Dabhol: The blame game

Print edition : December 03, 2004

At the site of the Dabhol power project. A file picture. -

TEC at any stage of the processing for TEC approval.

THE Dabhol project has been mired in controversy for the past several years and the problem remains unsolved to this day. It is natural that we should want to learn from this experience and even fix responsibility. But to do this one must engage in objective analysis and not indulge in blame game based on distortion of the facts to reach predetermined conclusions. Unfortunately, Prashant Bhushan's article "Enron's Montek Connection" (Frontline, November 19) falls squarely in the latter category. He claims that I was responsible for bypassing the normal process of clearing the Dabhol project in order to accelerate clearance in 1993. There is no basis for this assertion and I welcome the opportunity to clarify the position.

It is important to recall that the Dabhol Project was a State sector project negotiated between the Maharashtra government and Enron. This meant that the Power Purchase Agreement (PPA), which determined the tariff and other obligations, was negotiated by the Maharashtra State Electricity Board (MSEB) and the State government directly with the promoters and there was no Central government involvement in the process. The Central government was only involved subsequently at three stages: (i) granting foreign investment permission (ii) granting techno-economic clearance (TEC) and (iii) granting a counter-guarantee.

The grant of foreign investment approval was required under the Foreign Exchange Regulation Act (FERA) and was processed through the Foreign Investment Promotion Board (FIPB), which was chaired by the Principal Secretary to the Prime Minister and included several Secretaries besides the Finance Secretary. The role of the Finance Ministry in this process was very limited as the facts below will testify.

Enron had initially represented that its financing plan included World Bank financing. Since such financing would have required the active involvement of the Finance Ministry, the views of the World Bank were sought in order to ascertain whether it was likely to finance the project if approached. The Bank responded negatively on the project, as correctly pointed out by Prashant Bhushan, and its views were also conveyed to both the Maharashtra government and the Power Ministry. With World Bank financing ruled out, and since the project was a State government project, the Finance Ministry had no role in determining whether the project was indeed the appropriate choice for Maharashtra. This was clearly for the MSEB as the sole purchaser of the power and for the Maharashtra government to determine. The Maharashtra government were fully aware of the reservations expressed by the Bank and could take them into account, along with other relevant considerations in taking their decision.

Prashant Bhushan faults the Finance Ministry for ignoring the advice of the Bank but it needs to be understood that a negative reaction to a particular project from the World Bank does not mean, and should not mean, that the Ministry must oppose the project in other fora. In fact, there are scores of projects that have been taken up after they were turned down for Bank financing precisely because the government takes into account a number of considerations, which may not be shared by the Bank. The perception that the Finance Ministry should have opposed the project because of the negative views expressed by the Bank reflects a lack of understanding of how government works. Ministries operate within rules of business and typically do not interfere in matters outside their jurisdiction. Questioning State projects on technical grounds was simply not a function of the Finance Ministry.

During the course of deliberations in the FIPB, it was felt that since the application related to a State sector project, it would be useful to ascertain the views of the Government of Maharashtra (GOM) and the MSEB on the capital costs indicated by the promoters. In this context, I was asked by the Chairman of the FIPB to have a meeting with representatives of the Maharashtra government. Prashant Bhushan describes this meeting as the result of "an elaborate plan... devised to bypass the CEA". This is completely untrue. This meeting was not a Finance Ministry initiative but a meeting pursuant to FIPB discussion. This is why the Prime Minister's Office and not the Finance Ministry, issued the minutes of this meeting. More important, the meeting was called not to "clear" costs but only to ascertain the views of the GOM and the MSEB. As reported in the minutes, the GOM and the MSEB officials indicated that in their assessment the costs were broadly comparable with those of other projects and this outcome was subsequently conveyed to the FIPB meeting on November 5, 1993. My role in this process was not to clear costs but to report to the FIPB the assessment conveyed by officials of the GOM and the MSEB.

The FIPB meeting finally cleared the project from the foreign investment angle and this decision was entirely in line with the recently announced government policy of allowing 100 per cent foreign investment in generation. The important point to note is that the FIPB clearance related only to the foreign investment angle and had no bearing on other statutory approvals required under the relevant laws, including labour laws, environmental laws or the electricity laws. It was well understood that these statutory approvals would have to be separately obtained from the relevant authorities. The discussions and decisions in the FIPB, therefore, in no way constituted a "clearance" of costs or tariffs.

This brings me to the issue of Techno-economic clearance (TEC). Prashant Bhushan asserts that I tried to bypass the normal process to accelerate clearance. This is completely untrue. As he points out, the statutory responsibility for evaluating costs and granting TEC to any power project, public or private, rested with the Central Electricity Authority (CEA). The Finance Ministry was never involved in these processes nor did it have the power to do so.

Prashant Bhushan's article claims that the Power Secretary wrote to the CEA urging it to clear the project and in this context referred to the FIPB minutes as indicating that the Finance Ministry had already cleared the costs. Since this particular issue has been referred to in other media reports I welcome the opportunity to clarify the position. As Finance Secretary, I had no personal knowledge of any correspondence that may have occurred between the Ministry of Power and the CEA. Certainly, no reference was ever made to the Finance Ministry, nor was its opinion sought either by the Power Ministry or the CEA, on any aspect of the TEC at any stage of the processing for TEC approval. Any objective observer would appreciate that an issue cannot be considered as cleared by the Finance Ministry if there is nothing on record from the Ministry ever conveying such a clearance or recording it on the Ministry's files. FIPB minutes, which refer to the assessment of the GOM and MSEB officials in the completely different context of granting foreign investment approval, cannot possibly be viewed as a Finance Ministry clearance of costs.

Another important point to note is that the original Dabhol project which was discussed in FIPB was subsequently cancelled following a change of government in Maharashtra. The new government comprehensively reviewed the project size, costs and tariffs and the project was renegotiated and a modified PPA was signed. A revised TEC was also granted by the CEA to the modified project. Presumably, the revised costs of the renegotiated project must have been considered afresh and even Prashant Bhushan does not claim that the Finance Ministry was involved in any way in these clearances.

The only aspect of the Dabhol project where the Finance Ministry played a direct role is in the issue of a counter-guarantee to the primary guarantee given by the Maharashtra government to back payments due from the MSEB. This counter-guarantee was issued in response to a request from the Maharashtra government on which the Ministry of Power obtained a Cabinet decision that the counter-guarantee be issued. The Finance Ministry negotiated a counter-guarantee that was much more limited than originally sought and which restricted the total claims of foreign lenders in the event of termination to $300 million.

Dabhol was clearly a flawed project choice by the Maharashtra government and the subsequent problems bear that out. It is clearly important to learn the right lessons. These are not, as Prashant Bhushan would have us believe, that there is something inherently wrong in private investment and foreign investment in infrastructure. Rather, it is that private investment in infrastructure projects needs a strong regulatory system capable of determining the tariff in a transparent manner, with due regard to what is fair to the consumer. From the consumer perspective, what matters is the tariff. Unfortunately, the earlier system of techno-economic clearance did not focus specifically on this issue. This is because the system was tailored mainly to giving clearances to public sector projects and was clearly not rigorous enough. This lacuna has since been filled, and all generating stations today have to get tariffs approved by an independent regulator.

Finally, I cannot help commenting on Prashant Bhushan's reference to the fact that in my early career I was on the staff of the World Bank from 1968 to 1979. This is true, but since then, I spent 22 years in the Government of India and I would like to assure readers that my views on economic reforms and foreign investment, which I have long argued in public, reflect my own convictions of how our policy should evolve to deal with changing circumstances.

Anyone is welcome to criticise my views in substance, but let us focus on the issues and not trade on suspicions based on an early association with an international organisation such as the World Bank of which India is a founding member.

I hope the facts enumerated above would help readers to form an unbiased judgment. Scrutiny of government decisions, and also of the role of public officials, is an essential part of a functioning democracy but this calls for dispassionate analysis and not contortion of facts to arrive at predetermined conclusions. An objective analysis would reveal that there is no basis for Prashant Bhushan's claim that the Finance Ministry in any manner cleared the costs or tariffs of the Dabhol power project, or tried to push for hasty clearance.

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