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Dabhol and political sparks

Print edition : Oct 27, 2001 T+T-

Even as the legal tangle worsens, Sharad Pawar's opposition to a judicial probe into the Dabhol power project leaves the ruling Democratic Front in Maharashtra seriously divided.

SIX years since the point of time when the Shiv Sena-Bharatiya Janata Party alliance was swept to power in Maharashtra after promising to drive the Dabhol power project into the sea, the controversial project seems set to cause a second political upheaval. The announcement in September of a judicial investigation into the Enron-sponsored project provoked bitter protests from the Nationalist Congress Party (NCP), stalling the early appointment of a retired Judge to head the inquiry. This, in turn, has generated angry reactions from the Congress(I) as well as the Left parties whose support is necessary for the Democratic Front (D.F.) to remain in power. The NCP itself seems divided on the issue.

For the record, NCP politicians claim that their opposition to the judicial investigation is based on their concern for Maharashtra's economy. "We feel the decision has already had an adverse impact," says NCP spokesperson Vasant Chavan. "One leading industrial house has decided not to invest in Maharashtra," he claims, "while smaller organisations are in the process of relocating in neighbouring States."

Leaders of the NCP have also been using Prime Minister Atal Behari Vajpayee's September 7 promise of an "early and amicable resolution of issues relating to the Dabhol Power Company (DPC)" to argue that the Maharashtra government should not precipitate a showdown. Shortly after the September 19 decision to order a judicial investigation, NCP president and former Chief Minister Sharad Pawar warned that "if the State government has to pay a huge sum to Enron as compensation, we are not going to be party to the decision". However, official polemic fools no one. Pawar's role in bringing about the DPC deal, a process dogged by rumours of payoffs to key politicians in the then Congress(I) government and the subsequent Shiv Sena-BJP government, obviously underpins the NCP's disquiet.

The Peasants and Workers Party, the Communist Party of India and the Communist Party of India (Marxist) also made it clear that they would bring down the D.F. government unless an investigation was ordered. Informed sources told Frontline that Congress(I) Ministers who attended the Cabinet meeting that decided on the investigation said that if the NCP insisted on stalling an investigation, it should be asked to leave the D.F., paving the way for elections. Should the NCP delay indefinitely the appointment of a retired Supreme Court Judge, the Congress(I) may eventualy accept that suggestion.

Interestingly, however, not everyone in the NCP appears keen on tying the party's fortunes to Pawar's fate in the Enron investigation. Informed sources said that Deputy Chief Minister Chhagan Bhujbal had told his Cabinet colleagues that while a decision should not be "taken in haste", the NCP was not opposed to a judicial investigation per se. Finance Minister Jayant Patil and Tribal Development Minister Madhukar Pichad too put up little resistance to the majority view at the Cabinet meeting. "An impression has been created that we are shielding Enron," Bhujbal said on July 11, "and we want to dispel that impression". Bhujbal and Pawar have clashed in the past, notably over the Deputy Chief Minister's campaign to secure Shiv Sena supremo Bal Thackeray's arrest. Enron, it would seem, is becoming another fault line between Pawar and his most important party colleague.

Until early this month, the DPC appeared stuck in a legal quagmire. Now, however, the company believes that things are starting to go its way. On October 11, a commercial court in London issued an ex-parte order that restrains the Maharashtra government from initiating legal proceedings in India seeking to block the ongoing international arbitration. For the DPC, this is a victory."According to their agreements, both the government and the DPC are bound by English law," a DPC spokesperson told Frontline, "and this order will ensure that Maharashtra can do nothing to hamper arbitration proceedings." A DPC statement says that "the injunction facilitates the timely and impartial review by the international arbitration panel of the dispute between the DPC and the Government of Maharashtra".

In April, the DPC had slapped notices of arbitration on both the Government of India and the Maharashtra government after the Maharashtra State Electricity Board (MSEB) refused to make payments. International arbitration proceedings were to begin, and arbitrators were appointed from both sides. However, the Bombay High Court and the Supreme Court restrained the DPC from proceeding with international arbitration, on the basis of a dispute over whether the Maharashtra Electricity Regulatory Commission (MERC) had the jurisdiction to decide the payment dispute.

The injunction from London is based on the premise that the arbitration proceedings and the MERC"s jurisdiction are separate issues. "Arbitration has no bearing on the ongoing proceedings in the Bombay High Court and the Supreme Court involving DPC, the MSEB and the MERC," says the order.

Not everyone shares this understanding of the legal situation. Abhay Mehta of the non-governmental organisation Prayas has described the London court's order as "a direct invasion of the sovereignty of the Indian state". Maharashtra, he pointed out, was a party to ongoing litigation in several courts, including the Supreme Court of India. If it were to follow the London judgment, the Maharashtra government's freedom of action would be "severely constrained". "No court," Mehta concluded, "should have passed such an order, let alone ex-parte."

But the fact remains that the London order could not have come at a better time for the DPC. The court cases in India were dragging on, and the pressures of mounting debt were beginning to tell. The announcement of a judicial probe last month into Enron's agreement with the government had created more problems for the beleaguered power corporation. Industry analysts are betting that international arbitration will go Enron's way. "They have a water-tight agreement," one consultant told Frontline. "Unfortunately for the government, it signed on the dotted line," he added.

If the DPC wins, some estimates suggest that the MSEB could have to pay a staggering Rs.25,000 crores in damages. This would include the monthly payments that the MSEB has defaulted on, along with penalties for pulling out. The MSEB currently owes the DPC in excess of Rs.950 crores. However, MSEB Chairman Vinay Bansal told Frontline that the London order was "just a tactical legal move". "It prevents the Maharashtra government," he said, "from getting a stay on arbitration. The MSEB can take whatever legal action is necessary. But since the government is responsible for us, their handling of the London issue will decide where we stand."

In October 2000, the MSEB stopped payments to the DPC, claiming that power had not been provided within a stipulated period. The DPC responded by invoking, unsuccessfully, guarantees provided by the Maharashtra and Union governments, and in April 2001 the company decided that it was time to quit. A notice of political force majeure was issued, claiming that government interference was hindering the company's operations. Notices of arbitration and conciliation followed a few days later. Finally, on May 19, 2001, the DPC served a termination notice. In response, the MSEB cancelled the power purchase agreement (PPA), stopped purchasing power and took its case to the MERC. The DPC says it does not recognise the MERC as this quasi-judicial body was formed after the PPA was signed.

Meanwhile, the DPC'S debt to its lenders has been mounting. Perhaps realising the futility involved in funding this controversial project, both off-shore and on-shore lenders have stopped disbursements for its second phase. But the DPC has still to meet its interest payment obligations. With the MSEB not paying up, the power company has defaulted on interest payments amounting approximately to $20 million. As a result of ongoing litigation, the DPC has also been restrained from invoking an escrow account. In addition, when it tried to invoke a Rs.136-crore letter of credit, the Supreme Court stayed the application. Enron had earlier indicated its willingness to sell its equity in the $3 billion 2,184 MW project, in line with its global shift out of the power sector. But Tata Power and BSES (formerly known as the Bombay Suburban Electric Supply) were the only companies that showed interest in buying a stake. Only Tata Power has filed a formal expression of interest with the Industrial Development Bank of India (IDBI), the lead lender. According to the IDBI, the BSES has indicated that it might pick up a stake "subject to conditions".

These conditions include Enron being willing to take a fairly severe hit on its equity holding. Enron, however, has repeatedly said it will not compromise in the matter of the value of its equity. BSES Chairman R.V. Shahi has said that he had told IDBI officials that the Dabhol project as it stands is not viable. Should the DPC restructure its tariff, the BSES may be interested. A statement issued by the BSES says that "fundamental issues would have to be addressed before any prudent investor ventured to buy DPC".

Indian lenders would be hard hit if the project falls through, and they have been pushing the MSEB for an out-of-court settlement. Institutions and commercial banks have an exposure of close to $1.5 billion in the DPC. After the financial situation of the DPC began to deteriorate, Indian financial institutions, led by the IDBI, drew up a funding plan last month to improve the project's saleability. Some people even suggest giving the company that would buy the DPC one of the MSEB's distribution circles. The MSEB is, however, not prepared to do this.

Given the complexity of the issues involved, it is anybody's guess where events will go from here. Proposals by the Madhav Godbole Committee to renegotiate tariffs by restructuring debt have gone nowhere, given Enron's refusal to compromise on the value of its equity. Enron could be counting on the NCP, and its allies in the BJP in New Delhi, to ensure that no judicial investigation gets off the ground. While there is little doubt that serious political dispute is brewing in Mumbai, the power multinational may be ill-advised to count its hatching chickens just yet. Presence in office has ensured that several of the NCP's key Ministers, including Jayant Patil and Laxman Dhoble, have been able to strengthen their position in Maharashtra's politically crucial cooperatives, and they are unlikely to throw away they influence they have gained for the sole purpose of protecting Pawar. The crisis the NCP could provoke may bring down the D.F. government, but could well claim Enron as well.