White Elephant On Distress Sale

Enron wants to sell and get out of the Dabhol Power Company (dpc). But the question is: What's a fair exit price? Expert suggestions vary. Kirit Parikh of the Indira Gandhi Institute for Development Research (igidr), who was on the renegotiation committee constituted by the Shiv Sena-bjp state government in 1995, puts it around $2 billion (Rs 9,400 crore), a billion less than the total project cost, 70 per cent of which has come through debts. Says he: "This should be an attractive offer for several Indian companies. Also, there's the option of de-dollarising the debt. Power can then be made available at about Rs 3 per unit." Incidentally, dpc also modified its offering to close to Rs 3 per unit recently.

But Parikh argues the offer would be unacceptable since the price is still dollar-dependent. Compared to an 8 per cent earning in a dollar investment, the Indian rupee promises to yield almost 12 per cent—the internal rate of return can thus be substantially reduced which will eventually translate into a sizeable reduction in costs like capacity charges. It will finally reflect positively on the unit price. Besides, a new buyer could backload the price and provide power at Rs 2.50 per unit with a 5-10 per cent hike every year. Even Enron's gas plant, Parikh says, is a viable natural gas fuel option to our 12 fertiliser plants running on lng.

But there aren't many takers for this argument in the current ncp-led coalition in Maharashtra. The Left Front is putting pressure on the government to coax the 12-member dpc board of directors, which includes six Indian directors, to move a resolution to declare the project sick, wind up the company and let mseb take over the assets once the high court has worked out the liabilities.

Sixty-five per cent of the total debts have been given by Indian financial institutions. They also provide guarantees for 20 per cent of the balance that has come from foreign lenders, who will thus get back their money almost immediately. Enron and its partners, Bechtel and GE, have pumped in $600 million of their own into dpc from a total equity commitment of about $900 million. So what is the fair business value of this paid-up capital?

The Godbole Committee Report bases its calculations on a "realistic" plant-load factor of 30 per cent and suggests writing down the equity by 50 per cent along with a moratorium of five years on the debt. Suggests Pradyuman Kaul, advisor on power to the Left coalition: "We had suggested writing down the equity to a tenth, to a price of about $100 million (Rs 470 crore), and talking upfront with banks on restructuring debt." $100 million may appear cheap, but it also comes with a $2 billion debt that needs to be renegotiated and serviced. Paying the interest on it assures that the buyer will not earn a penny for about five years. Kaul explains that $2 billion would be too high for a buyer, and, after servicing the debt, he could hardly think of backloading the price of electricity as suggested by Dr Parikh. He feels that a new buyer can afford a Rs 3 per unit price only on a "virtually impossible" 90 per cent load factor.

teri director R.K. Pachauri has a different opinion. Says he: "Enron should first complete the project and only then be allowed to exit." This would mean getting in about $300 million (Rs 14,100 crore) of pending equity, thus taking Enron's stake in the project to more than 50 per cent. However, it would have to be then represented in Enron Corp's balancesheet.Any dispute then could easily be taken to US courts. Critics cite this as a major reason why Enron hasn't brought in the rest of the equity.

Pachauri also feels that the onus is on the company to restructure the debt as it is a huge chunk that can make the company sink or swim. The price, he says, should be fixed on what it would cost to put up such a plant. But isn't there a general feeling that the entire country was taken for a ride and that we have signed a bad deal? Argues Parikh: "In a deal between two consenting adults, the one who makes a mistake has to pay for it." Parikh is of the opinion that demand for the underutilised plant will rise in the coming years.

What is clear is that the deal needs to be settled quickly. After the Godbole Committee report, a renegotiation committee, again headed by Madhav Godbole, former union power secretary, was set up. But Enron refused to deal with it on its own, insisting that the mseb and both the state and central governments be present for negotiations. Says Pachauri: "I don't think a renegotiation committee can settle the matter. Only the seller and buyer can settle it."

But the Left Front has been insisting on a judicial inquiry even before any renegotiation. It has also threatened to withdraw support from the state government if its demands are not met. But while Enron drags its feet on the renegotiation issue, the state government has now agreed to push the judicial inquiry through—its coordination committee met on August 15 to finalise the terms of reference for such an inquiry (the draft is expected to be finalised by August 21). Chief minister Vilasrao Deshmukh, reiterating the Democratic Front's commitment to a probe, assures that it will not clash with any of the ongoing litigations (there are still six cases pending in the high court and a citu case in the Supreme Court).

Technically, following the preliminary termination notice that dpc served in May this year, it can now issue a termination notice only on November 19. If this happens, they can claim damages. But if the results of the judicial inquiry are announced before that or if the high court or the Supreme Court judges the ppa invalid, Enron can end up with nothing in hand as has happened in other countries where the deals were found fraudulent. If Enron's position is valid, it can go for arbitration in the international courts. But even Enron has categorically stated, in international press, that it is keen on exiting the dpc. "We want out," chairman Kenneth Lay was quoted as saying recently.

Now the big question: Who will buy the Dabhol plant? To supply electricity at not more than Rs 3 per unit and a 30 per cent load factor (as suggested by the Godbole report), the losses for any buyer in five years will be about Rs 3,300 crore. No private company, feel experts, would be able to bear such losses. This then leaves only the government which can buy the project.

In the meantime, Tata Power has reportedly evinced interest in the project and has even held informal talks with the government. Reliance Industries, considered the potential buyer by many, has stated that it will route all its power buying through bses in which it has a substantial stake. There were also names of foreign buyers floating around. It is, however, clear that any talks can start only after the dispute is settled. Enron, meanwhile, remains tight-lipped on the question of the price or the potential buyer.The two parties are eyeball to eyeball and are waiting for the other to blink.