A CRITICAL STUDY OF DABHOL

POWER PROJECT

By
Vishwas.R.Bhat
MBA 2nd year
MINDS
 Introduction
• Dabhol Power Company (DPC) was promoted in March 1993 as a 100 per cent
foreign owned private unlimited liability company incorporated in India by Enron
Corp., USA (Enron), Bechtel Enterprises Inc., USA (Bechtel) and General Electric
Co., USA, (GE).

• In Phase I DPC will set up a combined cycle power plant with an installed capacity
of 695 MW at Dabhol, Guhagar taluka, Ratnagiri district, Maharashtra.

• The power generated by the plant will be sold to the Maharashtra State
Electricity Board (MSEB). The cost of the project is estimated at Rs. 3029 crore
(US$ 946.55 million).
 Objectives
• To study the detailed problems of the project
• To formulate the controveries
• To find out the reasons behind the failures of
the project
• The different players behind the failures
 Review of literature
• The Dabhol power plant project in India in the 1990’s is a case
in point in the power sector.
• The election of a new government that was not supportive of
the project led to renegotiation of tariff rates that reduced
the profitability of the private firm .
• Private sector consortium had signed a memorandum of
understanding with the local government. However when a
new government was reelected, the conditions of the pre-
existing agreement were unilaterally revised, resulting in the
private sector consortium –the Dabhol Power Corporation
(DPC) stopping the project.
 Parties involved
• Government of India
• Government of Maharashtra
• Maharashtra State Electricity Board (MSEB)
• Enron Corp. (Enron International)
• General Electric Co. (GE)
• Bechtel Enterprises

Research methodology
Dabhol Power Company
Revised shareholding pattern
MSEB Enron International GE Bechtel

10%
10%
30%

50%
 LOCATION
• Dabhol, Guhagar taluka, Ratnagiri
district, Maharashtra.

• Around 300 km from Mumbai,

– 45 Km from Chiplun,
– along NH 17

• Total area: 1, 700 acres

 Background on Enron’s Dabhol Power
Project
• Enron is a majority owner of Dabhol, a massive combined-
cycle power plant on the western coast of India's
Maharashtra state.
• The Dabhol power plant was initiated in 1992 and took nine
years to commence operation.
• The project is 2,184 megawatts, which Enron says is the
largest gas-fired power plant in the world.
• The plant closed in June 2001, due to a payment and
contract dispute
• between the Maharashtra state government and the plant
owners.
• Enron says it incurred over $1 billion in costs for the plant.
 Timeline of the project
1992 GoM, Enron, GE, Bechtel sign MoU
1993 PPA signed
1995 Construction of Phase 1 begins,
change of govt. in Mah,
project scrapped
1996 Renegotiation, construction of Phase 1 resumes
1999 Phase 1 becomes operational
2000 MSEB begins to default
2001 Enron files for bankruptcy, DPC shuts down
 Details of the power plant
• Phase 1 • Phase 2
– Capacity: 740 MW, – Capacity: 1, 275 MW
– Cost: $ 1.078 billion – Cost: $ 3.5 billion
– Fuel: Naphtha – Fuel: LNG
– Operations began: 1999 – Construction suspended
--------------------------------------------------------------------------
• Total capacity: 2, 015 MW
• Originally estimated cost of plant: $ 2.8 billion
• Capital cost calculated by DPC: Rs. 4.5 crore/MW (’96)
 PPA details
• Power Purchase Agreement for 20 years
• Implemented on BOO basis
• MSEB guaranteed to buy 90% of power
produced
• MSEB to receive 30% profits of DPC annually
• MSEB to bear any increase in fuel price
• MSEB to guarantee a min. fuel purchase
• MSEB to pay DPC $ 220 million per year
 Reasons for non performance of
ENRON
• By early 2002, Enron was variously termed
“radioactive,” “contaminated,” and
“obstructionist”.
• The Congress government in Maharashtra was
defeated in the state polls in March 1995 and a
new government of the Bharatiya Janata Party
(BJP) and Shiv Sena came to power.
• A committee lead by the Deputy-Chief Minister
recommended scrapping of the project.
Finally, the government scrapped the project on
August 03, 1995.
 The other reasons that had an effect on the
closure
• Failure of the GOIWhen Enron, Bechtel, and GE secured the
impressive guaranties and economic concessions from the GOI, it’s hard
to imagine that they foresaw the upcoming failure of the GOI to honor

its financial and contractual obligations, much less the GOI’s course of
conduct that was deemed expropriatory by an American arbitration

panel.

• In addition to failing to honor its counter-guaranty, the GOI also, through

its judiciary, improperly thwarted international arbitration panels from

proceeding.

• The GOI refused to commit the resources to solve the problems raised
through the project’s failure.
• Failure of the GOM
• The government of Maharashtra was the sole purchaser of power under the
PPA, and was also, ultimately, a 15 per cent equity holder in the project.

• Through its subsidiary, MSEB, the GOM was a prime mover in every aspect
of the deal’s completion, and was the chief beneficiary of the PPA due to the
state’s energy starvation.

• This unforeseen contractual breach was followed by the GOM’s participation

in important arbitrations and lawsuits, sometimes willingly, sometimes not.

• The GOM also utterly failed to participate or assist the long workout efforts.
Their absence was as confounding as it was difficult to work around.
 controversies
• Lack of competitive bidding
• MoU signed within 20 days
• NWG on Power found that MSEB would incur
losses amounting to Rs. 2000 crore
• One-sided MoU in favour of DPC (World Bank)
• No EIA was carried out
 contd…
• World Bank turned down financing when
sought by Central govt.
– It felt that the project was "not economically
viable".
– It also advised the project did not satisfy the test
of least cost power and
– it was too large for the power demands of
Maharashtra.
 contd…
• Power tariffs higher than those from other
independent power projects in the country
• MSEB to buy 90% of power produced and
from no other plant
• Counter-guarantees provided by State govt.
which waived sovereign immunity. Similar
counter-guarantee signed by Central govt.
• Agreement was treated as confidential
 contd…
• Electricity charges/kWh:
– Rs. 3 (Phase I, ‘99)
– Rs. 7.80 (Phase I, 2000)
– Rs. 2.54 (as claimed for Phase II, ‘99)
• In June 2000, the DPC reported profits of $42
million during the first year of its operations
• MSEB owed DPC almost $ 110 in Jan 2001
 contd…
• Land resettlement, compensation to affected
fishermen, pollution control measures
• Enron paid $20 million as "educational gifts“
• Project's promoters had not obtained the
CEA's statutory clearance as required under
the Electricity Supply Act
 FINDINGS
• Based on this analysis, the appropriate return to equity
holders should not be much greater than the cost of foreign
debt given the PP A and the counter guarantee by the
Government of India
• Payments by MSEB as per the PP A has been guaranteed by
the Government of Maharashtra and counter guaranteed
by the Government of India.
• The cost of foreign debt assumed in the Enron project is 10-
11 per cent. This is not the risk-free rate but a rate which
takes into account default risk.
• Government of Maharashtra and Government of India and
possibly by other contract-ing parties, the premium for
equity appears excessive.
 contd..
• This conclusion is confirmed by a recent
McKinsey study by Chia and Mallick (1996).
According to this study: "Independent Power
Producers (lPPs) have been asking developing
countries to pay higher prices than developed
countries
 REFERENCES

• Mickael Chia and Rob Mallick, "Why Power

Projects Get Stalled", The McKinsey
Quarterly, 1996, No.2.
• FACT SHEET=Background on Enron’s Dabhol
Power Project.
• The Dabhol Power Project Settlement
• What Happened? and How? Kenneth
Hansen, Robert C. O’Sullivan and W. Geoffrey
Anderson
THANK YOU