Politics, institutions and finance led to a dispute between the Maharajah’s state government and the plant owners, and the project was closed in June, 2001. In this case we will evaluate the role that these factors played in the Oddball Power Project. Prepare a Risk Breakdown Structure assessing the main categories of risks. Risk breakdown structure is the hierarchically organized depiction of the identified project risks arranged by risk category (PM MAMBO). The ORBS will prove extremely valuable to better grasp when a project needs to receive special scrutiny, in other words, when risk might happen.
The ORBS can help the project manager and the risk manager to better understand a recurring risks and concentrations of risks that could lead to issues that affect the status of the reject. Following the concept of the Work breakdown Structures (WEBS), the Risk Breakdown Structure provides a means for the project manager and risk manager to structure the risks being addressed or tracked. The Risk Breakdown Structure of Oddball project produced hierarchical structure under various names to describe sources of risk, or risk categories or types.
Each of these structures contains three or four hierarchical level to describe the types of risk faced by the project in question. ORBS Level Level 1 I Level 2 | Project risk | 1 Development Environment Risk | 1. 1 development system 1. 2 management methods 1. Work Environment I | 2. Economical risk | 2. 1 Contractual terms ; conditions 2. 2 partnership ;joint ventures. 3 suppliers ; vendors | 3. Technology Risk | 3. 1 Scope Definition. 2 Technical interfaces. 3 Performances. 4 Test and acceptance I | 4. External Risk | 4. Legislations. 2 Exchange Rates. 3 Regulatory. 4 Political I From this ORBS, we have developed a prioritize list of the top three (3) risks (potentially Most Critical) and among them are economical risk, development environment and technological risk Economical risk Economic risk is the chance that macroeconomic conditions like exchange rates, overspent regulation, or political stability will affect an investment, usually one in a foreign country. Enron experienced economic risk which was a serious danger to their investment.
The price of the power from Oddball was far beyond what consumers in the area were to pay or the state can afford. This is the most potentially critical out of the three (3) risks stated above. For instance, In 2001, power from Oddball was four times more expensive than that from domestic power producers. Phase 1 of the Oddball plant began operations in May 1999 and within one month MSIE raised concerns about its ability to pay a US$20 million monthly bill (custom book 201 1 peg 37). Furthermore, single customer was unable to pay for power: foreign creditors banks concerned about Men’s payment problems.
Development Environment Risk This is the second potentially critical risks after economical risk. It is the risk that the development of the project will cause destruction to the surrounding natural environment through catastrophic environmental pollution. For instance, the local communities and other Indian interest groups strongly opposed the Oddball project throughout its development. The communities had many of the same encores outlined above regarding the lack of transparency in the development process and the cost of the power.
In addition, the project was projected to displace 2,000 people and land was seized without notification or compensation. There were also environmental concerns with the project related to pollution of fresh water, diversion of fresh water for the project, and the potential contamination of salt water which would adversely affect fishing communities. Technological Risk Technological risks are the technical or performance limitations that endanger the project. Technological risks were considered minor to equity investors.
For instance, Bechtel had vast experience of several power and LONG Projects. As expected the project did not suffer any major technological difficulties during construction and initial operations. Describe the nature of each risk and why the risk is significant to project success. Development Environment risk It is the risk that the development of the project will cause destruction to the surrounding natural environment through catastrophic environmental pollution. From inception, Oddball was faced with controversy.
Memorandum of understanding was signed by Enron and Maharajah’s state government to evolve a 2,000 MN LONG-fired power plant at Oddball. Agreement was made in principle over the IIS$3. 1 billion project which was made unusually quickly. (Custom book 2011 peg 30). Both central and state government failed to conduct a financial appraisal of the project and conclusion for the approval was made without competitive bidding. The MOM failed to specify when the 20 year contract would begin and lacked a specification as to when electricity supply or payment would commence.
Economical Risk danger to their investment. The Maharajah’s State Electricity Board is the sole Purchaser of the Dip’s product -electricity. To mitigate the commercial risk DIP needed to sign a very binding power purchase agreement (PA) with its customer, but the price of electricity generated by Oddball was high. The structure of payments did not conform to earlier guidelines issued by the central government in 1992. Furthermore, no provision was made for auditing the project to ensure that the price of electricity was commensurate with its cost.
The power purchase contract was rigorously designed and was supposed to give the Oddball decent commercial risk cover. It however failed to take into count the possibility of the tariff hike to exceed the solvency of the buyer, which was not able to transfer the cost escalation to its customers or even the public opinion effects of the high prices. Technological Risk the project. The first MAW phase of the project was a combined cycle Naphtha fired plant. Liquid Natural Gas (LONG) was chosen for the second phase fuel.
The Oddball was to establish its own LONG supply with the generous excess capacity. Neither central nor state government engaged independent technical assistance. MSIE guaranteed a minimum fuel purchase but the fuel supplier was not bound o provide a minimum quantity of fuel. Although DIP admitted that It could not ramp-up from full stop or even from idle to base load in three hours, the legal notice should be considered more as a counter measure to Dips invocations of counter guarantees earlier same year. External Risk Here the political and legal risks shall be emphasized.
In the Oddball case the political risk consisted of a changing environment (new state government which caused the original deal to be cancelled), bureaucratic, inefficient and slow- moving administration of the state and constant re -examination of the project ND conflicts over the approved contract terms, especially the prices. Oddball project was antagonized; this was accentuated by a statement before U. S congressional hearing by a senior company official that Enron had spent US $ million in education in India to show the benefits of private power projects.
This sum was interpreted by many Indian to mean bribe money. (Custom Book 2011 page) The Legal aspect of the risk, the memorandum of Understanding, signed for a plant with a minimum capacity of 2000 MM, includes several conflicts with Indian Law. These conflicts impose legal risks by taking the local law properly into count. In addition, the Indian states that the price that the public pays for electricity must follow least-cost approach. Assess the factors that are causing the risk. First there was no feasibility study on the viability of the project and on the major partners.
The Oddball project was approved without adequate study of economic, environmental and social consequences. Questions that arise are whether Enron was fully aware of the financial credibility of India in the international market, whether they had considered alternative sources of financing and the problems with the feasibility report that Enron originally used. Also in India there was chaos on the policy front- projects which were pushed ahead without any set standards and criteria which are necessary for the efficient appraisal of projects. Another factor is the turning down of financing by the World Bank.
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 Maharajah’s. Despite local finance, the Indian government has had difficulties getting larger projects off the ground. By including the movement in the deal in order to gain access to the Indian market he venture kept a potential threat close to it. Also the contract between Oddball power cooperation and MSIE was too ambiguity. Rigid contractual framework dealt with most of the commercial risks adequately.
Failures in invoking guarantees can be considered more as legal or political than as economical risks. However the failure of MSIE, the customer, is part of the commercial risk- there is no solvent customer. There were some shortages in the power purchase Agreement (PAP) made between Oddball power cooperation and MSIE. According to Enron’s opponents the PAP leaves Men’s financial liabilities unclear. However this has not yet been successful argument in courts. The breakdown of project costs and many financial parameters were not defined and all the figures in PAP were estimations.
Because of the unclear nature of PAP and other considerations, DIP have been accused of frauds and misleading. Right from the inception, the project contract was questionable. The initial contract of the project was considered to be suspiciously generous to DIP. Oddball has been accused of corruption in the setting up of the project and in the procedures regarding granting official clearance for the project. From the above t can be concluded that if those factors are not critically checked and addressed, it will be difficult to get project initiated and completed.
Cite this Oddball Project Rejection Causes
Oddball Project Rejection Causes. (2018, May 25). Retrieved from https://graduateway.com/oddball-project-rejection-causes/