The issue of arbitration

Published : Oct 10, 2003 00:00 IST

GE and Bechtel initiate moves to retrieve their investment after a U.S.-based arbitration tribunal rules that the Indian government "improperly expropriated" their stakes in the Dabhol Power Company.

in Mumbai

DID the controversial Dabhol issue die with the fall of Enron? Not quite. On September 9, it came to the fore once again when an independent arbitration tribunal in the United States ruled unanimously that the interests of equity holders GE and Bechtel in the Dabhol Power Company (DPC) were improperly expropriated by the Indian government. Moreover, the tribunal ordered a binding award of $28.57 million each to GE and Bechtel for claims that they brought against their political risk insurer, the Overseas Private Investment Corporation (OPIC), an agency of the U.S. government.

GE and Bechtel each own 10 per cent equity in the $3-billion, beleaguered DPC. The arbitrators said that the Government of India (GoI) and its agents violated international law through an unlawful taking of GE and Bechtel's investments in the DPC. Meanwhile, OPIC, which has been slapped with the political risk insurance bill, has turned around and told the GoI to pay the amount because, according to it, the Indian government's political shenanigans have been primarily responsible for the collapse of the project. Anti-Enron activists in India, however, have pointed out that the dispute was purely commercial and had nothing to do with politics. Hence they say that the claim does not hold good.

Following the order, on September 22, GE and Bechtel filed an arbitration action against the GoI to recover their investments. The total claim, according to a press release, could amount to $600 million. The action was initiated by the two companies' affiliates, Energy Enterprises (Mauritius) Company and Capital India Power Mauritius I. The claim was made under the arbitration rules of the United Nations Commission on International Trade Law and the investment agreement between the Republic of Mauritius and GoI.

Located on the Konkan coast of western Maharashtra, the 2,184 megawatt (MW) power plant promoted by the erstwhile Enron Corporation has been lying idle for the past two years. Although efforts to restart the plant and recover its cost are being made by various agencies in India, till date a feasible plan has not been worked out. That there are several legal wrangles to be sorted has not helped to settle the issue. Yet, from the latest claim made on the Indian government, there clearly appears to be some people working towards a solution - perhaps not to revive the project but to recover their debt. The strategy the foreign investors have been adopting ever since the project's inception - squeezing the GoI and the Government of Maharashtra - seems to be their best bet for recovering their investment.

According to a press release from Bechtel, the tribunal, which was chaired by a former U.S. District Court Judge, found enough evidence to establish that "the Maharashtra State Electricity Board (MSEB), the GoM and GoI violated the Power Purchase Agreement (PPA), the GoM and GoI guarantees, and the State Support Agreements for political reasons and without any legal justification". Furthermore, the tribunal stated that the "Maharashtra Electricity Regulatory Authority (MERC), the MSEB, Indian Financial Institutions and the Indian courts have enjoined and otherwise taken away the claimants' [Bechtel and GE] international remedies under the PPA, all in violation of established principles of international law, in disregard of India's commitments under the U.N. Convention as well as the Indian Arbitration Act".

Although disagreeing with the tribunal's verdict, Maharashtra Chief Secretary Ajit Nimbalkar told Frontline that the Indian government could face some problems with the findings. "Maybe indirectly," said Nimbalkar, unwilling to elaborate any further. MSEB Chairman Asoke Basak said that eventually the tribunal's ruling may have an effect. Would it mean that the government, as in the past, will be pressured by the U.S. government to pay up? At least twice since the trouble between Enron and the government began, U.S officials have threatened India with curtailment of foreign direct investment unless the Dabhol issue is resolved (Frontline, May 10, 2002). One official has gone on record saying that "Indo-U.S relations depend on these five letters - Enron." In fact, says an informed source, in 2001-2002, U.S. Assistant Secretary of State Christina Rocca visited New Delhi three times mainly to discuss military and international policy issues. However, each time she forced National Security Adviser Brijesh Mishra to discuss the Enron issue. In April 2002, she told a television channel that she would discuss the expropriation of the DPC. Incidentally, the release of the tribunal's findings coincided with Rocca's recent visit to India.

"Everyone knows Enron is a friend of the present U.S government and everyone knows that OPIC is a friend of Enron's," says Pradyumna Kaul, leader of the Enron Virodhi Andolan. "GE and Bechtel are acting as a proxy for Enron. They are just the latest players of Enron attempting to recover money." Questioning the arbitration proceedings, he told Frontline: "Why should this `independent' panel have any relevance to India? The arbitration is part of an agreement reached among GE, Bechtel and OPIC. It has nothing to do with the Indian government." Not only had OPIC, along with the EXIM bank, loaned Enron $600 million towards owning a 65 per cent stake in the Dabhol project, the agency's political risk insurance cover to the three U.S. promoters amounts to almost $200 million.

If you look at the genesis of the dispute, says Kaul, it is clear that it is purely commercial, not political as the tribunal says. "They have no right to claim political risk insurance." The dispute began in 2001 when the MSEB, while making its monthly payment to the DPC, fell short of the total funds. The DPC returned the cheque stating it would accept only the full amount. A month later the same sequence was repeated. The MSEB made a counter-offer - it claimed that the DPC did not dispatch the required load as per the agreed time and so would have to pay a penalty. It suggested the DPC to set off the amount against its pending monthly payment. The DPC, in turn, rejected the proposal. The MSEB suggested that the payment dispute be resolved as per the PPA's methods of reconciliation. The DPC rejected this suggestion too and invoked the counter guarantees of both the State and Central governments. When the guarantee route failed to work, the DPC terminated the PPA. A protracted legal battle followed. During the past two years many more cases have been filed. The DPC till date remains stuck in a legal quagmire.

Kaul says that as 10 per cent equity holders in the DPC, GE and Bechtel have been active participants in this battle. "Enron, with the full knowledge of GE and Bechtel, pushed the dispute to the point of no return." He argues that when the energy giant realised the project was controversy-ridden and would probably wind up, it steered the dispute to ensure that it took on a political hue, which would later allow it to claim insurance. A look at the events suggests that Kaul may have a point. It took just six months from the time the DPC issued the preliminary to the final termination notice. Just after the termination notice was served, Enron collapsed. Moreover, in spite of Indian lenders' repeated efforts to re-negotiate the agreement amicably, the DPC refused. Again, as prominent equity partners, GE and Bechtel would have to be in on all the DPC's decision.

The Indian lenders' exposure to the Dabhol project has been pinned at a staggering Rs.6,000 crores. Initially, lenders proposed selling the assets and recovering part of the loan. Later, interested companies were allowed to bid for the project, which, according to an investment banker, is quite a valuable asset. Although due diligence was to be conducted by six companies, it fell through. Meanwhile, the lenders asked the Bombay High Court to appoint a receiver for the care and maintenance of the plant. A consultancy firmed appointed by the main lender, the Industrial Development Bank of India (IDBI), is in the process of restructuring the agreement and calling for international bids to buy the plant. Nimbalkar believes that the issue will soon be settled. An MERC official, however, told Frontline that he estimated that a settlement will take another two years. He said: "As per the agreement, the MSEB and Enron will have to fight out the problems in an arbitration panel set up in London. We must understand that the sale of the DPC will not mean the end of Enron."

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