Sucheta Dalal :The Maheshwar project: getting to the root of the matter
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » The Rediff columns » The Maheshwar project: getting to the root of the matter
                       Previous           Next

The Maheshwar project: getting to the root of the matter  

June 20, 2001

For nearly seven years now, a segment of the Narmada Bachao Andalon has been fighting the Shree Maheshwar Hydel Project in Madhya Pradesh. Shree Maheshwar is an independent power project, conceived along the lines of all the expensive IPPs that followed Enron's Dabhol Power Company.

After Enron's project in Maharashtra and Cogentrix's IPP in Karnataka, the Rs 22.54-billion Shree Maheshwar Hydel Power Company Ltd is arguably the most controversial power project in the country.

In many senses the battle against Maheshwar has been far more difficult than Enron because it does not involve the use of an expensive fuel like naphtha/LNG, nor does it involve a messy fuel like coal.

Also, since hydel power is traditionally supposed to be cheaper than other fuels, the activists have faced an uphill task explaining how this project could be more expensive than Enron.

But the truth is that the Maheshwar project (which is to be built on the Narmada river at Jalaud, and was handed over to the S Kumar group in 1994), is at least every bit as expensive as all IPPs.

Also, like all other IPPs, it is structured in such a way that almost 90 per cent of the funding comes from public finance. Remember Enron's $ 2.9-billion project is touted as the largest foreign direct investment in India although over half the project funds (nearly Rs 60 billion) have either come from Indian financial institutions or have been guaranteed by them.

Today, the Madhav Godbole committee report on Enron's project establishes two facts beyond doubt. First, that Indian lenders and financial institutions who have committed over Rs 60 billion to Enron failed to do proper project appraisal and did not apply their minds before committing the money.

Enron's power is at least five times more expensive than that produced by the state electricity boards and clearly unacceptable.

In fact, several industries -- including the railways -- have pleaded before the Maharashtra Electricity Regulatory Commission that they should not be forced to buy power from Enron.

It also proves that it was the anti-Enron activists who go the tariff projections right and leads to the conclusion that they should be given a proper hearing in every other project where there is strong local agitation.

This is important because, one way or another, it is public funds that are committed to large private (ad)ventures which pass off as greenfield projects and Indian banks, institutions and small investors taking on the risk profile of venture capitalists.

In the Maheshwar valley the NBA activists have been battling the Shree Maheshwar project for seven years, but their focus was primarily on the valley where it will displace several farmers and submerge fertile agricultural land, and -- to an extent -- on the foreign lenders and collaborators.

They also notched up crucial victories. For instance, a series of US companies which had decided to participate in the project were convinced to withdraw. In 1997, Bechtel Corporation backed out; in 1998 it was PacGen which dropped plans to acquire a 49 per cent stake; in December 2000 Ogden Energy opted out of being a strategic partner.

After PacGen's exit, two German power utilities -- VEW Energie and Bayernwerk -- agreed to acquire this 49 per cent minority stake but withdrew in 1999.

In fact, the German government also decided not to support the project after a huge debate in Germany and an independent study by its economic and social welfare ministry (the report is posted on a German government Web site dealing with the issue) citing concerns over rehabilitation of project affected persons.

Later, Siemens Ag also backed off from its suppliers contract which was to have been backed by the German government guarantee.

In January 2001, the Portuguese government turned down an application by ABB Ltd (equipment supplier) for the COSEC guarantee for around Rs 2 billion which was to be counter-guaranteed by IFCI.

Stunning as it seems, this stream of withdrawals had no effect whatsoever on the project itself. Every exit led to a quest for a new collaborator and the project itself was unhampered by any paucity of funds.

Money is routinely made available to the promoters and at the latest count, they claim to have invested nearly Rs 5 billion in Maheshwar.

The project currently has no strategic partner but it is unfazed. For the Maheshwar activists, this resilience of the promoters has been a mystery. It is only after the exposure of Indian lenders to Enron became public knowledge that they realised what is the source of the promoters' strength.

Lending by Indian banks and institutions is at the heart of all mega IPP and greenfield projects and until they keep handing over funds in driblets, a project never folds up.

A fortnight ago the NBA activists took their protests to the doorsteps of Indian FIs by holding demonstrations at Reserve Bank of India, ICICI, IFCI, Industrial Development Bank of India and the two nationalised insurance majors -- General Insurance Corporation and Life Insurance Corporation.

The demonstrations were followed by the presentation of a memorandum to all these institutions urging them to take another look at their decision to fund the project.

As always, the institutions' documentation talks tough. In this case, it says that no further funds would be disbursed without a strategic investor being in place, that the promoters will bring back all the capital advances of Rs 1.064 billion with interest given to various agencies who have not been awarded any contract, will appoint a concurrent auditor, and bring in additional funds to meet cost over-run.

However, none of these have been complied with, and the NBA has now decided to target the FIs by issuing a show-cause notice through Supreme Court advocate Prashant Bhushan.

Among other things, the notice points out that not only have FIs ignored the fact that various collaborators have walked out of Maheshwar, but it does not even have environmental and techno-economic clearance for its latest project cost.

Yet, the Indian lenders -- led by IFCI -- have committed to a financial package of Rs 20 billion which is nearly 90 per cent of the project cost of Rs 22.54 billion.

Without even going into the issues of rehabilitation, it seems clear that Indian institutions seem to be bending backwards to accommodate Shree Maheshwar - even when they have no resources to do so.

There is also the issue of power production. The project has a capacity of 400 MW, but this will depend on the strength of water available in the Narmada river.

The activitsts have vehemently contested the company's claims of being able to produce 400 MW of power except in the monsoons. The project cost, which is high to start with, will lead to even higher cost power during the non-monsoon period, they claim.

The cost has escalated from Rs 4.65 billion in 1994 to Rs 25.54 billion at latest count in 2001.

The moot question is, are Indian FIs incapable of proper project appraisal, or are there other forces at work behind their support to Maheshwar?

The exit of so many foreign lenders alone indicates that there is at least need for an independent Godbole-type inquiry. Despite the expensive 'education' provided by Enron, the DPC project is unaffordable.

Today, Indian banks and institutions are lobbying hardest on behalf of the US company, in order to protect their money.

Fortunately, Maheshwar has not reached that stage, nor has as much money been invested. But the facts presented by the activists make it clear that there is more than reasonable doubt about the viability of the project, even without going into critical issues such as rehabilitation of displaced persons and land available for their resettlement.

Clearly, an independent inquiry, by a committee acceptable to all sides needs to assess the cost and viability of the project as well as the promoters' claims about how much has already been spent on it. Until then the project has to be suspended.

-- Sucheta Dalal