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Dabhol PowerProject
Submitted By:
Sourabh Morey AH19155
Neeraj Namdev AH19158
Deepam Patidar AH19169
Rahul Vishwakarma AH19188
Rajat Rguwanshi AH19192
INTRODUCTIONTOTHECASE
• 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 EnronCorp,USA
• Envisioned as2 phases (1st of 695MW and 2nd of 1320MW)in Maharashtra
• Mired in controversy, right from inception to closure
• ‘Victim’ ofpolitical one-upmanship
• Finally shut down in 2001
POWERSCENARIOIN INDIAPRIORTOENRON
• Energy deficit of 18% recorded in 8th FiveYearPlan 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 than2800 Crores
• Reasons for poor performance of SEB’s – erratic fuel (coal) supply, low
capacity utilization, old equipment and poor maintenance, huge
transmission & distributionlosses (T&D)
• Availability of power expected to be ahuge constraint on industrial and
agricultural growth
POWERREFORMS& ENRON’SINTERESTIN
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 andO&M costs)
• Enron executives met with designated officer in-charge in USAin May1992
to discuss possibilities of alarge scalegas-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 gaspipeline network in India
ENRON/DABHOL–BACKGROUNDCHECK
• Enron –leading multinational corporation in the oil & natural gas industry,
$8billion in revenue in 1993
• Enron (as Enron Development Corporation, EDC) formed Dabhol Power
Company (DPC)with followingpartners:
• Bechtel –Engineering& construction conglomerate, $8billion in salesin 1992
• GE–Engineering,technology & manufacturing giant, $61billion in revenue in 1993
• Holding pattern of DPC:EDC80%, Bechtel 10%,GE10%.
EVENTCHRONOLOGYUPTO1995
Month &Year Sequenceof events
May 1992 Discussionbetween Enron officials and designated Indian officials in USA
Jun1992
MoU signed by Enron, Bechtel and GE with MSEB (Maharashtra State Electricity
Board); MSEBchosen asit was a profit generating SEB,large power demand existed
in Maharashtra, and Dabhol was close to seacoast (easier to transport fuel)
Jun1992 –Dec1993 Negotiations underway, necessarygovernmental clearances obtained by DPC
Dec1993
MSEB 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 caseof breach of agreement on part of either
1994 –early1995
Enron obtains financing for DPC; opposition parties (BJP and Shiv Sena) campaign
against ruling Congress government, promising to “throw Enron into the Arabian
Sea”
Jan1995 Loan agreements signed byEnron
Mar 1995 Opposition alliance wins Maharashtra state elections, acts on its promise
INVESTIGATIONOFDPC& PROJECTSCRAPPING
• Sustained opposition from locals and environmental
groups, adverse mediacoverage
• New Maharashtra government (GOM) appointed
Committee to look into the project
• Committee cameout with ahighly critical report:
• MoU ‘rushed’, ‘one-sided’, absenceof competitive bidding
• Only Enron’sconcernsaddressedin MoU,PPA
• Capital costs of the project inflated, power purchase rate
higher thanjustifiable
• Government scrapped the project inAugust 1995
• Enronimmediately suedGOMfor compensation
POLITICALFLIP-FLOPS,PROJECTCLOSURE
• Topbossesof Enronmet with GOM,including ShivSena supremoBalThackerayinNov1995
• Negotiations commenced immediately, and in Jan 1996 revised agreement was announced, and accepted in Feb
1996itself
• Revised agreement expanded 1stphase from 695MW to 740MW, committed MSEB to purchase 90% power from
2nd phaseof 1320MWalso
• 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
• MSEB stopped bill payments in 2001, and sought
• cancellation ofPPA
• Enron stopped power production & construction of Phase2, entered arbitrationproceedings
• PROJECTSHUTDOWN
constructioncommenced
INTRODUCTIONTOOURPROBLEM
• Issues& challenges faced by Enronin implementing the DPCproject:
• Alleged lackof transparencyin bidding process
• Corruption allegations???
• Extremely high return on investment of shareholders
• High risk on the part of MSEBdue 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 aspercontract
• Concernson substantial foreign exchangeoutflow
• Opposition from locals and environmental groups, and their harassment by Enron/ local
governmentmachinery
ISSUES& CHALLENGESFACED
• Alleged lack of transparency in bidding process?
• No competitive bidding procedures followed
• MoU preparation and signing in a ‘rushed’ and ‘one-
sided’ manner, withundue haste
• “Enron came, saw and conquered”: Manohar Joshi,
BJP-ShivSenaGovernment (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 EnronandShivSena
ISSUES& CHALLENGESFACED(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?
• MSEBcontracted to purchase90%of power generated by DPC,regardless of demand
• Could force MSEBto shut down other state-owned plants, which generated power at 25%
of DPC’scost;
• World Bank, in 1993, advised Indian Government (GOI)that DPCwould generate too much
power for Maharashtraat too high aprice
• State firms could producepower at 50%of the rate claimed by DPC
• In 2001, power from Dabhol 4 times asexpensive asother domestic plants, while only 10-
20%of produced power wasbeing purchased
ISSUES& CHALLENGESFACED(contd.)• Lossesto GOM andGOI?
• Breach of contract by MSEB would mean payments to
DPC were to be guaranteed by GOM, and these in turn
were to be guaranteed byGOI
• Severe penalties mentioned in PPAfor any suchbreaches
• Continued power purchases could lead to annual losses of
2000 Crores to MSEB, eventually rendering it, and
consequently, GOM,bankrupt
• Concerns on substantial foreignexchange outflow?
• Annual forex outflow asaresult of power purchase payments calculated as45000Crores
• Opposition from locals andenvironmental groups?
• Fierce opposition fromlocals
• 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 RightsWatch,Amnesty International
POSSIBLERECOMMENDATIONS
• 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 Youverymuch….

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Dabhol Power Project Controversy

  • 1. Dabhol PowerProject Submitted By: Sourabh Morey AH19155 Neeraj Namdev AH19158 Deepam Patidar AH19169 Rahul Vishwakarma AH19188 Rajat Rguwanshi AH19192
  • 2. INTRODUCTIONTOTHECASE • 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 EnronCorp,USA • Envisioned as2 phases (1st of 695MW and 2nd of 1320MW)in Maharashtra • Mired in controversy, right from inception to closure • ‘Victim’ ofpolitical one-upmanship • Finally shut down in 2001
  • 3. POWERSCENARIOIN INDIAPRIORTOENRON • Energy deficit of 18% recorded in 8th FiveYearPlan 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 than2800 Crores • Reasons for poor performance of SEB’s – erratic fuel (coal) supply, low capacity utilization, old equipment and poor maintenance, huge transmission & distributionlosses (T&D) • Availability of power expected to be ahuge constraint on industrial and agricultural growth
  • 4. POWERREFORMS& ENRON’SINTERESTIN 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 andO&M costs) • Enron executives met with designated officer in-charge in USAin May1992 to discuss possibilities of alarge scalegas-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 gaspipeline network in India
  • 5. ENRON/DABHOL–BACKGROUNDCHECK • Enron –leading multinational corporation in the oil & natural gas industry, $8billion in revenue in 1993 • Enron (as Enron Development Corporation, EDC) formed Dabhol Power Company (DPC)with followingpartners: • Bechtel –Engineering& construction conglomerate, $8billion in salesin 1992 • GE–Engineering,technology & manufacturing giant, $61billion in revenue in 1993 • Holding pattern of DPC:EDC80%, Bechtel 10%,GE10%.
  • 6. EVENTCHRONOLOGYUPTO1995 Month &Year Sequenceof events May 1992 Discussionbetween Enron officials and designated Indian officials in USA Jun1992 MoU signed by Enron, Bechtel and GE with MSEB (Maharashtra State Electricity Board); MSEBchosen asit was a profit generating SEB,large power demand existed in Maharashtra, and Dabhol was close to seacoast (easier to transport fuel) Jun1992 –Dec1993 Negotiations underway, necessarygovernmental clearances obtained by DPC Dec1993 MSEB 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 caseof breach of agreement on part of either 1994 –early1995 Enron obtains financing for DPC; opposition parties (BJP and Shiv Sena) campaign against ruling Congress government, promising to “throw Enron into the Arabian Sea” Jan1995 Loan agreements signed byEnron Mar 1995 Opposition alliance wins Maharashtra state elections, acts on its promise
  • 7. INVESTIGATIONOFDPC& PROJECTSCRAPPING • Sustained opposition from locals and environmental groups, adverse mediacoverage • New Maharashtra government (GOM) appointed Committee to look into the project • Committee cameout with ahighly critical report: • MoU ‘rushed’, ‘one-sided’, absenceof competitive bidding • Only Enron’sconcernsaddressedin MoU,PPA • Capital costs of the project inflated, power purchase rate higher thanjustifiable • Government scrapped the project inAugust 1995 • Enronimmediately suedGOMfor compensation
  • 8. POLITICALFLIP-FLOPS,PROJECTCLOSURE • Topbossesof Enronmet with GOM,including ShivSena supremoBalThackerayinNov1995 • Negotiations commenced immediately, and in Jan 1996 revised agreement was announced, and accepted in Feb 1996itself • Revised agreement expanded 1stphase from 695MW to 740MW, committed MSEB to purchase 90% power from 2nd phaseof 1320MWalso • 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 • MSEB stopped bill payments in 2001, and sought • cancellation ofPPA • Enron stopped power production & construction of Phase2, entered arbitrationproceedings • PROJECTSHUTDOWN constructioncommenced
  • 9. INTRODUCTIONTOOURPROBLEM • Issues& challenges faced by Enronin implementing the DPCproject: • Alleged lackof transparencyin bidding process • Corruption allegations??? • Extremely high return on investment of shareholders • High risk on the part of MSEBdue 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 aspercontract • Concernson substantial foreign exchangeoutflow • Opposition from locals and environmental groups, and their harassment by Enron/ local governmentmachinery
  • 10. ISSUES& CHALLENGESFACED • Alleged lack of transparency in bidding process? • No competitive bidding procedures followed • MoU preparation and signing in a ‘rushed’ and ‘one- sided’ manner, withundue haste • “Enron came, saw and conquered”: Manohar Joshi, BJP-ShivSenaGovernment (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 EnronandShivSena
  • 11. ISSUES& CHALLENGESFACED(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? • MSEBcontracted to purchase90%of power generated by DPC,regardless of demand • Could force MSEBto shut down other state-owned plants, which generated power at 25% of DPC’scost; • World Bank, in 1993, advised Indian Government (GOI)that DPCwould generate too much power for Maharashtraat too high aprice • State firms could producepower at 50%of the rate claimed by DPC • In 2001, power from Dabhol 4 times asexpensive asother domestic plants, while only 10- 20%of produced power wasbeing purchased
  • 12. ISSUES& CHALLENGESFACED(contd.)• Lossesto GOM andGOI? • Breach of contract by MSEB would mean payments to DPC were to be guaranteed by GOM, and these in turn were to be guaranteed byGOI • Severe penalties mentioned in PPAfor any suchbreaches • Continued power purchases could lead to annual losses of 2000 Crores to MSEB, eventually rendering it, and consequently, GOM,bankrupt • Concerns on substantial foreignexchange outflow? • Annual forex outflow asaresult of power purchase payments calculated as45000Crores • Opposition from locals andenvironmental groups? • Fierce opposition fromlocals • 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 RightsWatch,Amnesty International
  • 13. POSSIBLERECOMMENDATIONS • 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