The curious case of Cogentrix

What are the multinationals and the comprador groups up to?

THE name "Cogentrix" seems to have become synonymous with controversy in India. This multinational power generation company from the United States has been involved in one of the eight "fast-track" power projects that were chosen as examples of the benef its of "reform" in this sector over seven years ago. Cogentrix and Hong Kong's China Light and Power International were to set up a $1.3 billion, 1000 MW project in Karnataka.

Like all of the other optimistically styled "fast-track" projects, the project involving Cogentrix in Karnataka has been inordinately delayed. This reflected not only much controversy and widespread public doubts about the nature of the Power Purchase Ag reement (PPA) that had been signed with the State government in question, but also foot-dragging on the part of the foreign investors themselves.

The projects were controversial because the State governments had guaranteed to purchase power at rates that ensured the project developers of a minimum of 16 per cent rate of return on investment, in dollar terms (that is, protected against any exchange rate changes as well). And the Central government had agreed to provide counter-guarantees for this, in the event of the State government concerned being unable to pay up.

It is economics of the most basic and commonsensical level that such an agreement implicitly invites the guaranteed party to present inflated estimates of cost when the rate of return over costs is guaranteed. And in the most well known of these projects , that of Enron in Maharashtra and that of Cogentrix in Karnataka, there have certainly been well-founded suspicions of escalation and rigging of cost estimates by the investing parties.

The estimated cost of the 1000 MW coal-fired project in Karnataka to Rs.4,920 crores, of which the cost of various services, contingency provisions and interest amounted to nearly half. This is a very high ratio even by international standards; indeed, s everal of the costs included, such as "development fee" and "technical consultancy fee", are completely unknown in Indian practice. The cost of the boiler, the turbines and so on - that is, the real material for the project - accounted for only 27 per ce nt of the projected cost. By way of comparison, in the completely indigenous thermal plants built by Bharat Heavy Electricals Limited (BHEL), the boilers, turbines and so on account for around half the total cost.

For reasons like this, public interest litigation (PIL) came up in the Cogentrix case to question the basis on which the Karnataka government had signed the PPA with the Mangalore Power Company (MPC), of which Cogentrix is a major shareholder. Cases were filed in local courts, the High Court and finally the Supreme Court.

Such PIL was not simply obstructionist in nature. As a recent book has shown (Power Play by Abhay Mehta, Orient Longman, New Delhi; 1999) the basic laws of the land were continuously ignored or subverted in the Enron case, by both State and Centra l governments. There is no reason to suppose that the other six power projects were negotiated more scrupulously. Now that we know a little more about how such projects are pushed through, such litigation becomes both necessary and useful to prevent frau ds on taxpayers and consumers being pushed through in non-transparent ways.

But this, of course, means that the multinationals themselves are forced to be more open about how they have arrived at their estimates, and even about what methods they have actually used to convince the governments in question of the validity of their claims. And such disclosures tend to be anathema to all major private players, whether they are multinational or domestic companies.

In the case of the MPC, the litigation has essentially involved the issue of kickbacks received on the deal, and it successfully caused the Karnataka High Court to ask the Central Bureau of Investigation to look into the issue. This also ensured that the other aspects of the deal, that is, the PPA and the counter-guarantee by the Central government, continued to be held up at least until the courts had pronounced their final decision.

THIS is the background to the sudden and dramatic declaration in early December by Ron Somers, the chief executive officer of MPC, that Cogentrix and the other multinational sponsors would pull out of the 1000 MW project. Even though in more than seven y ears the company had only invested $27 million out of an estimated total projected investment of $1.3 billion (not exactly an indication of great enthusiasm or efficiency), Somers insisted that the collapse of the project, and indeed its apparent inabili ty to take off even over a period of seven and a half years, could be attributed to 'system failure' - "a string of coalition governments since 1995, the Pokhran nuclear tests and litigation".

Of course, all investors have the right to reconsider their investments, and finally entrepreneurial capitalism is all about such acceptance of occasional failures and the disregarding of sunk costs. If the Cogentrix decision were no more than another in stance of this tendency of capitalism, then it would not be worthy of much remark.

But was that all there was to it ? The timing of the Cogentrix announcement was significant, coming as it did only a few days before the Supreme Court was to deliver its verdict on the case. And, perhaps not completely unexpectedly, the Supreme Court ove rturned the High Court order, in effect clearing Cogentrix and its partners of all charges.

Again, not completely unexpectedly, once the legal hurdles had been overcome, Somers issued another statement, this time saying that the MPC could reconsider its decision to withdraw from the project if the Central and State governments agreed to fulfil certain conditions. He said that he would recommend to the sponsors the revival of the project, if the Karnataka government stood by the 1997 PPA - the very one that had been questioned by independent observers - and the Union Power Ministry gave the dra ft of the counter-guarantee without delay. He said that the company would require a time-bound commitment to resolve all the outstanding issues with both the governments.

The untutored observer could be forgiven for thinking that this sounds suspiciously like blackmail. But what is perhaps even more significant than the rather blatant attempt to arm-twist the governments concerned, is the implicit attempt to influence not just the administrative arm of the government but even the judiciary. Thus, the very fact of PIL defending the interest of the citizenry at large, as well as the due process of law which seeks to make decisions more open and accountable, are projected a s disincentives to multinational investment, to be avoided accordingly.

THE lesson in strategy has not gone unnoticed by other multinationals operating in the Indian power sector. Less than a week after the Cogentrix announcement and the subsequent Supreme Court decision, the British company Powergen Plc let it be known that it is considering pulling out of a $650 million project to build a 580 MW thermal power plant in Madhya Pradesh. Apparently Powergen is worried over litigation lodged with the Supreme Court seeking to lower the level of escrow cover that the State gover nment has to provide against purchases of electricity by the State Electricity Board. But it has said that it will not comment on its intentions before the Supreme Court makes its judgment, due to be delivered in mid-January.

At this rate, we should expect a spate of similar announcements from the other "fast-track" developers of power projects, unless the Central and State governments as well as the courts read the writing on the wall and move quickly to soothe these easily irritated investors. Our more comprador domestic business groups are already anxious to do whatever is thought necessary to keep multinational investors happy, no matter what the cost to the public exchequer or to Indian citizens.

Thus, the president of Assocham, the Associated Chambers of Commerce and Industry, has been reported as calling for "a review of the system of Public Interest Litigation to ensure it does not hinder infrastructure projects" (The Times of India, De cember 17, 1999). The implications of this are far-reaching. For the multinational corporations (MNCs), for some government agencies and for some industry representatives, the need to attract foreign investors at any cost is more important than democracy , than the rule of law, or the ability of the courts to impart some degree of transparency and public accountability to what is known to be an extremely opaque and murky process.

This is so essentially because at the existing power rates, MNC power projects cannot obtain commercially the returns that they are looking for. Escrow accounts and counter-guarantees are needed to assure these investors that the government will foot the ultimate bill even at the cost of other priorities, including possibly cheaper public sector power projects in the future. Clearly, with the money promised to MNCs from the public coffers, citizens do require some system of judicial review in order to a void the possibility of negligence and corruption.

The insidious interference with the Indian judicial system is perhaps only one of the signs of the tremendous social and economic changes, many of them negative, which can be brought about by this obsession with placating international investors. In the process, the legal, social and economic rights of Indian citizens can get completely bypassed.