The Hindu Business Line : The Dabhol dilemma again

The takeover of Enron's stake in Dabhol Power Company by GE and Bechtel may enable the restart of the process of law, now in suspended animation in the absence of a counter party, and reassure the world that India does keep its commitments, but it may make better economic sense for Maharashtra to buy power from outside the State than try to revive such a project, says S. Padmanabhan.

DPC revival — a long shot?

THE take over of Enron's 65 per cent equity stake in Dabhol Power Company by a GE-Bechtel consortium is welcome news. Once the US bankruptcy court order is operationalised, GE and Bechtel would take over Enron Mauritius Company, the holding company of DPC, thus controlling 85 per cent equity in the Indian outfit; the balance 15 per cent held by the Maharashtra State Electricity Board.

Ever since the collapse of Enron, all the legal actions against the US MNC and those initiated by the company have remained in suspended animation with no counter party to litigate.

Enron had filed for arbitration against the MSEB for cancelling the PPA (power purchase agreement) with the MSEB, and the Maharashtra Government, and the utility had filed a large claim on DPC for non-delivery of power within a stipulated time frame as agreed to by Enron under the PPA. GE and Bechtel had filed an arbitration suit in September 2003 claiming $1.2 billion for recovering their investment in the Dabhol Project.

In April 2003, the Attorney-General of India succeeded in getting an ex parte stay order from the Supreme Court to partially stop the proceedings of the Enron Commission of Inquiry (ECI), headed by a retired judge, Mr Justice S. P. Kurdukar, appointed by the Maharashtra government to probe the Dabhol power project fiasco.

The civil servant-politician combine was gleeful that the truth has been buried several hundred feet deep and are now getting ready to revive the project extracting sacrifices from financial institutions, offering concessions to re-start the project and are all set to sink in millions of dollars more to revive what now has become a dead horse.

The take over of the Enron holding company by GE and Bechtel will mean their stepping into the shoes of Enron, which means the entire litigation can be started afresh.

GE and Bechtel have been part of the Dabhol project for the last 12 years and they are in the know of all that has happened and their stepping in gives them greater responsibility to take over the liabilities of Enron on all the aspects of the project.

Perhaps this may prove to be beneficial to them as there is a good chance of their winning the arbitration against the MSEB and even after paying the claims for non-performance, they would have enough to repay all the debt outstanding with the FIs and foreign lenders.

Why is there a serious need to go through the litigation process and arrive at the truth? Why not just let bygones by bygones and restart the project?

Apart from the fact that this may cost as much as a new project and would add to the burden of the FIs, the lenders and the Governments of Maharashtra and India, it is essential that the rule of law is established so that India can reassure the world that it will keep its commitments at all cost.

It is also necessary to put in place a safety net so that corporates, civil servants and politicians do not yet again leave the nation holding a lemon. Sans Enron this was not possible but with the take over of DPC by GE and Bechtel the litigation can restart and the truth established.

The need to restart the litigation arises because of the High Court criticism of actions of two successive but opposing governments in Maharahstra — first, the Pawar government and then the BJP Government.

First referring to the Committee under Mr Gopinath Munde, which went into background of what the Sharad Pawar government did, the Bombay High Court quoted the Committee as saying: "The entire negotiation with Enron is an illustration of how not to negotiate, how not to take a weak position and how not to leave it to initiate to the other side."

After the cancellation of the PPA for Phase 1, the BJP Government renegotiated the project and awarded integration of both phases as well as the LNG terminal to Enron, and the Bombay High Court judgment pointed out the "The speed with which the negotiating group studied the project, made a proposal for renegotiation, which was accepted by Dabhol, and submitted its report is unprecedented.

The negotiating group was constituted by the Government of Maharashtra on November 8, 1995. It was asked to submit its report to the State Government by December 7, 1995. The Committee, however, submitted its exhaustive report along with data and details to the Government of Maharashtra on November 19, 1995, just 11 days after its formation, much before the December 7, 1995 deadline by which it was required to submit the same."

The second issue to consider in the same light is whether a restart is possible and feasible? In the absence of a restart what is the way out to recover the loans? This raises the following significant issues:

Equipment like turbines and rotors of the plant have remainedidle for the last four years.

The chances of corrosion and damage to the equipment are increasing by the day. A few critical parts, such as chips and documents, are alleged to have been illegally removed by Enron before it packed up. There is little hope of getting the missing parts back. Tonnes of ferrous metals used in the plant carry a high probability of rusting and becoming useless, especially as the plant is close to the sea.

The most critical part of the Dabhol project is the LNG terminal, which is highly prone to rust if left unused this long. If that happens, then no LNG carrier in the world will agree to fuel the plant, which effectively means Rs 3,000 crore will get translated into junk.

Given all this, the cost of revamping will be extremely high, for the contractor will have to replace practically everything. Thus, the revamp and renovation could cost upwards of $1 billion at a conservative estimate.

At one US$=Rs 47, the project cost, as approved by the Central Electricity Authority, was Rs 13,294 crore ($2,828 million) for generating 2,184 MW and the LNG terminal. This works out to Rs 6.09 crore per MW. As of 2002 the FIs' total exposure (both phases) is Rs 6,204 crore (IDBI Rs 2,121 crore, ICICI Rs 1,473 crore, State Bank of India Rs 1,749 crore, IFCI Rs 454 crore and Canara Bank Rs 407 crore).

This does not include the outstandings of foreign lenders and OPIC. Most foreign lenders are covered by guarantees from the FIs and to an extent by Government of India.

To this needs to be added interest for the last three years; even at 12 per cent, the interest liability for three years alone would work out to Rs 2,200 crore.

How much would the FIs need to sacrifice for the restart is anybody's guess. Conservatively, the FIs may have to sacrifice all the interest dues as well as much of the principal if they have to get all of the 2,184 MW plant and the LNG terminal up and running.

(There are several Dabhols — a number of IPPs (independent power producers) in near-similar conditions needing sacrifices because the State electricity boards have defaulted their contractual obligations signed by them under the PPAs and also due to high level of tariff arising out of high cost of liquid fuel. Gujarat, Tamil Nadu, and Kerala face this problem.

Any revival of Dabhol would open a floodgate of demands for more sacrifices by the FIs for the ailing Dabhols in other States. Would that be practical?)

Will the MSEB be able to pay the higher tariff required to support this level of debt. As it is the MSEB is unwilling to pay a tariff of more than Rs 2.80 per unit. Assuming that the LNG price is $3.50 per mmbtu landed at Dabhol (US$=Rs 44) given the heat value of natural gas at 11,000 kcal and calculating the net consumption at 1900 kcal per unit, the variable, or fuel, cost works out to Rs 1.20 per unit.

Thus, only Rs 1.60 per unit is available for repayment commitment, O&M, insurance, other overheads and equity returns to the shareholders.

Assuming a plant load factor of 85 per cent and an auxiliary consumption of 10 per cent, the net available kWh from the 2184 MW project will be 14635 million units per annum thus giving an excess of Rs 2,340 crore per annum to meet all the fixed cost commitments. Is this enough?

Will the MSEB be able to buy this 14000 MU of power per annum on a continuous basis? The LNG prices at $3.50 is a pipedream.

The restart of DPC may not work and it is a futile exercise to continue. The FIs will suffer seriously and we will be letting off the hook civil servants and politicians responsible for the mess. The whitewash begun five years age will have to stop, and the truth brought out. The Governments of Maharashtra and India will have to be made to pay for the mess they created.

It is better to build a new project using coal or natural gas outside Maharashtra and perhaps hydel projects in the North-East and buy power from these projects for the people of Maharashtra than trying to revive such dead horses as Dabhol Power Project.

(The author is a power consultant and can be contacted at paddy8@vsnl.com)

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