THE ECONOMIC TIMES
Friday, May 25, 2001, http://www.economictimes.com/today/25lead01a.htm
MSEB slaps PPA termination notice on DPC

THE FINANCIAL EXPRESS
Friday, May 25, 2001, http://www.financialexpress.com/fe20010525/top2.html
MSEB slaps notice revoking Dabhol PPA ,  Sanjay Jog

Similar articles as above also appeared in the following newspapers:

THE TIMES OF INDIA
Friday, May 25, 2001, http://www.timesofindia.com/today/25mbom1.htm
MSEB slaps notice on Dabhol Power Company

BUSINESS STANDARD
Friday, May 25, 2001,http://www.business-standard.com/today/economy5.asp?Menu=3
MSEB rescinds Dabhol PPA 
 
THE INDIAN EXPRESS
Friday, May 25, 2001, http://www.indian-express.com/ie20010525/bus7.html
MSEB slaps 'avoidance' notice on Dabhol PPA
Charges company with material misrepresentation

THE ASIAN AGE
Friday, May 25, 2001, http://www.asianageonline.com/
Dabhol gets notice of termination from MSEB
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THE HINDU BUSINESSLINE
Friday, May 25, 2001, http://www.hindubusinessline.com/stories/14255602.htm
DPC-MSEB row: Centre awaits negotiations 
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THE FINANCIAL EXPRESS
Friday, May 25, 2001, http://www.financialexpress.com/fe20010525/corp20.html
MSEB has no right to revoke PPA, says DPC
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THE FINANCIAL EXPRESS
Friday, May 25, 2001, http://www.financialexpress.com/fe20010525/news4.html
MSEB issues Rs 136-crore cheque for power purchased from DPC for April , Sanjay Jog
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THE FINANCIAL EXPRESS
Friday, May 25, 2001, http://www.financialexpress.com/fe20010525/news6.html
MSEB may file petition before MERC today 
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BUSINESS STANDARD
Friday, May 25, 2001,http://www.business-standard.com/today/state2.asp?Menu=32
MERC pulls up MSEB for not providing DPC papers to Prayas, Renni Abraham in Mumbai 
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THE INDIAN EXPRESS
Friday, May 25, 2001, http://www.indian-express.com/ie20010525/bus4.html
Godbole panel suggestions to be accepted, says Prabhu
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THE HINDU BUSINESSLINE
Friday, May 25, 2001, http://www.hindubusinessline.com/stories/142556rm.htm
Review panel member rejects Godbole's remarks 
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BUSINESS STANDARD
Friday, May 25, 2001http://www.business-standard.com/today/economy2.asp?Menu=3
Lower DPC tariffs: High oil prices may affect talks, S Ravindran & Arijit De in Mumbai
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BUSINESS STANDARD
Friday, May 25, 2001,http://www.business-standard.com/today/opinion5.asp?
GODBOLE REPORT, CEA's dubious due diligence
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THE ECONOMIC TIMES
Friday, May 25, 2001, http://www.economictimes.com/today/25econ08.htm
Will the lights go out on Dabhol II?, Anto T Joseph 
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THE ECONOMIC TIMES
Friday, May 25, 2001, http://www.economictimes.com/today/25econ07.htm
Bechtel's out if dues not paid by May 31, Anto Joseph 
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THE ECONOMIC TIMES
Friday, May 25, 2001, http://www.economictimes.com/today/25econ11.htm
MERC questions validity of clearance for DPC unit
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THE ECONOMIC TIMES
Friday, May 25, 2001, http://www.economictimes.com/today/25edit01.htm
Attaboy, Godbole
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THE FINANCIAL EXPRESS
Friday, May 25, 2001, http://www.financialexpress.com/fe20010525/an1.html
Reform needs leadership, consensus will follow 
  Q & A -- Montek singh Ahluwalia
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THE ECONOMIC TIMES, Friday, May 25, 2001
MSEB slaps PPA termination notice on DPC

IN A retaliatory action, MSEB has slapped a legal notice on Dabhol Power Company to cancel the power purchase agreement. The Board will file a case with the state electricity regulatory commission on Friday. A retaliation to DPC's May 19 preliminary termination notice, MSEB had with this notice legally questioned the validity of the entire PPA, state government sources said here. MSEB chief Vinay Bansal confirmed the development and said the notice was served on Thursday "rescinding" the PPA and accordingly setting it aside under law. "We are saying that as per the Indian Contract's Act, 1872, MSEB wishes to consider the entire contract with DPC as void," sources said. The legal notice for cancellation of the PPA comes in the wake of DPC's failure to achieve 100 per cent peak load capacity in 180 minutes from a cold start. 

"We do not need to send a preliminary termination notice, this trumpcard of ours has entitled us to terminate the PPA," they said. "Under the PPA, DPC had made a representation that its power plant will conform to certain dynamic characteristics and operations, which it has time and again failed to comply with," the sources added. The sources said DPC had, in several letters to MSEB and the state government, admitted that the multinational could not "ramp up" generation as it was a base-load power station and not a peak one. "As per the Indian Contracts Act of 1872, such a confession amounts to material misrepresentation of facts, which, in this case, has been knowingly committed by DPC," the sources said. On May 19, 2001, DPC had issued a PTN to MSEB after months of working with the loss-making board, the state government and the Centre to find solutions, saying "it was apparent that the first two parties are unwilling to honour their offtake commitments for the entire 2,184-mw power station".  "The Centre has clearly communicated its unwillingness to assist MSEB and Maharashtra in either buying power or providing credit support," DPC added.
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THE FINANCIAL EXPRESS, Friday, May 25, 2001
MSEB slaps notice revoking Dabhol PPA ,  Sanjay Jog

THE Maharashtra State Electricity Board (MSEB), in a retaliatory move, on Thursday slapped an "avoidance" notice under the provisions of the Indian Contracts Act on the Dabhol Power Company (DPC) for "material misrepresentation".  "We are now convinced that your conduct is not bonafide and as such we are constrained to avoid/rescind the power purchase agreement dated December 8, 1993, with immediate effect,"  MSEB chairman Vinay Bansal said in a strongly  worded two-page notice to DPC.

Mr Bansal claimed the company had made material misrepresentation and "Our consent to the PPA was caused, inter alia, by the  representation on your part in respect of the capacity and capability of the Dabhol power station. In the circumstances, we are advised that  the PPA is void and/or is voidable at our option."
However, MSEB said that it was agreeable to continue the present arrangement of purchase of power and payment till the disputes were resolved by the appropriate forum "so as to minimise loss and inconvenience". "For such  supply, we are prepared to make payments to  you to as provided for under the PPA, but such  payments would be subject to adjustments on the basis of determination of reasonable   compensation by a competent forum," MSEB added.

The MSEB missive said at that all material times,  the company represented that it would build,   construct, own, maintain and operate a state-of-the-art power station with a Nominal Baseload Capacity of 670 mw, having a start up and loading profile that would reach full load within 180 minutes from a cold start. The   company also represented that the Dabhol plant would have certain Operating Characteristics and   Dynamic Parameters.  "One of the key characteristic and parameters of the Dabhol power station to be constructed in phase I of the project was that from a cold start the power plant would have the capacity to ramp up to 100 per cent load within a period of 180 minutes," MSEB said. It further added that relying   upon the said express representation in respect of the Operating Characteristics and Dynamic Parameters of power station relating to attaining  full generation from a cold start, MSEB consented to the PPA. Since commissioning of the Dabhol plant in May 1999, the company has been billing MSEB for capacity payments based on the Rated Baseload Capacity for each Availability Period.

  "Until January 2001, the Operating Characteristics and Dynamic Parameters of the power station in respect of the ramp up capacity in a cold start had never come into question and at no stage you disclosed to us any information in respect of the capability of the Dabhol power station being materially different from the contractual parameters mentioned in the PPA," MSEB said. Further, on January 28, 2001, to its urgent requirement, MSEB instructed to deliver fully declared baseload of 657 mw within three hours. "You, however, failed to deliver the energy required by us and committed breach of the PPA. You committed similar defaults on February 13 and March 29. In view of these defaults, we became entitled to rebate as provided in the PPA in respect of the three occasions and claimed the same from you," MSEB added.

MSEB charged that the company, however, failed and neglected to compute the rebate or adjust the rebate in the billing statement or to pay the same to MSEB. "In the letters addressed to us after January 28, you have admitted that your power plant does not conform to the PPA and is not capable of meeting the contractual terms in respect of the crucial Operating Characteristics and Dynamic Parameters. In particular, you have acknowledged and admitted that the actual performance and capability of the power station does not conform to the start up and loading profile curves of Schedule 6 of the PPA," MSEB added.
 
MSEB said it has shown utmost restraint and has given more than sufficient opportunities, to resolve the issues amicably. "Instead of cooperating in the matter, you have embarked on a campaign to create confusion and obfuscate the issues, which has involved, inter alia in wrongfully withholding rebate payments, pressurising us to make payment that are not due, invoking guarantee issued by the Government of Maharashtra and Government of India, invoking arbitration, declaring Political Force Majeure, without justification, wrongly seeking to activate the escrow arrangement without being entitled to do so and issuing preliminary termination notices on false and frivolous grounds," it added.   According to MSEB, in these circumstance it was now convinced that the company's conduct is not bonafide and it was constrained to avoid/rescind the PPA with immediate effect.
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THE HINDU BUSINESSLINE, Friday, May 25, 2001
DPC-MSEB row: Centre awaits negotiations 

THE Centre is willing to consider any worthwhile idea emerging out of the negotiating committee for the settlement of the dispute between Dabhol Power and MSEB, according to the Union Power Minister, Mr Suresh Prabhu. An official release issued today states that any such proposal has to be acceptable to both the MSEB as well as the DPC. Industry sources, however, point out that the Centre's stated position is not likely to provide a breakthrough since the Centre has endorsed a consensus-driven approach with its involvement restricted to the participation of its member Mr A.V. Gokak in the negotiating committee. A meeting between Dabhol Power Company and Ministry of Power is slated to be  held on Friday following DPC's request to the meet the Power Secretary, Mr A.K. Basu. 
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THE FINANCIAL EXPRESS, Friday, May 25, 2001 
MSEB has no right to revoke PPA, says DPC

THE Dabhol Power Company (DPC) in its reaction said the Maharashtra State Electricity Board did not have the right to rescind the power purchase agreement (PPA) as attempted in its notice.   A DPC press release issued here on Thursday said that it would appear that MSEB's notice was a deliberate attempt to further delay the resolution of difficult issues confronting the MSEB. Nevertheless, even though the MSEB continues to seek ways to delay and frustrate the resolution of these matters, DPC remains open to receiving proposals from the board, Government of Maharashtra and Government of India.  "In the first place, the PPA does not allow MSEB to shut down the plant except in emergencies. Moreover, the Dabhol plant was intended as a baseload facility. As a result, the question of plant performance following a cold start should not arise. The MSEB has chosen an obscure and improper justification for attempting to rescind a contract that, in any event, was signed more than seven years ago. In any case, this basis and many of MSEB's related claims are already the subject of a pending arbitration initiated by the DPC. Our arbitration notice of April 12, 2001 should serve as evidence of our confidence in SPC's legal position, and we expect that the issues in arbitration will be resolved to our satisfaction," the company added.
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THE FINANCIAL EXPRESS, Friday, May 25, 2001
MSEB issues Rs 136-crore cheque for power purchased from DPC for April , Sanjay Jog

THE Maharashtra State Electricity Board (MSEB), which served an "avoidance" notice, on Thursday prepared a cheque of Rs 136 crore towards power purchase from the Dabhol Power Company (DPC) in April this year. MSEB sources told The Financial Express that the payment would be made "under protest" as the DPC has failed to pay the rebate of Rs 401 crore charged by it for misdeclaration and default on the availability of power on January 28. "The cheque was prepared well before 5 pm, however, the DPC officials would collect it on Friday (May 25), the due date for the payment of bills," MSEB sources said.

Sources said that the MSEB has taken a conscious decision to continue the power purchase and make payments to the DPC, despite serving the "avoidance" notice. MSEB has so far paid the February bill of Rs 114 crore and Marchbill of Rs 134 crore "under protest." MSEB said that despite its instructions to maintain load at 657 mw from 6 pm onwards, DPC was unable to pick up and is generating only 216 MWH at 6.45 pm. On the appointed hour 6 pm- 9 pm, DPC's declared baseload capacity of 657 mw, the company failed to deliver energy as instructed by the MSEB and delivered only 156 mw on January 28, 2001.

According to MSEB, a shortfall occurred and in terms of Clause 8.4 (b) (iii) the available baseload  capacity was required to be calculated. Such shortfall was to be calculated on the basis of the formula set out therein for a period of 14 days prior to the available period in which the shortfall occurred.MSEB said that DPC owes nearly Rs 143.073 crore after adjusting the December bill (Rs 102 crore) and January bill (Rs 111 crore). MSEB is entitled to damages for misrepresentation calculated from the date the power plant made its "entry into commercial service" and/or MSEB under section 19 of the Contract Act, is entitled to treat the contract as void. MSEB said in failing to compute the rebate for the shortfall that occurred on January 28 in its billing statement of January, DPC committed a breach of Clause 11.1 (b) (ii).  MSEB was thus entitled to adjust the rebate against the outstanding sum for the period relating to the January billing statement.
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THE FINANCIAL EXPRESS, Friday, May 25, 2001
MSEB may file petition before MERC today 

THE MSEB is trying its level best to file a petition on Friday before the Maharashtra Electricity Regulatory Commission (MERC) for seeking its ruling over its dispute with DPC, under the provisions of the Electricity Regulatory Commission (ERC) Act, 1998.  MSEB sources say a petition, comprising annexures, is being prepared in consultation with the battery of lawyers. The petition will be made with an appeal to the MERC to adjudicate the disputes.

  "The DPC has committed a material misrepresentation and also misdeclared and defaulted on the  availability of power in January, February and March. Although the PPA had been inked between the MSEB and DPC before the establishment of MERC, the disputes have arisen after the MERC was delegated powers to adjudicate disputes on December 5, 2000," MSEB sources said.  "As per the ERC Act provisions, MERC is in a position to admit the MSEB's petition on the grounds that consumers are entitled for getting quality power at fair price. The decision to take up the matter at the level of the MERC is with an objective to shift the legal battle from London to the Indian soil. Simultaneously, it would also save cost."

  The MSEB at length would explain its case, vis-a-vis, DPC's failure to honour the rebate and its payment.  Under the PPA, DPC undertook to construct and operate a base load, combined cycle power station in two phases. MSEB agreed to purchase and accept delivery of the electrical energy generated by the Dabhol power station into its distribution system and pay for the electrical generating capacity made available to it, as well as for the electrical energy actually delivered, subject to the terms and conditions of the PPA. "In terms of Clause 1 of the Government of India guarantee dated September 15, 1994, no sums of money are validly due by MSEB to DPC and accordingly, there has been no failure on the part of MSEB to make such payments," MSEB said.
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BUSINESS STANDARD, Friday, May 25, 2001
MERC pulls up MSEB for not providing DPC papers to Prayas, Renni Abraham in Mumbai 

The Maharashtra Electricity Regulatory Commission (MERC) on Thursday pulled up the Maharashtra State Electricity Board (MSEB) for not having provided
 documents related to the Dabhol Power Company (DPC) to Prayas, an NGO, despite being ordered to do so in January. Chairman of MERC, P Subrahmanyam, said, "In the wake of the January order by the commission and in the light of the Right of Information Act passed by the Maharashtra legislature, all documents apart from those listed by the government have to be made available to the public. Even the Electricity Regulatory Commission Act states that the such commissions (like MERC) will act in a transparent manner. Hence we said that all the documents should be provided to Prayas." 

The commission rapped MSEB for not being able to explain, with legal opinion, how it could withhold the documents despite the MERC ruling. The Commission has given the board a month to provide all documents to Prayas as well as itself, related to the DPC project.  With regard to those documents it claims confidentiality, the Commission has sought a clear legal stand by it and not a reliance on merely the legal opinion forwarded by DPC."When MSEB has such a huge legal department at its disposal it's reliance on DPC's legal opinion is not reasonable," the Commission held. Another rider posed by the MERC was that while all costs effected by MSEB's contractual agreements with DPC were passed on to consumers why the consumer was not allowed to see the documents related to the PPA.Sources added that containing the fuel cost charges will reduce tariffs and make the project conducive to higher offtake of power.
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THE INDIAN EXPRESS, Friday, May 25, 2001 
Godbole panel suggestions to be accepted, says Prabhu

The Central government will accept the recommendations of the renegotiating committee headed by Madhav Godbole for the settlement of the dispute between Dabhol Power Company (DPC) and Maharashtra State Electricity Board (MSEB). A government statement quoting power minister Suresh Prabhu said "the Government of India is ready to consider any worthwhile idea emerging out of the renegotiating committee for the settlement of the dispute."  The proposal, Prabhu said, has to be acceptable to the parties to the dispute -  Maharashtra State Electricity Board and Enron-promoted Dabhol Power Company- adding that a quick settlement of the differences was essential for the power sector of Maharashtra.

Dabhol Power Company had last week slapped a preliminary termination notice (PTN) on MSEB following the dispute over payment of power bills. While former telecom secretary A V Gokak has been appointed as centre's nominee on the Godbole committee constituted by Maharashtra government, a                    committee of senior officers of the concerned ministries has been set up to quickly examine the proposals emerging out of the negotiating committee. The committee officers comprise officials of ministries of finance, power and petroleum.
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THE HINDU BUSINESSLINE, Friday, May 25, 2001
Review panel member rejects Godbole's remarks 

 DR R.K. Pachauri, a member of the Review Committee set up by the Maharashtra Government on the Dabhol controversy, has voiced his concern on a fellow member's recent statement in a leading national daily on the issue. In a press statement released here, Dr Pachauri has contended Mr Godbole's statement that, ``The committee has also suggested that the judicial enquiry, headed by a service or a retired Supreme Court judge should be initiated as soon as possible.'' According to Dr Pachauri, this statement needs to be seen in the context of the fact that three out of the five members in the committee recorded their strong dissent with this view. ``Can the view of two members of the committee, clearly a minority, be read as `the committee has also suggested...','' Dr Pachauri has                      argued. According to him, ``Can a judicial enquiry really force Enron back to the negotiating table?'' In the press statement, he has thrown up several other questions -- Can the Maharashtra Government renegotiate a deal with Enron if a judicial enquiry is in progress, and would the public accept any such deal till the enquiry is over? And till it is over, the Maharashtra Government would continue to run up huge bills
even as the State is unable to absorb the power generated by Dabhol.
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BUSINESS STANDARD, Friday, May 25, 2001
Lower DPC tariffs: High oil prices may affect talks, S Ravindran & Arijit De in Mumbai

The spurt in global oil prices, and the consequent impact on naphtha, will curtail Dabhol Power Company's (DPC) ability to offer concessions on its tariff structure, 
even as the government looks to isolate fuel costs from the tariffs.The Madhav Godbole committee is currently renegotiating a lower tariff structure for power from 
the 2,184 mw Dabhol power project. Top government sources said they were working around the uncertainties in the naphtha prices. "We are working towards a rational tariff structure which will insulate it, to some extent, from the vagaries of fuel prices," a top state government source told Business Standard. The official indicated that this could take the form of reducing the pass-through component of fuel prices. "We could try to get a lower pass-through, from the current 100 per cent," he explained. 

Alternatively, the fuel component could be capped at a certain level to protect the tariff from surging fuel prices. Fuel prices are an important component in the 
tariff structure, as the entire component (in variable costs) is passed on to the purchaser. Crude oil prices, which had touched a high of $33 per barrel last year, 
pushing up DPC's tariff, had softened to $26 per barrel levels in December 2000. However, prices have jumped over 20 per cent in the last few weeks to around 
the $30 levels again. Power industry sources indicate this may cast a shadow over the conciliation talks. While the 740 mw phase-I of the project is currently naphtha-based, the entire plant is supposed to turn to LNG once the 1,444 mw phase-II comes into commercial operation. Naphtha and LNG prices are both linked to crude oil prices. DPC had earlier attributed the rise in tariff from the contracted price partly to the sharp rise in global naphtha prices.It had argued that the rise in naphtha prices coupled with the low offtake of power by the MSEB was responsible for the higher tariffs. 
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BUSINESS STANDARD
Friday, May 25, 2001,http://www.business-standard.com/today/opinion5.asp?
GODBOLE REPORT, CEA's dubious due diligence

The Central Electricity Authority's role in scrutinising the technical aspects of the project is questioned

The 'techno-economic clearance (TEC)' from CEA has been a controversial issue. The in-principle clearance for DPC's project pursuant to sections 29 and 44 of the Electricity (Supply) Act, 1948 (the Act) was issued by MSEB on May 20, 1993. The clearance was granted subject to clearance from the CEA as required under 
section 44 of the Act. On November 26, 1993, CEA granted its conditional clearance... for the project after considering the technical aspects of the scheme at its 
meeting held on November 12, 1993. A day earlier, on November 11, 1993, the Secretary, Ministry of Power, appears to have written to the CEA and quoted an extract of the minutes of a Foreign Investment Promotion Board (FIPB) meeting of November, 5, 1993 which said, "...Finance Secretary has observed that the question of the cost of power has been looked into and it has been found that it was more or less in line with other projects being put up in Maharashtra". Accordingly, the CEA observed that "The aspects related to import of fuel, foreign exchange rules and deviation from Government of India tariff notification indicting return on equity have been examined by FIPB and the project has been found acceptable by them." 

On July 14, 1994, CEA issued another clearance for the project... stating that all the conditions had been complied with. However, it reiterated two conditions stipulated earlier, viz., - Phase II of the project could only be taken up after MSEB/GoM ensures absorption of the entire power including off-peak power in or outside Maharashtra together with the completion of associated transmission system matching with the commissioning schedule of the project. The CEA, as stated in an affidavit by the CEA in the CITU case, considers this to be the "techno-economic clearance" accorded to the scheme, which was based on discussions in a meeting held on 24 June 1994. The minutes of this meeting are not available to the Committee. Furthermore, it is curious that the letter does not mention the word "techno-economic" anywhere, as compared to a clearance given to similar IPP [independent power producer] projects ... 

Subsequently, on December 23, 1994, CEA issued a letter to Ministry of Power stating that "the cost of power has been found reasonable by the Ministry of Finance, CEA feels that since the cost of power is to be derived from the capital cost, the capital cost of Dabhol project may also be considered reasonable" In effect, the CEA said that since the Ministry of Finance finds the tariff acceptable, the capital cost is reasonable, which accords greater significance to the role of the tariff... In addition, curiously enough, it makes no reference to the meeting of 24th June 1994 regarding techno-economic appraisal of DPC mentioned in the CEA's affidavit. Thus, it is moot question whether the CEA discharged the statutory duty cast on it under the Electricity Supply Act adequately. 

...Modification to the project after renegotiations: Subsequent to the negotiations conducted by the Negotiating Group ... the CEA received a letter from DPC dated 
March 7, 1996 intimating certain alterations to the Dabhol project and stating that these alterations were minor as per the first proviso of section 32 of the Electricity 
Supply Act, 1948.  The State of Maharashtra, through GoI [Government of India], had sought CEA's views in the matter. The matter was deliberated upon by the CEA and the GoI was informed that increase in capacity of plant and use of naphtha in place of distillate fuel in Phase I of the scheme were of minor character but the removal of LNG facility from the scope of the scheme and execution of the same by a separate entity in Phase II of the scheme was of a major nature. 

Subsequently, DPC vide letter dated May 7, 1996 informed CEA that DPC was agreeable to implement the scheme without changes considered as major by CEA, 
viz. the removal of the LNG facility from the project scheme. As a result DPC and MSEB went ahead with the project, without hiving off the LNG facilities and avoided
obtaining any fresh clearance required from CEA. It is difficult to comprehend how MSEB agreed to accept the re-integration of the LNG facility, which was not in its 
own interest.  The Committee finds it inexplicable why there was no mention of any reduction in capital cost of the project from $2,828 million to $2,501 million as 
agreed to by DPC as mentioned in the Summary Report of the Renegotiating Group, which appears to have been intimated to CEA, as part of its economic appraisal. 

Neither is there any intimation about the change in the cost of power, due to the renegotiation of tariff, which formed the basis for CEA consideration that "the capital 
cost of Dabhol project (is) reasonable". The counter-affidavit by CEA on July 1, 1996 in the CITU case however states that "since no cost increase (was)
 involved...fresh formal clearance...(was) not necessary". This only adds strength to the suspicion that the CEA did not consider the economic aspects of the 
project at all. Indeed, given the non-availability of any official record of the meeting on June 24, 1994 with the Committee, and the nature of this letter dated
 December 23, 1994, the Committee is doubtful whether the economic aspects of DPC were discussed at all. ... 

Demand for power: As already mentioned, the GoM's submission at the start of the project regarding the need for power was flawed to the extent that it failed to 
distinguish between different types of load. This led to an inappropriately high PLF of 90% being taken for purposes of calculating per unit tariff. In 1993, however, 
based on the past growth of consumption and load, it was possible to argue that a 695 MW plant could be absorbed into the system. This, however, completely 
omitted any consideration as to whether there was a demand for power at the price that was expected to be charged by DPC.... 

The subsequent error of calculation: However, this mistake pales in comparison to the assurance given by MSEB, on September 2, 1998, that there was sufficient 
demand to absorb the power from Phase II. As mentioned earlier, the CEA clearance to DPC stipulated that "Phase II of the project could only be taken up after 
MSEB/GoM ensures absorption of the entire power including off-peak power in or outside Maharashtra together with the completion of associated transmission 
system matching with the commissioning schedule of the project." In response to a letter from DPC on the demand supply position in the MSEB system, MSEB 
replied, establishing that there was sufficient demand. ... 

The initial error of composition: The MSEB demand projections for justifying the requirement of Dabhol was on the basis of the 15th EPS. The actual consumption 
in 1998 was higher than the estimate in the 15th EPS by 4.4%. MSEB therefore replaced the base year EPS estimate with the higher actual consumption and 
applied the EPS growth rates to this higher base. On the face of it, perhaps justifiable, until one looks at the growth of demand in the past. ... The actual growth 
in demand in the MSEB system in the years immediately before 1998 were actually much lower than the 15th EPS estimates. Indeed, there is a sharp slowdown 
in growth in 1996. This slowdown was completely ignored. While the actual consumption in 1998 was indeed about 4.6% higher than estimated by 15th EPS, the 
trend growth rate was actually much lower (2% in 1997 and 5% in 1998). As compared to the growth of 2% and 5% in the previous two years, MSEB estimated an 
immediate return to earlier growth rates of 8 to 9% ... 

Based on these extremely over-optimistic assumptions, MSEB stated "there is sufficient projected base load demand for power in the state to justify Phase II of 
the Dabhol project, even at a 90% dispatch. This was stated without an analysis of the load curve. Indeed, MSEB in its projections before the Committee has 
submitted that their current expectations are that consumption in 2004-2005 will be around 67813 MU as opposed to 91202 MU expected by them in 1998, 
implying an overestimation of 58%! On the basis of this unconvincing estimation of demand ... Phase II of DPC was given the go ahead. 

The World Bank was asked to review the project by GoI, for possible financing. It reviewed the project extensively and pointed out on April 30, 1993 that "The
 project (was) not a least-cost choice for base load power generation compared to Indian coal and local gas. Even if domestic fuels (were) not available, 
imported coal would be the least-cost option for base-load generation for MSEB with current environmental standards. The unique features of this LNG-based 
project...offset LNG's environmental benefits over coal."  

The current design which would "Dispatch the plant as a base load unit at 80-85% minimum plant factor...would prevent the operational flexibility of a combined 
cycle plant, (and)..the project would add more capacity than needed to meet the projected load growth in 1998 and would also result in uneconomic plant dispatch."In addition, "substantial adjustment in electricity tariffs would be required to recover the cost of the project from the consumers and to safeguard MSEB's financial position...Adjustments limited to special industrial categories would not be sufficient as their capability to continue to cross-subsidize, by paying more than the already high cost of LNG power would be limited." 

Subsequently, after further discussions, the World Bank wrote again on July 26, 1993 to "reconfirm (their) earlier conclusion" and stress that the project needed to 
be reshaped to "serve higher-value intermediate load", and that if the project was being justified on the basis that the existing system (was) projected to decline in 
efficiency (and) most recently discovered slippages in MSEB's ongoing and planned least-cost program, then it was better to take determined actions...to 
reverse this projected deterioration rather than accepting it as a given fact in the analysis of new investments.... 

Enron was concerned. It wrote to MSEB stating, ... "I feel that the World Bank opinion can be changed. We will engage a PR firm during the next trip and hopefully 
manage the media from here on. The project has solid support from all other agencies in Washington. We will get there! We need now to put the PPA behind us"
 (emphasis added). MSEB and GoM addressed these objections of the World Bank by emphasising the environmental benefits of gas, reducing the plant size...
and assuring the GoI that there would be power sector reform to adjust electricity tariffs .... 

In retrospect, all the concerns of the World Bank proved well founded. Reform did not occur, the cost was too expensive and the system has not been able to 
absorb the capacity, even of Phase-I. In hindsight, it is always easy to argue that the decisions made at that time were not justified, but in this case these issues 
were raised and dismissed at the time the original decision was made.
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THE ECONOMIC TIMES, Friday, May 25, 2001 
Will the lights go out on Dabhol II?, Anto T Joseph 

WITH lenders, both offshore and domestic, refusing to fund the cost overrun of $400 million, the second phase of the Dabhol project seems to be in deep trouble. The US power major may now be forced to chip in with the additional project cost, either in the form of equity, quasi equity or debt, or a mix of these. Enron has, however, informed lenders that it would bring in the additional project cost only if the renegotiations look like making any headway. With EPC contractor Bechtel stopping construction at Dabhol, Indian lenders are fearing a further cost overrun. "It could be around $20 million per month. If the project is delayed for a few months, the financial viability of the project will be at stake," said senior financial institution officials. They said the huge cost overrun had become a major deterrent in completion of phase II. When domestic lenders refused take any further exposure in the controversial project, Enron had scouted for foreign debt, but in vain. "Indian lenders, who contributed 40 per cent of $2.9 billion (earlier project cost), had earlier refused to take more exposure. Later, foreign lenders have also                                           taken a negative stand," said sources. 

According to FI sources, Enron wanted to maintain status quo in the debt-equity ratio at 70:30. This would mean an additional debt of $280 million and an equity call of $120 million. With the minority stakeholders -- MSEB and Bechtel (they hold 15 per cent and 10 per cent, respectively) - having                                           shown their dissent in the project, a new equity infusion  has turned almost impossible. In this situation, Enron will have to raise its stake from the current level of 65 per cent. "This is an unlikely scenario since Enron is actually planning to reduce its stake in the project to below 50 per cent," said an Enron official. "Enron is in a fix now. The entire responsibility of bringing in the additional cost lies on the shoulders of Enron. It could bring the fund in the form of equity, quasi equity or                                           debt, or a mix debt-equity," said an industry analyst. Cost overrun has stemmed from de-valuation of rupee vis-a-vis dollar and increase in equipment cost. Indian Fis are now wary of a further cost overrun due to delay in project execution. 

According to the PPA, the PTN would mean fixing up a deadline of six months for pulling the final plug on the project. "As of now, the FIs have held back $250 million debt to the project. After the PTN is served, DPC could not expect lenders to make any more disbursements, and it has almost sealed the fate of the project," said an FI source. While the 740-mw phase I is operational, the second phase of 1,144 mw was expected to go fully operational by the year-end. One unit of 740 mw (part of the second phase), which was on trial runs, was expected to be commercially operational in June. With Bechtel stopping  the construction work at the site, it has now become uncertain.
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THE ECONOMIC TIMES, Friday, May 25, 2001
Bechtel's out if dues not paid by May 31, Anto Joseph 

FRUSTRATED by a series of payment defaults, US-based Bechtel has threatened the Enron-promoted Dabhol Power Company that it will withdraw from the controversial project by May 31, if its dues are not paid. In a letter written to DPC, Bechtel - which is the EPC  contractor for the 2,184 mega-watt project and also a   minority stake holder (10 per cent) in DPC - has said it was stopping civil work at the site in coastal Maharashtra. Sources from financial institutions said that the unit I of the project's phase-II, which was slated to be operational commercially by June, will not be ready by then, after Bechtel stopped work at the site. Around 10 to 15 per cent of the work is yet to be completed, sources added. 

Both Bechtel and DPC refused to comment on these developments. FI sources said the issue will be discussed threadbare at the meeting in New Delhi on Friday called by the Centre. While Bechtel issued the May 31 deadline to DPC to make its outstanding payments, lenders have refused to bail out  the project with any further debt disbursements. The preliminary termination notice issued by the cash-starved DPC has compounded the matter, according to FI sources. The ongoing payment impasse, involving MSEB and the state and central governments, has resulted in delays in payments to vendors for the second phase of the power project. On May 2, Aric Oakf, project director of Bechtel India, had said his company was concerned about the payment defaults. He had said that the company was exploring various options as per the EPC contract. 

On May 3, the Economic Times had reported that Bechtel was considering pulling out of the project. Though there were defaults and delays in payment, the company had continued with the construction work at the site. Sources said DPC was not in a position to change the situation, unless lenders soften their stance and start funds disbursal. The lenders have held back around $250 million payment out of the committed debt, after the project ran into a series of controversies. Bechtel, one of the largest engineering construction firms in the world, has set up more than 450 power plants, installed more than 6,800 kilometers of high voltage transmission lines, and is the leading builder of independent power projects worldwide.
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THE ECONOMIC TIMES, Friday, May 25, 2001 
MERC questions validity of clearance for DPC unit
 
FRESH trouble seems to be brewing for the Maharashtra State Electricity Board over the present dispute with Enron's Dabhol Power Company, as the state electricity regulatory commission on Thursday questioned the basis on which the MSEB cleared the 2,184 mw project. "As per your submission that MSEB did not have the actual documents of the financial closure of the project's Phase II till February 27, on what basis did the board clear the project?" MERC members asked MSEB technical director Prem Paunikar while hearing the petition filed by Pune-based NGO Prayas. 

In it's plea, Prayas has sought the status and copies of various power purchase agreements and related contracts or commitments signed by MSEB with independent power producers including DPC, in the state.In its argument, MSEB said it was contractually bound with DPC as the energy major had claimed confidentiality on several documents. The documents in question are both Phases I & II of the $3-billion project, which include details of the preliminary termination notice, termination notice, the 20-year gas supply agreement and liquid fuel contract with Oman LNG, operation and maintenance records, construction contracts                                           and fuel management. (PTI)
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THE ECONOMIC TIMES, Friday, May 25, 2001
Attaboy, Godbole

AFTER an initial fit of pique directed at NCP boss Sharad Pawar, Madhav Godbole has decided to stay on with the committee that will renegotiate the deal that the Dabhol Power Company has with the Maharashtra State Electricity Board. Thank goodness for that. For many years, India needed something like the report filed by the committee headed by Mr Godbole. The Enron project has been dogged by controversy, allegations of goldplating and graft. The initial power purchase agreement (PPA), signed in 1993 when the Congress government of Sharad Pawar ruled Maharashtra, was attacked by the opposition which included the BJP and Shiv Sena. When a Sena-BJP coalition came to power it scrapped the deal, only to sign another one in 1995. Then, the so-called `renegotiation' was widely perceived to have been an eyewash that allowed everybody to save face but push the project through. 

One year later, the only thing cleared by the first, 13-day Vajpayee government in New Delhi was a counter guarantee for the project. Five years later, the same allegations are flying thick and fast. Given that, Godbole should stick around to finish a job that needs to be done. The report of the committee headed by him points out serious flaws in the way the project was cleared, in the terms that successive governments in Maharashtra and New Delhi agreed to and in project specifics. If this is correct, a handful of babus, mantris and managers have been taking the Indian public for a ride and profiting at everybody else's expense. 

That has to stop. The terms under which the project functions have to be renegotiated. Yes, there are serious problems with IPPs trying to sell power to bankrupt state utilities. Those problems have to be resolved by quick reforms. Meanwhile, there is no reason why India should put up with                                           irregularities pointed out in the Godbole report. Investigations to probe mala fide intent among everyone involved in clearing the project on the existing terms must  start now. Prosecution, conviction or acquittal of those accused should follow. A democracy which boasts about `rule of law' can do no less.
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THE FINANCIAL EXPRESS, Friday, May 25, 2001, 
Reform needs leadership, consensus will follow 

  Q & A -- Montek singh Ahluwalia

Joining the Union ministry of finance as an economic advisor in 1980 after a decade at the World Bank,  Montek Singh Ahluwalia soon moved to the centre stage of policy making. In 1985 he was inducted into  Prime Minister Rajiv Gandhi's "Camelot" and began shaping policy, setting the stage for the economic reforms introduced in 1991. Over the past two decades Dr Ahluwalia has pushed economic liberalisation sometimes as a General on a battlefield, with his army of fellow travellers in different economic ministries, and sometimes like a guerrilla using unexpected opportunities to plant an idea into a Prime Minister's mind. Through well thought out strategy and clever tactics, Dr Ahluwalia has left a mark on economic policy making in India. After two decades in government he moves on to the International Monetary Fund where he will head an independent evaluation office, evaluating the Fund's policies, on a reported US$150,000 annual salary. Dr  Ahluwalia is not yet calling it quits to policy making in India, but agreed to give an 'exit interview' to The Financial Express. 

You joined the government as an economic advisor in 1980 and have been closely associated with   economic policy making for two decades now. The Indian economy had registered an annual average rate of growth of 3.5% between 1950 and 1980 and since 1980 it has recorded a 5.5% to 6.0% rate of growth.   Was this acceleration of growth built on the foundations of what had been achieved in the first phase or would you take credit for your policies of economic liberalisation and trade openness in the second phase? 

I certainly would not claim that the acceleration in growth was due to my being there! Individuals play a relatively small part in the larger scheme of things. I have no doubt that the policy changes which began in the mid-1980s, but were really accelerated after 1991, are major factors explaining the improved performance in the last two decades. In the 1980s, the government recognised the limitations of the earlier control regime but changes were marginal. The controls remained in place but they were operated more flexibly. The 1991 changes were much bolder. They were based on a clear recognition of the need for a system change. It was recognised that the economy would benefit from much greater freedom and the unleashing of competition and unshackling of entrepreneurial energy.

While 1991 did constitute a policy break, and there was an acceleration of growth in 1993-96, the long-term rate of growth of 1981-2001 has refused to rise above 6.0%. So have the post-91 reforms failed to deliver higher growth?

We had a sharp acceleration of growth in the mid-1990s with three years of 7.5% growth in 1994-95 to   1996-97. Since then, it is true that growth has slowed down. This deceleration is worrying and needs to be   reversed. I must mention however that although the average growth in the 1990s may not look much better  than in the 1980s, there is in fact a significant difference between the two decades. In the 1980s, growth was fuelled by an unsustainable build-up of debt, internal and external. In the 1990s the external position has actually improved over the decade. We have a current account deficit which is quite modest in my view; if anything it is too small. In terms of debt service ratios, we are now in a very comfortable position.  

 While the external profile of the economy has certainly improved in the 1990s, the internal fiscal profile is back where it was in the beginning of the 1990s, and growth has slowed down.

That is undoubtedly a major source of weakness at present. There are many respects in which the economy is stronger than at the beginning of the 1990s. Let me mention four. First, freeing up the economy from the   draconian and hugely inefficient external sector controls has contributed to efficiency and created self-confidence in external economic management. We now know we don't need the extensive and highly   inefficient foreign exchange controls and import controls we had earlier to manage the economy. We would  never have developed an Infosys or a Wipro if we had not changed these external sector controls. 

Second, the unleashing of competition in industry has strengthened Indian industry. Industry circles often   show signs of nervousness and this is understandable given the nature of change, but by and large I would   say Indian business is gearing itself up for competition. It may be a little too slow, but the process is   underway. Every industrialist may not survive in the new competitive world, and this is an important cause of  nervousness, but the objective cannot be that every industrialist will do well- only that Indian industry as a group will do well. I think that will happen with the right policies.

Third, liberalisation of controls by the Centre has given the states new degrees of flexibility for attracting   investment both domestic and foreign. Some of the states have done very well with growth rates comparable with the best in the world. The negative side of course is that the weaker performing states have seen a deterioration in their growth. However, there is now a much greater realisation in these states that much of the problem lies with their internal policies and they must take steps to improve their performance. Herein lies the real hope for higher growth for the country as a whole in the future. We don't have to learn from other countries, which is much more difficult. We have to learn from our own better performing States.

Finally, we are doing very well in some of the new sectors as software and IT services. The total impact may be small at present, but it has high potential (the present slowdown notwithstanding). More importantly, it shows how well we can compete when conditions are right and also the potential for new entrepreneurship. 

Of course, the fiscal deficit remains a major problem. It is a first generation reform which has fallen by the  wayside. There was an improvement in the first two years of the reform, but since then there has been a   steady deterioration. The fiscal situation in the states in particular has got much worse. Unless we complete
this first generation agenda, the second generation reforms may get derailed. 

  Why is this so? 

On the expenditure side there has been a steady expansion in current expenditure at the expense of   investment. On the revenue side the tax ratio remains below the 1990 level. We have also not done enough to raise user charges, either in the Centre or the states. The crisis in the power sector is a good example. The SEBs as a group have losses of about Rs.25,000 crores per year. We have also not met disinvestment targets.

Would you say the political will to tackle this is lacking? Well, I am an optimist so I would like to put it differently. These are clearly difficult issues which can only be tackled over time. The major good news is that there is much greater realisation in political circles today that the present path is non-sustainable. Six or seven years ago this realisation wasn't there, certainly not at the state level. There was a tendency to think   that problems can be solved by the Centre giving more resources. Today, state chief ministers know that their fiscal problem cannot be solved by the Centre. Many states are even talking the language of fiscal reform and, even more important, power sector reform. Of course, talking is not enough. If some states begin to move ahead, we will all begin to see light at the end of the tunnel.

So it is state chief ministers who must now lead reform? You are not hopeful that the centre will provide that leadership?

The Centre must certainly take parallel action in its area but I would not call this leadership. Each has a well defined agenda. The central side agenda has been clearly laid out in the report of the Prime Ministers Economic Advisory Council. These ideas have been there for ten years. You wrote a paper which came to be referred to as the M-paper when Mr V P Singh was Prime Minister. Ten years later we are saying the same things. That paper did point in the direction where we have been going in this decade. It is not correct to say that there has been no action. What has been achieved in the last ten years goes much beyond what was proposed in that paper which was after all only a 2-year agenda at the time. Policy today has certainly gone much further which is good.

But that is largely on the external policy front and in industrial policy. Public finances are where they were.  

That is indeed the area which is weakest. But, let us recognise some gains even on the fiscal front. We have made great progress in rationalising the tax system, by creating incentives for people to be more honest. Tax ratios to GDP for personal and corporate taxation have improved though they are still too low. The main reason why the tax ratio has not improved is that the decline in customs revenue, which was to be expected, has not been matched by an offsetting increase in revenues from excise duties. There is a great deal of leakage in this area. The absence of services in the tax net is also a major problem. We should really move to a modern integrated VAT, which is the least distortive form of indirect taxation. If we could move to a VAT covering goods and services we could generate additional revenues of two to three per cent of GDP. This has been the experience of many countries which have adopted an integrated VAT. However, that requires a Constitutional amendment. Pending that, we have to rationalise the excise duty structure and integrate services taxation with goods in an expanded Cenvat. The Parthasarathy Shome Committee has made some new interesting  proposals in this regard.

I am emphasising the changes needed on the revenue side because there is really no margin available to   reduce the total government expenditure to GDP ratio. On the expenditure side, what we need is a   restructuring of expenditures, in which we reduce subsidies and wasteful current expenditures but use the   resources released to increase public investment in education, health care, roads (both highways and rural   roads) and other economic infrastructure where the private sector will not invest. In short, total government expenditure in India is not too high. The political support for cutting expenditure and downsizing the   bureaucracy can only come if this is seen as a redirection of expenditure to other more important uses. The improvement in the fiscal balance must therefore come from the revenue side. We are not mobilising as much as we should from existing rate structure and we are not doing enough to raise user charges for services provided by the government. Whether it is the railways or higher education, or power, or provision of municipal services, we must increase user charges so that these systems generate the revenues needed to ensure efficient supply.

If this does not happen, can the economy attain the eight per cent growth that the Draft Tenth Five Year plan would like to see in the next five years?

If we don't tackle the fiscal problem facing the government, we will not be able to undertake essential public investment in social and economic infrastructure. Interest rates will remain high which means private investment will also not take place and the growth we have targeted will definitely not be possible. The Planning Commission has said this loud and clear in the Approach document (10th Plan). The PM's Economic Advisory Council has said the same thing.

I must emphasise that the recipe for high growth is not just public investment. Private investment is 70% of   total investment and high growth depends crucially on private investment and its efficiency. Reforms must   continue if private enterprise is to do its bit. But, this growth process needs to be underpinned by public   investment in crucial sectors of social and economic infrastructure which depends on the fiscal health of the   government.

Do you see economic growth getting stuck at the 5.5% to 6.0% of the past two decades and economic   policy getting stuck in political debates? 

I certainly hope not, but that depends on whether our policies evolve in the right direction. I remain hopeful  mainly because we have been able to move forward in the past decade even if fitfully. Five years ago, we were debating insurance sector liberalisation. Now that is done with and over, and nobody worries about it. Even on privatisation, look at Balco. There were fundamentalist positions being taken, but the issue has been resolved. From the fact that something looks very difficult today, we should not conclude that nothing will happen. However, we must recognise that we cannot continue with this slow pace of change. It is not enough to make progress compared to the past. In a competitive world we have to benchmark against our competitors and that is where progress is clearly not fast enough. I hope the Tenth Plan can be used as an opportunity to re-review the momentum on a core set of policy changes. If that is done, we should be able to reach 8.0% growth. Otherwise it will be difficult.

Are you worried that this year again we might slip on growth?

The economy is decelerating at present and the first two months of this (fiscal) year show no immediate sign of a turnaround. It is difficult to say whether the situation will turn around in the rest of this year. The global slowdown will certainly hold back investment. However, short-term prospects are not the only issue. The issue for us is to outline what we need to do to move on to a higher growth path of 8.0% or so over the next 5 years.

In your two decades in economic policy making what have been the most difficult challenges you have had to face?

The most difficult challenge was clearly getting out of the crisis of 1991. It is difficult to imagine now how difficult the situation was then. The RBI was forced to restrict access to foreign exchange for exporters in order to manage its low reserves position. By 1993, the entire crisis was behind us. The critics of liberalisation, and there were many, predicted at the time that the policy of liberalising external controls would be an absolute disaster. I take some satisfaction that these critics were proved comprehensively wrong. The policy initiatives were well grounded in both economic theory and practice,  especially the experience of other countries and they worked.

This suggests that if we are serious about change it is not necessary to wait to generate political consensus which would ensure support from all quarters. We have to look two years ahead and hope that people will come around to supporting the reforms if they work. The experience of the last ten years certainly tells us that while change is resisted when it is proposed- (and this is possibly even a good thing since it generates debate and shapes policy in a way that makes it acceptable to a wider constituency)-at the end of the day, people accept sensible policies. The Press plays a major role in persuading people. I must say that so far it
has generally backed sensible policies.

The policies of the last decade have been criticised for getting the sequencing wrong. Indian industry has said that it was wrong to have done so much on external liberalisation without doing enough on internal liberalisation. Is this fair criticism? 

I don't think this is entirely fair. It is not true to say that domestic liberalisation was not bold. We got rid of industrial licensing and MRTP at one stroke. Indian industry was given the freedom to expand, upgrade   technology and access capital markets, even markets abroad. By contrast, the opening up on the external side was very slow. QRs were removed fully 10 years after the reforms began and even today our tariffs are still the highest in the world, three times higher than in south-east Asia. There is no evidence that Indian industry has been swamped by external competition. Had this been the case, you should have seen a huge increase in non-oil imports. On the contrary, in the last three years, non-oil imports have been totally sluggish.

That is not to say that we have been able to do all we should to support domestic industry. I think we should have moved faster with infrastructure reform especially power sector reform, to give Indian industry support on that front. Similarly, we should have moved faster to remove reservations from the small-scale sector. If we have to compete with other developing countries, including China, we must get out of the present policy of  reservation for the small-scale sector and allow the SSIs to expand to competitive scales. However, if it is difficult to make all these changes at once, it doesn't mean there should be no external liberalisation until everything on the domestic side is done.

Were the first steps we took on power sector reforms wrong? I mean, did we make mistakes negotiating with Enron on the Dabhol Power project? 

As you know, the Enron project is currently going through a process of re-negotiation and I would not like to comment on it. It is a state government project which was negotiated by the state government, and then   re-negotiated again by the state government.  

But it is said the Union finance ministry at that time, and you were there, had urged the speeding up of clearances and was keen on getting the project off the ground.

This is factually incorrect. The Finance Ministry was never concerned with speeding up or giving any project clearances for Enron. The only clearance Finance Ministry was directly involved in was the foreign investment clearance given by the FIPB where the Finance Ministry was represented. That clearance only involves permission for foreign investment. All the other clearances are the responsibility of other agencies and the Finance Ministry was not involved in that process.

But you gave the counter-guarantee?

  Yes, the Finance Ministry gave the counter-guarantee. However, that was a cabinet decision to give  counter-guarantee to 8 projects. The Dabhol PPA had already been tied up by then.

What lessons did you draw from the Enron experience?

I am not sufficiently familiar with the details of the Dabhol Project but I would focus on two major lessons. First,  it is clear that the power tariffs from the Dabhol Project have turned out to be much higher than the Government of Maharashtra had anticipated. This definitely suggests the need for greater due diligence on the part of State Governments before they lock themselves into long-term power purchase contracts. It is particularly important to quantify likely risks arising out of possible variations in fuel prices and exchange rate changes.

Second, when a State Electricity Board contracts for purchase of power, it should have the capacity to absorb the power as well as pay for it. At the time when the DPC project was signed the State Government may have assumed that it would undertake the requisite reforms that were needed in the power sector to enable the SEB to pay for the additional power. Since the reforms could not materialise the ability to pay is simply not there. The relevant lesson for the future is that much needed and well-known reforms designed to ensure current viability of the power system should not be delayed. Otherwise it will be difficult to pay for power from new projects whether in the private sector or the public sector.

So you agree that mistakes were made in power sector privatisation?

During the decade of 1990s, there has been a great deal of evolution in restructuring of the electricity industry across the world. Even in some of the developed countries, reliance was initially placed on long term purchase contracts that subsequently had to be re-negotiated and opened up to market forces. Reforms in Orissa have been an important learning experience. I think it is important that we absorb the lessons of experience in different states and make sure that policies for the future avoid some of the problems that have arisen not only in India but in many other countries also.

Another issue that you grappled with in the finance ministry where it is believed your perceptions were different from that of some others was the question of India going nuclear and the likely impact of sanctions on the Indian economy. With hindsight would you say your concerns were exaggerated? 

I don't think our assessment of the situation was wrong. Our assessment at the time of the 1998 tests, was   that there would be a negative reaction on aid flows in the short run, but there will be no impact on the trade  front except in the form of restrictions on export to India of certain sensitive items. Over the medium run, the economic impact of the tests on the economy as a whole would depend primarily on the quality of economic management and the progress of economic reform. We were consistently of the view that the long-term economic performance of the economy ought to depend more on trade and private capital flows rather than official aid flows. India's access to international capital flows depends entirely on how private capital markets view us, and that is a function of our economic policies, and economic performance. That is more or less what  happened.

Your policies have not really helped attract foreign investment into India in a big way. Why? 

We have seen an increase in foreign investment but not huge flows of FDI coming into India, like in China.  However that was never really expected. Personally I think we should be satisfied if we can double or treble existing levels of FDI flows within the next five years. For this to happen, the main steps needed are to improve the performance of infrastructure in certain critical areas. Central Government policy towards FDI is not the constraint. There are some sectoral caps in some sectors (mainly telecommunications, civil aviation, insurance and banking) but there are no restrictions elsewhere. If we can create an environment in which it is perceived that India's infrastructure constraints are being overcome and adequate investment is being made in power, roads, railways, telecommunications, etc, then foreign investors will look at India much more positively as an investment destination. 

As someone who is now going to Washington DC to evaluate the International Monetary Fund, how do you view the severe criticism the Fund has attracted after its handling of the Asian financial crisis, the Russian economy and economic crises elsewhere, including in India.

The Fund's programmes in East Asia have been widely criticised and the Fund management has also   recognised that some mistakes were made in East Asia. However, it should be recognised that the East   Asian crisis, like the Mexican crisis before it, was very different from traditional external payments crises the Fund was used to handling. These crises reflect the extreme vulnerability of developing countries to a sudden loss of confidence in a world where capital has become highly mobile, at least for countries which adopt capital account convertibility. The name of the game in such cases is not so much to provide some funds IMF but more generally to take action that will restore confidence of private markets in the quickest possible way. It is clear that the IMF programmes did not succeed in restoring confidence very quickly. How far the problem was due to the Funds policies and how much it reflected the basic uncontrollability of such crises in the short run, is difficult to say. In retrospect it is important to mention that performance in different countries has been difficult. In Korea, for instance, the recovery has been was remarkable, much better than projected by the original critics. Indonesia on the other hand remains mired in difficulties. In Brazil, the situation appears to have been well handled.

The Fund is now fully aware of the fact that its conditionality must be tailored to the specific circumstances of each case. You mentioned our experience with the Fund and I should point out that it has been very positive. We entered into a programme with the Fund which was fully our own, and reflected a genuine internal consensus on the need to give a new direction to our policies. The crisis was overcome more quickly than was predicted. We drew less from the Fund than was initially expected and our post-programme growth rate was very high. So, we should have no complaint. The Fund would have no problems if all its programmes were like the India programme!

You have now spent two decades in government offering policy advice. Has the quality of economic policy making improved in India in this period or worsened?

The quality of debate on economic policy has hugely improved. The economic press, the interaction between government and industry, the public debate have all improved.

Your assignment with the Fund is for four years. So is it the end of the road for you as far as government of India is concerned or will you be willing to return home if a future government were to ask you to come
back?

I certainly don't view this as a permanent exit. I didn't apply for the job but when it came up I felt it was a  challenge. After 22 years of continuous service in the Government of India a bit of a change is not a bad idea.