The Hindu Business Line : Failed bail-out of Dabhol

The recent bail-out operations in the US consisting of the troubled assets’ repurchase package have met with substantive criticism that the process amounts to nationalisation of private losses and privatisation of profit. The reference is obviously to the fact that the distressed institutions have incurred losses in pursuit of greed and they are being rewarded by the Government’s take-over of their responsibilities. We have had our own instance of such a bail- out of distressed assets in the form of the Dabhol project.

Much has been written about the Dabhol issue, both in the newspapers and elsewhere. In fact, in an article in this newspaper titled “Dabhol’s controversies revisited”, (July 2, 2001) I had pointed out the complex history of the negotiations and the fraud rendered in the settlement.

Non-disclosure of liabilities

The Dabhol Project was propelled by Enron, a firm that collapsed as a result of its high order of risk-taking. It was also guilty of flagrant dressing of accounts and non-disclosure of liabilities. Its profits were exaggerated by diversion of liabilities to Special Purpose Vehicles off the balance sheet.

It was the Maharashtra Government’s misfortune that with the Government of India’s concurrence, the project went ahead on the basis of guarantees of assured returns by the Central Government and the Maharashtra Government. Doubts had been expressed even then that the project was high-cost, with uncertain gas supply and was likely to result in a heavy burden to State and Central Governments.

The High Court had pointed out that the negotiating committee had examined the project with the connected data on various other projects, including data on similar projects in the UK, held considerable negotiations and settled the terms of the project’s revival. The High Court noted that the speed with which the whole thing was done by the committee was unprecedented.

Project, a white elephant

The unfortunate fact is that the distressed assets of Dabhol are now owned by Ratnagiri Gas and Power Private Ltd (RGPPL), one of the Indian entities with partial shareholding by National Thermal Power Corporation (NTPC) and Gas Authority of India Ltd (GAIL). This settlement was arrived at thanks to the intervention of the Central Government and the financial institutions that had lent substantial sums to the project.

Unfortunately, the project, which was designed to produce 2150 MW, has been producing power only in the range of 350-569 MW in the recent period — from April to August 2008. The Table illustrates the performance of the 2150 MW installed capacity plant, formerly Dabhol, and now RGPPL.

What is worse, the units were not fully operational because of the basic problem with the turbine design. General Electric, the turbine supplier, has denied responsibility for the failure, pointing out that the project had not been in operation for a long time and this itself contributed to the risk of failure.

The State Government had incurred substantial expenditure on repairs of the turbines, even transporting them to outside locations, such as England. It is unfortunate that the project remains a white elephant, drawing on the resources of both the State and Central Governments..

The original PPA between Enron and the Maharashtra State Electricity Board had imposed a tough performance guarantee on General Electric. General Electric had agreed to pay Dabhol Power Company a penalty of roughly $2000 per kilowatt of shortfall in capacity under the original PPA. At this stage, it is only fair that the successor company, RGPPL, should have received a compensation of about $1 billion for a shortfall the project has registered. Unfortunately, this does not seem to have happened.

This distressed asset retrieval, or bailout, of the Dabhol Power Project is a lesson on how to conduct complex negotiations with the US on power projects.

It is particularly germane in the context of the ensuing Indo-American Civilian Nuclear Cooperation. General Electric is one of the aspirants for supply of nuclear power generators. Care has to be taken to ensure that tough performance guarantees are not only incorporated in the agreement, if and when entered into, but are also implemented without fear or favour.

Hard lessons to be learnt

Multinationals of course usually make promises, but get tough when it comes to fulfilment. We have burnt ourselves once in the Dabhol case and have to be careful with suppliers of equipment which have an imperfect performance record, such as General Electric vis-À-vis Dabhol.

Questions for consideration also arise whether power projects can be safely left to the private sector to be dominated by foreign direct investors. Following the initial phase of economic reforms, there was a great deal of enthusiasm to take up the Enron-assisted Dabhol project through foreign direct investment.

Even at that time, I recall how certain officials of the World Bank dealing with India had told me in Washington that the project was ill-conceived and that we should not be too keen on it. But with the initial exuberance and enthusiasm of liberalisation, the Central and Maharashtra State Governments overrode many of the objections and went ahead with the PPA guarantees from the Centre for the loans involved.

It was obvious to some of us at that time that the Dabhol was an accident waiting to happen. But it is only fair to caution that foreign direct investments in power, whether nuclear or non-nuclear, be examined meticulously with special reference to the record of the suppliers, not only in relation to the quality of the equipment but also their operating experience. It would be worthwhile if India learns a lesson from a project such as Dabhol, which was badly appraised and weakly negotiated. Dabhol is a warning for future negotiations.

FDI, not a panacea

Above all, we should learn to depend more and more for our power projects on our indigenous equipment manufacturers, such as BHEL, which can, if need be, enter into licensing arrangement with firms such as General Electric. In that case, intellectual know-how and reliability are more certain. This, perhaps, is a lesson we can learn from China.

Foreign direct investment in the power sector is not a panacea for our problem. Dabhol shows that it may only lead to more difficulties and trouble. One Dabhol is good enough to teach us what to avoid and what to look for in future power projects. We cannot afford to multiply the white elephants, such as Dabhol, which weigh heavily on the country’s financial, infrastructural and economic future.

blfeedback@thehindu.co.in

More Stories on : Power | S Venkitaramanan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Over the moon

Leave infrastructure to private sector

Failed bail-out of Dabhol

A Deepavali like no other

Higher standards will find their level

Financial chaos