Sucheta Dalal :Finding A New Buyer Alone Is No Solution (25 February 2002)
Sucheta Dalal

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Finding A New Buyer Alone Is No Solution (25 February 2002)  

The Maharashtra government, we are told, has dashed off several letters to the union government pleading for participation by the National Thermal Power Corporation in the bailout of Enron’s controversial Dabhol Power project. Each time the power ministry, headed by Shiv Sena minister Suresh Prabhu, has turned them down and the finance ministry has concurred with this decision.

The union government is justifiably afraid that by being forced to bail out Enron, they would open themselves to similar demands from other state governments whose power projects are also languishing. It has left it to the leadership of the Industrial Development Bank of India to protect the financial institutions’ lending of over Rs 6,000 crore and to hammer out a solution, even if it involves appropriating all of DPC’s assets that were pledged against its equity and its borrowings.

For a while, it appeared as though the FIs were well on course to selling Enron’s stake in DPC and resolving the imbroglio. Eight bidders were vying to take over the company and some even paid up the earnest money of $100,000 to demonstrate their seriousness.

What is, however, lacking is transparency; we also learn that the due diligence process is not making much headway. Moreover, merely finding a buyer for DPC does not solve the problem. Maharashtra’s ability to buy high cost gas-based power remains unresolved and this not being discussed publicly at all.

Even if IDBI finds a buyer for DPC, what about the viability of the new set-up? The people of Maharashtra who have witnessed various governments muck around with the power situation surely have a right to complete information about a deal that is going to affect them directly.

For instance, one has always looked at the DPC issue in terms of finding a way to re-start the 2000 mw plant and get it to generate electricity again.

However, energy analysts such as Shantanu Dixit and Girish Sant of Prayas (Pune) and Pradyumna Kaul of the Enron Virodhi Andolan, who have led the battle against Enron, believe that gas-based power will always remain an expensive disaster.

They say that unless Enron exits at no cost and all stakeholders including the FIs, state and central governments as well as the public are willing to make a huge sacrifice, the project will remain unviable. They argue that in the long run, it may be cheaper for India to write off the Rs 6,000 crore FI investment rather than paying a far higher price by restarting and using the utility. They suggest that DPC should be allowed to remain as a “national monument to monumental corruption”.

High level sources at the Maharashtra State Electricity Board, astonishingly enough, agree with this view, but say that it will never happen. At the same time, they point out that Maharashtra will never be able to buy power from Enron’s 1,400 mw phase II or to give up a 1,000 mw distribution circle to a private buyer. This makes it even more imperative that the new negotiations should be completely transparent and take the people into confidence — otherwise the protests and litigation will continue. Power sector sources close to the Dabhol negotiations, have come up with another solution to the Enron problem which suggests that the project should be taken over by a consortium of investors rather than sold to a single buyer.

The proposal, which has been discussed with some of the parties to the negotiation process, is considered viable if the right leadership is provided in structuring it.

The proposal is as follows: The Godbole committee’s recommendations should be the starting point and form the basis for deciding the power purchase agreement as well as the financial hit that each party to the deal would have to take.

Having done that, the DPC equity should be acquired by a consortium of ten entities each holding a 10 per cent stake. Enron’s original partners, General Electric and Bechtel would remain in the consortium in order to ensure smooth completion of the project. MSEB would retain a 10 per cent stake.

The rest would be acquired by IDBI, ICICI, State Bank of India, Gas Authority of India Ltd, Power Finance Corporation, a private party and NTPC.

The effort should be to beat down the price paid to Enron, rather than to drive it up through competitive bidding.

The last two participants would be crucial to the consortium. The private party (preferably the Tatas or BSES, who have experience of operating in Maharashtra) would operate the project, rewrite the contract, get the plant running again and complete Phase II. MSEB would commence purchase from the 740 mw phase I under a new PPA, but would need to raise its revenues by around Rs 100 crore in order to do so.

This will have to be financed partly through a tariff hike and partly through state support. Gail would re-negotiate and operate the gas facility and takeover the fuel purchase and management contracts. The deal with Gail would be such that it would cross-subsidise part of the power project cost. Remember that the fuel management and gas supply contracts, which promised hefty profits were a big attraction to Enron.

MSEB sources also suggest that Dabhol should be connected to the Uran pipeline so that gas is available for MSEB’s 500 mw, fully operational plant at Uran which has been lying idle for a long time. NTPC’s participation and central government support is critical to the deal in order to ensure that NTPC does not harm Maharashtra’s ability to sell the Phase II power to other states by setting up cheaper and competing projects.

Last week, this paper reported that NTPC had turned down the Maharashtra government’s request to take over DPC. Maybe NTPC and the power minister will be amenable to a deal which only requires cooperation from NTPC and a tiny investment.

However, such a deal can only be structured by Maharashtra, with support and participation of the central government, the finance ministry, power ministry and the FIs.

After all, none of them can wish away their role in clearing the ludicrously expensive Dabhol project and offering it a sovereign guarantee.

If the alternative is to scrap the project altogether, or be tied up in litigation with various non government organisations and people’s groups forever, the institutional stakeholders will probably be more willing to discuss a sensible solution.

-- Sucheta Dalal