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Friday, 25 May, 2001, 10:41 GMT 11:41 UK
India's power crisis escalates
Indian man sitting by candlelight next to his computer
Indian citizens are left in the dark over power negotiations
India's electricity industry is in dire need of investment, but as Mark Tully in Delhi reports, a row between power giant Enron and the authorities is likely to scare investors away.

India's Maharashtra State Electricity Board has said it is cancelling its contract to buy electricity from US power company Enron.

The state of Maharashtra is the sole customer of Enron's troubled power project in India.

Earlier this week, Enron had moved to pull out of its $2.1bn power project in the state. This latest move will escalate the ongoing bitter fight between the two sides over unpaid bills.

The Enron project has now become so controversial that it is more likely to dissuade, than persuade other investors in India's power sector.

Power cuts

In Delhi citizens can face hours without electricity, but they are the lucky ones. In some parts of India it can be days.

Economists have identified India's chronic shortage of power as a roadblock that has to be removed if the country is ever to match China's growth rate.

But India's hopes of attracting foreign investment in the power sector have suffered a severe setback with the recent publication of a report by government officials that speaks of an inexcusable failure of following proper procedures in negotiations with the US company Enron.

Attracting international investors

The laboriously negotiated on-off-on Enron power project was to be an example that would attract other international investors.

Enron have moved to pull out of their project in India

Instead the state electricity board, which was to purchase the power, has defaulted on its payments to Enron.

The US firm, in turn, might well pull out of India, and the project has fulfilled the worst fears of international investors who were already reluctant to venture into India's bureaucratic jungle.

According to the report on Enron, the main culprits are the electricity board and the government of the state of Maharashtra.

They are charged with making extremely questionable assumptions, failing to insist on competitive bidding, ignoring warnings about the demand for power at the agreed price, and negligence on several other counts too.

But it was not the experts, it was the politicians who took the decisions on Enron.

Political involvement

The project became a political football that was kicked into touch by the right wing Hindu Bharatya Janata Party or BJP when they were in opposition, but was revived after fresh negotiations when they were elected.

Now that the BJP no longer rules Maharashtra, the government is anxious to rid itself of the burden of purchasing Enron's expensive power.

Even now Enron and its Indian subsidiary Dabhol Power might be saved if it is allowed to sell power directly to its customers.

But under the law as it stands, power companies can only sell to the bankrupt state electricity boards. This brings us back to politicians and their henchmen, the bureaucrats, often described as knowing awfully little about an awful lot.

That law is a relic of the old Indian controlled economy - known as the neta babu raj, or raj of the politician and the bureaucrat, whose powers and perks it was designed to protect.

A cautionary tale

In spite of India's avowed conversion to liberal economics much of the neta babu raj remains intact for obvious reasons.

But Enron can't escape their share of the blame.

They should not have taken advantage of "the inexcusable failure of governance" to strike a deal that, while manifestly in the company's favour, was always going to be an embarrassment to the politicians and bureaucrats who negotiated it.

There are also unanswered questions about how Enron persuaded the BJP politicians to change their minds.

So the Enron story is a cautionary tale for India: Keep politics out of power and other infrastructure projects.

And for foreign investors too: Make sure the bargain struck is a bargain that will stick.

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See also:

20 May 01 | Business
Enron warns India
06 Feb 01 | South Asia
Enron cashes in India power bill
08 Jan 01 | South Asia
Showdown looming over Enron project
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