Sucheta Dalal :How the Dabhol deal was swung by the govt
Sucheta Dalal

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How the Dabhol deal was swung by the govt  

Oct 10, 2005

On Thursday last, Ratnagari Gas and Power Pvt Ltd (RGPPL) took physical possession of the controversial Dabhol Power Company (DPC) — a decade-old symbol of the worst kind of exploitation by foreign companies, political corruption, bureaucratic collusion and the spinelessness of government-owned lending institutions.


However, in a move that redeems past mischief, the Government of India needs to be complimented for a hard negotiation that stitched together a viable deal to revive the massive 2,150 MW combined cycle power plant and five Mtpa LNG facility.


The process of reviving Dabhol was considered so impossibly expensive and un-negotiable that some NGOs had even suggested that it should be converted into a monument to political corruption. Instead, Ratnagari Gas promises to deliver power at Rs 2.30 to Rs 2.50 per unit (comprising a fixed charge of one rupee per kw and a variable charge of Rs 1.30 plus depending on the global LNG prices), when Maharashtra is already buying power at Rs 3.30 per unit.


The deal, of course, comes at a whopping price tag of Rs 10,038 crore; involved sacrifices from all the Indian stakeholders to the original Enron deal and another government guarantee. But the expected value of the Equity IRR (Internal Rate of Return) is now estimated by IDFC at 13 to 24 per cent on a plant load of 80 per cent.


For the government, it was really a Hobson’s choice — arbitration or a gruelling negotiation. Arbitration could easily have gone against the government because the case would be handicapped by the fact that the politicians and bureaucrats across the spectrum had a dubious role in clearing the scandalous project. On the other hand, a closed power project was a national embarrassment in the face of a looming power crisis, so negotiation was the only option.


The process began in October 2004 when the government set up the Empowered Group of Ministers and a restructuring package was developed by November 11 on the following principles: One, a one-time settlement for offshore stakeholders, the Overseas Private Investment Corporation (OPIC), GE, Bechtel, banks and Export credit agencies. Two, formation of a financial Special Purpose Vehicle (SPV) comprising Indian lenders to negotiate and settle offshore lenders’ claims and raise funds to pay them off. Three, formation of a project SPV comprising GAIL, NTPC and Indian lenders, who would invest Rs 1,500 crore in the equity.


Four, transfer Dabhol company’s assets to this Project SPV with clean title and no encumbrances through the Debt Recovery Tribunal. Five, get government to clear a series of legal exemptions, including waiver of excise, sales tax and income tax liability wherever necessary. NTPC’s job would be to restart the power project while GAIL would complete the Liquified Natural Gas (LNG) facility and source the fuel.


The key player in the Dabhol negotiations turned out to be Cabinet Secretary B.K. Chaturvedi. An important negotiating team member recalls, ‘‘The Cabinet Secretary’s leadership was outstanding — great conceptual clarity, attention to detail and persuasive ability. He shot down bureaucratic objections and saw the point about finding a solution soon.’’


Another says, Chaturvedi never directly invoked the might of government, but knew exactly which buttons to push in order to get results. Power Secretary R.V. Shahi, who knows the inner working and financing of power projects, played a crucial role and the Defence Minister and the Law Minister also chipped in with important suggestions.


M. Damodaran, then IDBI chairman, set the tone for the tough financial bargaining in the early and difficult phase, where foreign lenders had refused to take India seriously. He achieved the first breakthrough with offshore lenders in January 2005. Interestingly, after the major foreign lenders agreed to a settlement, ANZ Grindlays, which has large business interests in India, gave the negotiators a tough time and wrangled an additional $3.5 million for itself.


The toughest part of the effort was to break the tight bond between OPIC, GE and Bechtel who were negotiating as a team. As was evident from the very beginning, the US government institution was ever willing to let GE and Bechtel use its clout and bargaining power to bolster their demands. OPIC however agreed to a settlement in March 2005.


Then came the task of breaking the GE-Bechtel bond. They held 10 per cent each of Dabhol’s equity and had bought over the defunct Enron’s 65 per cent stake.


Initially, GE was extremely high-handed, until it was ‘strongly persuaded’ that its large power sector business in India could be seriously jeopardised by its stubborn stand over a few million dollars. In fact, GE expected big orders from NTPC and at one time it was made explicitly clear that it could forget about getting the business. Once it was evident that these were not idle threats, GE capitulated in June 2005 and turned cooperative.


Bechtel continued to be a tough nut to crack, because unlike GE it had no major commercial interests in India. It was inclined to take its chances with the arbitration, after having won two minor arbitration awards against a lender and the Maharashtra government. The government left no stone unturned to get Bechtel to be reasonable. We learn that even Mukesh Ambani was asked to speak to the Bechtel chief and explain why it would make sense to cooperate.


Once Bechtel was isolated, it was persuaded to settle. However, some domestic stakeholders were also a problem. The Maharashtra government, which was primarily responsible for the Dabhol mess, believed it was doing the government a favour by participating in the negotiation, say my sources. MSEB had even refused to buy power if the final contracted price went beyond $3.5 mmbtu (translates to Rs 2.3 per Kw).


The Empowered Committee was all set to demand that Maharashtra should introduce open access for sale to other users well before the legally stipulated year 2009. I learnt that the tough and skilful negotiation by ICICI Bank’s Joint Managing Director Kalpana Morparia was a big asset in completing the deal.


In a rare compliment, a top bureaucrat says, ‘‘Kalpana was brilliant throughout and in my book the Person of the Match.’’ Unlike the government, ICICI Bank, of course, has plenty of experience driving hard bargains with defaulting companies.


Ironically, if an earlier Congress government had shown half the knowledge, gumption and uprightness in the original negotiation with Enron, India would have avoided international embarrassment and chronic power shortages by having many more Independent Power Projects producing reasonably-priced power.


-- Sucheta Dalal