Now, A Cure That Kills

EXCLUSIVE
In a dubious revival plan, EPF, LIC are asked to repay Dabhol foreign debt
21 Mar, 2005
Rajesh Ramachandran
Outlook

'Workers of India unite to pay Enron's foreign debts; you have nothing to lose but your provident fund!' This seems to be the slogan from a Left-supported UPA government keen to bail out foreign investors with bad debts in Enron's dubious Dabhol power project.

The Rs 2,000-crore bailout package to help foreign banks is proposed to be raised largely from the Employees Provident Fund Organisation (EPFO) and the Life Insurance Corporation of India (LIC). Outlook has copies of official letters to the Central EPF Commissioner, Anirudh Rai, seeking funds for the bailout.

The deal is simple: Indian banks which have sunk over Rs 3,600 crore in Dabhol have been pressured by the government to form a Special Purpose Vehicle (SPV) or a company—Gas & Power Investment Company Ltd (GPIC)—to buy out the debt of foreign lenders. The GPIC proposes to rescue 20-odd foreign banks by floating 22-year bonds worth Rs 10 lakh each. EPFO, LIC and like institutions would buy them. While foreign banks are being rescued, there is no word on how the Indian banks' bad debts in Dabhol would be repaid.

After repaying the foreign lenders, the government, through a fresh SPV, may ask the National Thermal Power Corporation, the Gas Authority of India and Indian banks to put in Rs 500 crore each for a Rs 1,500-crore Dabhol revival plan.

But, according to Dr E.A.S. Sarma, former Union expenditure secretary and a member of the Godbole Dabhol review committee, it's inherently an unviable project and if power from it were to be sold competitively, someone would have to take the hit. Says Sarma, "It's unfortunate that the PF money of poor workers, investments by unsuspecting LIC policy holders and the
taxpayer are sought to be exposed to Enron's unethically incurred liabilities."

He feels the EPF and LIC are being arm-twisted by the government into violating their investment norms. The proposal was initiated by setting up the GPIC over a month ago. The State Bank of India (SBI), IDBI, ICICI Bank, IFCI and Canara Bank—the Indian lenders to Enron—were made part of it.

After the GPIC's formation, SBI managing director Ashok Kini wrote a confidential note, on February 9, to EPF commissioner Rai: "Your involvement, as a key investor in the SPV, is essential at this stage to facilitate the buyout of foreign banks' debt as a first and important step towards restructuring of the Dabhol project."

Such was his hurry that he wanted money within weeks. Kini told Rai, "It's imperative that the financial SPV raises resources in the next few weeks since the settlement reached with the foreign banks envisages payout within a definite time-frame within the next two to three months."

While Kini cited the support of the empowered group of ministers and the office of the cabinet secretary to tap the PF, another letter from the SBI on February 24 to EPFO stressed that the finance ministry was keen to resolve the issue.

Finance minister P. Chidambaram was earlier Enron's lawyer and hence had 'recused' himself from the group of ministers formed to clean up the Dabhol mess. This group includes agriculture minister Sharad Pawar, who first signed the agreement with Enron as Maharashtra chief minister, Planning Commission deputy chairman Montek Singh Ahluwalia, who as finance secretary gave the Centre's counter-guarantee to Enron, defence minister Pranab Mukherjee and power minister P.M. Sayeed.

However, sources told Outlook that the reference to the finance ministry's keenness to raise money from the EPFO in SBI's letter is not accidental and that the finance ministry is behind the revival project.

The EPFO normally does not invest in non-public sector bonds. So, to convince the PF managers "to make an exception to the internal practice of not investing in non-PSU bonds", the GPIC gave a presentation to the central board of trustees of EPF on March 3. Even while talking about the proposal, the GPIC assured the board of an AAA(SO) rating for the bonds by CRISIL and ICRA because these had central government guarantee.

But those who have tracked Dabhol for a decade, like Shantanu Dixit of Prayas, a non-governmental organisation, claim these bonds cannot be redeemed by running Dabhol on purely commercial terms. Enron's equipment suppliers GE Bechtel upped its stake to 85 per cent in Dabhol during the US bankruptcy court proceedings of Enron. It has also sued the Maharashtra State Electricity Board for Rs 26,000 crore in a London arbitration court for unpaid dues and loss of profit.

So even if the foreign lenders are paid off and money is found to refurbish Dabhol, GE Bechtel's unpaid dues and ownership rights would have to be settled before the issue is resolved. Therefore, the prospect of government recovering its money from Dabhol looks all the more bleak.

Abhay Mehta, author of Power Play, an expose on Dabhol, says this attempt to rope in the EPFO and LIC is a bigger scam than the original project. "The assets are worthless without a cash flow and the only way it can be ensured is by producing electricity. That requires buyers to purchase it at market prices. But given the capital cost involved and today's gas prices, Dabhol cannot sell electricity at less than Rs 4 per unit. And MSEB cannot buy electricity at this rate. So the money spent would have to go from the taxpayers' pockets either to redeem the bonds directly or through a plethora of tax concessions to make the project artificially viable," says Mehta.

In fact, Heinz Vergin, the World Bank's country director for India, had deemed the project "not economically viable" in April 1993. Then, why is the government desperate to help Enron's foreign lenders? Outlook contacted the cabinet secretary's office supposed to be spearheading the revival project, Kini who urged EPFO to invest in the bonds and power secretary R.V. Shahi. But failed to get a response.

Critics point to a Washington Post article that appeared two years ago by way of explanation. According to documents accessed by that newspaper under the US Right to Information Act, President George Bush was to speak to then Indian PM A.B. Vajpayee about Enron on November 8, 2001, but could not because Enron's collapse began that very day.

The US national security council was also involved, as evidenced by an e-mail which said, "Brajesh Mishra would be willing to meet with Mr Lay (Kenneth Lay, the disgraced ex-Enron chief) and the bankers but only at the residence". Also, vice president Dick Cheney during a visit to Delhi raised this issue with the then Opposition leader Sonia Gandhi.

The process continued even after Enron's collapse. All this was to "protect the US taxpayers' $640 million interest" in Dabhol. Now, Anup Mishra, joint secretary in charge of Dabhol in the cabinet secretariat, is in Washington, so were representatives of the Indian banks who are floating the bonds.

The BJP government, that had given the counter-guarantee to Enron during its 13-day government, had in its later avatar as the NDA set up a committee that recommended paying off Enron's foreign lenders by an Indian bank. The new government seems to have only amended this recommendation to rope in the EPF and LIC to share the burden.

Dr Sarma feels that on ethical considerations, the foreign lenders also should have made sacrifices like Indian banks. "Had the government insisted on that approach, perhaps, such an arrangement would have been arrived at," he says.

Now, the US banks can be sure of their money being returned by Indian taxpayers. But this move has prompted critics to allege that the government is writing off Dabhol's liabilities and gold-plating the company for eventual sale to Reliance, Tatas, Shell or British Gas.

The transparent alternative of nationalising Dabhol would obviously imply a loss of opportunity to the private sector. And this of course, runs contrary to the reformers' agenda of foreign direct investments replacing government ownership in the power sector.