Coming to Light

In the beginning
FIRST conceived in 1992, the Dabhol power project was set up in two phases of 740 mw and 1,444 mw. The power plant was to initially run on a fuel called naphtha. It was expected to switch to liquefied natural gas LNG once the LNG terminal was ready and LNG was delivered to the project site from Oman and Abu Dhabi.

The promoters of the 2,184 mw power cum LNG venture worked out a 8216;8216;take or pay8217;8217; power purchase agreement PPA between Maharashtra State Electricity Board MSEB and the Dabhol Power Company DPC. MSEB was contracted to purchase 90 per cent of the power generated.

MSEB8217;s obligations under the PPA, both for phase I and II, were guaranteed by the state government. Specific clauses were also counter-guaranteed by the Central government.

The Dabhol plant had generated power for just about one year when it was forced to shut operations in 2001. The power purchase costs became unbearable for MSEB. This led to a host of contractual issues between the promoters, the state government, the electricity board, lenders to the project and the government of India.

The project promoters are usually described as Enron, GE and Bechtel. Their investments actually came through an amazing maze of SPVs in various countries. It was these companies that slapped legal notices on different arms of the Indian state.

While the final investment came through vehicles in Mauritius, try this alphabet soup of companies 8212; Offshore Power Production CV, Travamark Two BV, EFS India-Energy BV, Enron BV, Indian Power Investments BV Netherlands, Capital India Power Mauritius I, and Energy Enterprises Mauritius Company. Add to these foreign lenders. It is not for nothing that business analysts describe the Dabhol project as one of the most complex in living memory.

The mess gets messier
THE disputes between the various stakeholders drew in the government of India under the provisions of the Bilateral Investment Promotion Agreement BIPA signed by India with some countries. In the case of Dabhol, so far only the BIPA with Mauritius has been invoked. Notices were also received under individual BIPAs with the Netherlands, the United Kingdom, the United States, France, Switzerland and Austria.

The accusation was uniform: although a number of independent decisions may have been taken by the government of India, the state government, Indian FIs and MSEB, cumulatively they reduced the value of investments from the concerned country. These were claimed to be 8216;8216;measures 8230; equivalent to expropriation8217;8217;.

The Indian side 8212; a collective of respondent entities 8212; contested these claims. The deadline for arbitration proceedings to begin was July 19, 2005.

But parallel to this, the Indian side also explored an out-of-court settlement. After all, Indian lenders had invested Rs 6,000 crore in the project and this money was being wasted. Finally, however strong the case may have been, there was always the possibility of a loss. This would have had India paying a whopping 5 billion.

Okay, let8217;s talk
ORIGINALLY, the four promoters of the Dabhol Power Company DPC were Enron 65 per cent equity, GE and Bechtel 10 per cent each, and the state government owned Maharashtra Power Development Corporation Ltd, MPDCL 15 per cent. The bankrupt Enron8217;s stake was later taken over by GE and Bechtel.

Soon after coming to power, the UPA constituted a Group of Ministers GoM, with Defence Minister Pranab Mukherjee as chairman, on Dabhol. Under the GoM8217;s plan, DPC8217;s assets would be transferred to a new entity after a buyout of offshore lenders, claims of the American government8217;s Overseas Private Investment Corporation OPIC being met, and a negotiated settlement with GE-Bechtel.

By May 2005, after much haggling between the GE-Becthel combine and the Indian negotiating committee 8212; led by the chairman of IDBI 8212; the settlement amount was finalised at 305 million: 145 million for GE and 160 million for Bechtel. Similarly, the buyout of foreign debt was concluded at 230 million. OPIC8217;s exposure was put at 228 million.

Art of a deal
IT was deal-making of the highest order. Both sides played hardball. GE-Bechtel adopted a rigid stand on legal issues pertaining to third party claims. In May-June 2005 talks came to a standstill. With the arbitration deadline approaching, the Indian government had to act fast. Bechtel made menacing noises that it was prepared for arbitration.

Sources involved in the negotiation process say it was always crucial to get GE on board. It had supplied the main turbines for the power station and was expected to upgrade these once the plant became operational.

GoM insiders reveal the Indian side adopted two strategies to break the ice: backroom diplomacy, and dividing GE and Bechtel. A channel was opened with the US government to make the American companies see reason. The effort was to avoid the embarrassment of arbitration coinciding with Prime Minister Manmohan Singh8217;s visit to Washington, DC.

There was some tough talk. The two companies were told that intransigence could affect their business prospects in India, in terms of government contracts. GE gave in and on Saturday, July 2, signed an agreement.

Bechtel needed additional cajoling. It is learnt that one of the GoM members, on a visit to the US, raised this issue 8216;8216;at the highest level8217;8217;. Indian negotiators conceded ground on some of Bechtel8217;s demands at a 8216;8216;make or break8217;8217; discussion on Monday, July 4, America8217;s independence day. This prompted Bechtel to 8216;8216;broadly8217;8217; accept the terms set by the Indian government.

Detailed talks were set to begin in London on Saturday, July 9. But the serial blasts on July 7 have pushed back these dates. It is learnt the final agreement with the foreign banks and OPIC could be signed any day. Most of the documentation for this is ready.

So what8217;s left?
There are some rungs to climb between settlement and restrart. For one the name 8216;8216;Dabhol8217;8217; is jinxed and will soon be deleted from the corporate lexicon. Three new entities have been formed to enable the revival.

8226; Ratnagiri Gas and Power, a JV between NTPC and GAIL will ensure the plant is up and running.

8226; New Age Power Company has been formed for the limited purpose of holding GE-Becthel8217;s equity in Dabhol.

8226; Gas 038; Power Investment Company GIPCL has been incorporated by ICICI, IDBI, SBI, Canara Bank and IFCI with the sole purpose of floating Central government guaranteed bonds to repay the foreign debt and OPIC8217;s claims.

The Union Power Ministry holds a meeting every Friday with representatives of the Maharashtra government, FIs and the Cabinet Secretariat to finetune the Dabhol strategy. At one such meeting, a tentative date was decided upon for restarting the plant 8212; July 2006.

In April 2002, Punj Lloyd was appointed by the court receiver to undertake preservation work at the power station. A team from GE, NTPC, BHEL and Punj Lloyd has already visited the site and reported the plant is in good shape. A specialised team from GE is due to pay a second visit in August. GAIL has also asked Whessoe Oil and Gas, a British company, to study the status of the LNG facility.

The power plant would need about 2.1 mmtpa of LNG at full capacity. GAIL is negotiating with the original suppliers in Oman and Abu Dhabi, as well as companies in Qatar and Australia. These agreements can only be signed once it is clear who will operate the power project.

And the sweeteners
AFTER settling the claims and adding the asset preservation expenses as well as costs to complete the Dabhol project 8212; LNG terminal plus phase II 8212; the total restart costs comes to 2.25 billion or Rs 9,800 crore.

Based on the limited availability of LNG at such short notice, the offtake from the power plant has been considered at 40 per cent plant load factor PLF for the first year and 80 per cent PLF thereafter for the entire 2,184 mw capacity. The capacity charge for power has been considered at Rs 0.93 per unit through the 25-year period.

Concessions are being considered so as to keep the tariff reasonable. From the state government, waivers on the waterfront royalty, stamp duty and sales tax on purchase of equipment, electricity charges till completion of construction and local taxes are on the cards.

On its part, the Centre has to amend the Income Tax Act to extend section 801A benefits, waive excise duty on naphtha if the project is to restart with naphtha fuel, waive past customs dues and extend benefits under the mega-power policy. One can expect a slew of such proposals being cleared in the coming few months. Once in place, the final variable cost should be Rs 1.37 per unit. The total tariff will therefore come to around 2.30-2.40 per unit.

BUT in this revival saga, the Central Electricity Regulatory Commission CERC, the final authority that would give the go ahead, is yet to get involved. The regulatory angle is vital.

The project could become unviable if, instead of a fixed tariff, revenues are determined as per CERC norms for gas-based projects, which do not provide separate norms for advanced-class machines installed at Dabhol. The government is 8216;8216;working on this8217;8217;. Dabhol is on its way.