Power games

The timing of the Mangalore Power Company's decision to withdraw from a "fast track" power project whose progress has been hampered by a succession of legal cases raises questions about the promoters' motives.

SUDHA MAHALINGAM in New Delhi PARVATHI MENON in Bangalore

ON December 9, the board of directors of the Mangalore Power Company (MPC) decided to "cease development" of its 1000-megawatt (MW) coal-fired thermal power project, citing "delays" and "inadequate returns" as the main reasons. However, the sequence of e vents that led to the abandonment of the project points to the rather unfashionable theory that the project promoters, Cogentrix Energy Incorporated and China Light and Power International (CLP), used the slow pace of progress of the project owing to bur eaucratic and legal delays as an excuse to try and extract further concessions from the Karnataka Government and the Centre. Consider the following.

The promoters were embroiled in nine court cases, one after another. The last one, which belonged to the public interest litigation (PIL) category, alleged payment of kickbacks by the promoters and had awaited judgment in the Supreme Court for 11 months. Altogether, from the day Cogentrix signed a memorandum of understanding (MoU) with the Government of Karnataka the company had waited for seven and a half years to develop a 1000 MW project. This was, on the face of it, a compelling argument for the boa rds of directors of the two promoters to take stock of their interest in the project at the end of the year and to withdraw from it.

This rationale, however, stands punctured by the events of the day before the MPC board decided to give up the project. On December 8, on the directions of the project sponsors, the company's counsel, Fali S. Nariman, made a 'mention' in the courts in vi ew of the prolonged delay. The Judges asked the company to wait for a few more days. Why, then, on the very next day, did the company decide to pull out?

The peculiarities of the MPC project requires to be borne in mind while studying the issue. By virtue of its being a fast-track project contracted under the MoU regime, it enjoyed a sovereign guarantee as well as escrow cover from the State government. B oth these provisions had been endorsed by the State and Union Cabinets, although they were contingent on the outcome of the court case. Compare this with the present flock of private power generation projects at the development stage in various States, w hich are jostling with one another for the limited and perhaps unreliable escrow cover, escrow being a basic minimum requirement to find financiers for the projects. Most independent power producers (IPPs) today subsist on optimism rather than on any rea l indicators on the ground. They are no less plagued by delays, having been contracted during the MoU raj until 1995. Karnataka does not lack in its share of such projects. The 1000 MW Nagarjuna project, also in Mangalore, and the 500 MW Vijayanagar proj ect, promoted by the Karnataka Power Corporation Ltd, have been eyeing the limited escrow pre-empted by the MPC; they have no hope of getting this if the MPC goes ahead with the project.

The MPC, on the other hand, had everything going for it. The courts were set to decide in a few days and the remaining clearances were contingent on the court verdict. Why then did the sponsors cite delays as the reason for their pullout?

THE other reason cited for the pullout by the sponsors was "inadequate returns" from the project. The cost of MPC power (at a dollar rate of Rs.40.62) was worked out at Rs.3.89 per KWhr, according to Purna Cherla, chief financial adviser of the Karnataka Power Transmission Corporation (KPTC). However, MPC chief executive officer Ron Somers denied that the cost would be this high. He instead gave a figure of Rs.2.51 per KWhr (at an exchange rate of Rs.43.75). At current exchange rates the cost would be h igher. Under the two-part tariff regime adopted by the Karnataka Electricity Board (KEB) in contracting power from this project, the price of electricity is indexed to both inflation and foreign exchange fluctuation. How then did the returns suddenly bec ome inadequate? What was the provocation for the sponsors to complain about an erosion in returns?

The only consideration is that the promoters perhaps feared that the project would meet the same fate as the 1000 MW Hinduja-promoted fast-track project in Andhra Pradesh. In a bid to bring down the tariff, Andhra Pradesh is revising the project on numer ous counts. Grant of sovereign guarantee by the Centre is contingent on the State paring the returns on several technical as well as financial parameters.

Karnataka government officials are reported to have estimated that the KPTC will have to pay Rs.180 crores a month to buy power from the MPC. In fact, they are reported to have estimated that without a drastic widening of the paying consumer base and a c onsiderable hike in tariffs, the KPTC will have no resources to buy power from the MPC at the negotiated rates; and it that case the guarantee provisions will be activated. Therefore, it would make immense sense for the KPTC to try and drive down the pri ce of power that it would purchase from the MPC.

What are the parameters on which the KPTC could revisit the November 1997 Power Purchase Agreement (PPA) with the MPC? Although the project cost and the cost of financing are the key determinants of the tariff, the operational parameters of a power stati on are no less significant in terms of the cushion they provide to the generator. The KEB has contracted power from the project on "normative" terms. This means that the power producer would reap the benefits if operations acquire a level of efficiency a bove those specified in the contract. The MPC contract leaves room for the promoters to make profits on the operational parameters. For instance, the contract stipulates a station heat rate (a measure of efficiency of the power station), of 2449 Kcal/KWh r: the National Thermal Power Corporation's stations operate at 2200 to 2300 Kcal/KWhr. In the case of auxiliary consumption (the percentage of power required to operate the station), the Cogentrix deal allows for a heat rate of 9.2 per cent: coal statio ns operate at considerably lower heat rates.

A Government of India notification of June 1998 stipulated that all operational parameters will have to apply to actual terms, not normative terms, if a counter-guarantee is sought. Therefore, according to KPTC officials, the PPA will have to be reworked to bring it in line with the actual operational parameters of the plant before the promoters are given a counter-guarantee.

Another area of dispute could be the recent notification relating to income tax. According to the PPA based on earlier terms allowed by the Government of India, income tax is a pass-through. However, according to the latest guidelines, income tax on retu rns over the assured 16 per cent on equity can no longer be a pass-through. This would mean that at the prevailing tax rates, the promoters will have to take a 30 per cent cut in returns on their bonus generation. That would be a sizable amount.

The MPC has already bid for an EPC (engineering, procurement and construction) contract and contracted Black & Veatch, a firm of consultants; subsequently EPC rates went down drastically, but are hardening once again. Last year, a Government notification advised State governments to rebid EPC contracts for projects in which counter-guarantees were sought. However, the power purchaser needs to assess whether it makes sense to renegotiate the EPC, now that the prices are climbing once again. In any case, the KPTC could reopen the EPC contracts as well.

The Central Government notification specifying that all normative values relating to station heat rate and auxiliary consumption should be replaced by actual values is binding on the State Electricity Board as well as the promoters. These changes, which are likely to eat into the cushion that was available to the MPC, will have to be incorporated by the company if it wants a counter-guarantee. Although another notification, issued in July 1998, clarified that the application of actual values would be wi th prospective effect from June 8, 1998, the MPC will still have to pare its operational parameters to actuals unless it gets a specific reprieve to that effect from the Union Cabinet. That should explain why Ron Somers insists on a guarantee from the Go vernment that the PPA of November 1997 will not be revisited before he recommends the revival of the project to his principals in North Carolina, United States.

The Karnataka Cabinet, which discussed the issue on December 16, set up a high-level committee of officials to decide whether escrow facility should be extended to the project. According to the State Government, the PPA did not envisage an extension of e scrow to the MPC and since the move would block nearly Rs.450 crores of the KPTC's funds, it merited careful consideration. Further, the State Government has left it to the Centre to decide on the applicability of the June 8 notification of the Governmen t of India.

The MPC's official line citing governmental and judicial delays as the reasons for its pullout sounds hollow on another count as well: the promoters' incoherent response following the favourable court verdict. While the MPC's local chief stated that he w ould recommend to his principals the conditional reconsideration of the pullout decision, the CLP issued a curt statement from Singapore stating that it would not be interested in reviving the project. Even more curious was the CLP's contention (as repor ted by a news agency) that while delays were an issue, prolonged litigation was not the main factor behind the pullout decision. Yet in the absence of the court case, the company would have been steaming ahead with escrow and sovereign guarantee clearanc es. What, then, was the provocation for the withdrawal from the project?

With factors extrinsic to the sponsors having been discounted, the spotlight now turns to the promoters themselves. A plausible explanation could be found in a recent statement by Bharatiya Janata Party general secretary Jagadish Shettigar, in which he s aid that lack of trust between the two promoters was behind the pullout decision. Somers conceded to Frontline that there had been a delay in the transfer of MPC shares to the CLP, which became a co-promoter only in 1995; but he blamed it on routi ne administrative delays. The share transfer is now complete, with the CLP holding 50 per cent of equity of the MPC. The U.S.-based energy multinational General Electric has the option to buy 10 per cent from the CLP. V.P. Sharma, business development ma nager of the CLP, went to great lengths to assure Frontline that there were no differences between the promoters. Only future events will show whether this is true or not, especially in view of the inconsistencies in the positions taken by the two on the question of reviving the project.

Assuming that there are no differences between the promoters, the pullout decision must then have been taken purely on the sponsors' whim, which would be an extremely unbecoming act that deserves a reprimand, for the company's move, in effect, corrupted the foreign investor perception of the country. U.S. Ambassador to India Richard Celeste said that India had been put on the U.S. Inc. watchlist. "The Cogentrix case is a symptom of the problems of doing business in India," Celeste said, and added that t he key players in the Central and State governments (presumably the State Chief Minister and the Union Power Minister) should pick up the phone and speak to the CEOs of Cogentrix and China Light and Power. This despite the fact that the MPC had not even formally informed the State government, the Centre or even its power purchaser, the KPTC, of its decision to "cease development of the project" but had gone directly to the media. Both the Central and State governments overlooked this slight; as soon as the apex court set aside a Karnataka High Court judgment ordering an inquiry by the Central Bureau of Investigation into allegations of kickbacks by the promoters, the governments asked the company to reconsider its pullout decision. Somers then drew up a list of things he wanted the State and Central governments to do before he would ask the MPC board to reconsider its decision. Among other things, he wanted the Centre to give a draft counter-guarantee and the State Government to give an undertaking to the effect that the PPA of November 1997 would not be reopened.

Whatever the reasons for the shelving of the project, the sponsors were in a win-win situation. If the court had delivered an adverse judgment, the pullout decision would have been vindicated. In the event, the favourable judgment appears to have given t hem ample elbow room to wrest further concessions from the State and Central governments should they reconsider their decision.

The MPC has not done too badly for itself on another front: the two-Judge bench of the Supreme Court gave the MPC a clean chit and severely indicted the Karnataka High Court for ordering a CBI inquiry on "flimsy grounds and materials". Justice Saghir Ahm ed and Justice Rajendra Babu said: "The H.C. has looked at different circumstances in the case with a jaundiced eye. We think the H.C. has gone too far." The judgment said that a criminal investigation could not be started on mere "surmises" and "conject ures" without any reasonable basis. The Judges also said that there was no foundation for the allegation that the sponsors had paid kickbacks to secure the contract. In another scathing remark, the Judges observed: "The allegation of bribery made against (H.D.) Deve Gowda is based on a letter written by George Fernandes and the basis of this letter, again, is not clear." The Judges also concluded that on the basis of the material provided by the petitioners, no case could be registered, to say nothing o f having an investigation conducted. The judgment sets at rest any hope the petitioners may have of directly approaching the CBI for an investigation, although the Judges did observe that the petitioners were at liberty to approach the investigating auth orities on the basis of any new material that they may have.

The apex court's dismissal of the petitioners' allegations on the ground that they were based on flimsy material and grounds raises certain serious questions about PIL. Public interest litigation is doubtless an important instrument for citizens to get j ustice from the system in a democratic polity. However, all that the petition filed by Arun Kumar Aggarwal and S.K. Kantha appear to have done is to delay the project by two and a half years and, in the process, push up the costs in terms of legal fees a nd cost overruns, not to mention the delay in providing electricity to a region that faces power shortage. This additional cost will be absorbed not by the sponsors but by the project and therefore borne by the consumers of the power it would produce.