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Aftershocks of Dabhol Power Project

The ruling political and bureaucratic elite seem to believe that the ghost of Enron project and the monumental failure of governance in its approval can be exorcised by reviving it at any cost. The settlement reached with the two foreign equity holders and the international banks and financial institutions is far too generous. In addition there are the large subsidies (estimated at Rs 10,000 crore) doled out at the cost of the unsuspecting taxpayer to hide from public scrutiny how totally unviable this project was.

Commentary

Aftershocks of Dabhol Power Project

The ruling political and bureaucratic elite seem to believe that the ghost of Enron project and the monumental failure of governance in its approval can be exorcised by reviving it at any cost. The settlement reached with the two foreign equity holders and the international banks and financial institutions is far too generous. In addition there are the large subsidies (estimated at Rs 10,000 crore) doled out at the cost of the unsuspecting taxpayer to hide from public scrutiny how

totally unviable this project was.

MADHAV GODBOLE, E A S SARMA

I
n perhaps the largest corporate scandal in the world, the Enron empire of the US collapsed in 2001 after ruining the lives of millions of its employees and shareholders. It is noteworthy that in spite of the complexities of the financial transactions of the company, the web of shell companies it had created and the extraordinary political clout of its president, Kenneth Lay, criminal cases against the top executives of the company were pursued vigorously, and in less than five years, several top executives were convicted to undergo prison terms running into several decades.

Lay died of a heart attack soon after the judgment was announced but before the sentence could be pronounced. In sharp contrast is the position in India where all those involved in the approval of the Enron power project, which unjustly tarnished India’s image internationally, led to series of arbitration proceedings and court cases, and resulted in a huge financial loss to the exchequer, have not even been held accountable. The ruling political and bureaucratic elite seem to believe that the ghost of Enron project and the monumental failure of governance in its approval can be exorcised by reviving it at any cost and renaming it the Ratnagiri power project. The settlement reached with the two foreign equity holders and the international banks and financial institutions is far too generous. In addition there are the large subsidies (estimated at Rs 10,000 crore) doled out at the cost of the unsuspecting taxpayer to hide from public scrutiny how totally unviable this project was.

To begin with, it would be useful to recapitulate the salient features of the project. It was to be a base load project with an installed capacity of 2,184 MW and was to use LNG as feedstock. Phase I of 740 MW was commissioned on May 13, 1999 and when the project was mothballed on May 29, 2001, construction of phase II of 1,444 MW was at an advanced stage. This was the largest private sector power project taken up in the country by a foreign investor at an estimated cost of $ 3,000 million. The power purchase agreement (PPA) entered into by Enron with the Maharashtra State Electricity Board (MSEB) was totally one-sided and the cost of power was so high that it would have meant financial ruin, not just of the MSEB but also the government of Maharashtra (GoM), which had given guarantees for the timely payment for the power purchased by MSEB.

The GoM appointed an expert committee on February 9, 2001 to examine the project and suggest a way out. Apart from three other members, the authors of this article worked as the chairman and member of the committee respectively. The committee submitted its report on April 10, 2001 in which it, inter alia, recommended that the project should be restructured by negotiating it afresh to bring down the cost of power. The committee had underlined that this would mean all concerned parties taking a “hair cut”, i e, making substantial concessions. The settlement reached by the centre needs to be examined in this background.

Mischievous Allegation

The argument advanced by the Dabhol Power Company (DPC) and its proponents that MSEB rescinded the contract with DPC due to its inability to pay for power is mischievous and misleading. Under the contract, MSEB had to make “capacity payment” to DPC, on the basis of the rated base load capacity declared to be available by DPC for each availability period, irrespective of whether energy was actually delivered by it to MSEB or not. Accordingly, MSEB had made a huge payment of Rs 2,180 crore to DPC from May 1999 till May 2001, when the dispute between the parties arose on account of the material misrepresentation made and non-fulfilment of commitments given by DPC in the PPA, which had guaranteed that the power plant had the capacity to ramp up from cold start (i e, when the plant is completely shut down for over 12 hours) to 100 per cent load within a period of 180 minutes. The DPC repeatedly failed to fulfil this obligation when MSEB asked the DPC plant to be brought on line and as a result was liable to pay a rebate of Rs 401 crore to MSEB. The DPC refused to adjust this amount against the payment which was due to it from MSEB and instead insisted that MSEB should make full payment for the power purchased by it and the question of breach of the PPA obligation should be referred to an international arbitration. This was a totally indefensible position taken by the DPC and when MSEB declined to go along, the Enron company stopped the supply of power to the electricity board. In the settlement agreed to, MSEB appears to have been forced to give up the claim for this large amount altogether.

The details of the revival package worked out between the concerned parties such as Bechtel, General Electric, Indian and foreign financial institutions, MSEB and others in July 2005 are still not in the

Economic and Political Weekly August 26, 2006

public domain. Though phase I of the plant was partly restarted and power therefrom sold to MSEB, the details of the new PPA are not known. The tariff at which power from the rechristened (Ratnagiri) plant is to become available is not clear. Approval of the Maharashtra Electricity Regulatory Commission (MERC) has not been taken for the purchase of this power nor has it been established that it is according to the criterion of merit order dispatch, which requires that power must be purchased by a distribution agency based on its cost, with the cheapest power being drawn first. At the commencement of negotiations, the GoM had laid down a condition that it would take power from this project at a tariff not exceeding Rs 2.40 per unit. Later, GoM relented and agreed to a higher price of Rs 2.80. Now the figure being talked about is Rs 5.30 or even more. It is not clear if this is to be the cost at the bus-bar. In that case, the cost to the consumer would be even higher taking into account the transmission and distribution losses. If the application of the Maharashtra power distribution company for purchase of power from this project had come before the MERC for approval, all details of the financial restructuring could have come into the public domain and it would have been possible to contest some of the terms of the settlement. It would have also enabled quantification of diverse subsidies which taxpayers all over the country have to bear to artificially bring down the power tariff for this project.

Under Duress

It is believed that the settlement was agreed to by the government under duress, mainly due to the apprehension that the arbitration proceedings launched by the multinational equity holders under bilateral agreements with some countries were likely to go against India. To what extent such fears were justified is debatable. Whether the legal firms selected to represent India’s interests were sufficiently experienced, competent and qualified is also not clear. It is far from clear why MSEB and GoM did not offer to purchase the 65 per cent equity held by Enron during the bankruptcy proceedings in the court in New York when it was available for a mere $ 20 million. We had publicly raised this issue way back in June 2004.1 The government has never clarified the position, even to date.

The negotiating position of the government would have been strengthened immensely if the judicial commission of enquiry, which the authors of this article had recommended, in spite of the opposition of the other three members of the expert committee, had been permitted to go ahead. The authors had forewarned that, “If the judicial enquiry also establishes that there is exercise of undue influence that had resulted in any decision that was against the public interest, the relevant provisions of the contract law may have to be invoked for legally reviewing the existing contractual commitments with DPC and taking all necessary steps that would subserve the public interest, without GoM/MSEB having to incur any contractual liability.”2 In spite of opposition from vested interests, it was due to the considerable public pressure that the GoM appointed a commission under the Commissions of Inquiry Act, 1952, under a retired judge of the Supreme Court on November 7, 2001. The commission was asked to submit its report in six months. The appointment of the commission was opposed not only by Sharad Pawar, who was the chief minister at the time the project was originally approved, but also by the NDA government at the centre by filing a petition in the Supreme Court under Article 131 of the Constitution. Unfortunately, the court gave an ex parte stay on April 9, 2003 restraining the commission from proceeding further with the enquiry. It was shocking to see that the state government neither took care to file a caveat in the court not to hear the matter without issuing a notice to it nor did it make any effort to get the stay vacated.

Even after the United Progressive Alliance (UPA) government came to power, it too was not interested in the enquiry by the commission and the stay continued indefinitely. Finally, when the much extended term of the enquiry commission came to an end in 2005, the state government quietly buried the commission by not extending its term. After thus deliberately weakening its own case by not permitting such a high level judicial commission of enquiry to function, the centre has entered into a settlement package, which according to the sketchy information available in the public domain so far, is as one-sided as was the original PPA of the project.

The fair price of equity of the foreign promoters was not more than $ 320 million. If the written down price of the 65 per cent equity held by Enron ($ 20 million) is taken into account, this was even lower. But, Bechtel and GE, who had purchased the Enron equity at this throwaway price had been given much more than their equity investment though the project had become sick and had been shut down as unviable. In any project which becomes sick, it is the equity holders who have to take the maximum hit. In the present case, apart from giving up its claim of Rs 401 crore referred to earlier, MSEB, which had 15 per cent equity in the project, had to forego its investment totally. A question also needs to be asked as to what sacrifices the Indian and foreign financial institutions were forced to make. After all, they were no less responsible for not carrying out the financial scrutiny of the project properly. Instead, they relied solely on the generous guarantees of the state government and the counter-guarantees by the central government.

‘Privatisation of Profits and Nationalisation of Losses’

Even a rudimentary examination of the basic features of the project should have made it clear to any analyst that it had no chance of success and that it would mean a financial ruin for MSEB and the state government. But, as is the common experience, multinational firms, in their pursuit of maximising their profits, hardly ever exhibit any social commitment or concern for the interests of their much weaker joint sector partners from developing countries. The role of the Indian and foreign financial and legal consultancy firms appointed by the MSEB too left much to be desired. With all the political rhetoric of the on-going economic reforms and the talk of disinvestment in PSUs, restructuring of the Dabhol project has meant nothing but the nationalisation of a badly conceived and designed largest private sector power project in India funded by a notorious multinational. The PSUs such as NTPC and GAIL, which were not earlier prepared to touch the project with a barge-pole, have been coerced into taking over and running the project, reminding one of the heady days of social control over the commanding heights of the economy. This is yet another example of “privatisation of profits and nationalisation of losses”!

When the scandal is of such monumental proportions, it is no wonder that the “much educated” ruling politicians, and

Economic and Political Weekly August 26, 2006 bureaucrats are going out of their way to shower concessions on this project to bring down its nominal tariff as much as possible, with hidden subsidies. The state government has already announced a series of concessions such as in stamp duty, sales tax and so on. The centre has extended project-specific concessions such as of customs duty waiver for the naphtha to be imported for the project, waiver of capital gains tax, income tax concessions, grant of mega power project status and so on. It has even decided to refund the import duty levied on the project! Tax concessions are hardly ever given retrospectively for a specific project. But, political reputations and interests of so many influential power elite are involved in the instant case that no price is too high to pay to save them. According to some tentative estimates, the burden of subsidy for this project which will have to be borne by the taxpayers may be as high as Rs 10,000 crore over the next few years. No second-hand power project anywhere in the world would have cost as much. The authors of this article, who had raised their voice against the project, were branded by its proponents as enemies of Maharashtra who were responsible for plunging the state in darkness!

Scandalous cases like this make the government worry about the Pandora’s box which the Right to Information Act would force it to open and the skeletons which would tumble out of it. It is therefore no surprise that demands for information pertaining to this project and its judicial enquiry are stone-walled, whichever political parties are in power at the centre and in Maharashtra. It is an eloquent commentary that Parliament has had no time or inclination all these years to discuss this project, whether in its previous or the present incarnation, and the failure of governance across different governments at different points of time, at both the state and the central levels, and at both administrative and political levels.

EPW

Email: madhavg@vsnl.com eassarma@gmail.com

Notes

1 Madhav Godbole, ‘Resolving Dabhol Tangle’,

Economic and Political Weekly, June 5, 2004,

pp 2329-34. 2 Government of Maharashtra, Report of the Energy

Review Committee, April 2001, pp 84-85.

Economic and Political Weekly August 26, 2006

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