Of power and potatoes

WHEN I wrote two weeks ago in this column about some blunders Enron had made in India, some readers asked if I had changed my mind. We thought you were pro-Enron, they said, so have you turned anti-Enron?

I find the question irritating and meaningless. As a liberal, I am for dynamic, competitive markets that benefit the consumer and the economic growth of the country. This does not, however, mean being in favour of any one company or another. The whole point of competition is that any company that fails to deliver should be beaten by others that do. Favouring markets does not mean ensuring riches for multinationals or big companies, but exposing them to competition that forces them to deliver or go bust.

This is simply not understood, or simply not believed by many readers. For decades, they have been told by socialists that capitalism favours big capitalists at the expense of consumers.

In fact a look at the US, shows that neither size nor lineage guarantees prosperity, or even survival. The Dow Jones Index is composed of the 30 biggest companies. Of the 30 that constituted the index when it first started a century ago, only one–General Electric–is still there. All the others have either broken up, been taken over, or gone bust. Size is no more a guarantee of survival for companies than for dinosaurs.

In India, there was more stability for big business, but that was a consequence of the licence-permit raj. The planning framework ensured that no unit could start without permission, no unit could close down without permission, and the government would keep ailing firms alive by writing off loans, giving tax breaks, raising import duties, and propping up third rate managements one way or another. Ironically, the prosperity of the inefficient rich was ensured by socialism, not capitalism.

Liberalisation after 1991 has produced dramatic changes. Many of the old industries are in deep trouble, and their old inefficiencies stand exposed for all to see. The real gainers have been consumers, who now enjoy a vast array of goods at more competitive prices than before. The beneficiaries also include the newer, more dynamic entrepreneurs like the Ambanis, and the software giants who have gone from zeros to heroes.

Back to Enron. In 1991, bankrupt, inefficient state electricity boards (SEBs) had a virtual monopoly over power generation, transmission and distribution. I instinctively oppose monopolies, whether in the public or private sector, since they disempower consumers. I saw the ideal solution as the break-up of SEBs and their replacement by a marketplace where private companies would compete for the custom of buyers.

In fact the supposed reform continued with SEB monopolies, but allowed power generation to be subcontracted to private parties at a cost-plus price backed by counter-guarantees from the Centre. This was an extension of arrangements that had long existed for a handful of private sector power producers like Tata Electric and Ahmedabad Electric.

From my viewpoint this was clearly sub-optimal. Yet, given that SEBs looked moribund, it looked like one step forward. The unwillingness of SEBs to adopt a commercial attitude meant they had no money to keep up their traditional monopoly over generation, and so they were willing to let others do this. but they insisted on keeping their monopoly over transmission and distribution. Now, their bankruptcy arose from their failure to check theft and line losses, to levy reasonable tariffs, and to bill customers accurately and collect dues on time. Private generation did nothing to solve these problems, it merely postponed the day of reckoning.

Unbundling and privatising SEBs should have been the first step in reforms, not the last. But TL Shankar, former head of the Hyderabad Staff College, told me that such a sequence would have been politically impossible. The route actually taken was flawed, but the only one politically possible. I agreed, but with misgivings.

The governments cost-plus approach bristled with possibilities of misuse and inefficiency. This had already been demonstrated in the fertiliser industry, where guaranteed returns lead to understatement of capacity, high capital costs and expensive fertilisers.

When Enron first made its proposal, I remember talking to its top negotiators, Rebecca Mark and Kenneth Lay about pricing. Why, I asked, should there be any guaranteed returns for Dabhol or any other power project? After all producers of potatoes did not negotiate individual prices or guarantees. They produced as many potatoes as they wanted and sold to whomever they could at whatever the going price at the time was. Why should producing and selling power be any different from producing and selling potatoes?

Rebecca Mark said there were technical reasons. Besides, she did not want to seek out individual buyers and collect dues from them. This posed many problems, and she was more comfortable selling to a single monopoly buyer like the SEB which she believed–wrongly as it turned out–to be solvent.

Kenneth Lay said a negotiated price made sense because the cost of power depended on the fuel used, the location and many characteristics of the specific site. I retorted that the cost of producing potatoes also depended on the potato varieties and fertilisers used, on the soil quality of each farm, its climatic conditions, its access to irrigation, and other site-specific factors. Yet no government negotiated a cost-plus arrangement with each farmer. Producers were left free to produce at their own risk for the market. Why not the same for electricity?

Kenneth Lay eventually admitted that this could be done in due course, but argued that it would take time to create a market for electricity. Till then, he said, it made sense for projects like Dabhol to sell power to monopoly SEBs.

So, I had two pragmatists–TL Shankar and Kenneth Lay–telling me that the first step would have to be Dabhol-like projects. They both felt the creation of a marketplace as a first step was an idealistic pipe-dream. I had to agree. But it seems clear after the Dabhol mess that the pipe-dream would have served the country far better.

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