There is still time to salvage the Dabhol project

Y C Halan

Enron Corporation’s decision to pull out from the Dabhol Power Company (DPC) is not good news for India Inc. This, despite the fact that the project had been engulfed in controversies right from the beginning.

Initially, questions were raised at the allegedly high tariff rate that was fixed, when the power purchase agreement (PPA) was signed. Subsequently, two successive governments in Maharashtra reopened it, before, both the government and the company agreed to implement it. However, the matter was not settled, even at that stage. Politicians of every hue have been making allegations of gross misdeed by DPC. And now, the Central government is taking a tough stance on the issue of the payment of money that was promised under the counter guarantee agreement.

DPC on the other hand, had also adopted an aggressive and stiff attitude, all along. The latest salvo was the one fired by the DPC chief executive in India, following the concurrence from its US-based parent company to initiate termintation proceedings.

The fact is, the whole deal was wrongly planned, negotiated, executed and followed up—right from the beginning. For starters,the project did not follow the conventional norm of competitive bidding. In 1992, when the Sharad Pawar government initiated the dialogue with Enron to set up a 740 mega watt (MW) power plant, none other than the the World Bank had raised objections to the project. The second phase of the project was added later when Ms. Rebecca Mark, the high-flying chief executive of Enron, impressed Shiv Sena supremo Bal Thackery about the need for setting up the project in Maharastra.

Unfortunately, the deal, for electricity generation that was not needed by Maharashtra, at a tariff far exceeding the market norms, was finalised in the best interests of the US company alone. For example, a capacity of five million tonnes was created against the need for a 2.1 million tonnes re-gasification plant. Similarly, the port attached to the plant also has excess capacity. And, the full cost for gas supply over a 20 year period was added to the project cost. Hence, it can be assumed that not only the project cost, but the variable cost was also converted into fixed cost. The MSEB on the other hand, agreed to pay DPC, whether or not, the power was bought.

The demand for power in Maharashtra was over-estimated despite warnings by the World Bank. Further, the poor financial condition of MSEB was ignored, and the state public sector committed itself to pay at one of the highest rate, for electricity, that may not have been needed or even be bought.

The current pullout threat may have reason from other considerations too. Over the years, internationally, Enron has shifted its main focus of activities from power generation to other activities. It decided to withdraw worldwide from managing assets, and instead concentrate on trading in energy products. Clearly, it wanted an escape route out of India.

In hindsight, the Dabhol deal was a short-sighted decision by politicians and bureaucrats, ignoring the business principles and national interests. Now we are in a difficult situation. If the PPA is terminated, the government will be required to pay approximately Rs 15,000 crore.

That is not the only damage. A pull-out by Enron will send out alarming and wrong signals to other global power investors. At the same time, the energy markets in Singapore, Korea, Thailand and China have become more attractive and investments may flow to those countries, rather than to India.

The overall power scenario in the country is far from satisfactory. The impoverished state electricity boards have to pay an astounding Rs. 25,727 crores as the principal amount and Rs 15,746 crores as interest obligations, totalling a mammoth Rs. 41,473 crores, to central power utilities.

The Ninth Five Year Plan shortfall of 12,242 MW tops the existing deficit of 14,115 MW from the previous plan. So, adequate power generation is critical, if a faster rate of growth of the economy is to be achieved. It is this context, that it needs to be understood that despite the difficulties and the current imbroglio, it would be foolish to let the DPC withdraw from the country.

As is being suggested, the utility company should be allowed to sell power to other users in Maharashtra and outside the state. The only way to salvage the project is that the Central and the state governments should show its honest intentions by handing over the negotiations to professionals. Let the politicians, who have already made a mockery of the project, withdraw from the scene.