Subject: Re: More Enron news from the Indian angle
Date: Mon, 24 Dec 2001 22:18:12 +0000


Margaret

To clarify: No, I am not saying that India is the bad guy and America is the 
good guy in any general sense. You've said that I'm unprepared to accept 
that Enron is responsible for its bankruptcy. I don't know what gave you 
that impression: in my view, Enron's bankruptcy is due to a combination of 
factors: accounting firms' poor due diligence, greed on the part of some 
Enron executives, and the failure of the securities industry to understand 
how poorly-funded Enron really was. Enron's bankruptcy, at the same time, is 
not due to its environmental record in Latin America, or its power plant in 
India. Those are separate issues. Enron in 2000-2001 was a fundamentally 
different company from the one it used to be -- like Long Term Capital 
Management, like Barings, it had become a hedging, trading firm; it was no 
longer an infrastructure company -- anyway, all that is besides the point. I 
agree with you if you are to say that Enron's officials, at senior levels, 
are to blame for the firm's bankruptcy and loss of jobs. But I wouldn't 
blame "Enron", as though it was somehow an entity acting on its own. Some of 
my good friends have lost jobs in this and got measly compensation. But 
that's the nature of the system -- to their credit, those individuals have 
shown spunk and are rebuilding their lives.

I don't believe that as a result of Enron's collapse the global economic 
crisis has deepened, as you've put it. Enron's assets will be bought cheap 
by others; and its trading operations are supposedly very good, and either 
Goldman Sachs or Citicorp will be buying it before too long.

As regards Enron in India, you've asked:

>but should Enron not be faulted
>for taking this risk in the first place?

Why is that risk-taking a fault? That's the principle on which capitalist 
system functions. You take a risk, you charge it accordingly, and ask for a 
higher return -- that's what India offered -- 16 percent return on capital 
-- and Enron took that risk. Nobody has said that the project was unsound -- 
that is, it was faultily engineered, or it did not perform, in terms of 
generating power. The factors behind its failure have to do with finance, 
not the engineering or technology.

>And given the devaluation of the
>rupee, doesn't it make sense for India to avoid incurring debt to overseas
>companies?

That's a point of view. Sometimes it makes sense to raise debt overseas, 
even with a depreciating currency, if the company/country's sovereign rating 
is good, and if interest rates internationally are low. Reliance Industries, 
for example, does raise debt, and its rating is superior, or was until 
recently, to that of the Indian Government. I'd say if the Tata group tried 
to raise debt in the current environment, of low interest rates, they'd be 
doing something smart -- India's domestic interest rates are much higher. It 
is a decision to be made based on the punt you want to take--will the rupee 
depreciate so fast as to eat into the interest saving? It is a hypothetical 
question, and it also depends on the risk-bearing capacity of each 
individual investor.

>And could you explain more about how Maharashtra's claim about
>expensive power was "fictitious"?

I base this on the unstated assumption in my previous post: that India 
subsidizes power. So India's "cheap" alternative power comes at a cost borne 
by other people. So if enron was "expensive" it was because the "cheap" 
power produced by the state electricity boards could be "cheap" because of 
subsidies. That's diversion of resources from tax-payers to other uses. As 
you know, in India taxes are only paid by the salaried class. Businesspeople 
can, and do avoid taxes by claiming all sorts of business expenses; 
politicians and wealthy farmers never pay taxes, and as a result, as Nani 
Palkhivala put it, the transfer of resources from the honest salaried class 
to the dishonest class takes place. And the beneficiaries of the cheap power 
are often those in powerful vote banks, or the ruling elite and their 
constituents. Granted, there is an element of polemic here, but to call 
Enron power as "expensive" without looking at the subsidy economics which 
reduce the prices elsewhere shows a misreading of India's electricity 
economics on the part of the journalist who wrote the story for Reuters.

>Of course, India needs more power, but it
>has to be able to afford it somehow.  Other states would/could not buy
>Dabhol power at the price Maharashtra was paying for it.

Prices do fall when supply increases. If MSEB ran its other plants at full 
capacity and sold that power to other states, it could have recouped the 
extra cost of Enron -- or, as I said earlier, it could have renegotiated 
that element of the contract. And neither of the Maharashtra governments did 
that.

>  If,
>hypothetically,  the Dabhol plant could have been built by an Indian 
>company
>without incurring massive overseas debt, then the price of the plant and 
>the
>price of the power it produced would have been lower.
>

That's hypothetical, because I don't think any Indian company has built a 
plant on this scale (2400 MW), with this technology, and in such a record 
time, despite the political hiccups. When I wrote about the project, which 
was a good five years ago or more, I remember senior engineers and 
executives of Tata Power marveling at the way the project was being 
engineered, designed and executed. There is much for India to learn from 
this, said a very senior Tata executive to me at that time. Many Indian 
companies do contract overseas debt for projects of this scale, through 
bonds and other instruments.

Salil

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