Deep Politics, Liberalisation and Corruption: The Mangalore Power Company Controversy

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Law, Social Justice & Global Development
(An Electronic Law Journal)

Deep Politics, Liberalisation and Corruption:
The Mangalore Power Company Controversy

Desmond Fernandes
De Montfort University, Bedford, UK

Leo Saldanha
The Environment Support Group
Bangalore, India

This is a commentary published on: 9 January 2001

Citation: Fernandes D and Saldanha L, 'Deep Politics, Liberalisation and Corruption: The Mangalore Power Company Controversy', 2000 (1) Law, Social Justice & Global Development Journal (LGD).


This paper examines the arduous political and legal struggle against the Cogentrix/Mangalore Power Company (MPC) power plant in Dakshina Kannada district, Karnataka, India. Using the key concept of ‘deep politics’, links are drawn between the liberalisation policy in India and corruption. The avowed need for liberalisation, specifically in the Indian power sector, is analysed in an elaborate manner by examining the economic aspects of generation, transmission and distribution of power in India prior to - and post - liberalisation. Drawing upon the deep political experiences of Enron, the case of Cogentrix is followed from the time of its arrival in India, the many highs and lows in the struggle against the project, through to its hard fought exit. The attempt to resurrect the MPC project through deep political means is also charted. The findings of this study suggest that liberalisation backed initiatives of the ‘model’ Cogentrix-MPC kind have merely served to corrupt governmental and judicial systems further, and sought to constrict those very democratic spaces which, in the past, have provided at least some theoretical measure or opportunity for redress of public grievances.
Keywords: Deep Politics, Liberalisation, Corruption, Cogentrix, Political, Environment, Governance.

1. Introduction

In the early 1990s, the Indian government committed itself to a World Bank-International Monetary Fund (IMF) inspired economic liberalisation programme as part of its New Economic Policy (NEP). Official announcements at the time had suggested that this programme would usher in a new era of sustainable economic growth, efficiency, public accountability, transparency, ‘open’, democratic and less corrupt governance. Through a process of privatisation, Trans-National Corporations (TNCs) and Independent Power Producers (IPPs) were to be actively approached and invited to present a lead in instilling model ethical codes of conduct in various sectors of the economy, including that of power generation, transmission and distribution (T&D). Karp and Kaye, for example, note that in the power generation sector, a US TNC, Cogentrix Energy Inc. (Cogentrix) was invited to proceed with a US $1.1 billion project which was supposed to be the ‘model’ for India’s new private power policy (Karp and Kaye, 1996, 52). Cogentrix’s model stance, one was informed, extended towards understanding that its customers were not only end users, but also:
‘employees … (as well as) people living in communities where its operating facilities are or will be located … and the environment that is shared by all. To that end, Cogentrix remains steadfast in its commitment to operate at production levels that are the envy of the electric power industry while protecting the environment. The company will continue to … strive to understand the concerns and needs of the people in the communities in which it operates to achieve another reliable partnership based upon the notions of sustainable development’ (Mangalore Power Company, 1997, 1).
Special incentives were offered to stimulate TNC and IPP investment, including:
‘100% equity participation to foreign investors … assured returns (and) a five-year tax holiday (for) … new industrial undertakings … anywhere in India for either generation or generation and distribution of power’ (Mujumdar, undated).

The High Court of Karnataka has noted that the Government of India’s:

‘liberalised policy also envisaged the establishing of power projects by the foreign companies exclusively or in collaboration with each other. The Government of India decided to provide sovereign guarantee and permission to use imported coal in pursuance of the liberalised policy … After the power sector was opened for private investors and entrepreneurs, no effort was made to involve local investors and entrepreneurs having (an) interest in the establishment of power plants in the country’ (Arun Kumar Agarwal & Kantha vs. State of Karnataka and others,1 106, 109).2
A political decision was also made to ensure that the first eight TNC initiated power projects to be approved and recognised by the government were to be accorded ‘fast track’ status and promised sovereign counter-guarantee by the Union Government, in case the largely bankrupt State Electricity Boards (SEBs) defaulted on payments for power supplied.3 The offloading/unbundling of SEBs was mooted with the intention of privatising the entire power chain of generation-transmission-distribution systems. The tariff for the supply of power by the private parties was as follows:
‘Private parties were told that they could sell the electricity on a cost-plus basis, that is, after accounting for all costs and a reasonable rate of return. A 16% return on the equity investment was assured by law’ (Mehta, 1999, 24).
In the case of Cogentrix, it was to be favoured in more than one way:
‘Firstly, 100% taxable profit of the company has been exempted from income tax for five years beginning from the year of commercial operation; the stamp tax on purchase of immovable property has been waived for the company; similar is the case for registration fees for movable property. Further, property tax, including tax on land and buildings, sanitary tax, lighting tax and water supply tax as levied by the local authorities are being treated as waived. Even entry tax and other local taxes are being treated as exempted including excise duty on construction contract. Finally, research and development cess has been waived on the assumption that there will be no payments made for the import of technology’ (Assadi, 1996, 2130).
Mehta further concludes that profits from the project, according to conservative estimates, were expected to total about US $ 120-180 million a year. Officially, the return on equity was expected to be of the order of 28.5%, or US $ 80 million per year (Mehta, 2000).
Enron’s Dabhol Power Corporation (Enron/DPC) and Mittal-Ispat-GEC Alsthom-EdF of France’s Bhadrawati project were to also be favoured in a number of ways. When it was discovered, for example, that the official rate of return to Enron would have rendered:

‘DPC’s Power Purchase Agreement (PPA) illegal … a series of surreptitious amendments to the (Indian) laws … as suggested by Enron’s lawyers … were issued by bureaucratic fiat, bypassing Parliament’s mandate completely’ (Mehta, 1999, 126).

Consequently, a new notification was provided which ensured that the rate of return in Enron’s case could now stand at 31.5% (Mehta, 1999). It was officially agreed that:
‘the minimum return Enron will secure, on its purported equity, is about US $ 4 billion over the life of the contract. The change of five words in the law allows it an additional 3 billion dollars. Further, the rate of return is computed on admittedly very-very inflated capital costs as well as very high rates of interest. Effectively, the rate of return on real equity is limitless’ (Mehta, 1999, 125).
Electricity laws were to also be completely reinterpreted to favour the Enron and Bhadrawati projects. The projects were to additionally benefit from exemptions from Section 10(15)(iv) and Section 10(6A) of the Income Tax Act, 1961; Section 205A(3) of the Companies Act; the Bombay and Maharashtra Sales Tax Act; payment of stamp duty and payments of water tax and octroi (Mehta, 1999).
These ambitious and highly controversial power sector reforms were adopted by the government on the grounds that:

  1. They would positively lead, within a short period of time, to a massive and assured increase in power generation and desperately needed investment in the power sector which would otherwise have been starved of government funds;

  2. The privatisation of power utilities would lead to significantly cheaper electricity rates for members of the public, as well as environmentally sensitive and sound, sustainable planning, management and operational strategies;

  3. TNC intervention in this sector was absolutely necessary if inefficiencies, a lack of transparency in decision-making, poor Indian bank project lending practices and corrupt and ‘deep political’ processes were to be confronted and addressed in any meaningful manner. Privatisation through liberalisation was proposed as the panacea for all ills affecting the power sector (The Hindu Survey of Indian Industry, 1996).

As Linda Powers, an Enron employee, was at pains to point out:

‘Working through this process (of liberalisation, as well as Enron’s TNC involvement in the DPC project) has given the Indian authorities a real and concrete understanding of the kinds of legal and policy changes needed in India, and has given the Indian banks a real and concrete understanding of sound project lending practices’ (as cited in Mehta, 1999, 121).
Ron Somers, Managing Director of the Cogentrix linked Mangalore Power Company (MPC) project, had similarly noted that the standard to be set by his proposed project and company was likely to serve as the type of model and benchmark for future projects which Indian planners and politicians would use to ensure that complete transparency took place, and environmentally friendly programmes were being promoted (The Hindu, 12 August, 1995; The Hindu, July 27, 1995).
It was also argued that the crisis relating to the country’s growing demand-supply gap would never be resolved if one remained sorely dependent upon corrupt and inefficient, deep political operational structures of the SEBs and Public Sector Power Generation Enterprises. As Bhupal Singh, ex-chairman of the Uttar Pradesh State Electricity Board and Chairman of the All India Power Engineers Federation has confirmed, such inefficiency in the public sector certainly existed due to:
‘irrational tariff, political and bureaucratic interference and, above all, rampant corruption, together with massive theft of energy … (which was responsible for) a nosedive in the performance levels’ (Singh, 1997, 17, 19).
In analysing the actual progress of these reforms in the power and other sectors, however, it has become abundantly clear that several of these stated objectives have not been achieved. Harriss points out that the recent exposes of corruption scandals, for example, have indicated that ‘the evidence is clear that the scope and range of corruption has tremendously increased’, not decreased, ‘during the era of liberalisation’ (Harriss, 1998, 80). According to Harriss:
‘huge scandals at the top have been unearthed. At the centre … the securities, sugar, urea, housing, petrol pumps, railways … hawala … and telecom scams.4 In the states, the fodder scam of Bihar, the Enron (power station) deal of Maharashtra,5 the cloth and school uniforms, colour TV sets, transport spare parts, steel doors, slippers, crematorium, furniture purchase and coal import scams of Tamil Nadu’ (Harriss, 1998, 80, 81).
In Karnataka, the government promoted model Cogentrix-MPC project would also appear to have been embroiled in a series of corruption scandals. The ‘key players’ in these corrupt exercises, moreover, ‘seem safe, heavily protected as they move around or hiding in safe bunkers’ (Harriss, 1998, 80).
As S S Gill, in his path-breaking study, The Pathology of Corruption, has observed:
‘(It was) generally assumed that with the progress of liberalisation … the (corrupt) business-politician nexus would weaken and wither away’ … (However), the new regime of liberalisation, instead of removing handles for extortion, ha(s) actually broadened the horizons for corruption….Earlier, one had to conduct prolonged negotiations with foreign suppliers, involve a battery of nit-picking officials in the process, and then receive his (or her) cut at the end of a long tunnel. Now, the culture of deregulation (has) encouraged ministers to bypass procedures to avoid delays … rely on the expertise of touts, and deal directly with multinationals. This direct approach (has) enabled a minister to sign a Memorandum of Understanding (MOU) without much delay or hassle, and direct the hefty commission to his (or her) foreign account …
Liberalisation … has created a mind-set where economic offenders are not only being treated with kid-gloves, their misdeeds are being considered as pre-conditions for growth. Furthermore, there has mushroomed a whole army of wheeler-dealers and fixers who have not only acquired mastery over government procedures, but (who) are also adept at circumventing them. They call themselves consultants and lend their expertise to ministers in fixing deals with multinationals’ (Gill, 1998, 28,178, 149, 182).
In the power sector, Bhupal Singh has concluded that these reforms have clearly failed to achieve the stated aims:
‘(Of the) 40 projects in the private sector in competitive bidding route, (and) 100 projects … on the negotiated route (amounting to 20,000 MW with an investment of Rs. 65,000 crores) … construction has started only on about 3,500 MW capacity in additional projects in the private sector. The counter-guarantee had been given by the Government of India (favouring) fast track projects initially … as according to it, the credit rating of the country was supposed to be quite low.
The fact, (however), is that a number of foreign countries with advanced power technology were willing to back up their country’s equipment manufacturers initially to promote the sale of equipment to India … despite its so-called poor credit rating. But personal visits abroad by vested interests in authority made (foreign companies) more aggressive and assertive putting (India) on the defensive ... A disadvantageous scenario (has) emerged (resulting in) most of the fast-track projects (coming up) through negotiations without competitive bidding.
The likely (adverse) impact of forex commitments of allowing repatriation of profits

(due to) sovereign counter guarantees on India’s meagre financial resources struck the formulators of this policy quite late.6 Most of the private power projects have been dragging as the proposals have run into controversy that have led to delays mainly because of lack of transparency. Unforeseen hurdles have been encountered because either experts were not consulted in advance (and/or) people with flimsy knowledge were made to append their signatures here and there with a view to offload the responsibility of the bureaucracy and politicians’ (Singh, 1997, 22, 23).

V. Ranganathan, Professor of Economics at the Indian Institute of Management (IIM), Bangalore, has also detailed the way in which these reforms in the power sector have been effected:
‘(They) are being driven by a shortage of Government finance, and to a large extent, the reforms are externally driven in the form of conditionalities for funding and are, consequently, force-fed. One consequence of this has been the blurring of the distinction between ends and means; privatisation which should be regarded as a means to achieve the end of competition, is in our context resorted to as an end in itself, resulting in a public monopoly being replaced by a private monopoly. We must clearly understand that privatisation alone, without scope for competition, need not deliver improved results, ipso facto.
Regrettably, even in areas such as generation where competition is possible, we have not attempted the right steps. We assure a guaranteed load, and a guaranteed return for each specific location and for each specific fuel, thereby protecting inefficiency and providing super-normal profits to the private IPPs ... There is a certain lack of confidence in the reform process even in the bureaucracy itself. At best, it is done, as a means to get World Bank or Asian Development Bank (ADB) loans, because, like Charlemagne who commandeered ‘baptism or total annihilation’, these organisations say: ‘Privatisation or no loans’’ (Ranganathan, 1997, 64, 65).
A report by Assadi confirms that heavy concessions to TNCs via the reform process have been granted at the cost of taxpayers:
‘Awarding tax holidays despite the taxable profit would mean that large amounts of profit may be siphoned off from India to the western world, principally the US. Further, in the US, (TNCs like Cogentrix have) taken into account 4% annual inflation but Indian inflation is counted at 10% per annum. This would mean inflated cost of output, mainly electricity, and a stagnated cost of inputs. This would, when it is translated into monetary form, absolutely squeeze the Indian economy in general, different categories in particular’ (Assadi, 1996, 2130).
Assadi has also contested the claim that the public will stand to benefit from lower electricity prices with the process of liberalisation:
‘An argument has … been advanced that the cost per unit of Cogentrix electricity power, (for example), will come down from Rs. 2.59 per unit to Rs. 2.40 per unit and that, in the longer term, the price will settle down to Rs. 1 after 20 years, as the capital cost will be loaded in the beginning. This particular argument is untenable in the context of the fact that the contract is renewable every year. Since the contract is linked to prevailing dollar rates - or equivalent to Indian rupees - it is obvious that, given the sliding rupee value in the international market, power purchase will become costlier and … Indians will have to pay a heavy price for inviting MNCs in the years to come.
Further, the collection of fixed charges by the company … will also be … passed on … later … to the consumers. This will have multiple consequences: increasing cost of all essential commodities and increasing the cost and prices of industrial goods in the context of the declining purchasing power of the people. Most affected in this context would be the middle class in the urban areas and the peasants/farmers in the rural areas’ (Assadi, 1996, 2130).
More recent assessments, by Mehta (1999) and Mahalingam (2000), would appear to confirm the basis of Assadi’s concerns. Mahalingam, for instance, observes that Enron’s DPC, in its first bill to the Maharashtra State Electricity Board (MSEB), is charging electricity at the rate of Rs. 5.92 a kwh, ‘a far cry from Rs. 2.03 a kwh (as) specified in the PPA’ (Mahalingam, 2000, 88). The Hindu also confirms that the most recent cost estimate for the Cogentrix linked MPC power project ‘works out at Rs. 4.42 a unit on the assumption that the project becomes fully operational by April 2004. Further, the cost estimate refers only to the first year of generation. The cost of the project, as such, will go up substantially with the weakening of the rupee vis-à-vis the dollar in recent years’ (The Hindu, 19 December 1999).

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