Dabhol Power Company, a collaboration between Enron, Bechtel Enterprises, and General Electric, was established to construct a significant power plant in Maharastra state, India. Enron holds stakes as a fuel supplier and operator of the plant, while Bechtel has engineering, procurement, and construction involvement. General Electric is a primary equipment supplier, and the Maharastra State Electricity Board is the electricity purchaser. In addition to these sponsors, AES Corporation is another major player in the development, ownership, and operation of electric power facilities.
Despite the Maharashtra government’s loan application being rejected by the World Bank, the project was still deemed “not economically viable”. The Dabhol Power Company procured a significant amount of debt for funding the project, with a major portion sourced from export credit corporations. Phase I had a debt-to-equity ratio of 2.34, whereas Phase II had a ratio of 1.75. MSEB served as the sole consumer for DPC.
If MSEB were to default on its payment, it would have difficulty repaying its debt obligations. However, due to the challenging terms in the PPA, it was highly likely that MSEB would be unable to buy power from the Dabhol Power Plant and sell it at a profit. This would result in a loss for MSEB and require the state and, if necessary, the central governments to provide support. Instead of funding the project through alternative means such as raising more equity from sponsors or through the market (although this might have been challenging due to the long incubation period of such projects), the Dabhol Power Company could have opted for securitization.
The interest expenditure on debt would have been manageable if certain conditions were met. Additionally, MSEB acquired a 30% stake in the company under revised terms. This equity stake had both advantages and disadvantages. On one hand, it provided MSEB with the opportunity to share in the profits. On the other hand, it created difficulties in negotiation as MSEB was the sole customer, resulting in a conflict of interest. The DABHOL power project offers valuable lessons for future strategic initiatives in India. It raises questions about addressing the risks associated with large global projects and how to protect against these risks.
What other strategic, financial, and regulatory initiatives should be suggested to ensure the success of similar projects? The Enron Dabhol project has taught valuable lessons for any future strategic initiatives in India, and it is essential to avoid repeating the mistakes made in the DPC agreement. Learning from the shortcomings of this agreement is crucial to prevent similar situations in the future, safeguarding the interests of future stakeholders and establishing benchmarks for evaluating future agreements.
- A surplus of power is as harmful as a shortage of power. Under certain circumstances, it may be cheaper to have no power than buy exorbitant unaffordable power. It is crucial to study the tariff implications of any supply-demand matching exercise.
- Competitive bidding procedures rather than MoUs and counter-guarantees are the most effective method of getting the best terms from investors. The PPAs may come in the way of merit order dispatch, which is the most cost-effective way of supplying electricity to meet demand.
- The broader developmental implications of expansion must be kept in mind. The given sector must pursue the goal of universal access to affordable utility. A stress on self -reliance as a central developmental objective to avoid control being taken over by foreign forces can be essential at times.
- To protect against exchange rate volatility, the forex indexation of a given project costs must be avoided as far as possible. For instance, to protect against the impacts of international oil price rises, fuel policy must be based, ceteris paribus, on indigenous resources.
- There must be not only competitive bidding in the process, but also transparency, accountability and participation. The right to information is crucial tool in the hands of people which they must exercise with the assistance of public-interest organizations. The DPC episode demonstrates that despite the presence of certain safeguards, the lack of transparency in the agreement inevitably resulted in its failure.
Furthermore, it demonstrates the sheer level of government and investor apathy towards consumer welfare. These colossal global projects come with a significant amount of risk, ranging from political and economic risks to country and lending risks. Certain examples of the associated risks include:
- Industry cycle and the prospects of growth of the industry over a longer period
- Competitive positioning that would determine the market share, substitutes, variable costs of production etc
- Regulation that would impact quickness and smoothness of decisions and actions and transparency in the process
- Tariff structure and Government support
- Repayment risk
- Currency risk
In summary, large-scale projects necessitate significant financial investment and have lengthy completion times. They also involve political, economic, legal, regulatory, and financial risks. The challenge lies in attracting private investors who are willing to participate in these projects due to their complex and risky nature. Concerns over corruption and political and economic instability in developing countries often cause hesitancy among investors. To address these concerns, the government needs to establish a clear investment policy, structured process flow, and transparent mechanism that create a favorable investment environment. It is essential to effectively utilize project financing tools to mitigate these risks and fears.
Recalling the lessons learned from previous experiences can greatly contribute to the success of the project. The following recommendations are provided to help prevent the challenges encountered in the Dabhol case in future agreements:
- Any potential problem in agreements should be thought about, planned for, and dealt with in the first set of negotiations, rather than rectified time and again later.
- Transparency is the key to the successful implementation of any agreement.
- Negotiating with investors is a task that needs an expert panel that can professionally handle a given situation and can ensure stakeholder representation
- Investors have a legitimate right to maximize their gains.
- Government must recognize that the best incentive to investors is credible policy and a transparent investment environment, not the unsustainable artificial incentives.
- While protecting the interests of the electorate should be the government’s top priority, the consumers must not take it for granted that the Government will protect their interests.
- Consumers need to become more organized and vocal and push for a greater role in policy decisions.
- Investors must understand that unrealistic commercial agreements result in enhanced risks and are likely to fail.
- Investors must understand and accept the commercial risks of the investments accompanied by high rates of return.
