Sobering thought: power investment policy still hasn8217;t recovered from that contractual mess
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For power-starved Maharashtra and power-hungry India, the on-going revival of the 2,184 MW Dabhol power plant is both great news and a great lesson. The plant had shut down when the Dabhol Power Company issued a final termination notice to the Maharashtra State Electricity Board MSEB after the latter failed to pay dues. MSEB, on its part, had found the tariff negotiated with DPC prohibitive. Under the new arrangement, the state distribution company will buy 500 to 550 MW of power for 48 days. What will happen after that is not clear. But it better be soon 8212; the plan is that Dabhol will generate up to 5,000 MW of power, ending Maharashtra8217;s woes for some time to come. The Ratnagiri Gas and Power Company, as DPC is now called, has a December deadline for the full-fledged functioning of the plant.
Ratnagiri has the advantage of working with some of the best technology used in this business. GE and Bechtel were DPC8217;s technology providers. But it was with GE and Bechtel that a settlement of nearly Rs 10,600 crore had to be made in July 2005. That was the price of contractual foul ups on official India8217;s part. And the genesis of that error was, of course, the well-intentioned but badly designed power investment policy of the Narasimha Rao government. It incentivised cost padding, among other things, and made it pretty certain that investors would try to earn super normal returns.
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The Dabhol contract demonstrated this folly when MSEB was asked to buy power from DPC at an incredible Rs 7 per unit. There should have renegotiations. What happened instead was political manoeuvring, and probably worse. That anti-foreign investment lobbies had jumped into the act didn8217;t help matters. When the deal was pushed through it should have been obvious to the parties concerned that MSEB would default, as it did. Even if Enron, DPC8217;s major investor, hadn8217;t gone bust, the power project in India would still have ended up in arbitration. In the end, legal hands helped unravel the administrative and commercial mess, as seems to be the standard operating procedure for big infrastructure projects in India. But the DPC settlement cost the exchequer a lot of avoidable money and its effect on the power investment policy has been such that some of the basic reforms 8212; sorting out SEBs, for instance 8212; are still not completed.
