The story of how Montek Singh Ahluwalia, as Finance Secretary, worked to bypass the financial examination of the Enron project by the Central Electricity Authority, ignoring even the World Bank's financially prudent advice on the project.
Jyoti Basu called him a "World Bank man". Although Montek Singh Ahluwalia was most recently a Director of the International Monetary Fund, that appellation is not incorrect to describe Montek, who spent the first 11 years of his career with the World Bank. Thus his ideological schooling had been at the WB/IMF school of economics, which has been pushing the policies of liberalisation, privatisation, and globalisation in all Third World countries as conditionalities for giving loans to them.
The character of the WB/IMF in terms of who controls them and the financial interests they push have been laid bare by Professor Joseph Stiglitz in his book Globalisation and Its Discontents. One cannot have better credentials than Stiglitz to comment on such matters. A Nobel Laureate in Economics, Stiglitz was earlier chairman of President Bill Clinton's Council of Economic Advisers and then Chief Economist of the World Bank. Stiglitz points out that, "underlying the problems of the IMF and other international economic institutions is the problem of governance: who decides what they do. The institutions are dominated not just by the wealthiest industrial countries but by commercial and financial interests in those countries and the policies of the institutions naturally reflect this" (page 18).
Stiglitz goes on to observe that "the IMF's behaviour should come as no surprise: it approached the problems from the perspectives and ideology of the financial community, and these naturally were closely (though not perfectly) aligned with its interests. As we have noted before, many of its key personnel came from the financial community, and many of its key personnel, having served these interests well, left to well paying jobs in the financial community" (ibid., pages 207-208).
As Revenue Secretary and then Finance Secretary through most of the 1990s, Ahluwalia spearheaded the neo-liberal economic policies in India, exactly according to the prescriptions of the WB/IMF. But his enthusiasm for privatisation went beyond the most basic financial prudence that even the World Bank observed. Thus when Ahluwalia sought World Bank funding for the privatised Enron power project, the Bretton Woods institution, despite being a strong votary of privatisation of the power sector, found it impossible to support the project. The World Bank found the project too large to be run as a baseload plant. It was very sceptical about the absorption of 2000 MW of power during off peak hours. It also did not like the idea of using imported liquefied natural gas as fuel (in which Enron was particularly interested, being mainly a gas trader). It concluded that this was definitely not the least cost option for Maharashtra.
Enron's cavalier response to the World Bank report was expressed by its vice-president, Joseph Sutton, who wrote to the Chairman, Maharashtra State Electricity Board (MSEB): "I feel that the World Bank opinion can be changed." Responding to recent media criticism of the project, he added, "We will engage a PR firm during the next trip and hopefully manage the media from here on." And that is precisely what Enron proceeded to do. But the media were not the only institution this multinational managed. A senior Enron official later told the United States Congress that the company had spent $20 million (Rs.70 crores), in "educating" Indians, prompting many to wonder which Indian officials had been educated at Enron's school of business.
Things thereafter proceeded briskly for Enron despite the severe WB report. It received clearance after clearance, but was frustrated by the Central Electricity Authority (CEA), which had the statutory duty under the Electricity Supply Act to evaluate the project from the technical and financial angles. The CEA found the capital cost of the project much too high (Rs.4.49 crores/MW as opposed to between Rs.1.81 crores and Rs.1.91 crores/MW, which it considered reasonable for a Gas Turbine Combined Cycle project). The Authority also found that even if one admitted such inflated capital costs, Enron's return on equity worked out to 26 per cent in the fifth year, going up to 52 per cent in the 15th year, as opposed to a maximum of 16 per cent allowable under Indian law.
The CEA further estimated that the MSEB would have to back down 408 MW of its own generating capacity, which cost it 50 to 80 paisa a unit, to accommodate 695 MW of Enron's power (of Phase 1) at Rs.3.47 a unit. Enron's response to the CEA was arrogant: "Capital costs are irrelevant to the CEA." The multinational's response to the CEA's request for a break-up of capital costs was: "Your request for more detailed project costs of equipment/system/works other than those provided in the capital cost summary cannot be supported and is not deemed necessary."
Annoyed by the CEA's `intransigence', Enron's Rebecca Mark wrote to the then Chief Minister of Maharashtra, Sharad Pawar: "The remaining concern seems to reside with Mr. Beg, Member-Planning for thermal projects (CEA). He continues to hold up project approval based on demand for power in Maharashtra. No one from the Ministry of Power in Delhi has given direction to Mr. Beg to move forward on this issue" (letter dated August 26, 1993).
But it seems that the CEA, with statutory responsibility to grant or withhold techno-economic clearance to the project, was not willing to take "directions" on the issue. An elaborate plan was then devised to bypass the CEA.
Union Finance Secretary Ahluwalia appears to have been the lynchpin of this plan. On November 3, 1993, he called a meeting specifically to discuss the financial aspects of Enron. This meeting was attended, among others, by the MSEB Chairman, MSEB Financial Adviser R. Mathrani (who happened to be Ahluwalia's college friend), and the Power Secretary. Although Enron officials were not present at this meeting, their advocacy for the project could scarcely have matched Ahluwalia's.
When concern was raised about assuring domestic investors in the project a guaranteed return in dollars, the "Finance Secretary observed that the Indian Company law does not allow such differentiation in treatment of investors". When the issue of capital cost was raised, the financial advisor of the MSEB asserted that "they were not competent to comment on the capital costs, but generally felt that they were not out of line". Ahluwalia noted that "in general power projects had substantial cost overruns over the original PIB-approved estimates. There was advantage therefore, in a proposal such as that of Enron where the construction costs and risks were undertaken by the company."
Two days later, on November 5, 1993, a few days before the CEA was to meet to consider the techno-economic approval for the Enron project, Ahluwalia called a meeting of the Foreign Investment Promotion Board (FIPB). He reported that "the question of cost of power had been looked into and it had been found that it was more or less in line with other projects being put up in Maharashtra". Thus the MSEB's financial advisor's casual observation that "they were not competent to comment on the capital costs, but generally felt that they were not out of line" was two days later elevated to "the costs of power had been looked into and that it was more or less in line with other similar projects being put up in Maharashtra"! Never mind that there was no examination of "other similar projects in Maharashtra". There was in fact no remotely similar project being put up in Maharashtra or anywhere else in the country.
But the deed was done. On November 11, 1993, the day before the CEA meeting, it received a letter from the Ministry of Power quoting the above statement of Ahluwalia from the minutes of the FIPB meeting and effectively asking the CEA not to examine the project from the financial angle. At this point the CEA capitulated and abdicated its duty to examine the financial aspects of the project.
The Chairman observed that "the Dabhol tariff was a negotiated one and a communication was received from the Ministry of Power informing that the cost of power had been looked into by the Ministry of Finance and found to be more or less in line with other projects being put up in Maharashtra. As such, tariff aspects and deviations with reference to GOI notification and cost estimates could not be examined by the CEA." This is how the CEA was persuaded to grant technical - as opposed to techno-economic - clearance to the project. This clearance was then treated as the statutory clearance of the CEA.
Ahluwalia however prevaricated when examined on this issue by the Parliamentary Standing Committee on Energy. The 26th report of the Standing Committee makes this observation on Ahluwalia's role: "The Finance Secretary claimed to have been `consistently stating' that cost per unit rather than cost per MW needed to be defined. He went on to state that, `We [the Ministry of Finance] do `not do that' [that is, look at the cost per unit] since `we do not have any experts.' He went on further to state that the scrutiny of the cost per unit had to be done by the CEA. The Finance Secretary presumably forgot his role in the FIPB meeting of November 1993 where he had decisively come to the definite conclusion about the reasonableness of the cost of power from the Dabhol project."
It is now a historical fact that the MSEB had to stop taking power from the Enron plant soon after it started producing since the cost of power was so high that the MSEB, until then one of the healthy State electricity boards, would be bankrupted. The MSEB, the State of Maharashtra and the Government of India are now saddled with arbitration claims from Enron and its successors in excess of Rs.20,000 crores. It is an interesting aside that even after Enron had become persona non grata in India, Ahluwalia was seen "cosy[ing] up to Enron chief Kenneth Lay" at the 1996 annual meeting of the World Bank and IMF in Washington (Rahul Singh in "Washington Diary" in Outlook, October 30, 1996).
Ahluwalia hoped the Enron project would create a "favourable psychological impact for foreign investment in the power sector". What is clear is that he was eager to push the IMF/WB privatisation and globalisation agenda in India even at the risk of serious financial imprudence. To this end he not only appears to have worked to bypass the financial examination of the project by the CEA, he even ignored the World Bank's financially prudent advice on this project. Alas, such men have been entrusted with the economic policies of the country. That is the misfortune of India.
Prashant Bhushan is a lawyer practising in the Supreme Court.
COMMents
COMMents
SHARE