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Credit Risk Analysis

Case Study on Dabhol Power Project

Submitted to:
Prof. Vivek Saxena Course In-charge Credit Risk Management

Submitted by:
Ashish Shah (218) Gopal Sharma(231)

NIIT University, Neemrana


Credit Risk Analysis

Brief Timeline of Enrons Dabhol Power Project:

1991India opens its power sector to private foreign investors. 1992 Feb. Enron begins investigating opportunities in the Indian power sector. 1992 May Enron executives pitch their ideas to the Indian power secretary, who is in the 1992 United States to encourage foreign participation in the Indian power sector. June Enron and General Electric sign a memorandum of understanding with the 1992 Maharashtra State Electricity Board (MSEB) to build the Dabhol project. The operating entity is the Dabhol Power Company, a joint venture. Enron is the majority owner, while General Electric and Bechtel each own 10% shares. June The parties negotiate the terms of the deal. Enron obtains the necessary 1992Dec. approvals for the project from the Indian government. 1993 Dec. The Dabhol Power Company and MSEB sign the power purchase agreement. 1993 1994Indian political parties opposing the ruling Congress party campaign on an antiearly 1995 Enron platform. Enron seeks and obtains $635 million in financing, insurance, and loan guarantees from Bank of America, ABN Amro, a group of Indian banks, the U.S. Export-Import Bank, and the Overseas Private Investment Corporation (OPIC). Commerce Secretary Brown visits India, accompanied by Ken Lay, and oversees Jan. signing of loan agreements by the Dabhol Power Company with the U.S. Export 1995 Import bank and OPIC

Spring 1995 Aug. 1995 Aug.-Dec. 1995

The opposition alliance wins the election in Maharashtra in March, and in May the new government appoints a committee of state ministers (the Munde Committee) to review the Dabhol project. The Munde Committee issues a sharply critical report that recommends scrapping the Dabhol project. The state government acts on this advice. Enron enters arbitration and seeks $300 million in compensation. The state government files suit in September to void the agreement, alleging fraud and misrepresentation. U.S. officials, including Energy Secretary Hazel OLeary, warn India that its action will discourage foreign investment.

Credit Risk Analysis

Nov. 1995

Rebecca Mark, Chairman of Enron International, meets with Bal Thackeray, the top power in one of the ruling parties. Afterwards, negotiations resume between Enron and the state. The state announces it will accept a revised agreement. The state and the Dabhol Power Company finalize the terms of the revised agreement. Legal challenges to the project by Indian groups continue, but are eventually dismissed. Enron obtains approval from the Indian government to expand the Dabhol liquified natural gas terminal to allow it to process 5 million metric tons annually. Dabhol Phase I (740 megawatts) begins generating power. The state of Maharashtra stops paying for Dabhol as of its $22 million December 2000 bill. The state subsequently seeks to cancel the power purchase agreement. Enron begins arbitration proceedings. Secretary of State Colin Powell raises Enrons problems regarding Dabhol in a discussion with Indias foreign minister. The Dabhol Power Company ceases operation of the Phase I portion of the plant and halts construction on the 90% completed Phase II portion (1,444 megawatts).

Jan. 1996 Feb. 1996 1996-1997 1997

May 1999 Jan. 2001

April 2001 April 2001 May-June 2001


Credit Risk Analysis

1) Risk Analysis & Mitigation Arrangements: Risk 1. Economic/ Demand 2. Currency 3. Financial 4. Technical 5. Political 6. Social 7. Environment Mitigation Strategy Through Contract - PPA Through Contract Leverage Good Credit Rating Partner with GE & Bechtel Govt Guarantees GoI/ Pollution Board Borne By MSEB MSEB/GoM/ GoI DPC DPC OPIC/GoM/ GoI DPC/MSEB/ GoM DPC Ability to Bear Questionable Questionable Good Good Good Questionable Questionable Magnitude High Medium Low Low Low Medium/High Medium

Contractual Operational risk management/mitigation arrangements that underpinned the original Dabhol Power Project include the following: The MOU was signed between Enron and MSEB in less than 3 days in a matter involving a project of the value of over USD 2.5 Billion and also neither central nor state government engaged independent technical assistance or competitive of any kind. Nobody bothered to know the details about Enron i.e. what its history is, business or accomplishments. Neither the balance sheet and annual accounts of Enron, nor any information about its activities, area of operation, its associates etc, was obtained by the government. Dabhol plant was planned as a base load power station when Maharashtra faced electricity shortage only during peak hours. So the project will produce a surplus power at much higher cost and also Maharashtra Government has to buy that Power at much higher agreed cost. Also despite of Project rejection by CEA, the central government has approved the project despite of the fact that CEA approval is mandated by law in such scenario. Audit provision in not mentioned in the MoU and also it did not specify when the 20 years contract would begin.


Credit Risk Analysis

2) How Enron may have demonstrated Credible Commitment to the Dabhol Power

Project? Enron has to deal with the various land and legal issues and also they have to struggle for getting loan from World Bank for their project because of the nature of the project (DPC is base load project whereas Maharashtra required power only for peak hours and also the power supply cost to government is costly and they sense that the Maharashtra-Enron MoU was unduly favorable to Enron) Enron demonstrated credible commitment to the Dabhol Power Project in the following ways: The Dabhol Power Company (DPC) formed to operate the plant was 80% owned by Enron along with GE (10%) and Bechtel (10%).The total equity investment done by the 3 foreign companies was USD 276 million. Enron agreed to invest a sum of over USD 3.1 billion in India in a matter of 3 days. Two months after signing the MoU, Enron submitted detailed implementation proposals to Indias Foreign Investment Promotion Board, and on its recommendation, split the project into two separate phases. With completion of Phase II of Dabhol project, it would run on Qatar sourced LNG, where Enron had extensive interest. To proceed with the Dabhol project, Enron needed to secure more than 150 federal and state level clearances. They had to deal with various land and legal issues. Additionally various central and state taxation had to be dealt with to start off with the project. Enron with its aggressive efforts overcame the notoriously famous and slow Indian bureaucracy with great speed. Enron persevered to educate the Indian public about the benefits of the project by running full page advertisements in leading newspapers dailies. After the project was cancelled, Enron proposed a tariff revision to take account of Dabhols infrastructure and tax requirements and to match the most favourable offer delivered under similar private power projects. Enron offered MSEB 30% stake in DPC and also suggested switching from distilled fuel to naptha or LNG from domestic suppliers. Enron made negotiations with the government on accepting a new turbine design which would reduce the capital cost by USD 300 million, re-gasification project devolved into a separate venture. Enron agreed on lowering the unit rate of power from USD 0.055 to USD 0.043 due to which the expected ROE for Enron reduced from around 30% to 20%.

Even after so much of delays and all the political disturbances and local unrests around the project, Enron remained committed to the project.

Credit Risk Analysis

3) Approaches to manage risks in an unstable political and Institutional Environment: Enron could have clearly specified the terms and condition to MSEB and also it should be thoroughly scrutinized by officials of MSEB which was not done. Also Capital Cost of the project was artificially inflated as per Mundane Committee report. Also instead of foreign currency denomination of tariff payments, they could have allowed to be paid in local currency i.e. Indian Rupees so rate will be considerably lower for the consumers and also foreign exchange risk will be minimized in this way. Also it could have taken local parties and people so that in future in case of change of government they dont have to face a problem of newly electing party cancelling the contract made by loosing party. Because they had failed to gather local public and Media support, they had to suffer a lot in terms of project delays and revision in the terms and conditions of the project. Even Enron hasnt clarified many things to MSEB and they have structured the deal in their favors which was later identified by CEA and World Bank. They could have made deal more transparent and beneficial for the parties. In order to manage such risks the project should be independently audited by experts involving technical and financial feasibility so that any future event related to political instability doesnt hamper the project. Whenever a project of such large magnitude is undertaken the local public should be well educated and kept in loop and also be involved in opportunities created by such projects. This would benefit the project in case of change of governments at state or central levels. Another important fact to be considered is that the shareholding pattern should have a sizeable representation from the local nationalized company. This would ensure that the interest of both the parties is maintained in project completion. Apart from these the following points should also be taken into account while engaging in large projects for national benefit: They should have ensured payment guarantees and should make transparent bidding process.