The high Cost of Delay

On returning to work after four weeks’ leave, my colleagues tell me that Enron remains the hottest topic in town. and that I simply must write about it.

I have long argued that the ideal solution is for the Maharashtra State Electricity Board to take up 30 per cent of equity of the Dabhol Power Corporation, reducing En-ron’s stake to 50 per cent. This means 30 per cent of the profits stay with the MSEB. So if indeed the profits of Dabhol Power Corporation are excessive, as alleged by critics. MSEB can pass on its share of excess profits to consumers. reducing the impact on them by 30 per cent.

Critics have devoted long columns to calculating the excess profits over 20 years and the impact on consumers. But if my formula is accepted, the cost to consumers and outgo of dividends automatically falls 30 per cent. more than any other form of cost-cutting can possibly achieve. This will not satisfy ideologues of the left or opportunists of the BJP (who want to paint the Congress Party as having sold the country’s interests to foreigners). They insist on cancellation in the holy name of patriotism, the last refuge of scoundrels. But for non-scoundrels interested in rational solutions, my proposal is surely superior.

It achieves at one stroke three aims. First, it checks any excessive profit outgo or cost to the consumer. Secondly, it avoids the payment of horrendous penalties for cancellation, which reports put at anything between Rs 600 crore and Rs 1.500 crore. And thirdly, it ensures that Maharashtra has enough power to forge ahead on the industrial and agricultural front.

Of these considerations, the last is the most neglected, yet its impact on people is by far the largest.

Most computations made by supposed experts are useless since they neglect the cost of delay, two to three years, if the contract is cancelled and re-tendered. Already Maharashtra is suffering power shortages, which will worsen unless more capacity comes on stream quickly. A lack of power means less production, less employment less profit for reinvestment less goods to be transported or processed, and less demand for all services associated with production. Dr Kirit Parikh critic of the project, has calculated that a shortfall of one unit of power imposes a cost of Rs 5 on the economy. I think this is an underestimate. But even Dr Parikh’s estimates suggest that a delay of two years in Dabhol will impose a cost of Rs 3.600 crore. of three years Rs 5.400 crore. These are staggering sums.

There is an old saying, no power is more costly than no power. Arguments over whether Dabhol’s power should be priced at Rs 2.40 or Rs 2.10 pale into insignificance in comparison with the harsh fact that the absence of Enron’s power will impose a cost of at least Rs 5 per unit on Maharashtra’s economy.

Nor do critics take into account the cost that cancellation will impose on India’s foreign debt. We are so used in India to politicians kicking businessmen around with impunity that we scarcely know that. in civilized market economies. contracts are enforceable. A country which cancels contracts will be seen as a risky place to lend to or invest in, so investors will demand higher returns and lenders higher interest rates to compensate for the increase in perceived risk. India has signed memoranda of understanding for power projects of 120,000 MW, and a rise of just one per cent in financing these comes to a whopping Rs 5,000 crore per year.

The time factor also means that a plant built quickly is worth far more than a plant built tardily. If one plant is built in 3 years at a cost of Rs 1.000 crore and another is built in six years at Rs 800 crore, the second may look cheaper to the layman but is actually more costly since it means production and employment have suffered for three extra years. and the cost of foregone benefits runs into thousands of crores.

Enron has guaranteed to build its plant in 33 months, failing which it is liable to substantial penalties. By contrast, time overruns are a constant headache in the public sector units, whose average construction time (according to one estimate) is 75 months. The damage to the economy has been immense. Quickly- available power always merits a premiums, something ignored by critics who are utterly ignorant of the cost of time.

If the review committee of the Maharashtra government detects bribery or any other criminal act in the Enron deal. then the contract should be cancelled (this is standard practice the world over). But news reports suggest that the review committee has found no such evidence, yet against the rule of law. Given the collapse of morality in India, maybe 90 per cent of all contracts involve kickbacks, and if we cancel contracts merely on suspicion, the whole economy will grind to a halt.

It is deplorable that our politicians and bureaucrats are so rotten that corruption has become a way of life. Reforming this merits the highest priority. But a start has to be made by identifying some actual crimes, not by acting arbitrarily against ideological foes, as the BJP and some leftists are doing in the case of Enron. It is indeed sad that many eminent people who invoke the rule of law and castigate arbitrary government action in other matters want to violate these principles in the Enron case.

The fate of Enron is likely to be dictated by petty party politics, not reason. The BJP believes it can gain electoral ground by portraying Mr Sharad Pawar and other Congressmen as a bunch of corrupt goons. It knows that the Congress has such a reputation for immorality that even unsubstantiated allegations will stick. The BJP cannot be unaware that cancellation penalties will impose a huge burden on the taxpayer. But it does not care. In effect, it is using taxpayers’ money to finance its campaign on the theme of Congress dishonesty. The Congress is ill-placed to object: it has misused public funds for ages. The end result will be less power, industrial production, employment and investment.

What do you think?