DABHOLA POWER DEBACLE

Presentation By: Group 3

Anurag Singh Dushyant Singh Devvrat RaiyaniAnay Rekhde Arpit Modi Abhimanyu Singh Gavesha Beekray

INDIA’S POWER SCENARIO THEN India’s power needs were set to grow in 1992 Energy deficits of 18% was recorded leading

to frequent power cuts Emphasis on attracting private investments

on power in 8th five year plan(1992-1997) Export/Import reforms were enacted to bring

down costs in the power sector

INDIA’S POWER REGULATORY STRUCTURE The Industry was regulated at the Central or

National Level Power Sector - subject of concurrent list State governments responsible for managing

and operating state utility companies Central Government’s Ministry of Power is

responsible for regulating and is in charge of decisions on: Capacity additions Pricing/Tariffs Power-related investments

ENTRY OF ENRON Enron – world-leading multinational firm in

the natural gas industry Enron saw huge opportunities in India

To provide power To earn profits To obtain more projects if they were successful

with their first one India fit in nicely with their global objectives

at that time Enron proposed to build most modern power

plant at a time when most foreign players could not conceive such risk

WHY IN MAHARASHTRA? MSEB was profitable and this reduced the

revenue risk - the state board could pay Enron for power generated

A large demand for power existed in the state � Maharashtra already generated close to

10,000MW (12% of India’s generation capacity)

Location was close to a port making it easy to �transport fuel for the power plant.

Maharashtra was one of India’s more �developed states –institutional risks were comparatively lesser

BEST ALTERNATIVE – INDIA'S PERSPECTIVE

Ranking Alternatives Feasibility

Best Alternative

Contract a domestic private investor to build, own and operate the energy plant

Untenable then – pvt sector relied on state support

2nd Best Alternative

Domestic company becomes majority partner in power project

Untenable then – pvt sector relied on state support

3rd Best Alternative

Tap into alternative forms of energy sourced domestically (e.g. coal production)

Disregard of recommendations to explore domestic sources

4th Best Alternative

Have another foreign investor build, own and operate the energy plant

Sizeable cost advantage as a large multinational, foreign capital

BEST ALTERNATIVE – ENRON'S PERSPECTIVE At the time, ENRON was negotiating deal in

Qatar with state owned Qatar Gas & Pipeline Company to create a LNG facility

To avoid financial setbacks, ENRON needed to find large supply of consumers for the LNG

Israel, India and Pakistan were prime candidates

Israel had retracted from its commitment to lift 3 mn tones of LNG

Situation in Pakistan was volatile This left India as the only possible destination

THE CONTRACT A Power Purchase Agreement (PPA) was drawn

up wherein MSEB agreed to purchase a certain quantity of power from the Enron-led Dabhol Power Corporation (DPC) at a certain tariff.

DPC Ensured that adequate power will be made available

MSEB took care of demand risks with PPA. Initial price was Rs 2.4/KwH 20 year renewable concession was signed Dispute resolution was to be done through

international arbitration – not part of PPA but DPC shareholders agreement

RISK ANALYSIS

PROBLEMS WITH DPC Since the process was new to India, Govt. did

not consider the advantages of competitive bidding.

Agreement was directly negotiated between ENRON and Govt. through MoU

The secretive nature of the early negotiations between Enron and GoI led many to believe that project was allotted based on bribery and corruption

By proposing a negotiated deal between Enron and the MSEB, the Indian government was in the weak negotiating position

PROBLEMS WITH DPC World Bank Report expressed reservations

about the feasibility of such a huge project Central Electricity Authority (CEA)

determined that power tariff was too high and withheld approval

major debate between the MSEB and the central government ensued

Although the Congress party’s chief minister in Maharashtra was backed by his party in the central government when he signed the MOU, the central government via the CEA was reluctant to grant approval to the project

PROBLEMS WITH DPC Under GoI insistence CEA granted provisional

clearance for the project in November 1993, the MSEB took this as full clearance, and signed the final twenty-year PPA

The sale of electricity from DPC was never directly related to the demand in the market

Due to the Investment risk in India, the contracts had to be structured in such a way to guarantee a stable income stream for Enron

MSEB were prepared to commit to purchasing power to satisfy lender’s requirements

THE SAGA UNFOLDS Bharatiya Janata Party (BJP), a right-wing

party defeats the Congress and comes to power in 1995

BJP makes lots of nationalistic noise. Their leader says “we will not be dictated by foreign power giants”

Committee prepares a report on DPC Project is cancelled in August 1995

REASONS FOR CANCELLATION Lack of transparency and competition in the

bid process Some clearances were ignored based on the

‘fast-track’ nature of the project Cost of the project was greater than

comparable projects Enron cost Rs 4.49 Cr per MW Comparable projects cost Rs 3.6 Cr per MW

Tariffs were too high Environmental concerns and concerns raised

in a World Bank report were not addressed

BEST ALTERNATIVE - GOM The alternative of soliciting another investor

to take over a project which had become highly scandalized and plagued with financial uncertainties was improbable

Alternative of extracting domestic sources of energy to meet growing demand was also negligible

Throwing away the deal was also not advisable as it would give the impression of instability in the country and also have GoI confronting bill of nearly $300 million and bound by its guarantee for liability of non-payments

Thus renegotiating the deal was best alternative

BEST ALTERNATIVE - ENRON ENRON was aware that cost of International arbitration was

greater than procedure for renegotiating the agreement ENRON had serious cash flow problems with DPC Furthermore, if the project was terminated, Enron’s goal of

sourcing a large supply of consumers for its LNG facilities over a long period of time would never materialize

Enron had little choice but to negotiate with the Governments of India and Maharashtra instead of lobbying for policy, judicial and economic reform since there is no unified consortium of private investors or businesses in India with which a multinational could join forces and lobby

Specifically, Enron’s efforts to lobby the GOI to exert pressure on the GOM and the MSEB on the issue of default payments, quickly deteriorated vis-à-vis external events influencing American foreign policy

RENEGOTIATED DEAL ENRON was ready to renegotiate the deal,

after having realized that it would have to work with local politicians in order to move ahead

After review of the modified agreement, the government had reversed its position and accepted the renegotiated deal

Although elected to office based on cancellation of deal, GoM still had to solve problem of inadequate supply in energy sector

ENRON agreed to change from distillate fuel to Indian Naphtha fuel and made MSEB a 15% equity partner

IMMEDIATE POLICY CHANGES Revised project documents were immediately

made public so that the cost base of the project was transparent

As a result of the controversy over corruption, the government ruled that future power sector contracts would no longer follow the MOU process as with Enron, but would be replaced with mandatory competitive bidding

TRANSFER OF RISK FROM ENRON TO GOI, GOM Given the tenuous nature of the MSEB’s

financial position, the project lenders and Enron required a counter-guarantee of payment from the state government

The solvency of the state government was questionable, so Enron required that this insurance be further backed by a guarantee from the central government

This sovereign guarantee was controversial because the credit rating of the whole of India became dependent on non-payment by one state, on one project

Deal not signed until Atal Bihari Vajpayee’s13-day government came to power marking shift in risk

ENRON INFLUENCE ON GOM, GOI Combination of a take-or-pay contract and a

sovereign guarantee meant that Enron would be paid for the electricity without taking on the risk of reduced market demand or nonpayment by the MSEB

When ENRON came to India there was little regulatory structure for project approval process

Enron made many recommendations to the GoI as to how it could improve the process for foreign investors

Laws were passed as a result of Enron’s experience with Dabhol

All other projects in the country were benchmarked against the Dabhol tariff

THE ARBITRATION STORY After the MSEB failed to remit payment

government paid the MSEB’s arrears MSEB argued that the central government

should not pay the latest arrears because the bills needed correction, and Enron claimed that the MSEB was trying to renege on its contractual obligations

Enron invoked the political force majeure clause for non fulfillment of the MSEB’s contractual obligations and issued arbitration notice to the central government to collect the December bill

MSEB stopped payment on electricity from Dabhol, and issued notice to scrap the PPA

THE ARBITRATION STORY First, the dispute under the Power Purchase Agreement

was referred by the DPC to arbitration in London Second, Bechtel, as a co-owner of the DPC, referred a

claim under the DPC Shareholders Agreement to the ICC Arbitration in New York

Third, claims for about $1.3 billion in compensation were reportedly launched by Bechtel and General Electric under India’s bilateral investment treaties with Mauritius and the Netherlands

Fourth, in a state-to-state arbitration, the U.S. government brought a claim against India after OPIC was required, in an American Arbitration Association proceeding in the U.S., to pay about $110 million to Enron, Bechtel, General Electric, and Bank of America in risk insurance for the Dabhol project

THE ARBITRATION STORY Of these four arbitrations, only the ICC

Arbitration led to a known and publicly available award. This is partly because, in 2005, an overall settlement was reached between the U.S. and Indian governments, as well as U.S. firms, which terminated outstanding arbitrations and court actions

The ICC arbitration allowed tribunal’s decisions to expand the arbitration beyond the parties to the relevant contract and apply a variety of legal sources besides that contract, offered reasons to suspect regime bias and was indicative of wider conflict between Western and Third World interests

LEARNING FROM THE EPISODE A surplus of power is as harmful as a shortage of power It is imperative to examine the tariff implications DSM must be included as an option with Integrated

Resource Planning (Least Cost Planning) to arrive at the cheapest mix of supply and saving options. 

Competitive bidding procedures rather than MoUs and counter-guarantees

The sector must pursue the goal of universal access to affordable electricity

Protection against exchange rate volatility and strengthening of BHEL

Not only competitive bidding but transparency, accountability and participation

The right to information

POSSIBLE MEASURES FOR FUTURE Technical advisers must be appointed NGOs may act to ensure that peoples’ views

reach policymakers Consumers need to be more vocal so as to

play a part in decision making View of opposition party must be taken into

consideration Renegotiation of agreement, though not

advisable, but could have been done in this case

To conclude, trust and relationship and perhaps some initiative and flexible contracts might

have been more successful than relying purely on contract