THE Enron case is taking a curious turn indeed. From the US Ambassador to Bal Thakeray, from Dick Cheney to Sonia Gandhi, all are now talking of the need to solve the Dabhol-Enron issue amicably. We are told that this is to ensure Foreign Direct Investments (FDIs) for India, which otherwise might dry up. The question that needs to be asked is how much foreign exchange did Enron actually bring into India?

The conventional wisdom is that Dabhol represents the largest FDI in the country till date and therefore how we deal with this kindly investor, who has brought billions into India, is important for others. At the same time, we are also told that Indian Financial Institutions (FIs) have lent 1.3 billion dollars to the Dabhol project. In addition, they have guaranteed another 600 million dollars to other foreign lenders. In other words, if Dabhol goes bankrupt, the exposure of the Indian financial institutions is to the tune of 1.9 billion dollars or Rs 8,900 crore at current exchange rate!

Some preliminary observations are in order here. A project of this size – of about 2200 MW – would cost about Rs 6,600 crore at Rs 3 crore per MW. This is not a figure pulled out of thin air. This was the cost – Rs 3.18 crore per MW – that NTPC incurred while building the Kayamkulam project. In other words, the Indian financial institutions have lent more money to the project than what would have been spent if the project had been done by an Indian agency such as NTPC or the Maharashtra State Electricity Board (MSEB). If Enron has brought in foreign exchange, it is merely the recycled project funds taken as loan from Indian and other financial institutions.

For those unfamiliar with the operations of capitalism, there is the fond belief that capitalists bring in capital and therefore should be treated with kid gloves, lest they become unhappy and leave with their moneybags. The reality, as Enron has brought out, is quite otherwise. The capitalist starts with an inflated cost of a project, goes to financial institutions which have hard-earned savings of the people and get loans for 70 to 80 per cent of the project cost. Since this is well above the actual cost of the project, the capitalist can bring back a part of these loan amounts -- through over-invoicing -- as their equity. Not only is the equity thus generated gratis, they even make a tidy sum of profit even before the project has produced anything.

The Independent Power projects (IPP) are even one better. Normally, the banks or FIs ask for various guarantees for ensuring repayment. This could be land or other property that needs to be mortgaged. For power projects however, the loans are given as "non-recourse" lending. In such a case, only the project assets are available as security for the loan. If Enron walks away from the project, the Indian financial institutions have no other recourse except theses project assets. Enron has not hocked a cent of their assets to the Indian banks and cannot be touched if the project fails.

If the financial institutions had no security against which they gave loans to Enron, why did they give loan to Enron at all? By their own admission, the only "due diligence" they did, was to look at the Power Purchase Agreement (PPA). If the PPA showed that Dabhol would have a healthy balance sheet and would be able to pay the FIs, they were not interested to know whether the project cost was justified or it was a viable project. The sovereign guarantee to Enron on the PPAs was enough for the FIs. The Enron scam now becomes clear. In the first stage, get a PPA signed using various forms of "education". Once you have an educated Salve and a Sharad Pawar (later Bal Thakeray, Munde, Jaswant Singh and Vajpayee), a PPA is signed. Based on this PPA, loans are raised from Indian and foreign financial institutions. With loans, Enron then has money, which can be brought back as its equity share. Only money that Enron had to spend was "dubious development charges" or "educational fees". By now, the country has been educated by the Tehalka tapes what development charges and educational fees really mean. Sounds remarkably like the operation of East India Company, does it not?

It is not there was no resistance in the financial institutions. IDBI, one of the major lenders had objected to the inflated costs of the project. The intervention of Montek Singh Ahluwalia, the then Secretary, Finance to "overlook" such small irritants is well documented. Finally, IDBI and other FIs caved in and handed over the bloated project funds for Enron.

Let us see the record of the people involved in the sordid set of events of the Dahbol project. First is the dynamic duo, N K P Salve, the then union power minister and Sharad Pawar, the then chief minister of Maharashtra. They cleared the first stage of the project consisting of 695 MW. Salve brought out vituperative booklets, calling people opposing the Enron project all kinds of names. He even toured the United States and gave statements on how Communists and fellow travellers were opposing foreign investments in the power sector while he stood for such investments. Now he claims he was against the Dhabol project! Sharad Pawar is consistent; he was a friend of Enron then and is a friend even now. He has even threatened to take to streets if the Enron project is cancelled. Thakeray now claims that nobody told him there was second stage of another 1400 MW, that he supported this project only because it would do away with power cuts in Maharashtra. Of course a Dabhol project would do away with all power cuts in Maharastra ; power would become so expensive that very few people would then be able to afford it. The record of Jaswant Singh and Vajpayee is even murkier. The counter guarantee was cleared during the lunch break of the Lok Sabha, the day the 13-day ministry of Vajpayee was set to fall. Without this counter guarantee, Dabhol would have been hard put to raise the necessary finances and effect a financial closure (tie up the finances).

Why are Sonia Gandhi and Dick Cheney discussing Enron? To understand this, we must look at American politics. George Bush has been the biggest benefactor of the Texas oil and gas companies. He has done away with various environmental regulations that were forcing the oil companies not to pollute in Texas. In his reign, Texas became the most polluted state in the US earning for him the sobriquet "the Toxic Texan". Amongst all the Texas companies, Enron has provided George Bush with the heftiest contributions to his election kitty, even given their corporate jet to fly Bush all over the US and is well known to be particularly close to the Bush administration. Recently, the Enron chief, Kenneth Lay was in the news for "interviewing" a future chairman of the Federal Energy Regulatory Commission. To get Lay’s nod, of course he was expected to tow the Enron line such as no price caps in California, etc. It is widely accepted that the Bush administration will go by what Enron wants in the energy sector. It is not surprising that Dick Cheney therefore thought that this was the most important topic for discussions with Sonia Gandhi. Jaswant Singh and Vajpayee are already on board on Enron. The Congress, which has been threatening to rock the boat in Maharashtra – witness Vilasrao Deshmukh talking about a judicial probe -- also needed to be brought to heel. And Sonia Gandhi’s assurance that Enron issue should be settled amicably brings out clearly that she has been now brought to heel.

For those who have argued that the state needs to get out of the power sector and induct private sector in through IPPs so that it has funds for the social sector, should now realise the folly of their position. With one IPP, not only can Maharashtra not pay the subsidies for agriculture, it cannot pay even its employees, schoolteachers, doctors and nurses. Privatising infrastructure does not release funds for other sectors; on the contrary it eats up all the resources of the state. Instead of capital expenditure that the state was earlier incurring, the state now incurs revenue expenditure in paying for the costly private power it has to buy. And as Enron shows, the revenue expenditure of just two to three years can pay for one Enron!

The problem that the people of Maharashtra have is that the two dominant parties – the Congress and the BJP -- sold the interest of the people down the river. Their game plan is now to get out of the Enron imbroglio by letting NTPC or the Power Grid split the power bill of Enron with Maharashtra. The centre is now arm-twisting various states with active help from the Congress so that these states all pool in to bail Maharashtra out of the Dabhol mess. If the mess is shared, it will be less noticeable; this is the belief that those arguing for an "amicable settlement". What they forget is that not only have they have received "education" from Enron, so have the people. They have learnt the hard way what the IPP route and the PPAs actually mean in terms of their electricity bills. It might have been possible in 1994-95 to argue that Enron power will cost only Rs 2.40 per unit; today, anybody advancing such arguments will be laughed out completely. It is time that the rulers learn the old adage that all people cannot be fooled for all times. Enron cannot be foisted on the people of Maharashtra and other states once again. Enron PPA needs to be scrapped if Maharashtra is to be saved from financial bankruptcy. There is no other recourse.