Reviving Dabhol

The revival of the power project, which has been idle for the past four years, puts a heavy burden on Indian public lending institutions while the foreign participants in the earlier project get away with a favourable settlement.

ENRON may be dead but its spirit lives on, in Dabhol, Maharashtra. The utterly controversial power project, which has been idle for the past four years, is now being revived. The keen interest taken by the Union and State governments has led to a settlement of sorts.

But the project, notorious for courting controversy ever since it was initiated in 1993, promises to live up to its history. As has always been the case of Enron's Dabhol project, the devil is in the details of the new deal.

Untangling the Dabhol knot required answers to three sets of questions, primarily by the Union and Maharashtra governments, which are responsible for the mess that the project is now in. The first related to the terms on which the claims of foreign participants (owners, guarantors and lenders) in the project would be settled. This became a knotty issue because the two governments and their several agencies, notably the Maharashtra State Electricity Board (MSEB), had been dragged to courts across the globe by the foreign owners of the Dabhol Power Company (DPC), which ran the project. The flawed structure of the contracts that the governments (and their agencies) entered into with Enron made the former vulnerable to arbitration proceedings in legal terrain unfamiliar to them. Those who have consistently opposed the Dabhol project would have argued that such proceedings could have been challenged in Indian courts, especially if it is proven that the company and its foreign associates acted with mala fide intent. Indeed, in May 2004, the Delhi High Court restrained the DPC from going ahead with arbitration proceedings in London.

The second set of questions relates to how the assets of the project, in a state of decay, could be revived. This meant identifying an entity which could be persuaded to operate a second-hand high-cost plant. How could profitability be assured for the entity in such an irremediable situation?

The third set of issues, arising out of the last set, related to how the cost of power could be kept at reasonable levels, without hampering the MSEB, which has already paid a heavy price for its association with the Dabhol venture.

Soon after the United Progressive Alliance (UPA) government assumed power at the Centre in 2004, it expressed keenness to revive the project. It constituted a Group of Ministers in July 2004 to address the issues relating to the problem. The Finance Ministry, which was neck-deep in the imbroglio because of the controversial terms on which it provided counter-guarantees for the project, has obviously played a key role in the settlement that has been forged. For its part, the Government of Maharashtra constituted a three-member panel in June to oversee the terms of the settlement. Union Finance Minister P. Chidambaram apparently `recused' himself because of the potential conflict of interest. Chidambaram, when he was not a Minister, provided legal advice to Enron on the crucial clause relating to arbitration proceedings (Frontline, August 11, 1995).

Defence Minister Pranab Mukherjee has chaired the empowered Group of Ministers, which has handled the issues relating to the revival of the project. It was reported in August 2004 that the Group of Ministers were considering a plan to float a special purpose vehicle (SPV) that would buy out the claims of offshore lenders. There were also reports that the Union Finance Ministry would provide a counter-guarantee to the SPV, to be funded by Indian financial institutions. The Group includes Agriculture Minister Sharad Pawar, who first signed the agreement with Enron when he was the Chief Minister of Maharashtra, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, who as Finance Secretary gave the Centre's counter-guarantee to Enron, and Union Minister for Power P.M. Sayeed.

Under obvious pressure from the Union government, two public sector majors in the energy business, GAIL (India) Limited (formerly Gas Authority of India Ltd.) and the National Thermal Power Corporation (NTPC), have acquired the assets of the DPC. Each company has invested Rs.500 crores in Ratnagiri Gas and Power Private Ltd (RGPPL), the SPV floated for the purpose. While GAIL is to be entrusted with the responsibility of sourcing liquefied natural gas (LNG) for the project, the NTPC is to operate the plant.

Meanwhile, the Union government has also announced a settlement with claimants from overseas, including the two foreign power and construction majors, General Electric (GE) and Bechtel, who owned 85 per cent of the equity in the DPC, the operator of the power plant at Dabhol. It also includes settlement of claims by foreign banks. The settlement includes payments to the Overseas Private Insurance Corporation (OPIC), which had lent $ 138 million, apart from providing insurance against "political risk". The process was set in motion in the arbitration proceedings in London, which resulted in a "consent award" on July 18.

In May 2004 the two United States-based companies had filed arbitration claims in London for more than Rs.25,000 crores. Earlier, the Maharashtra Power Development Corporation, which held about 15 per cent of the equity in the DPC, paved the way for the settlement by paying Bechtel $160 million. The publicly owned Industrial Development Bank of India (IDBI), which led the consortium of Indian lending institutions for the Dabhol project, paid GE $145 million. The claims of the 19 foreign lenders, settled at a 20 per cent discount, amounted to $230 million. OPIC received $220 million as its share of the settlement. In effect, a sum of $ 760 million - about Rs.3,268 crores - has been paid to the foreign claimants.

In 2001, GE and Bechtel, each of which held 10 per cent of the equity at the time the DPC was formed in 1993, acquired Enron's stake for $20 million. The $305 million that they have received as a result of the settlement is an obvious windfall for the two companies, especially when compared to the huge losses incurred by the MSEB, the lenders and the power consumers in Maharashtra.

However, the details of how the claims of the Indian financial institutions are to be settled are not clear. The main Indian lenders to the DPC have been the four public sector institutions (the IDBI, Canara Bank, the State Bank of India and the Industrial Finance Corporation of India) and the privately owned ICICI. These institutions' claims on the DPC are reported to be at least Rs.9,000 crores - Rs.6,000 crores as principal and Rs.2,500 crores as interest. These institutions had classified their loans as Non-Performing Assets after the DPC stopped repaying its dues in 2004, three years after it stopped generating power. Media reports indicate that the financial institutions are likely to forgo interest payments amounting to Rs.2,500 crores. The properties of the DPC have been in the possession of the Mumbai High Court receiver since April 2002. The IDBI is likely to contribute Rs.500 crores as equity in SPV. Media reports indicate that the IDBI, GAIL and the NTPC will each hold 28 per cent of the equity in the SPV, while the Maharashtra Power Development Corporation will hold 15 per cent. The new investors, all publicly owned companies, are also reported to be seeking technical help from the erstwhile owners, Bechtel and GE, to restart Phase I of the project (740 MW) and for completing Phase II (1,444 MW).

THE most striking aspect of the deal lies in the fact that public sector companies have been burdened with the responsibility of restarting the project, which is likely to cost more than Rs.12,000 crores. This includes the Rs.3,800 crores that has been paid to foreign entities and the Rs.2,000 crores that would be needed for the regasification facility. (LNG has to be converted into a gas by heating it in a regasification unit before it can be transported through pipelines. The project has a significantly higher capacity for storage of LNG after taking care of the needs of the power plant.) Apart from these, there are the dues to Indian financial institutions amounting to Rs.6,000 crores. In addition, the new promoters have to bear the cost of restarting a project that has been mothballed for more than four years.

According to industry experts, the cost of the Dabhol plant is about $800 per kilowatt (inclusive of the regasification facility), compared to $500-550 for a brand new Combined Cycle Gas Turbine (CCGT) power plant. It is obvious that the NTPC and GAIL will be saddled with not only a second-hand plant but one which costs about 45 per cent more. Their headroom is also limited by the tariff set by the MSEB. The new promoters' reported move to forgo any profits for the first five years of the plant's operation thus appears an admission of the difficult situation they are in after being forced into a bad deal.

Industry sources have pointed out that GAIL may have significant cost disadvantages in having to work with the same contractors who handled the work earlier. The absence of an engineering database and intellectual property ownership are likely to add to the costs. They say that new contractors are generally averse to working or providing guarantees on machinery that has been abandoned for four years. If they do, they might charge a significant premium for their services.

The MSEB has set a cap of Rs.2.30 per unit (kilowatt hour) for power supplied by the reworked Dabhol project. NTPC officials are reported to have said that unless Indian financial institutions "take a hit" by forgoing even a part of the principal that is due to them, it may be difficult to keep the price of power below the target. In particular, the price of fuel (LNG) in a highly volatile market is a source of concern. This implies that it may be difficult to keep variable costs in check, implying that fixed costs have to be pruned. The only way that can be done is by forcing Indian lending institutions, mostly publicly owned, to make some more sacrifice.

Girish Sant, member, Energy Group at Prayas, a Pune-based group that has monitored the Dabhol project, told Frontline that "GAIL and the NTPC are buying a high-cost second-hand plant". He also pointed out that the two companies would be unable to charge higher tariffs if they go to the regulator, the Maharashtra Electricity Regulatory Commission (MERC). He said that the Union government was keen to place the reworked project beyond regulatory oversight. "There is scope for the excess cost to be loaded on to the tariff in the absence of regulatory oversight," he said.

The settlement with the foreign claimants obviously required funds. The government has hit upon a novel idea, with obvious backing from the Finance Ministry, of asking public institutions to pick up the bill. The idea was to float a separate SPV, an investment company, to fund the settlement. Initially, attempts were made to get the Employees' Provident Fund Organisation (EPFO), which handles the savings of millions of workers, to lend resources to the SPV. However, this was abandoned as it became evident that there would be all-round protests. Later, the publicly owned Life Insurance Corporation (LIC) stepped in with the offer to buy government bonds to fund the payout to the foreign entities. The bonds, with a maturity of 15-20 years, are to be guaranteed by the government. The other financial institutions, which had lent to the ill-fated project, are also likely to participate in the venture.

What other options did the two governments have? Does the restoration of the Dabhol project provide a quick solution to Maharashtra's immediate energy needs? Critics of the government believe that such questions place the cart before the horse. They point to the fact that there was no need for the government to succumb to the exorbitant demands of the foreign lenders and equity holders. Girish Sant told Frontline that this would have required the government taking a completely different track. "Instead of conducting an investigation, the government has made an out-of-court settlement," he said.

Girish Sant said: "This is the price we are paying for the mistakes of the past. But the cost associated with these mistakes has to be calculated and placed before the people." He said that if the government had initiated judicial proceedings, it could have identified those responsible for these mistakes. "This would have revealed that this happened because of governance failure. If this had been demonstrated, then even GE and Bechtel and the foreign lenders would have been forced to bear the brunt," he said.

It is obvious that the Dabhol saga is far from over. The Supreme Court is hearing a petition filed by the DPC which has challenged the MERC's jurisdiction in questioning the MSEB's deal with the DPC. The critics of the government regard the MERC as a forum where there is some scope for public scrutiny. However, reports indicate that the government would prefer to bypass the MERC. The Power Purchase Agreement (PPA) is likely to be ready soon. If and when that comes into public domain, more sparks can be expected to fly.