Power faults
THIS small book is a fairly detailed technoeconomic analysis of the Enron controversy and raises some interesting questions.
Apart from the problems of high capital cost and high load factor guarantee, it brings out 2 facts not generally known. First, Dabhol Power Corporation (DPC), a subsidiary set up by Enron to execute the project, has extracted from its own sub-contractors, General Electric (GE) and Bechtel, more stringent performance guarantees than it has given to the Maharashtra State Electricity Board (MSEB). To the authors, this seems to establish the duplicity of Enron. The one question one should raise and which the authors do not is: why did not MSEB demand from PPC the kind of guarantees Bechtel and GE have given to DPC?
The second observation of the authors is that while working out the capacity charge, a 20 per cent interest on Indian rupee loan was assumed, whereas the loan by the Industrial Development Bank of India (IDBI) is given only at 17.5 per cent. Why didn't IDBI or MSEB notice this? It shows more a failure on our part than on the part of D PC and underlines the importance of soft technology of project management and contract negotiation.
But the authors claim that D PC will get an internal rate of return {IRR) of 28 per cent post-tax on equity. In arriving at this, they have used an inflation rate of 8 per cent. Usually in calculating IRR for a project, one does not include an inflation rate as then the comparison with alternatives gets muddled.
Another misleading statement made by the authors is regarding my work. The authors claim that I had accepted a 30 per cent IRR on equity as reasonable whereas they consider a 17- 21 per cent IRR post-tax as reasonable. What they don't say is that in my articles, the 30 per cent IRR was pre-tax return and not post-tax. Also what they don't say is that I had considered 30 per cent acceptable provided the project cost was minimised. The authors have quoted me out of context.
Their second objection is that if the project is awardea to Bharat Heavy Electricals Ltd, there will be a multiplier effect. However, Enron has brought most of its capital from abroad which is unlikely to be available to finance a project awarded to BHEL. In any case, the country needs more power and for whatever investible resources we have, BHEL should be encouraged to compete for them. The authors present alternatives for electricity in Maharashtra based on demand side management {DSM) options. I greatly support DSM. I would also argue that even with DSM, we will need to expand generation capacity.
Further, the book exposes the hollowness of multinational corpora- tions' {MNCS) claims on provision of development assistance to India. What I would like to point out is that our national corporations can be equally predatory given half a chance. The answer does not lie in swadeshi {what is produced inside a country) but in competition and transparency. If we have these, even MNCS won't be able to take us for a ride. If we don't, our own public and private sectors will fleece us.
In short, the book provides a somewhat flawed appraisal of the Enron controversy. .
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