1. DABHOL
A POWER DEBACLE
Presentation By: Group 3
Anurag Singh Dushyant Singh Devvrat
Raiyani
Anay Rekhde Arpit Modi
Abhimanyu Singh Gavesha Beekray
2. INDIA’S POWER SCENARIO THEN
India’s power needs were set to grow in 1992
Energy deficits of 18% was recorded leading to
frequent power cuts
Emphasis on attracting private investments on
power in 8th five year plan(1992-1997)
Export/Import reforms were enacted to bring down
costs in the power sector
3. INDIA’S POWER REGULATORY STRUCTURE
The Industry was regulated at the Central or
National Level
Power Sector - subject of concurrent list
State governments responsible for managing and
operating state utility companies
Central Government’s Ministry of Power is
responsible for regulating and is in charge of
decisions on:
Capacity additions
Pricing/Tariffs
Power-related investments
4. ENTRY OF ENRON
Enron – world-leading multinational firm in the
natural gas industry
Enron saw huge opportunities in India
To provide power
To earn profits
To obtain more projects if they were successful with
their first one
India fit in nicely with their global objectives at that
time
Enron proposed to build most modern power plant
at a time when most foreign players could not
conceive such risk
5. WHY IN MAHARASHTRA?
MSEB was profitable and this reduced the revenue
risk - the state board could pay Enron for power
generated
„A large demand for power existed in the state
Maharashtra already generated close to 10,000MW
(12% of India’s generation capacity)
„Location was close to a port making it easy to
transport fuel for the power plant.
„Maharashtra was one of India’s more developed
states –institutional risks were comparatively lesser
6. BEST ALTERNATIVE – INDIA'S PERSPECTIVE
Ranking Alternatives Feasibility
Best Alternative
Contract a domestic
private investor to build,
own and operate the
energy plant
Untenable then – pvt sector
relied on state support
2nd Best
Alternative
Domestic company
becomes majority
partner in power project
Untenable then – pvt sector
relied on state support
3rd Best
Alternative
Tap into alternative
forms of energy
sourced domestically
(e.g. coal production)
Disregard of
recommendations to
explore domestic sources
4th Best
Alternative
Have another foreign
investor build, own and
operate the energy
plant
Sizeable cost advantage as
a large multinational,
foreign capital
7. BEST ALTERNATIVE – ENRON'S
PERSPECTIVE
At the time, ENRON was negotiating deal in Qatar
with state owned Qatar Gas & Pipeline Company to
create a LNG facility
To avoid financial setbacks, ENRON needed to find
large supply of consumers for the LNG
Israel, India and Pakistan were prime candidates
Israel had retracted from its commitment to lift 3 mn
tones of LNG
Situation in Pakistan was volatile
This left India as the only possible destination
8. THE CONTRACT
A Power Purchase Agreement (PPA) was drawn up
wherein MSEB agreed to purchase a certain
quantity of power from the Enron-led Dabhol Power
Corporation (DPC) at a certain tariff.
DPC Ensured that adequate power will be made
available
MSEB took care of demand risks with PPA.
Initial price was Rs 2.4/KwH
20 year renewable concession was signed
Dispute resolution was to be done through
international arbitration – not part of PPA but DPC
shareholders agreement
10. PROBLEMS WITH DPC
Since the process was new to India, Govt. did not
consider the advantages of competitive bidding.
Agreement was directly negotiated between
ENRON and Govt. through MoU
The secretive nature of the early negotiations
between Enron and GoI led many to believe that
project was allotted based on bribery and corruption
By proposing a negotiated deal between Enron and
the MSEB, the Indian government was in the weak
negotiating position
11. PROBLEMS WITH DPC
World Bank Report expressed reservations about
the feasibility of such a huge project
Central Electricity Authority (CEA) determined that
power tariff was too high and withheld approval
major debate between the MSEB and the central
government ensued
Although the Congress party’s chief minister in
Maharashtra was backed by his party in the central
government when he signed the MOU, the central
government via the CEA was reluctant to grant
approval to the project
12. PROBLEMS WITH DPC
Under GoI insistence CEA granted provisional
clearance for the project in November 1993, the
MSEB took this as full clearance, and signed the
final twenty-year PPA
The sale of electricity from DPC was never directly
related to the demand in the market
Due to the Investment risk in India, the contracts
had to be structured in such a way to guarantee a
stable income stream for Enron
MSEB were prepared to commit to purchasing
power to satisfy lender’s requirements
13. THE SAGA UNFOLDS
Bharatiya Janata Party (BJP), a right-wing party
defeats the Congress and comes to power in 1995
BJP makes lots of nationalistic noise. Their leader
says “we will not be dictated by foreign power
giants”
Committee prepares a report on DPC
Project is cancelled in August 1995
14. REASONS FOR CANCELLATION
Lack of transparency and competition in the bid
process
Some clearances were ignored based on the ‘fast-
track’ nature of the project
Cost of the project was greater than comparable
projects
Enron cost Rs 4.49 Cr per MW
Comparable projects cost Rs 3.6 Cr per MW
Tariffs were too high
Environmental concerns and concerns raised in a
World Bank report were not addressed
15. BEST ALTERNATIVE - GOM
The alternative of soliciting another investor to take
over a project which had become highly
scandalized and plagued with financial
uncertainties was improbable
Alternative of extracting domestic sources of energy
to meet growing demand was also negligible
Throwing away the deal was also not advisable as
it would give the impression of instability in the
country and also have GoI confronting bill of nearly
$300 million and bound by its guarantee for liability
of non-payments
Thus renegotiating the deal was best alternative
16. BEST ALTERNATIVE - ENRON
ENRON was aware that cost of International arbitration
was greater than procedure for renegotiating the
agreement
ENRON had serious cash flow problems with DPC
Furthermore, if the project was terminated, Enron’s goal
of sourcing a large supply of consumers for its LNG
facilities over a long period of time would never
materialize
Enron had little choice but to negotiate with the
Governments of India and Maharashtra instead of
lobbying for policy, judicial and economic reform since
there is no unified consortium of private investors or
businesses in India with which a multinational could join
forces and lobby
Specifically, Enron’s efforts to lobby the GOI to exert
pressure on the GOM and the MSEB on the issue of
default payments, quickly deteriorated vis-à-vis external
events influencing American foreign policy
17. RENEGOTIATED DEAL
ENRON was ready to renegotiate the deal, after
having realized that it would have to work with local
politicians in order to move ahead
After review of the modified agreement, the
government had reversed its position and accepted
the renegotiated deal
Although elected to office based on cancellation of
deal, GoM still had to solve problem of inadequate
supply in energy sector
ENRON agreed to change from distillate fuel to
Indian Naphtha fuel and made MSEB a 15% equity
partner
18. IMMEDIATE POLICY CHANGES
Revised project documents were immediately made
public so that the cost base of the project was
transparent
As a result of the controversy over corruption, the
government ruled that future power sector contracts
would no longer follow the MOU process as with
Enron, but would be replaced with mandatory
competitive bidding
19. TRANSFER OF RISK FROM ENRON TO GOI,
GOM
Given the tenuous nature of the MSEB’s financial
position, the project lenders and Enron required a
counter-guarantee of payment from the state
government
The solvency of the state government was
questionable, so Enron required that this insurance
be further backed by a guarantee from the central
government
This sovereign guarantee was controversial
because the credit rating of the whole of India
became dependent on non-payment by one state,
on one project
Deal not signed until Atal Bihari Vajpayee’s13-day
20. ENRON INFLUENCE ON GOM, GOI
Combination of a take-or-pay contract and a
sovereign guarantee meant that Enron would be
paid for the electricity without taking on the risk of
reduced market demand or nonpayment by the
MSEB
When ENRON came to India there was little
regulatory structure for project approval process
Enron made many recommendations to the GoI as
to how it could improve the process for foreign
investors
Laws were passed as a result of Enron’s
experience with Dabhol
All other projects in the country were benchmarked
21. THE ARBITRATION STORY
After the MSEB failed to remit payment government
paid the MSEB’s arrears
MSEB argued that the central government should
not pay the latest arrears because the bills needed
correction, and Enron claimed that the MSEB was
trying to renege on its contractual obligations
Enron invoked the political force majeure clause for
non fulfillment of the MSEB’s contractual
obligations and issued arbitration notice to the
central government to collect the December bill
MSEB stopped payment on electricity from Dabhol,
and issued notice to scrap the PPA
22. THE ARBITRATION STORY
First, the dispute under the Power Purchase Agreement
was referred by the DPC to arbitration in London
Second, Bechtel, as a co-owner of the DPC, referred a
claim under the DPC Shareholders Agreement to the
ICC Arbitration in New York
Third, claims for about $1.3 billion in compensation were
reportedly launched by Bechtel and General Electric
under India’s bilateral investment treaties with Mauritius
and the Netherlands
Fourth, in a state-to-state arbitration, the U.S.
government brought a claim against India after OPIC
was required, in an American Arbitration Association
proceeding in the U.S., to pay about $110 million to
Enron, Bechtel, General Electric, and Bank of America
in risk insurance for the Dabhol project
23. THE ARBITRATION STORY
Of these four arbitrations, only the ICC Arbitration
led to a known and publicly available award. This is
partly because, in 2005, an overall settlement was
reached between the U.S. and Indian governments,
as well as U.S. firms, which terminated outstanding
arbitrations and court actions
The ICC arbitration allowed tribunal’s decisions to
expand the arbitration beyond the parties to the
relevant contract and apply a variety of legal
sources besides that contract, offered reasons to
suspect regime bias and was indicative of wider
conflict between Western and Third World interests
24. LEARNING FROM THE EPISODE
A surplus of power is as harmful as a shortage of power
It is imperative to examine the tariff implications
DSM must be included as an option with Integrated
Resource Planning (Least Cost Planning) to arrive at the
cheapest mix of supply and saving options.
Competitive bidding procedures rather than MoUs and
counter-guarantees
The sector must pursue the goal of universal access to
affordable electricity
Protection against exchange rate volatility and
strengthening of BHEL
Not only competitive bidding but transparency,
accountability and participation
The right to information
25. POSSIBLE MEASURES FOR FUTURE
Technical advisers must be appointed
NGOs may act to ensure that peoples’ views reach
policymakers
Consumers need to be more vocal so as to play a
part in decision making
View of opposition party must be taken into
consideration
Renegotiation of agreement, though not advisable,
but could have been done in this case
26. To conclude, trust and relationship and perhaps some
initiative and flexible contracts might have been
more successful than relying purely on contract
