Dabhol power project
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Transcript of Dabhol power project
Dabhol Power ProjectA Brief Background of the issues and challenges faced by the company to
implement the projectBy
Team 01
INTRODUCTION TO THE CASE• Dabhol Power Project - considered as one of the MOST
CONTROVERSIAL projects undertaken in India with the help of foreign investment, after the economic liberalization of the early 90’s• Promoted by Enron Corp, USA• Envisioned as 2 phases (1st of 695MW and 2nd of 1320MW) in
Maharashtra• Mired in controversy, right from inception to closure• ‘Victim’ of political one-upmanship• Finally shut down in 2001
POWER SCENARIO IN INDIA PRIOR TO ENRON
• Energy deficit of 18% recorded in 8th Five Year Plan in 1992• Monopoly of government and state electricity boards (SEB’s)
in power generation– only 4.5% in private sector• Majority of SEB’s nearing bankruptcy at the time – cumulative
losses of more than 2800 Crores• Reasons for poor performance of SEB’s – erratic fuel (coal)
supply, low capacity utilization, old equipment and poor maintenance, huge transmission & distribution losses (T&D)• Availability of power expected to be a huge constraint on
industrial and agricultural growth
POWER REFORMS & ENRON’S INTEREST IN INDIA
• Economic liberalization of 1991-92 brought changes in power policy: relaxation of financial regulations & governmental red-tape – single window clearance, up to 100% FDI, import customs duty reduction, 5 year tax holidays, reforms in power tariffs (fixed tariffs for all fixed costs, and variable tariffs for fuel and O&M costs)• Enron executives met with designated officer in-charge in
USA in May 1992 to discuss possibilities of a large scale gas-fired thermal power project• Enron had major contracts with Middle-East suppliers for
natural gas supply, and envisioned Dabhol as a major customer of this gas, possible hub for future gas pipeline network in India
ENRON/ DABHOL – BACKGROUND CHECK
• Enron – leading multinational corporation in the oil & natural gas industry, $8 billion in revenue in 1993• Enron (as Enron Development Corporation, EDC) formed
Dabhol Power Company (DPC) with following partners:• Bechtel – Engineering & construction conglomerate, $8 billion in sales
in 1992• GE – Engineering, technology & manufacturing giant, $61 billion in
revenue in 1993• Holding pattern of DPC: EDC 80%, Bechtel 10%, GE 10%.
EVENT CHRONOLOGY UPTO 1995Month & Year Sequence of events
May 1992 Discussion between Enron officials and designated Indian officials in USA
Jun 1992MoU signed by Enron, Bechtel and GE with MSEB (Maharashtra State Electricity Board); MSEB chosen as it was a profit generating SEB, large power demand existed in Maharashtra, and Dabhol was close to sea coast (easier to transport fuel)
Jun 1992 – Dec 1993
Negotiations underway, necessary governmental clearances obtained by DPC
Dec 1993MSEB and DPC sign Power Purchase Agreement (PPA); MSEB to guarantee purchase of 90% power generated by DPC at all times. Penalties/ payment guarantees applicable in case of breach of agreement on part of either
1994 – early 1995
Enron obtains financing for DPC; opposition parties (BJP and Shiv Sena) campaign against ruling Congress government, promising to “throw Enron into the Arabian Sea”
Jan 1995 Loan agreements signed by Enron
Mar 1995 Opposition alliance wins Maharashtra state elections, acts on its promise
INVESTIGATION OF DPC & PROJECT SCRAPPING
• Sustained opposition from locals and environmental groups, adverse media coverage • New Maharashtra government (GOM)
appointed Committee to look into the project• Committee came out with a highly critical
report:• MoU ‘rushed’, ‘one-sided’, absence of
competitive bidding• Only Enron’s concerns addressed in MoU, PPA• Capital costs of the project inflated, power
purchase rate higher than justifiable• Government scrapped the project in
August 1995• Enron immediately sued GOM for
compensation
POLITICAL FLIP-FLOPS, PROJECT CLOSURE• Top bosses of Enron met with GOM, including Shiv
Sena supremo Bal Thackeray in Nov 1995• Negotiations commenced immediately, and in Jan
1996 revised agreement was announced, and accepted in Feb 1996 itself
• Revised agreement expanded 1st phase from 695MW to 740MW, committed MSEB to purchase 90% power from 2nd phase of 1320MW also
• Agreement criticised widely for only minor revisions, and increasing risk of GOM; public opposition to project continued
• Phase 1 operationalised in May 1999, phase 2 construction commenced
• MSEB stopped bill payments in 2001, and sought cancellation of PPA
• Enron stopped power production & construction of Phase 2, entered arbitration proceedings
• PROJECT SHUT DOWN
INTRODUCTION TO OUR PROBLEM• Issues & challenges faced by Enron in implementing the DPC
project:• Alleged lack of transparency in bidding process• Corruption allegations ???• Extremely high return on investment of shareholders• High risk on the part of MSEB due to guaranteed 90% power purchase,
high cost of power generation• Losses to GOM and GOI due to any breach on MSEB’s part, on account of
counter guarantees as per contract• Concerns on substantial foreign exchange outflow• Opposition from locals and environmental groups, and their harassment by
Enron/ local government machinery
ISSUES & CHALLENGES FACED• Alleged lack of transparency in bidding
process?• No competitive bidding procedures followed• MoU preparation and signing in a ‘rushed’ and
‘one-sided’ manner, with undue haste• “Enron came, saw and conquered”: Manohar Joshi,
BJP-Shiv Sena Government (GOM) CM
• Corruption allegations?• Speed with which MoU was signed, with some
clearances being ignored citing ‘fast-track’ nature of project
• Renegotiation of contract cancelled earlier by GOM took only 12 days, after meeting between leadership of Enron and Shiv Sena
ISSUES & CHALLENGES FACED (contd.)• Extremely high return on investment for shareholders?• Return pegged at 16% in contract, but calculations showed that it would go up to
58% in 20th year of operation
• High risk on the part of MSEB?• MSEB contracted to purchase 90% of power generated by DPC, regardless of
demand• Could force MSEB to shut down other state-owned plants, which generated power
at 25% of DPC’s cost; • World Bank, in 1993, advised Indian Government (GOI) that DPC would generate
too much power for Maharashtra at too high a price• State firms could produce power at 50% of the rate claimed by DPC• In 2001, power from Dabhol 4 times as expensive as other domestic plants, while
only 10-20% of produced power was being purchased
ISSUES & CHALLENGES FACED (contd.)• Losses to GOM and GOI?• Breach of contract by MSEB would mean payments to
DPC were to be guaranteed by GOM, and these in turn were to be guaranteed by GOI
• Severe penalties mentioned in PPA for any such breaches• Continued power purchases could lead to annual losses
of 2000 Crores to MSEB, eventually rendering it, and consequently, GOM, bankrupt
• Concerns on substantial foreign exchange outflow?• Annual forex outflow as a result of power purchase payments calculated as
45000 Crores• Opposition from locals and environmental groups?• Fierce opposition from locals• Land for project allegedly seized without compensation• Decrease in fresh water availability in surrounding communities reported• Non-violent protests reportedly put down by force – arbitrary arrests/
detentions, tear gas usage harassment, etc. reported by Human Rights Watch, Amnesty International
POSSIBLE RECOMMENDATIONS
• Always adopt competitive bidding, at least to avoid cries of ‘one-sidedness’• Detailed study of financial capability of power purchaser (in this
case MSEB) before entering into PPA’s of such nature, with stringent conditions as per international standards• Adoption of economical fuel for the power production• Better networking and building of trust with all concerned
parties – political leaders, affected locals (through proper compensation policies), environmental and other organisations working at the grassroots level
Thank You very much….