since utilities like services were non-tradables, import was ruled out even with liberalization, making investments within the country necessary if growth was not to be stalled by infrastructural bottlenecks. Third, it was presumed that the domestic private sector was not in a position to mobilize on its own adequate sums of capital for infrastructural investments, rendering foreign investments in these areas crucial. The officially-sponsored India Infrastructure Report made a case for attracting large sums of foreign investment into the area, and argued that financial liberalization and financial incentives were crucial to realize this goal.