Manmohan proposes, and disposes

You could call it the biggest irony of recent times. As finance minister at a time when the government was very keen to help Enron, despite grave opposition, Dr Manmohan Singh was responsible for restricting the central government counter-guarantee to the $2.4 billion Dabhol Power Company (DPC) to just around $300 million—so, assuming DPC does actually win the $5 billion it has filed for in the UK arbitration court, the Centre’s obligation will be under Rs 1,300 crore even today.

Yet, as Prime Minister, Dr Singh has cleared a proposal to increase this guarantee to Rs 3,150 crore!

According to the proposal, the financial institutions are to buy out all the foreign debt on the Dabhol plant and a special purpose vehicle (SPV) will be floated to do this—since the SPV has no real assets of its own, the government will provide a Rs 3,150-crore guarantee, on the basis of which it will borrow the funds to do so.

Then, if everything proceeds along the desired lines, the SPV will buy off the DPC equity from GE, Bechtel, and the government of Maharashtra as well, sell off DPC, and use the funds to retire the debt, and the government’s outgo will be zero.

So what’s the problem, considering the government’s exposure is really just a notional one?

More so since the plant which has been rotting in the Arabian sea breeze for over three years will finally get started—how colossal the national waste is can be seen from the fact that each day’s delay in starting the plant costs the country around half a million dollars in interest costs alone.

Add the cost of the power shortages due to this plant being out of commission, and the loss is many times this.

Actually, there is no real problem if all goes according to plan. There are, however, a few points worth keeping in mind while hoping things will work out this time around.

One, for over three years now, the financial institutions (FIs) have been promising to come up with a solution (including tax concessions and the “haircut” that the FIs and foreign lenders would take) that would get the plant to start “soon”, but this has never happened. Two, the SPV and all the talk of buying the debt of foreign lenders obfuscate the real issues.

For the fact of the matter is that, if the government was serious, both the foreign debt as well as the foreign equity could have been bought almost three years ago—after all, since the project was worth near-zilch once Enron filed for bankruptcy in December 2001, getting the stakeholders to the table couldn’t have been too tough.

Instead, the government didn’t even bid for Enron’s stake when it was auctioned at the bankruptcy court in the US, and allowed the stake to be bought by GE and Bechtel—if the government had bought Enron’s DPC stake, even the arbitration being fought at London wouldn’t have looked so menacing today.

In which case, what are the real issues? The real issues include who will buy 2,400 MW of power from the plant since, by law the power has to be sold only to the state electricity boards (SEBs), which are mostly bankrupt.

Since a counter-guarantee from the central government wouldn’t be forthcoming to take care of this issue, the only other option is to find other sweeteners.

Like tax breaks, waiver on import duties on naphtha to run the plant for a year or two till it starts using LNG, giving concessions to the plant under the mega-power policy (even if it did come up before the policy came into being!) and some way of even compensating for import duties already paid, and so on.

The point, however, and this is my big worry about why the project may still take years to get started, is that while the government knew this in 2001 itself, it has simply allowed matters to drift instead of settling these issues. What’s the guarantee the same delays won’t happen again?

The guarantee, it can be argued, is that while the NDA government was inefficient, things will really move, now that there’s a new dispensation in place. Possible, but the manner in which the government has started off has been quite a disaster.

There’s barely a month left for the government to file its reply before the arbitration court in the UK, and it has changed all the solicitor firms who’ve been handling the case, both in India and in the UK!

While changing law firms may not be the biggest disaster to have hit this particular case, surely the new solicitors will take some time to come to grips with the intricacies of the case? More important, just because a government has changed, it doesn’t mean each person involved in the case has to be changed.

The biggest beneficiary of the SPV-cover, if it finally does happen, will of course be the financial institutions (FIs). For, a large part of the foreign debt the SPV will now buy, like the Japan EXIM loans, are actually something the FIs themselves had guaranteed in the past, and earned guarantee fees on!

Japan EXIM’s loan, for instance, is based on guarantees from the Indian FIs that DPC would make all repayments in time. Now, at one stroke, a large part of the FIs’ liabilities will get transferred to the government of India. After which it doesn’t really matter if it takes more time to sell off the plant.