The Dabhol mess

The dispute between the Maharashtra State Electricity Board and the Dabhol Power Company reaches a decisive stage.

AFTER years of battle, the Dabhol Power Company (DPC) and the Maharashtra State Electricity Board (MSEB) have initiated processes that could finally terminate the Enron-sponsored $3-billion, 2,184-megawatt (MW) power project. Neither side has taken a decision regarding ending their relationship yet, but it is clear neither believes the relationship is sustainable. The current developments, it is suggested, constitute a crisis that could have serious implications for international investment in India. But the termination process also holds out the sole prospect of resolving the long-running controversy and saving the MSEB and the Maharashtra government from certain financial ruin.

On April 23, the DPC board met in London to decide, among other things, the future course of the Indian project. At the end of two days of deliberations, the board voted to opt out of the project. The MSEB, which holds 15 per cent of DPC's equity, was not permitted to vote as it was an "interested party". Indian financial institutions, which had backed the project, opposed the resolution, but were in the minority. It is now well known that the $40-billion Enron Corporation has shifted its business focus from owning assets to trading in products such as petroleum and gas. Therefore, an asset like DPC does not fit into its new strategy. At the conclusion of discussions, the board permitted Enron India managing director K. Cline Wade to issue a notice of termination to the MSEB.

In the 10 days that followed the board meeting, DPC has not actually served any such notice. Nor has it confirmed its willingness to renegotiate its power purchase agreement (PPA) with the MSEB. The only significant development appears to be that there were reports of large-scale retrenchment, but even that DPC does not validate.

The company spokesperson is unwilling to comment on any development. Nevertheless, a decision from DPC is expected soon. The MSEB, meanwhile, has responded to the developments by issuing a termination notice of its own, claiming that DPC had failed to deliver on its contractual obligations. Ever since DPC began generating power in May 1999, the once-profitable and efficient MSEB has been reduced to a loss-making organisation. As per the PPA, the MSEB pays Rs.95 crores as fixed monthly payments to DPC, irrespective of whether it uses the electricity or not. This is because the MSEB committed at the time of signing the agreement that it would pay for 90 per cent of the 740 MW of power produced by Phase I of the Dabhol Project.

WHILE it appears that both the MSEB and Enron are seeking to cut their losses and get out of the mess while they still can, the lending institutions are trying to persuade DPC not to pull out. Although they say that termination is not a constructive solution, the lenders have stopped further disbursements. Thirty per cent of the funds needed for Phase-II remains to be disbursed. Indian representatives and lenders, who met with the board, have asked DPC to consider renegotiating the PPA. Should the project be terminated, the Central government would have to pay up to Rs.1,800 crores as penalty, according to Central Power Secretary A.K. Basu. The amount is calculated on one year's electricity bill. Additionally, there is a termination fee of $300 million. However, the more worrying aspect of a termination is the huge debt component.

Most of the loans taken from international agencies are backed by domestic guarantees. If termination becomes inevitable, the foreign loans will remain completely secure. The agreement is that the Indian lenders will take on their bad debts, which means that apart from the funds they have sunk in, Indian lenders will shoulder a huge additional burden. Meanwhile, the Government of Maharashtra (GoM) and the Government of India (GoI) have clearly stated that termination is not what they want. The GoM has announced the formation of an experts panel to renegotiate the agreement and arrive at an amicable solution. The panel consisting of a representative each from the Union and State Finance Ministries, the Central Electricity Authority, and the MSEB and all members of the Madhav Godbole Committee, has been given a month to finish its task. The Godbole Committee, constituted to review the PPA, had suggested wide-ranging financial restructuring of the project.

Maharashtra's official position on terminating the PPA represents something of a volte-face, and it has caused more than a little discontent among alliance partners in the ruling Democratic Front that are opposed to the project. Interestingly, prior to the London meeting, Chief Minister Vilasrao Deshmukh had said time and again that no compromise would be made with Enron. But on the eve of the meeting, Deshmukh and MSEB Chairman Vinay Bansal met Union Ministers Yashwant Sinha and Suresh Prabhu in New Delhi as well as Congress(I) leader Sharad Pawar. It is probable that the GoM was advised at these meetings to soften its stand. On his return from New Delhi, Deshmukh announced that the GoM was prepared to renegotiate the deal. In fact, he said terminating the deal with Enron would not be a solution. The DPC, Deshmukh said, had "acted in haste", adding that the GoM would still try and make all attempts to reopen the PPA and bring the DPC to the negotiating table.

PAST experience suggests that not much is likely to come of the time spent at the negotiating table. The last review of the project, carried out by the Bharatiya Janata Party-Shiv Sena alliance government, led to a contract which protected Enron's interests. Shrouded in secrecy at the time of signing, the contract was formalised by the BJP-Sena alliance, despite its election promises to "throw Enron into the sea". According to independent experts, the renegotiated contract was even worse than the earlier agreement signed by the Congress(I) government led by Sharad Pawar. Opponents of the project had maintained that the GoI and the GoM would realise their folly only when the bills started coming in, which is precisely what happened.

Suffering huge losses because of these payments, the MSEB categorically told DPC in November last that it could no longer meet the exorbitant charges. The MSEB pays Rs.7 a unit to DPC as against Rs.2.80 a unit to Central and State generating stations. The MSEB defaulted on its December and January payments and has ever since been at loggerheads with DPC (Frontline, May 11, 2001). The quarrel escalated when DPC failed to supply power within a contractually stipulated time period of three hours on January 28. As the PPA provides for a penalty of two weeks' receivables, the cash-strapped MSEB decided to make good this clause. It slapped a Rs.401-crore fine for failure to ensure power availability. Since the MSEB could not make its monthly payment, it asked DPC to set off the fine against the amount the MSEB owed it. DPC refused to accept this and invoked its counter-guarantee clause with the Union government.

However, the Union Law Ministry upheld the MSEB's stand, stating that the utility company was within its rights to ask for an adjustment. When the Centre failed to meet the counter guarantee demand, DPC broke the stand-off by serving a notice of political force majeure on April 9. This clause stated that it would be impossible for the company to fulfil its contractual obligations owing to interference from the State. It was not coincidental that the notice came a day before the release of the Godbole Committee's report. An MSEB official told Frontline that DPC had pre-empted the committee's findings. Furthermore, a week later DPC served notices of conciliation and arbitration on the GoI and the GoM. Enron also let it be known that it was willing to sell its stake in DPC if a good price was offered. There has been speculation that the Reliance group is the most probable successor to Enron. At a recent press conference, Reliance managing director Anil Ambani said his company was "keeping an open mind" on taking over Dabhol.

Although the GoI believes that Enron should stay, it is far from clear if either it or the Maharashtra government could accept the consequences. The 1,444 MW Phase II of the project is scheduled for commissioning later this year. That means that the MSEB, according to the conditions in the PPA, shall have to fork out Rs.500 crores a month as stand-by charges to DPC, irrespective of how much it buys. Officials say the MSEB could end up paying upwards of Rs.6,000 crores each year, which the organisation just does not have. "It would be better for them to pay the Rs.1,800 crores now and terminate the agreement rather than struggle to pay thousands of crores later," says Pradyumna Kaul, an activist with the Enron Virodhi Andolan and a leading critic of the DPC deal. Kaul told Frontline that "the country definitely stands to lose less now than it will once Phase II goes online."

Besides, Kaul argues, the fact that Enron's decision to move out came on the first day of its board meeting makes it clear that the multinational has made up its mind. He says the DPC should be declared a failed business and the MSEB should be given the reins to run Phase I. "Let the financial institutions take the impact," Kaul suggests. "They can afford to take the impact. The MSEB cannot."

To terminate the agreement, Enron will need the approval of financial institutions, which have ploughed in approximately Rs.7,000 crores into the project. But, according to an MSEB official, Enron could work around a welter of legal loopholes. If it does so, it would result in a final arbitration process being initiated. In all likelihood, Enron will negotiate a closing "deal", the official says. Should Enron terminate the agreement, it will enter a six-month "cooling" period. The time could be used to pressurise policy-makers to meet pending payments. Enron will not leave without securing most of its returns, he says. On the other hand, should renegotiations begin with Enron, the Godbole Committee has suggested that priority be given to bringing down the cost of the project. The committee has blamed Enron for unfairly adding approximately $500 million, the cost of the on-site liquefied natural gas (LNG) facility, to the project cost. Renegotiating both the phases, removing the opacity in traffic structures and, most important, removing all dollar denominations are the other recommendations of the committee.

The showdown the MSEB anticipated ever since the squabbling over non-payment of dues began has now come about. With Enron still undecided on its final course of action, just how the conflict will end remains uncertain.