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Dabhol Power Project

Minority Staff Committee on Government Reform U.S. House of Representatives February 22, 2002 FACT SHEET Background on Enrons 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 total project cost is $2.9 billion. Enron owns 65%, Bechtel Enterprises owns 10%, General Electric owns 10%, and the Maharashtra State Electricity Board owns 15%. 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. I. CHRONOLOGY OF DABHOL POWER PROJECT India opens its power sector to private foreign investors. Enron begins investigating opportunities in the Indian power sector. Enron executives pitch their ideas to the Indian power secretary, who is in the United States to encourage foreign participation in the Indian power sector. Enron and General Electric sign a memorandum of understanding with the 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. The parties negotiate the terms of the deal. Enron obtains the necessary approvals for the project from the Indian government. The Dabhol Power Company and MSEB sign the power purchase agreement. Indian political parties opposing the ruling Congress party campaign on an antiEnron 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 signing of loan agreements by the Dabhol Power Company with the U.S. Export-Import Bank and OPIC. 1991-1992 Feb. 1992 May 1992 June 1992 June 1992Dec. 1993 Dec. 1993 1994-early 1995 Jan. 1995

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. 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 fore ign 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). The Bush Administration releases the White House Energy Plan, which contains a provision that benefits Enrons India operations. Vice President Cheney raises Dabhol in a meeting with Sonia Gandhi, the president of Indias opposition Congress Party. 2 Nov. 1995 Jan. 1996 Feb. 1996 1996-1997 1997 May 1999 Jan. 2001 April 2001 April 2001 May-June 2001 May 2001 June 2001

July 2001 The National Security Council leads a Dabhol working group with Administration officials, including Treasury, State, the Export-Import Bank, and OPIC officials. Christina B. Rocca, Assistant Secretary of State, meets with Indian officials on Dabhol. Alan Larson, Undersecretary of State for Economic, Business and Agricultural Affairs, raises Dabhol with the Indian foreign minister and the Indian national security advisor. Talking points are prepared for President Bush to discuss Dabhol in a meeting with Indian Prime Minister Vajpayee on November 9. However, the topic is vetoed the day before the meeting on November 8, which is the same day that Enron discloses a stunning $586 million in previously unreported losses. July 2001 Oct. 2001 Nov. 2001 II. DEVELOPMENT OF THE DABHOL PROJECT Enron began to investigate opportunities in the Indian power sector in 1992, when India first opened its power sector to private foreign investors.1 In May of that year, Enron executives pitched their ideas to the Indian power secretary, who was in the United States to encourage foreign participation in this sector.2 By June 1992, Enron had selected Dabhol as the site for a project, and, with General Electric, Enron entered a memorandum of understanding with the Maharashtra State Electricity Board (MSEB) to build the Dabhol project.3 The operating entity was the Dabhol Power Company, which is a joint venture.4 During most of the project development period, Enron owned 80% of the project, while General Electric and Bechtel each owned 10%.5 (In late 1998, MSEB purchased part of Enrons equity stake, which dropped Enrons share to 65%.6) The parties negotiated the project terms over an 18-month period, which culminated in Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002); Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 8 (revised July 6, 1998). 231 Id. Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 10 (January 1999). 45 Some sources refer to this entity as the Dabhol Power Corporation. Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 10 (January 1999). 6 Id the Dabhol Power Company and MSEB signing a power purchase agreement in

December 1993.7 Enron also obtained the necessary approvals for the project from the Indian government during this period.8 Over the next year, Enron developed the project financing, obtaining $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).9 As discussed below, the initial agreement was modified early in 1996, and the project was expanded. In addition, in 1997, the Indian government approved Enrons request to expand a portion of the project, the Dabhol liquified natural gas terminal, to allow it to process 5 million metric tons annually.10 III. ENRON PROMOTION OF THE DABHOL PROJECT From the projects inception, Enron strongly promoted Dabhol as a key element of its international strategy.11 In 1996, Enrons CEO and Chairman, Ken Lay, said, This project serves as a cornerstone of Enrons activities in India. We pursue additional projects in the country, we look forward to a long-term relationship with both the government and the people of India.12 As early as 1992, Thomas White, the president of Enron Power, stated: In the future, Enrons business will be 10% domestic and 90% overseas. 13 The Dabhol project was easily Enrons most significant overseas endeavor in its size, cost, and political visibility. According to Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 9-10 (revised July 6, 1998). Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 12-25 (January 1999). 98 7 Id. at 114; Financing for Indian Plant Secured, Houston Chronicle (Jan. 17, 1995). Enron, Enron International Our Presence in India (2000) (available online at: http://www.ei.enron.com/presence/projects/india.html). Power Politics: Enrons Plant in India Was Dead; This Month, It Will Go On, Wall Street Journal (Feb. 5, 1999) (Enron was eager to get a jump on the potentially mammoth [Indian] market). Enron Power Co Welcomes India Court Dismissal of Lawsuit, Asia Pulse (Dec. 3, 1996); see also India Draws Private Firms to Power Sector, Asian Wall Street Journal (Jan. 29, 1993) (Were very, very excited about it, says Joe Sutton, the Enron official overseeing the project. Were forging the way forward. This will be the cornerstone of other agreements). International Power Enron Power Lays Out International Strategy; Lands Philippine Project, Independent Power Report (July 17, 1992). 13 12 11 10 4

Enron, the 2,184 megawatt Dabhol plant is the largest gas-fired power plant in the world.14 Dabhol also was important for other Enron plans. Dabhol was intended to be a major customer for liquified natural gas supplies from a project that Enron had entered into with the Qatar government.15 As of 2000, Enron had 20-year contracts for 2.1 million tons/year of liquified natural gas with two Middle Eastern suppliers.16 A substantial element of the Dabhol project was construction of a modern port facility that could unload large tankers and a facility for regasification of the imported liquified natural gas.17 Enron saw this liquified natural gas terminal as the hub of a future Enron gas network in India.18 As of 2000, Enron was developing a natural gas pipeline project to carry the regasified liquid natural gas to Dabhol and customers north of Dabhol.19 In addition, in January 1999, Enron had entered a joint venture to construct, own, and operate a large liquified natural gas carrier dedicated to bringing liquified natural gas from the Middle East to the Dabhol terminal.20 Enron lobbied the Indian government, the U.S. government, and other institutions such as the World Bank to support the project.21 Enron led the efforts to obtain the financing for the High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001). See Enrons Overseas Reach Fell Shy of Goals: Firm Rode U.S. Policy, Washington Ties to Lofty but Failed Ventures, Dallas Morning News (Feb. 2, 2002); Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 8 (revised July 6, 1998). Enron, Enron International Our Presence in India (2000) (available online at: http://www.ei.enron.com/presence/projects/india.html) (contracts were with Oman LNG and Abu Dhabi Gas Liquefaction Company Ltd.). Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 8 (revised July 6, 1998). 18 17 16 15 14 Power Politics: Enrons Plant in India Was Dead; This Month, It Will Go On, Wall Street Journal (Feb. 5, 1999). Enron, Enron International Our Presence in India (2000) (available online at: http://www.ei.enron.com/presence/projects/india.html). 20 21 19 Id. See Bidding Set for Enrons India Project, Reuters (Jan. 21, 2002); The Enron Affair Shadowy Path to State Approval, Financial Times (Jan. 12, 2002); Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 9-10 (revised July 6, 1998); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 114 (January 1999). 5

project, which was a huge and critical endeavor.22 Enron also hired lobbyists and orchestrated media campaigns.23 According to a press account, Enron employee Linda Powers testified before the House Appropriations Committee in 1993 that Enron had spent $20 million on educating Indians in how capitalist business should work.24 A leader of the main anti-Enron alliance stated: The public face of Enrons strategy was to put up visiting U.S. officials and even local U.S. diplomats to argue that Enron was good for India and Indo-U.S. relations. This was a well-orchestrated campaign that had an insidious and secret element, which we are seeing unravel in Enrons U.S. operations.25 IV. VIABILITY OF THE DABHOL PROJECT As far back as April 1993, the World Bank evaluated the Dabhol project and concluded that it was not economically viable, and thus could not be financed by the Bank.26 An April 30, 1993, letter from the World Bank Country Director for India to an Indian official in the Ministry of Finance found that the proposed plant would produce too much power at too high a price for the state.27 Specifically, the World Bank found that the project was too See Enron Power Venture Signs Pact to Supply Indian State, Asian-Pacific News (Dec. 9, 1993) (Enron still had to complete financing arrangements. Apart from equity, the company intends to approach the U.S. Export-Import Bank and institutions such as the World Bank-affiliated International Finance Corp., as well as Indian financial institutions); Enron Backtracks, Deal Nears, Power Asia (Sept. 13, 1993) (Enron, with its reputation for efficiency, will be a blue chip client, facilitating mobilization of money in bonds and equity on the world market with [the International Finance Corp.] as a catalyst). For example, in 1993, Enron signed a consulting and investing agreement with former U.S. Secretary of State, James Baker and former U.S. Secretary of Commerce, Robert Mosbacher, saying it expected their knowledge and experience to aid Enrons drive to expand foreign na tural gas operations. An Enron spokesperson said: They will be providing us counsel and advice on how we might pursue various projects outside the U.S., based on their knowledge of people and government structures and government protocol in countries arou nd the world. She further stated that they could be involved in discussions for projects under development in several countries, including India. Heavyweights for Enron, Platts Oilgram News (Feb. 23, 1993). 24 23 22 The Enron Affair Shadowy Path to State Approval, Financial Times (Jan. 12, 2002). Id. 25 26 Letter from Heinz Vergin, Director of the India Country Department, World Bank, to M.S. Ahluwalia, Secretary, Department of Economic Affairs, Ministry of Finance (Apr. 30, 1993) (with attachment: India: Dabhol Power Project). See also High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001). Letter from Heinz Vergin, Director of the India Country Department, World Bank, to M.S. Ahluwalia, Secretary, Department of Economic Affairs, Ministry of Finance (Apr. 30, 1993) (with attachment: India: Dabhol Power

Project). 27 6 large for base load operation in Maharashtra.28 The Bank also found that the plants power, which would be produced from liquid natural gas, would cost much more than power from coal.29 Under the proposed deal, the plants power would displace lower cost power, raising power costs overall for the state.30 The letter stated: This adversely affects the economic viability of the project and would place a heavy financial burden on the MSEB.31 The World Bank also found that [t]he project is not part of the least cost sequence for Maharashtra power development. Local coal and gas are the preferred choices for base load generation.32 Enr on responded by increasing its lobbying efforts, targeting the World Bank and various Indian officials.33 According to a detailed report prepared by Human Rights Watch: Enron was undeterred by the World Banks refusal to fund the project or negative reports appearing in the Indian media. Consequently, Joseph Sutton, in a letter to Ajit Nimbalkar, wrote that Enron would hire a public-relations firm to manage the media from here on. Sutton continued: The project has solid support from all other agencies in Washington. Well get there!34 In addition, Indian officials had concerns about the national economic impacts of importing large quantities of liquified natural gas. According to media accounts, Indias planning commission originally opposed the project on grounds that the plants annual requirement of 3-million tons of gas would drain at least $250-million from Indias foreign exchange reserves.35 While the size of the project was scaled down from the originally proposed 2,550 megawatts to a still massive 2,184 megawatts, it is not clear whether this 28 29 30 31 32 33 Id. Id. Id. Id. Id. Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 9 (revised July 6, 1998); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations 14, 114 (January 1999). Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 114 (January 1999), quoting Letter from Joseph Sutton, chief operating office of Enron, to Ajit Nimbalkar, chairman, Maharashtra State Electricity Board (June 23, 1993). India Okays First Private Power Unit: A 1,920-MW Venture by Bechtel/Enron/GE, Independent Power Report (Jan. 15, 1993). 35 34 7 reduction fully resolved the concern about the projects effect on foreign exchange reserves.36 V. CONTROVERSY OVER DABHOL The Dabhol project was highly controversial in India from the start, and it was associated with allegations of malfeasance and corruption at the highest levels.37 While controversy has been ongoing throughout the life of the project, there are several key areas of dispute. These include the process and content of the original agreement, the process and content of the revised agreement, the projects effects on local communities, including human rights violations, and the cost of the power when the project ultimately came on line. A recent op-ed in the New York Times stated: From the beginning, critics in India warned that the power plant was

economically unsound, and there have been suggestions that corruption was involved in the awarding of the contract. The Hindu, a leading Indian newspaper, said recently that no India-specific shenanigan has yet come to light. But it added that the possibility of malfeasance cannot be dismissed in the light of voluminous material now available on Enrons unethical behavior in the U.S.38 An official report on the Dabhol project was commissioned by the Indian government and published in 2001 by Madhav Godbole, an independently minded bureaucrat.39 The report condemned the circumstances surrounding the approval of the project, finding that a severe abuse of governance and a lack of transparency marked [the projects] fast-track approval.40 See id.; High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001). The Biggest Fraud in Indias History, Guardian (Nov. 30, 2001); The Munde Committee, Report of the Cabinet SubCommittee to Review the Dabhol Power Project (1995), reproduced in Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations (January 1999) (The Project generated one of the most intense intellectual debates at the national level on any single commercial venture. . . . It soon took the shape of a mass agitation with the ordinary public getting involved in satyagraha, giving the Project law and order dimensions). For example, there were allegations that Indias Commerce Minister P. Chidambaram had strongly supported Enrons Dabhol po wer project in public forums in India and abroad without disclosing the fact that he had given a paid legal opinion to Enron. Entire Indian Project Can Use Naptha, Platts Oilgram News (July 26, 1995). Business Line reported that Enron had paid Mr. Chidambaram a substantial fee when he was practicing law in between holding two Cabinet posts, and members of the opposition party called for his dismissal on the grounds of conflict of interest. Id.; see also Government for Stay on DPC Arbitration, Times of India (Sept. 25, 2001); India Power Play, Energy Compass (July 13, 2001) (local reports continue to suggest that the entire deal is riven by corruption). 38 39 40 37 36 Money, Energy Politics and Enrons Costly Misadventure, New York Times (Feb. 3, 2002). Id. Id. 8 A. Criticisms of the Initial Agreement Fueled by negative reaction to the Dabhol project, the opposition party won in Maharashtra in 1995 on a platform of throwing Enron into the Arabian sea.41 The new government promptly appointed a group of ministers, known as the Munde Committee, to review the Dabhol project.42 The Munde Committee report critiqued both the process by which the project had been developed and the terms of the deal.43 It found that the initial memorandum of understanding was rushed and onesided (citing a letter from the World Bank), condemned the absence of competitive bids and lack of transparency in the process, critiqued subsequent changes to the project design as addressing only the concerns of Enron, and found that Enron was given undue favors and concessions.44 The report also found that the capital costs

of the project were inflated, that the rates for the power would be much higher than justified, in part because the contract was based on U.S. dollars (placing the risk of currency fluctuations on the state), that there were outstanding environmental questions, and that the project would adversely affect the state of Maharashtra.45 Based on this evaluation, in August 1995, the state decided to halt construction and cancel the project.46 The states chief minister Manohar Joshi stated: From the speed with which the memorandum of understanding was signed it seemed as if Enron came, it saw, and it conquered. The proposed capital investment in the project is definitely more than it should have been, and there is uncertainty about many components of the power purchase agreement resulting in payment of an unjustified rate which is higher than other comparable projects and therefore the project, in its current form, is not High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001); see also The Biggest Fraud in Indias History, Guardian (Nov. 30, 2001). High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 26 (January 1999); The Munde Committee, Report of the Cabinet Sub-Committee to Review the Dabhol Power Project (1995), reproduced in Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations (January 1999). The Munde Committee, Report of the Cabinet Sub-Committee to Review the Dabhol Power Project (1995), reproduced in Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations (January 1999); Entire Indian Project Can Use Naptha, Platts Oilgram News (July 26, 1995). 44 45 46 43 42 41 Id. Id. Legal Nightmare Looms as Maharashtra Axes Dabhol, Power Asia (Aug. 7, 1995). 9 in the interest of the state.47 B. Criticisms of the Revised Agreement In response to the states action, Enron sought $300 million in compensation, while attempting to convince the Indian government to reverse its decision.48 The state government countered by filing suit to void the agreement, alleging fraud and misrepresentation.49 In early November 1995, Rebecca Mark, Chairman of Enron International, held a crucial meeting with the Bal Thackeray, the top power in one of the ruling parties.50 After this meeting, negotiations resumed between Enron and the state.51 On January 8, 1996, the state announced it would accept a revised agreement, and the terms were finalized on February 23, 1996.52 While the state dropped its lawsuit, other Indian groups continued to pursue legal challenges to the project. Eventually, all of these were dismissed.53 Critics of the revised agreement charged that the revisions were very minor, failed to fix the fundamental problems of the project, and in fact exacerbated those problems.54 The revised agreement expanded Phase I of the project from 695 megawatts to 740 megawatts and committed the state to both Phase I and the 1,320 megawatt Phase II portion of the project (under the initial

Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), 9-10 (revised July 6, 1998) (quoting Enron Decision: Shockwaves, India Abroad (Aug. 11, 1995)). 48 49 47 Indias Maharashtra Govt Files Writ Vs Enrons Dabhol, Dow Jones News Service (Sept. 7, 1995). Indian State Sues to Void Enron Pact, Alleging Fraud, Wall Street Journal (Sept. 8, 1995); Indias Maharashtra Govt Files Writ Vs Enrons Dabhol, Dow Jones News Service (Sept. 7, 1995); Previous Adjudication May Strengthen Enrons Case in Dispute with India, Global Power Report (Nov. 9, 2001). Power Politics: Enrons Plant in India Was Dead; This Month, It Will Go On, Wall Street Journal (Feb. 5, 1999); Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (C), 1 (1996). Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (C), 1 (1996). 52 51 50 Id. at 3. See India: Supreme Court Not to Go into Enron Project Validity, Hindu (May 3, 1997). 53 54 Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (C), 2-3 (1996); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 29-31 (January 1999). 10 agreement, the state was bound only to the Phase I portion).55 As the Maharashtra State Electricity Board was still committed to buying 90% of the plants output and covering the risk of currency fluctuations, the expansion increased the financial risk to the state under the revised agreement.56 In addition, while the state announced that Enron had reduced the capital costs of the project, critics charged that the reductions were largely the products of external factors, not accommodations by Enron.57 A recent press account described Indian suspicion over the dramatic reversal: [Enrons recent] problems seemed to lend credence to long-standing claims in India that the company bulldozed and bamboozled a newly elected state government into approving a power project it had campaigned to stop. In 1995 the newly installed state government of Maharashtra approved in 12 days the building of a plant three times larger than the original project, which had taken nine months to negotiate.58 C. Local Opposition and Human Rights Violations The local communities and other Indian interest groups strongly opposed the Dabhol project throughout its development. The communities had many of the same concerns outlined above regarding the lack of transparency in the development process and the cost of the power.59 In addition, the project was projected to displace 2,000 people and land was seized without notification or compensation.60 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.61 According to a comprehensive report issued by Human Rights Watch in 1999, the local communities in fact suffered from sharply reduced quantities of fresh water available for consumption and Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 3031 (January 1999). Phase II may have been subsequently expanded, as recent reports describe Phase II as 1,444 megawatts. India: Update 1 Sale of Enrons India Plant to Begin Next Week, Reuters English News Service (Jan. 26, 2002). See Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (C), 2 (1996). 57 58 59 56 55 Id. Bidding Set for Enrons India Project, Reuters (Jan. 21, 2002). Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 3342 (January 1999). 60 61 Id. at 39-44. Id. at 44-48. 11 agriculture.62 Acting on these concerns, leading Indian environmental activists and representatives of villagers organizations in the area organized to oppose the project through largely nonviolent protests.63 They were countered aggressively by government security forces that were paid for by the Dabhol Power Company, the operating entity for the project, which was majority owned by Enron.64 The Human Rights Watch report details what it termed a pattern of serious human rights violations that the project provoked.65 Police beat and jailed human rights and environmental workers deemed to have instigated largely nonviolent protests against the project, tear-gassed demonstrators, and threw suspected protestors into preventive detention.66 Human Rights Watch found that Dabhol Power Company employs security forces who routinely beat and harass people demonstrating peacefully against the power plant.67 Enron denied any role in the arrests or beatings in India, but the Human Rights Watch investigation countered the Enron claims: The Dabhol Power Corporation and its parent company, Enron, are complicit in these human rights violations. Enron's local entity, the Dabhol Power Corporation, benefitted directly from an official policy of suppressing dissent through misuse of the law, harassment of anti-Enron protest leaders and prominent environmental activists, and police practices ranging from arbitrary to brutal.68 Additionally, the Human Rights Watch report found categorical evidence that Enron was paying the government directly specifically to police the protests, and that it was also lending the police its helicopters.69 62 63 64 65 66 67 68 Id. Id. at 2-3. Id. Id. at 2. Id. at 2-3, 58-99. Hell's Wells, Australian Financial Review (Feb. 10, 2001).

Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 3, 104-111 (January 1999). 69 Id. at 106-109; Hell's Wells, Australian Financial Review (Feb. 10, 2001). 12 Enron denied this report as well, so Amnesty International investigated. Amnesty found suppression of local protests and said that people who protested against Enron, however peacefully, were liable to harassment, arbitrary arrest, preventive detention under the ordinary criminal law and ill-treatment.70 D. Dispute Over the Cost of Power As it turns out, the critics predictions were correct, and the price of the power from Dabhol is far beyond what consumers in the area will pay or the state can afford. The financial problems began to appear in the winter of 2000. Phase I of the project runs on naptha (a derivative of crude petroleum), but oil prices have apparently been higher than projected, and demand has been substantially lower.71 In addition, the deal was structured to peg the costs of power to the dollar, so the state bore the risk of currency fluctuations.72 The state was contracted to buy the full output of the plant, but was purchasing only 10%-20% of the plants output from Phase I.73 The state was obligated nonetheless to pay the plants full fixed costs, which furthe r increased the rates.74 In 2001, power from Dabhol was four times more expensive than that from domestic power producers.75 The payments due for the power from Dabhol alone would be more than Maharashtras entire budget for primary and secondary education.76 These financial problems were expected to dramatically worsen after Phase II came on line, as it would add an additional 1,444 megawatts of power and the entire project would be converted to run off imported liquid natural gas, which is a relatively expensive fuel.77 The state of Maharashtra stopped paying for Dabhol as of its $22 million December 2000 70 71 72 Hell's Wells, Australian Financial Review (Feb. 10, 2001). Bidding Set for Enrons India Project, Reuters (Jan. 21, 2002). Money, Energy Politics and Enrons Costly Misadventure, New York Times (Feb. 3, 2002); Bidding Set for Enrons India Project, Reuters (Jan. 21, 2002). High -Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001). 74 75 76 73 Id. Enron Issues Veiled Sanctions Threat to India, Financial Times (Aug. 24, 2001). High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001). 77 See id.

13 bill.78 The state subsequently sought to cancel the power purchase agreement.79 Enron began arbitration proceedings in April 2001, ceased operation of the Phase I portion of the plant in May 2001, and halted construction on the 90% completed Phase II portion of the plant (1,444 megawatts) in June 2001.80 Enron claims that the state owes it $64 million in unpaid bills.81 VI. ENRONS POSITION AFTER PLANT CLOSURE The state has urged Enron to renegotiate the contracts at lower prices, but Enron has refused.82 Enron sought to sell its 65% stake in the project for $2.3 billion.83 In a September 14, 2001, letter to Indian Prime Minister Atal Bihari Vajpayee, Ken Lay stated that Enron wanted $1.2 billion for the cost of the companys investment and $1.1 billion for the purchase of offshore lenders debt.84 Mr. Lay argued that the $2.3 billion total strikes me as exceptionally reasonable when compared to the size of our legal claim, which Enron estimated at $4 billion to $5 billion.85 In a press interview in August 2001, Mr. Lay warned that if Enron did not recoup at least its full costs in building the plant (reported in that article to be $1 billion), India could be subject to U.S. sanctions.86 VII. U.S. GOVERNMENT EFFORTS TO HELP ENRON ON DABHOL See id. (stating that the state of Maharashtra has stopped paying its bills for Dabhol and the December payment for $22 million is now more than a month overdue, not to mention the January bill). But see Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002) (stating that the state electricity board stopped paying its Dabhol bills in May 2001). Enron Rocks Indias Flagship Investors, Financial Times (May 29, 2001); Indian Govt Admits to Mistake in Agreeing to Enrons Tariff, Asia Pulse (Jan. 28, 2002); Dabhol Power Company: Will there Ever Be Light?, Press Trust of India Limited (Dec. 25, 2001). Enron Rocks Indias Flagship Investors, Financial Times (May 29, 2001); Indian Govt Admits to Mistake in Agreeing to Enrons Tariff, Asia Pulse (Jan. 28, 2002); Dabhol Power Company: Will there Ever Be Light?, Press Trust of India Limited (Dec. 25, 2001). 81 80 79 78 Cheneys Role Draws Scrutiny, Los Angeles Times (Jan. 19, 2002). Enron Rocks Indias Flagship Investors, Financial Times (May 29, 2001) . 82 White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002). 84 85 86 83 Id. Id. Enron Issues Veiled Sanction Threat to India, Financial Times (Aug. 24, 2001). 14

From the inception of the Dabhol project, Enron successfully enlisted the U.S. government in its support. The Export-Import Bank and the Overseas Private Investment Corporation (OPIC) were critical sources of funding and loan guarantees. Secretaries of State, Treasury, and Energy all supported the project, particularly during Enrons disputes with the Indian government in 1995 and 2001. Most recently, numerous Bush administration officials, including the Vice President himself, have intervened on Enrons behalf. There is even a provision that wo uld help Enron regarding Dabhol in the White House energy plan for the nation. A. Support During the Clinton Administration After the World Bank declined to fund the Dabhol project, U.S. government entities provided key funding for the project.87 OPIC ultimately supplied Dabhol with a total of $160 million in loan guarantees and $200 million in risk insurance.88 The ExportImport Bank provided a roughly $300 million loan in late 1994.89 (Of this, $202 million is outstanding, but four Indian banks have guaranteed the loan, eliminating any risk to U.S. taxpayers, according to an Export-Import Bank spokesperson.90) In addition, numerous Clinton Administration officials supported the project. For example, Commerce Secretary Brown wrote to Indias minister of Commerce before a January 1995 trip to India, asking the minister to facilitate financial closing of the Dabhol project in time to be celebrated during my visit.91 Once in India, and accompanied by Ken Lay, Secretary Brown oversaw the signature of loan agreements by Dabhol Power Company with U.S. ExportImport Bank and OPIC.92 In visits to India, Treasury Secretary Robert E. Rubin and Energy Secretary Hazel OLeary expressed Washingtons concern that India stand by commitments to investors.93 For example, Secretary OLeary warned India that it was hurting its reputation with 87 Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 114 (January 1999). See Enron Project was Raised with India, Houston Chronicle (Jan. 18, 2002); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 114 (January 1999); Financing for Indian Plant Secured, Houston Chronicle (Jan. 17, 1995). See Financing for Indian Plant Secured, Houston Chronicle (Jan. 17, 1995); Enron Seeks U.S. Aid, Miami Herald (Jan. 19, 2002) (sources provide varying exact dollar estimates). 90 91 89 88 Id. Id.; see also Brown in India Unveils Alliance for Business, Asian Wall Street Journal (Jan. 17, 1995). Brown in India Unveils Alliance for Business, Asian Wall Street Journal (Jan. 17, 1995); Financing for Indian Plant Secured, Houston Chronicle (Jan. 17, 1995). See also Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002). 93 92 Indias Dabhol/Fight - 2: In Some Areas Reform Seen Rapid, Dow Jones International News (Apr. 26,

1995). 15 foreign investors.94 After the project was cancelled, in late 1995 and 1996, Mack McLarty, a White House counselor, closely monitored the Dabhol project with the U.S. ambassador to India, keeping Ken Lay informed of the administrations efforts.95 In addition, according to press reports, President Clintons ambassador to India, Frank Wisner, was among the plants most influential advocates.96 Mr. Wisner joined the board of an Enron-controlled company after he left the Foreign Service in 1997.97 B. Support During the Bush Administration The Bush Administration intensified U.S. government efforts on behalf of Dabhol as the project ran into trouble again in early 2001. As one commentator observed: But there was something quite specific that Mr. Bushs top aides did to help Enron last year before the hollowness of the company became clear: they lobbied to avert the shutdown of a $2.9 billion power plant in India built by Enron and two other American partners.98 Numerous high level officials, including Vice President Cheney, encouraged the Indian government to resolve the dispute. On April 6, 2001, Secretary of State Colin Powell raised Enrons problems regarding Dabhol in a discussion with Indias foreign minister.99 Secretary Powell said that such intervention was not inappropriate.100 Vice President Cheney raised the issue of Dabhol in a meeting with Sonia Gandhi, the Enron: The Fallout: Enron Political Allies Saw to Indian Affairs, Asian Wall Street Journal (Jan. 22, 2002). But see Enron Episode Wont Affect Other Deals: OLeary Murali Ranganathan, News-India Times (Aug. 25, 1995) (Energy Secretary Hazel OLeary said last week that the cancellation of the Enron power project in Dabhol, Maharashtra, will not jeopardize other private power projects currently being pursued by the U.S. companies in India). 95 96 94 The White House; That Invisible Mack Sure Can Leave His Mark, Time (Sept. 1, 1997). White House Aided Enron in Dispute, Washington Post (Jan. 19, 2002). Id. Money, Energy Politics and Enrons Costly Misadventure, New York Times (Feb. 3, 2002). 97 98 99 Enron Probes Alleged Shredding Document Destruction Reportedly Continued To at Least Start of Jan., Boston Globe (Jan. 22, 2002). Anderson CEO Points a Finger at Enron Model; Company Policies Labeled a Failure, Houston Chronicle (Jan. 21, 2002). 100 16 president of Indias opposition Congress Party, on June 27, 2001.101 In a June 28, 2001, e-mail, a National Security Council aide wrote: Good news is that the veep mentioned Enron in his meeting with Sonia Gandhi yesterday.102 According

to press accounts, the National Security Council led a Dabhol working group with Administration officials from various agencies, including Treasury, State, the ExportImport Bank, and OPIC, to try to resolve Enrons problems with the project.103 E mails sent from June 2001 through November 2001 from the National Security Council and OPIC discuss the Administrations efforts on Dabhol over that timeframe.104 In July 2001, an assistant secretary of State, Christina B. Rocca, met with Indian officials on the Dabhol issue.105 In discussing investment in India with an Indian industry group, she stated many of Indias problems in this regard can be summed up in the five-letter word, Enron.106 The Administrations efforts continued into the fall of 2001. In October, the Undersecretary of State for Economic, Business and Agricultural Affairs, Alan Larson, raised the Dabhol issue with the Indian foreign minister and the Indian national security advisor.107 On November 6, 2001, in a message to a top aide to the Indian Prime Minister, the President of OPIC, Peter Watson, emphasized how important this issue was to the U.S. government: The acute lack of progress in this matter has forced Dabhol to rise to the highest levels of the United States government.108 He continued: I ask that you give this matter serious and immediate White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002); Veep Tried to Aid Enron: Key Role in India Debt Row, New York Daily News (Jan. 18, 2002); Money, Energy Politics and Enrons Costly Misadventure, New York Times (Feb. 3, 2002). 102 103 101 Veep Tried to Aid Enron: Key Role in India Debt Row, New York Daily News (Jan. 18, 2002). White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002); Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002). Chronology of Administration Dealings with Enrons Dabhol Power Plant in India, Washington Post (Jan. 22, 2002). 105 106 104 Id. Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002). Chronology of Administration Dealings with Enrons Dabhol Power Plant in India, Washington Post (Jan. 22, 2002). White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002). 108 107 17

attention.109 Administration officials warned India that President Bush would raise the issue of Dabhol with Indian Prime Minister Vajpayee when they met in November 2001, and talking points were prepared for President Bush to discuss the issue in a meeting with Mr. Vajpayee on November 9, 2001.110 However, an e-mail sent the day before the meeting, on November 8, warned that President Bush can not talk about Dabhol.111 That same day, Enron had disclosed a stunnin g $586 million in previously unreported losses.112 Since Enrons collapse, the Administration has continued to pursue the issue, but more quietly. U.S. Ambassador Robert Blackwill recently warned an Indian business audience about the effects of the dispute.113 He stated: I hear a frequent buzz from the United States that the sanctity of the contract may now be in doubt here, a concern that can spell death for potential investments.114 C. The White House Energy Plan In addition to lobbying Indian officials, the Bush Administration also included a provision in the White House energy plan that would benefit Enron on Dabhol. The final White House energy plan specifically recommends that the President direct the Secretaries of State and Energy to work with Indias Ministry of Petroleum and Natural Gas to help India maximize its domestic oil and gas production.115 The energy plan does not discuss this recommendation or explain why maximizing oil and gas production in India should be a U.S. national energy priority, but one of its primary effects is to benefit Enron.116 Dabhol was widely viewed as the cornerstone project for foreign 109 110 Id. Enrons Overseas Reach Fell Shy of Goals: Firm Rode U.S. Policy, Washington Ties to Lofty but Failed Ventures, Dallas Morning News (Feb. 2, 2002); White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002). White House Aided Enron in Dispute: Cheney, Others Intervened Over Indian Power Plant, Washington Post (Jan. 19, 2002). 112 113 111 Id. Enrons Overseas Reach Fell Shy of Goals: Firm Rode U.S. Policy, Washington Ties to Lofty but Failed Ventures, Dallas Morning News (Feb. 2, 2002). 114 115 Id. (quote dated Jan. 28, 2002). National Energy Policy Development Group, National Energy Policy, 8-20 (May 2001). See Enrons One Good Return: Political Investments, Wall Street Journal (Jan. 31, 2002). 116 18 investment in energy projects in India.117 It was also the single largest foreign investment in India, representing over 10% of the total direct foreign investment in India since 1992.118 The conflict over Dabhol was broadly viewed as chilling foreign investment in Indias energy sector.119 As a result, resolution of Enrons Dabhol problem was a precondition to collaboration between the United States and Indian

governments to promote Indias natural gas and oil production.120 In addition, Enron had further ambitions in Indias power sector. Enron saw its liquid natural gas imports facility at Dabhol as the hub of a future Enron gas network in India.121 As the chief executive of Enron International, Joseph Sutton, stated in 1999: The power plant is important, . . . [b]ut our vision all along is to bring gas to India.122 It appears that this recommendation on India was added to the White House energy plan late in the process. As of March 30, 2001, the State Department drafters had not included anything about India in the White House energy plan.123 This recommendation was inserted after the draft came under White House control, during a period in which the White House task force See, e.g., India Okays First Private Power Unit: A 1,920-MW Venture by Bechtel/Enron/GE, Independent Power Report (Jan. 15, 1993) (The approval is considered a landmark in Indias efforts to attract foreign investors). High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001); Enron Power Station to Begin Commercial Operations, Agence France-Presse (May 11, 1999). See Enron Rocks Indias Flagship Investors, Financial Times (May 29, 2001) (quoting a senior executive discussing the hurdle rate of return for investment in India, which is the minimum rate of return on equity in dollars: If this Enron thing works out badly, the senior executive said, the hurdle rate is going to be infinity); High-Stakes Showdown; Enrons Fight Over Power Plant Reverberates Beyond India, New York Times (Mar. 20, 2001) (The worry that Dabhol could chill foreign investment is serious for India); NSC Aided Enron's Efforts: Agency Sought Lay Meeting with Indians on Plant, Washington Post (Jan. 25, 2002) (In a meeting with the Indian government on April 6, Secretary of State Colin Powell told his Indian counterpart that failure to resolve the matter could have a serious deterrent effect on other investors); Accounting for Enron: U.S. Fought for Companys Project in India, Wall Street Journal (Jan. 21, 2002) (quoting Bush Administration Ambassador to India, Robert D. Blackwell as stating, I want to be frank. . . . These disputes have darkened Indias investment climate). See also quote from Christina B. Rocca, assistant secretary of State, supra note 106 and accompanying text. 120 121 119 118 117 Enrons One Good Return: Political Investments, Wall Street Journal (Jan. 31, 2002). Power Politics: Enrons Plant in India Was Dead; This Month, It Will Go On, Wall Street Journal (Feb. 5, 1999). 122 123 Id. Enrons One Good Return: Political Investments, Wall Street Journal (Jan. 31, 2002).

Stakeholders: Identify all the major stakeholders in the DABHOL power project. What are the intended benefits and costs of this project for the stake holders? Analyze the roles, responsibilities and reward structure of the stake holders. Based on the case study do you foresee a need to change the reward structure? Enron, Bechtel Enterprises, and General Electricthrough offshore subsidiaries formed Dabhol Power Company to build the first phase of a major power plant in Maharastra state in India. Later, part of the equity was sold to the Maharastra State Electricity Board. Enron is also a stakeholder as fuel supplier and as the operator of the plant. Bechtels construction arm has engineering, procurement, and construction stakes; General Electric is a major equipment supplier; and the Maharastra State Electricity Board is the electricity purchaser. There are also other major sponsors of IPPs, such as AES Corporation, whose sole business is developing, owning, and operating electric power facilities. Moreover, the Asian DevelopIn Indias Dabhol project, for example, the owners are Enron, Bechtel, and GE Capital. Shareholding Pattern [pic] Investment by Stake Holders ||| |Foreign lenders (ABN AMRO, Standard Chartered, BNP Paribas, Calyon, CSFB, etc.) |USD 325 million | |Domestic lenders (the largest being IDBI, ICICI, SBI, Canara Bank and IFCI) |Rs. 62 billion | |Export Credit Agencies (JBIC, US EXIM, Belgium OND) |USD 480 million | |Overseas Private Investment Company (OPIC), USA |USD 250 million | Counter guarantee by Govt. of INDIA Ownership stake |Stake Holder |% stake | |Enron (indirectly through a series of shell companies) |65% | |GE (indirectly through a series of shell companies) |10% | |Bechtel (indirectly through a series of shell companies) |10% | |Maharashtra State Electricity Board (MSEB) |15% | Responsibilities & Rewards Enron Phase 1

Construction of a 695MW gas-fired power station to generate electricity constantly at Dabhol, Guhagar taluka, Ratnagiri district, Maharashtra scheduled to commence production in December 1997. Capital cost- $920 million. Phase 2 Expand the capacity of the plant to 2015MW and involved in the construction of a 1320MW gas-fired plant, re-gasification facility, and an LG carrier as well as corresponding port facilities including a fuel jetty, navigation channel, and breakwater. It was scheduled for commissioning at the end of 2001. Switch the entire plant to LNG for fuel upon the completion of Phase II. Capital Cost - $1.9 billion Renegotiated deal Enron cut the price of the power by over 20 percent, cut total capital costs to $2.5 billion and increased output to 2184MW. Enron suggested switching from distillate fuel to naphtha or LNG from domestic suppliers. Devolving of the re-gasification plant into a separate venture. Enron offered MSEB a 30% share in DPC. This would reduce the projects annual cash outflow by US$ 150-170 million. Annual return promised to investors in the Qatar facility was 15%. Power purchase agreement assured DPC of an internal rate of return of 16% which as per industry observers was calculated as DPCs real post-tax interest rate of return to be between 26% and 32%. MSEB Take-or-pay contract MSEB to buy a minimum amount of electricity at a plant load factor of 90% as per 20yr contract irrespective of amount of energy used. MSEB to bear any increase in fuel price. MSEB to pay DPC $ 220 million per year. MSEB was required to build transmission lines from the power station to its power grid. MSEB to receive 30% profits of DPC annually.

State Government Guarantee from the state government in the form of Letter of credit for credit support also waived sovereign immunity. Main recipient of electricity due to the paucity of energy in the state. Provide land for construction of the power station, power, communications, water, and approach roads during construction. Central Government Central government provided counter-indemnities. Escrow account over some of MSEB payments. Oman Gas Company Entered into a contract with the DPC to supply gas. Business Plan viability and Execution: Identify and discuss the original business plan of this project. Given the data of this case, was the DABHOL power project a feasible and worthwhile business proposition? In view of the business plan, critically comment on the project execution strategy. Dabhol Power Company was a unlimited liability special purpose company (SPC) incorporated to execute the project. The power project at Dabhol was one of the eight fast track power projects identified by GOI post the liberalization of the Indian economy. An MOU was signed between Enron and Maharashtra Govt in June 1992 which marked the beginning of the project. Salient Features of the project were as follows | |Phase 1 |Phase 2 | |Capacity |740 MW |2015MW | |Cost |USD 920 M |USD 1.9 B | |Fuel |Naphtha |LNG (Sourced from Qatar) | |Planned Completion |Dec-97 |End of 2001 | Right from the inception the project was criticized by masses and viewed to be highly in favour of Enron (Majority stake holder in DPC). Even the World Bank turned down Maharashtra govts loan application terming the project as not economically viable. Some of the critical objections were as follows

1. The govt hurried in closing and the deal, and no other vendors were considered. 2. No EIA was carried out. 3. The project would produce too much power as compared to the state demands. And given the poor transmission system between the regional grids this would imply much higher costs for the govt. 4. The MOU required the state to pay DPC at 90% load factor irrespective of the demand; this was highly in favour of DPC and virtually assured the company of zero business risk. 5. As per the MOU, the govt had agreed to pay DPC as per base load independent of the actual demand. This was heavily criticized as the state faced shortage of power only during peak hours. 6. The structure of payments did not confirm to earlier guidelines issued by the central govt. 7. Naphtha wasnt a cheaper source of power as compared to the orthodox sources like fuel. 8. Sufficient audit measures were not assured, to regulate the cost of power. 1. MSEB had guaranteed a minimum fuel purchase from the supplier (Enron had heavy investment in the company) but the supplier wasnt bound to provide a minimum quantity of fuel; In addition to it, MSEB had agreed to bear any further increase in the fuel price! 2. All currency risk was taken by MSEB and not by DPC. All these guaranteed an extraordinary IRR of 26 to 32% (post tax) to DPC. Project Financing: Identify the possible sources of financing for a major infrastructure power project of this nature? Critically examine the financing options used by the DABHOL power project. What was the impact of the financing decision for the overall risk and success of this project? Explain, with rationale, what should have been done differently to finance this project? The possible sources of financing for a major infrastructure project of this nature are: Combination of debt and equity: Debt could be raised through a syndicate loan or loans from commercial banks and financial institutions. Equity could be pooled in by the promoters/sponsors 1. Securitization of the receivables i.e. in this case, the proceeds from running the power plant

2. Subordinated debt or mezzanine debt (multi-tranched) 3. External commercial borrowings 4. Equity financing using QIBs, strategic investors, or private placements 5. Bridge financing for short term requirements Dabhol Power Project used the following financing structure for the 2 phases: |Phase I |$ mn | |Phase II |$ mn | |Equity |276 | |Equity |414 | |Debt | | |Debt | | |Syndicate Loan (BankAm-ABN Amro Led) |150 | |Syndicate Loan - IDBI Led |333 | |US Exim |298 | |Syndicate Loan - Domestic & Offshore lenders |497 | |OPIC |100 | |OPIC |60 | |IDBI |98 | |Jexim |258 | |Debt/Equity Ratio |2.34 | |Commercial Banks |175 | | | | |US Exim |90.8 | | | | |Debt/Equity Ratio |1.75 | As is evident, Dabhol Power Company raised a large amount of debt to finance the project and a large portion of it was also from the export credit corporations. Phase I had a D/E ratio of 2.34, while Phase II had a D/E ratio of 1.75. DPC depended solely on MSEB as a consumer. If MSEB were to default on its payment, it would struggle to pay back its debt obligations. On the other hand, given the excruciating clauses in the PPA, it was very likely that MSEB would not be able to purchase power from the Dabhol Power Plant and sell it profitably. It would have to incur a loss and have the state & if required central governments provide cover. The alternative that Dabhol Power Company could have taken in terms of financing the project was to raise more equity from the sponsors or through the market (though this might have been relatively difficult given the long incubation period typical of these projects). They could also have opted for the securitization route. This was, the interest expenditure on debt would have been manageable. Also, based on the revised terms, MSEB received a 30% stake in the company. The equity stake was a double-edged sword. While on the one hand, it gave MSEB an opportunity to partake in the profits; on the other hand, it also made it difficult for MSEB to negotiate, since it was the sole customer too implying a conflict of interest. Lessons Learnt and exit strategy: What are the crucial lessons of the DABHOL power project for other strategic initiatives in India? How do you address the risk inherent in such enormous global projects? How do you immunize against such risks? What other strategic, financial and regulatory initiatives would you recommend for such projects to succeed? Lessons

The Enron Dabhol project has offered many lessons for any future strategic initiatives in India and it is imperative that the mistakes made in the DPC agreement must not be repeated. In order to avoid such situations from arising in the future, it is crucial to learn lessons from the shortcomings of the agreement. This will protect future stakeholders and provide benchmarks to examine other future agreements. 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. It also clearly reveals the extent of Government and investor indifference to consumer interests. Risks There is a high risk inherent in such enormous global projects. It could vary from political and economic risk to country and lending risks. Some of the risks involved would be: 1. Industry cycle and the prospects of growth of the industry over a longer period 2. Competitive positioning that would determine the market share, substitutes, variable costs of production etc 3. Regulation that would impact quickness and smoothness of decisions and actions and transparency in the process 4. Tariff structure and Government support

5. Repayment risk 6. Currency risk To generalize, it can be said that the large-scale projects require massive capital investment with long completion times, and they carry political, economic, legal, regulatory and financial risk. A key issue becomes how to attract private investors willing to participate in projects given their complex and risky nature. Cases of corruption and political and economic risk in the developing country make investors hesitate. To mitigate these risks and fears, the Government must ensure that a clear investment policy, structured process flow, transparent mechanism is established which makes the investment environment conducive. Tools of project financing must be appropriately employed. In addition, keeping in mind the learning from the past can go a long way on making the project successful. Recommendations The following recommendations will help future agreements to avoid the difficulties that have arisen in the Dabhol case: 1. 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. 2. Transparency is the key to the successful implementation of any agreement. 3. Negotiating with investors is a task that needs an expert panel that can professionally handle a given situation and can ensure stakeholder representation 4. Investors have a legitimate right to maximize their gains. 5. Government must recognize that the best incentive to investors is credible policy and a transparent investment environment, not the unsustainable artificial incentives. 6. While protecting the interests of the electorate should be the governments top priority, the consumers must not take it for granted that the Government will protect their interests. 7. Consumers need to become more organized and vocal and push for a greater role in policy decisions. 8. Investors must understand that unrealistic commercial agreements result in enhanced risks and are likely to fail. 9. Investors must understand and accept the commercial risks of the investments accompanied by high rates of return.

Problem: What can Enron do to salvage the Dabhol project and its ties to India? After nine years of an obvious debacle, it seems that Enron and the Indian government have reached a state of impasse, where a sustainable long term relationship cannot be achieved. Enron has chosen to terminate the agreement by offering to the Indian Prime Minister Enron's 65% equity in DPC for US$1.2 billion and offshore debt for US$1.1 billion. o Various political parties have consistently used Enron as an issue to gain the masses' approval and thus political power. Given the size and the "foreign" nature of the investment, Enron will constantly stir political unrest unless it gives in to the terms of the party in power. o Difficulty in predicting and understanding local political conditions and coping with the constant threat of forced re-negotiation o The agreement (PPA) was flawed from the beginning and unless the company sees the error of its ways, reviews from the World Bank and other committees would always reflect that there was a one-sided deal and would lead to a protracted debate of who owes who. o MSEB's capacity to pay DPC in the next few months is seriously doubtful. Though the Indian government has a guarantee, paying DPC will likely bankrupt MSEB and will lead to a threatening major dispute between MSEB and DPC. If Enron had wanted to cut its losses, it should have let the project end in Phase 1. It need not have negotiated for Phase 2 financing after barely getting Phase 1 operational. Recommendations: To be able to salvage its stake in DPC, it must re-negotiate the PPA with a reasonable tariff and terms that would pass the scrutiny of a neutral third party, e.g., the World Bank. Given the fact that MSEB could not absorb all the electricity generated by DPC, Enron should find a secondary market where the excess power can be sold to, or scale down its projected operation. Without these concessions, the benefits of an increased and continuous electricity supply cannot be realized in India, and the re-negotiation will still not be successful as DPC is trying to sell MSEB what it does not need. At this point, while Enron is still in a strong legal position to demand payment from the Indian government, it should be the one to spearhead the re-negotiation. It seems that the Indian government, with the Godbole committee report at the height of the cooling period, is bent on finding a more favourable position by re-evaluating the flaws in the PPA. In the end, Enron may well be the losing party if the Dabhol plant remains non-operational. With the Indian government knee high in debt, it will be a great challenge to get payments even if these were contractually committed. To improve its chances of staying in DPC and in India as well, Enron should get a local partner who could help re-negotiate with the government by selling a part of its stake in the Dabhol project. From the beginning, while Enron refused a local partner and chose to directly deal with each level of government, it tried to maintain a neutral and distant position. However, with the deeply political agenda of parties criticizing the project, Dabhol may have been spared by not being viewed as a "purely foreign investment". A reputable local partner (e.g., Tata group) appeals to the Indian people's principle of swadeshi, of being able to patronize in part, an Indian-generated electricity supply. The local partner, upon negotiation, may take care of local factors like asking the government to try to remember its objectives in entering into foreign fast-track projects (Dabhol), and to re-evaluate them critically. This is also a good time to raise the appropriate rate of return given that Enron has a large capital intensive project coupled with an uncertain political environment. Although the DPC project is becoming less and less profitable, saving it will allow Enron to pursue more smoothly its other interests in India, including its pipeline project with the Gas Authority of India. It is not only money at stake but Enron's reputation for its capability and character to do business globally.

Features of PPP model in rail project & Issues in Dabhol Power Project By Sakthivel Balakrishnan Features of PPP Model in Rail Project: Key drivers for PPP model in Infrastructure: Increase investment and operational efficiencies in the provision of infrastructure services; maximizing revenue being an important secondary objective Incentives structure to provide more efficient services is more robust for the private sector Furthers the objective of efficiency through competition for the market Substantial reduction in O&M costs and higher efficiency in railway projects Increased viability due to spreading & sharing business risks Shortage of Funds/Need for Private Capital Proper Sharing of Risk Maximum Asset Utilization Innovation may happen Applicable Laws: RAILWAYS ACT, 1989 & RAILWAY BOARD ACT, 1905 Allows private railways Systems. Railway Board Establishment INDUSTRIAL POLICY RESOLUTION, 1991 Train Operation Can Only Be Done By The Public Sector, While All Other Activities Of Design, Construction, Financing, and maintenance Can Be Undertaken Through Private Participation PPP models in fixed rail infrastructure: BUILD/OPERATE/ TRANSFER (BOT) (Annuity) Ownership of assets continues with Private developer. MOR awards a concession of 12 years, during which Private developer gets annuity twice a year. After termination, assets transferred to concerned Zonal Railways. BUILD OWN OPERATE New line and gauge conversion projects. Operation in most cases is undertaken by IR under a contract as is the case with maintenance of gauge conversion projects PRIVATE RAILWAYS Private participation in design, construction, financing, maintenance and operation of rail services under contract or concession arrangement ROLLING STOCK MANUFACTURING JV New coach & other stock/parts factories and loco manufacturing units in Joint Venture with Private Sector Challenges in PPP model implementation: Need for a focussed policy & approach for implementation of PPP models in development of Railways infrastructure Political risk Land acquisition Avoid creation of private monopolies as an alternative to public monopolies Ensuring private sector participation in Formulation of policy & regulations Focusing primarily of quality and return to government vs. Increased cost/concession due to reduced competition

Issues in Dabhol Power Project: Right to Information: The Enron Power Project has totally ignored the right of the people to know The Enron Power Project at Dabhol, Maharashtra, is a good example of how withholding information regarding public authorities from the people can cause great prejudice to public interest and allow corruption to thrive. High Capital Cost due to lack of competitive bidding: The capital costs of Enron Power Project (as per their PPAs) were much higher than those known to be incurred both abroad and in India where international competitive bidding did not take place. The deal was negotiated exclusively between the Maharashtra government and Enron. The project costs and power tariffs were higher than other power projects in India, and the cost of electricity from the DPC project would significantly inflate prices in other areas. The cost of power from this Project would be Rs.2.40 per unit based on a Dollar rate of Rs.30 which rate would increase with the increase in the price of Dollar since the price of electricity from this Project was largely denominated in Dollar. Delays in Project Completion: For several reasons, for example, high costs, environmental impacts, and perception of financial irregularities, there have been protests against the power plant. Litigation, as also renegotiation of Power Purchase Agreements (PPAs) have caused long delays in project completion, so that construction has not been completed as scheduled. Unacceptable PPA terms - not viable for the SEBs: The MSEB promised to buy all the high-priced power produced by Enron, whether there was demand or not, and even if cheaper power were available from its own generating plants. These contracted annual payments to Enron would amount to half of Maharashtra's entire budget expenditure. The DPC was assured a post tax return of 16 percent on capital investment, and there was no limit on the capital expenditure Enron could make. Indian economists calculated that the after-tax rate of return would actually be 32 percent, about three times the average rate in the US. There were counter guarantees from the state and central governments for payments which would have been due to DPC from the MSEB. However, the contract shields Enron from Indian jurisdiction as all disputes must be settled under English law in England. An assurance was given that the project would not be nationalized. The project authorities carried out no environmental impact assessment. The power purchase agreement between the DPC and MSEB was initially kept secret from the public. High returns sought by Equity Investors: Risk of cost overrun while construction is borne by EPC contracts and also that of plant underperformance. Risk while operating and maintenance is borne by O&M contractors. Hence the premium of 8 to 12 percent which is being paid to equity holders is apparently unjustified as equity holders and debt holders bear the same risk. Therefore the argument that equity investors require the high return in developing countries because of higher risk faced doesnt work. High returns sought by equity investors leads to high risk.

Politics, Institutions, and Project Finance: The Dabhol Power Project. Risk Breakdown Structure Prepare a risk Breakdown Structure assessing the main categories of risks. The risk breakdown structure is a hierarchical framework presenting possible sources of risk, used to structure risk identification and qualitative assessment. [ (Simon, 2007) ] Risk Categories are a common listing of sources of risk. Depending on the size of the project, one might employ a Risk Breakdown Structure (RBS). The main categories of risks assessed for the Dabhol Power Project are: technical, management, commercial and external risks. Risk Breakdown Structure (Simon, 2007) Prioritizing Risks From this RBS, develop a prioritized list of the top three (3) risks (potentially most critical). There are several quantitative techniques exist. The sensitivity analysis, decision tree analysis and the simulation techniques are a few means prioritizing risks. The first step is to determine the probability and impact of the risks. Qualitative and quantitative risk analysis are means to rate the risks. Qualitative risk analysis is a process that determines what impact the identified risks will have on the project and the probability that they will occur. Rank orders risks in priority order according to their effect on the project objectives. (Kim Heldman, 2005) The Probability scales are created by using high for critical risk, medium for significant risks and low for negligible risks. For example, high score on the probability or impact scale would be considered critical. This means the risk will occur frequently, has occurred on past project, and conditions exist for it to recur. (Kim Heldman, 2005) The Monte Carlo analysis is the most common simulation technique and requires the use of a computer and software written for this purpose. Monte Carlo looks at schedule and cost risks individually and from the perspective of the whole project. (Kim Heldman, 2005) Prioritizing the top three risks for this project are: technical, management and commercial risks. Nature of Risk Describe the nature of each risk, why the risk is significant to project success and assess the factors that are causing the risk. The three main risks in the Daghol Power Project are technical, management and commercial risks. (1) Technical risk is associated directly with the knowledge base being employed and its technical aspects including such things as understanding, reproducibility and the like. In this project, Dabhol Power the technical risk is in the planning and the bidding process of the project. (2) Management risk refers to future conditions or circumstances that exist outside of the control of the project team that will have an adverse impact on the project if they occur. Whereas an issue is a current problem that must be dealt with, a risk is a potential future problem that has not yet occurred. [ (TenStep) ] Project management processes, such as risk analysis are critical to project success. Examples like test and acceptance, changes in the middle of the project or additional requirements could cost money are management risks. (3) Commercial risk a company takes by offering credit with no collateral is a common term in the business world. The lack of financial resources from the central government to finance part of the project is a risk factor for success of this project. They dont have the financial experts to evaluate these companies. A reactive project manager addresses issues when they occur. A proactive project manager addresses potential problems before they occur. This is the art of risk management. References Kim Heldman, P. (2005). Project Manager's Spotlight on Risk Management. San Francisco: Jossey-Bass. Simon, D. H. (2007). Practical Project Risk Management; The ATOM Methodology. Vienna: Management Concepts, Inc. TenStep, I. (n.d.). TenStep. Retrieved Nov. 18, 2012, from 7.0 Manage Risk: http://www.tenstep.com/open/7.0Managerisk.htm1

Dabhol Power Company (DPC) was promoted in March 1993 as a 100% 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 taluk, Ratnagiri district, Maharashtra. The plant will operate on distillate fuel oil and/or natural gas. 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 crores (US $ 946.55 million). There is also a plan to expand the generating capacity from 695 MW to 2015 MW at a later stage under Phase II. The project was initiated in response to the Indian governments invitation in May 1992 of foreign investment in the power sector. In June 1992, the Congress government of Maharashtra, lead by Chief Minister Sharad Pawar, signed a Memorandum of Understanding with Enron, Bechtel and GE. DPC was made a subsidiary of Enron in March 1993. The critical Power Purchase Agreement (PPA) between DPC and MSEB was signed on December 12, 1993. The other important agreements were signed in 1994 and early 1995 and work on the project commenced in February 1995. 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. The two parties as a part of their election manifesto were committed to terminating the agreement with Enron. A committee lead by the Deputy-Chief Minister recommended scrapping of the project. Finally, the government scrapped the project on August 3, 1995. Enron subsequently sued the government for damages and simultaneously attempted to renegotiate the project with the government. Background on Power in India There was a realization in the early phase of economic reforms in India that availability of power would become a constraint on industrial and agricultural growth. Bulk of the power, about 72%, comes from thermal sources; 26% from hydro sources with a small 2% nuclear component. Power generating capacity increased at the rate of 8.4% per annum during the eighties but only 5.2% per annum during the period 1990-91 to 1994-95. It is estimated that the rate may fall further to 2-3% during 1995-96 and 1996-97. The corresponding decline in the growth rate of power generation was less

- from 9.1% during the eighties to 7.3% during the 1990-95 period. This is mainly because hydropower generation has been aided by better rainfall and thermal power generation has benefitted from improved plant load factors (PLF) or capacity utilization. Most of the power generating capacity is under government control with only about 4.5% in the private sector. The state governments control about two-thirds of the generating capacity. The central government owns about 30% through the National Thermal Power Corporation (NTPC) and the National Hydroelectric Power Corporation (NHPC). India's constitution includes the power sector in the concurrent list. The responsibility for the development of this sector is vested with both the central and state governments. The Ministry of Power and Non-Conventional Energy sources, comprising of the Department of Power (DOP) and the Department of Non-Conventional Energy Sources, formulates policies regarding the power sector. It is also responsible for the administration of the Indian Electricity Act, 1910 and The Electricity (Supply) Written by Professor Sidharth Sinha, Indian Institute of Management, Ahmedabad for class discussion. This case is based largely on the IDBI Detailed Appraisal Note of the Enron Project and other published sources. Teaching material of the Indian Institute of Management, Ahmedabad, is prepared as a basis for class discussion. Cases are not designed to present illustrations of either correct or incorrect handling of administrative problems. Copyright 1996 by the Indian Institute of Management, Ahmedabad. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 2 Act, 1948 and for undertaking such amendments to these Acts as may be necessary from time to time. The Central Electricity Authority (CEA), constituted under the Electricity (Supply) Act, advises the DOP on technical and economic matters. Besides CEA some important corporations for the transmission and generation of power, e.g., NTPC, NHPC and the Power Grid Corporation (PGC), have been set up in the central sector. The State Electricity Boards (SEBs) are state level authorities who oversee generation, transmission and distribution of power to various consumer segments within their respective states. The operational and financial performance of the SEBs have not been satisfactory and they have accumulated huge losses over the years. The cumulative losses of the SEBs as per the annual accounts for 1992-93, after taking into account Rural Electrification subsidy was Rs.2880 crores. The bulk of the losses were contributed by Bihar and Assam with approximately Rs.1000 crores each. The SEBs of Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra and Tamil Nadu showed cumulative profits. Because of poor financial performance SEBs have not been able to utilize multilateral and bilateral assistance. Only 26% of the total commitments by the World Bank for the State power sector has been utilized. In the private sector Andhra Valley Power, Tata Power and Tata Hydro- all Tata group companies, Ahmedabad Electricity Company and CESC are the power generating companies. They operate as licensees of the SEBs and run their own generation and distribution systems. Besides, there are some large captive power stations linked to local grids which are owned by both public and private sector enterprises. Renusagar Power is a private sector captive power generating plant for the Birla Group Aluminium company HINDALCO. BSES and Surat Electricity are power distribution companies which have a private sector holding. BSES has now entered into power generation also. As per CMIE estimates the average energy shortage in 1993-94 was 7.3%. While shortages in the Northern and North Eastern states were close to the national average, they were much higher in the Southern and Eastern states. In the South the energy shortage was 12.5% while the

peaking shortage was 21.8%. In the East the energy shortage was 32.4%. Only the Western states had a lower than average deficit of only 0.2% with a peaking shortage of 7.6%. It must be noted that the actual shortage based on unrestricted demand would be much higher. Apart from inadequate capacity shortages have been due to a low PLF (Plant Load Factor or capacity utilization) and transmission and distribution losses. The average PLF was 54% in 1990-91 and has increased to 60% during 1994-95. The PLF for central sector plants was higher than average at 70% for 1993-94. The main reasons for the low PLF are erratic supply of the main feedstock-coal; old plant and equipment; and poor maintenance. The average transmission and distribution (T&D) losses are about 22% against an international average of 10%. The much higher T&D losses in India mainly reflects the theft of power. Private Sector Initiative in the Power sector A fresh initiative began in the late eighties to involve the private sector in power generation. The government has formulated a policy to encourage greater participation by privately owned enterprises in electricity generation, supply and distribution. Enterprises can be set up either as licensees or as generating companies and the surplus electricity from the captive power plants can be offered for sale to the SEBs. The government has attempted to attract private power sector participation by implementing reforms in the financial, administrative and legal environment relating to setting up of power projects. The details are given in Appendix 1. As a part of this initiative the government cleared eight foreign projects. Details of these projects are in Appendix 2. Project Promoters This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 3 Dabhol Power Company has been promoted by Enron, GE and Bechtel, all based in the USA. Enron is the holding company for a number of affiliates engaged in the area of oil and natural gas exploration, production, marketing, gas pipeline operation and power plant design, engineering, operation and financing. The main companies of Enron are: Enron Gas Services Development and marketing activities for North America including natural gas and liquids marketing, power services, domestic power development and marketing and producer finance activities. Enron Operations Corporation Operation of all Enron's physical assets, Domestic and International. Enron Oil and Gas Company Domestic and International Exploration and Production Operations. Enron International Inc. Development and marketing activities for international businesses. This includes development of integrated natural gas projects and marketing of natural gas, liquids and electricity. Enron Development Corporation is a part of Enron International responsible for international project development activities. Enron along with its affiliates earned a revenue of US$ 7.972 billion for the year ended December 31, 1993 on which it earned a net profit of US$ 333 million. Details of the power plants where Enron has ownership/operating interests are given in Appendix 3. Bechtel is an engineering and construction company with presence in various industries like oil/gas, power, engineering, construction and financial services. The sales of the group for the year ended December 31, 1992 was US$ 7.8 billion. GE is engaged in the manufacture of aircraft engines, medical and diagnostic equipment/ systems, equipment for electrical generation, transmission and distribution, motors, home appliances etc. It is the largest manufacturer in the world of steam and gas turbines for power generation. For the year ended December 31, 1993 it earned a revenue of US$ 60.562 billion on which it earned a net profit of US$ 4.135 billion.

Ownership Structure The three promoters have set up Mauritius based private unlimited companies Enron Mauritius Company (Enron), Power Enterprises Mauritius Company (Bechtel) and GE Capital India Power Mauritius Limited (GE). The Enron company will hold 80% of the shares of DPC and the Bechtel and GE companies will each hold 10% shares. The ownership structure of DPC is shown in Appendix 4. The structure is primarily motivated by tax consideration. Appendix 5 explains the details of the tax situation motivating the ownership structure. Management This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 4 C is being managed by a board consisting of two directors, viz., Ms. Rebecca P. Mark (39) and Mr. Joseph W. Sutton (47). Ms. Mark, a BA in Psychology and MBA from Harvard University, is Chairperson, President and CEO of Enron Development Corporation (EDC). She has been associated with the company's project development activities worldwide in power generation, pipelines, liquefied natural gas and liquid fuels. Mr.Sutton, a Master's degree holder, is presently designated as Principal looking after EDC's activities in Asia and Mid-East region. He is a retired colonel of the US Army. He was associated with the setting up of Enron's power plant in the Philippines. In terms of the shareholder's agreement to be entered into among Enron, GE and Bechtel, the latter two companies would also be appointing their nominees on the Board of DPC. Indian financial institutions have also stipulated a condition for the inclusion of two nominees on the board. Construction The company has engaged the services of a consortium of GE and Bechtel companies for plant construction on a fixed price turnkey basis for an aggregate contract price of Rs.1872 crores (US$ 585 million). DPC will enter into separate agreements with these companies. The price is not subject to escalation except on account of changes in duties/taxes and changes in scope of the project. If the turnkey contractors are not able to demonstrate the minimum performance levels in the performance tests on or before the guaranteed completion date (33 months from the date of issue of notice to proceed), liquidated damages for delay, shortfall etc. become payable. The liquidated damages payable for delay is US$ 250,000 per day for first 183 days and US$ 340,000 per day thereafter. For shortfalls in performance liquidated damages are US$ 0.8744 per KW/day for base load capacity below 625 MW. Similarly, there is a bonus clause for early completion and better performance. If the power station does not achieve stipulated guaranteed specifications within 274 days of the guaranteed completion date, DPC can terminate the contract. As per the construction contract Bechtel would be constructing two jetties construction jetty and fuel

jetty. The construction jetty will be used for receiving equipment and material. The promoters have agreed to provide project cost overrun undertaking to the extent of US$ 50 million. Owner's Engineer DPC has also appointed two Enron affiliates - Offshore Power Operations C.V. and Enron Mauritius Services Company - as Owner's Engineer to monitor and report the progress of the project work, review all bid documents and liaise with local and statutory authorities as also with various contractors engaged in construction and operation of the plant. They will also undertake certain supervisory and management services in relation to the design and procurement work carried out in USA, design, construction, commissioning and testing of the proposed infrastructure works and power plant. For their services they will be paid Rs.32 crores (US$ 10 million). Operations Offshore Power Operations C.V. Netherlands have also been appointed as the Operation and Maintenance Contractor for a monthly fee of US$ 50,000 during the project training and start-up stage which would increase to a base annual fee of US$ 2,000,000 (to be escalated by US inflation) during the operative period. The O&M contract is valid for 2 years. The O&M contractor would be responsible for operating and maintaining the plant by appointing suitably qualified and experienced personnel. The objective of the operator would be to minimize operating costs and optimize the plant availability, capacity and efficiency. Both DPC and O&M contractor would define target heat rate and availability criteria and based on actual performance bonuses/damages are payable/receivable. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 5 The overall day to day affairs of the plant would be looked after by the O&M contractor's project manager, who in turn would report to General Manager to be appointed by DPC. Fuel Supply The plant would be fuelled by imported distillate obtained from the international market. The fuel will be shipped directly to Dabhol and received at the jetty to be constructed as a part of the project. The risk of loss of cargo will be borne by the fuel supplier until the fuel is delivered to the inlet at the fuel facilities of DPC. Enron Fuels International Inc., an affiliate of Enron, is being appointed as Fuel Manager who would negotiate the price, arrange delivery of the fuel to the site, storage and maintenance of all fuel and related facilities. Agreement for supply of fuel is under negotiation with different suppliers, viz., Texaco, Mobil and Clarendon. The Fuel Manager will be paid a fee of US$2.5 million per annum in terms of the Power Purchase Agreement. Appendix 6 provides a list of all companies associated with project implementation and operations. Insurance The company will obtain a range of insurance policies covering various risks during both the construction and operating stages. The construction stage insurance will include interest of DPC, lenders and all contractors. The annual insurance premium allowed under the PPA during operating stage is US$ 7,350,000. Due to the fact that the 9FA turbine is of recent design and manufacture, it is considered by underwriters to be a developmental model until at least 8000 hrs. of successful operational experience has been accumulated. It is expected that the 9FA turbine will be able to demonstrate its performance as required by insurers before DPC's plant is commissioned. Till then damage to the turbines arising from design, material or workmanship problems is not covered. Power Purchase Agreement Maharashtra State Electricity Board (MSEB) is the principal buyer of the power to be generated by the company. DPC has entered into a Power Purchase Agreement (PPA) with MSEB

whereby MSEB has agreed to purchase entire power generated by DPC. According to the PPA capacity payments are made through fixed charges and energy payment through variable charges. The capacity charge would consist of fixed operation and maintenance (O&M) charge to cover fixed O&M costs, and capital recovery charge to cover debt service, taxes and returns to shareholders. Energy charge would comprise fuel payment, variable O&M charge, fuel management fee and hot and cold start fee. There would be rupee and dollar stream of payments. As per the PPA, DPC guarantees an availability of 92% during the peak season (October 1-May 31) and 86% during the off-peak/monsoon season (June 1-September 30). Penalties are payable if the company does not meet the guaranteed availability and bonus if availability levels are exceeded and MSEB utilizes the availability. Further details of the PPA are given in Appendix 7. Statutory Clearances Appendix 8 lists the status of various statutory and other clearances required for the project. Project Cost This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 6 A break-up of the project cost is given below. Figures in Rs. crores Land including development Plant, Machinery and Infrastructure Total Amount Foreign Currency 78.4 1871.2 1305.8 Main Equipment 610.69 Works 1092.28 Import duties Additional taxes Technical consultancy Break-up 168.23 48 35.2 35.2 Owner's Engineer 32 Stone and Webster 3.2 Miscellaneous fixed assets

51.2 44.8 Development fee 86.4 86.4 62.72 62.4 547.26 365.7 Preliminary expenses Pre-operative expenses Insurance cost 73.6 Financing expenses/fees 112.48 Interest during const. 354.78 op. support/O&M costs Contingency Working Capital Total 6.4 160 160 87.82 87.82 3028.2 2148.12

The development fee has been included in the project cost for payment to the promoters for the initial development effort till the financial close. The justification for this cost is that international power developers spend considerable sums of `venture' money to develop various projects including power projects on an average time frame of 2-3 years before the project reaches financial close. Spending development money up front is seen as risk money by international project promoters on which they do not earn a return till financial close is achieved and the project is implemented successfully. Further the project developer may be handling several projects at any one time of which only a few may reach financial close/take-off. Hence the developer view all development activity as a portfolio and expects to make some profit on the portfolio. Since the company earns development fees only in its successful projects these development fees also have to compensate for the losses from the unsuccessful projects. Government Guarantees The government of Maharashtra has guaranteed the payments due to DPC from MSEB for the power purchase. The government of India has also provided a counter guarantee for the payment due to DPC in case of a failure to pay by both MSEB and government of Maharashtra. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 7 Means of Finance The cost of the project estimated at Rs.3029 crores is proposed to be financed as given below: Rs. crore (US $ mn) I. EQUITY a) Promoters - Enron * (80%) - Bechtel * (10) 90.86 (28.40) - GE * (10%) b) 726.88 (227.16) 90.86 (28.40) DEBT Rupee Loan - AIFIs 908.60 (283.96) FC Loan 700.00 (218.75) - US Exim Bank 966.00 (301.84) - Overseas Private Investment Corporation (OPIC) -

240.00 (75.00) - US Bond Issue - 214.40 (67.00) @ Total 700.00 (218.75) 1420.40 (443.84) 2120.40 (662.59) 3029.00 (946.55) *through their affiliates (Figures in bracket indicates US $ in million based on the exchange rate of 1 US $ = Rs.32) @DPC has stated that US Bond issue may be revised upwards up to US $ 150 million. In that event other loans would be reduced correspondingly. Equity The promoters have proposed to bring in their entire contribution initially by way of subordinated unsecured loans from a syndicate of international banks (backed by guarantees of promoters) till the commissioning of the project. Thereafter, the loans will be replaced by equity to be contributed by the promoters under an equity subscription agreement. As a result of this arrangement the project will be completely funded by debt during the construction period. These loans cannot be repaid without substituting them by equity. The interest on these unsecured loans will not be charged to the project and will be borne by the promoters. (Initially, a provision of Rs.64 crores had been made as interest on pre-equity loan). Enron proposes to disinvest a part of its equity from 80% to 50% in favour of one or more offshore companies/investors, prior to commencement of commercial operations so as to avoid consolidation of accounts in the books of Enron (parent company). A condition has been stipulated that DPC will obtain a prior written approval from IDBI for disinvestment of shareholding by the promoters. The promoters together would hold at least 70% of the equity till one year after project completion and at least 50% for next 4 years. Thereafter, Enron alone will hold not less than 26% of the shares. Term Loans

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IIMA/F&A 435 8 The company has sought Rupee term loans of Rs.700 crores from Indian Financial Institutions. The loan would carry interest at 17.5% per annum repayable in 36 quarterly installments commencing from April 1, 1977. The total rupee requirement is estimated at Rs.880.08 crore which will be partly financed out of Rupee term loans and the balance through foreign currency funds raised abroad. In the case of foreign currency loans the export credit from US Exim bank will cover approximately 85% of the value of US goods and services component. US Exim credit are repayable in 18 equal semi-annual installments with a moratorium of 6 months from the date of commercial operations. The company has approached Indian financial institutions for guarantee of Rs.1239 crores comprising principal of Rs.966 crores and interest of Rs.273 crores. OPIC is a US government body which finances projects promoted by US companies outside USA. The company also proposes to tap the US bond market. Lehman Brothers who are the DPC's overseas merchant bankers would be co-ordinating the bond issue. Depending on the market sentiments the issue size would be increased to US$ 150 million in which case the other loans would be reduced accordingly. Enron has successfully made a bond issue in the USA to finance the project in Philippines. Cash Distribution Payments by MSEB to DPC will be made in a bank account to be maintained by an independent trustee acceptable to the lenders. Accounts would be maintained in both rupee and dollar denomination. When rupees are received by the rupee trustee, it will first set aside amounts for meeting the current rupee and dollar O & M requirements of the project (including fuel, insurance, maintenance reserves, etc.). Next the trustee sets aside amounts for the monthly accrual of the net principal and interest payment. Besides, a 6 months' debt-service reserve is to be provided for backed by a letter of credit to be arranged by the shareholders of DPC. A cash reserve of four months operating expenses (excluding fuel) would be maintained. An L/C backed reserve equivalent to one month's fuel expenses and a cash

maintenance reserve of approximately US $7 million per year would also be maintained. Once all of these accounts are filled, either with L/C's or cash as envisaged, any surplus funds will become available for DPC to distribute to its shareholders. DPC has agreed that there will not be any reduction in capital during the currency of institutional loans/guarantees. DPC proposes to distribute as dividend the entire net income and any surplus cash thereafter would be used to prepay the institutional loan/ US Exim bank loan at lender's option. Profitability Projections Profitability projections are provided in Appendix 9 to 12. The assumptions underlying the profitability projections and tariff calculation are provided in Appendix 9. Appendices 10 to 12 contain the profitability projections, projected balance sheet and projected cash flows respectively. Public Controversy The project generated significant controversy with both academics and politicians criticizing the agreement. The main criticism was that the capital cost as well as return to shareholders on their investment was too high. This in turn lead to a high tariff for the power purchased from DPC. Moreover the 90% guaranteed offtake by MSEB would reduce its flexibility in obtaining power from the cheapest source. A representative set of criticisms is presented in Appendix 13 and Enron's response to these criticisms is in Appendix 14. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 9 Appendix 1 Dabhol Power Company Private Sector Participation and Incentives to Private Sector1 A fresh initiative began in the late eighties to involve the private sector in power generation in a bigger way. A decline in Plan expenditure and the growing power shortages were the main reasons for the invitation to the private sector. With the objective of raising resources needed for the capacity addition programme, the Government has formulated a policy to encourage greater participation by privately owned enterprises in electricity generation, supply and distribution. The private sector entrepreneurs can set up enterprises either as licensees or as generating companies and the surplus electricity from the captive power plants can be offered for sale to the SEBs. The government has attempted to attract private sector participation by implementing reforms in the financial, administrative and legal environment relating to setting up of power projects. The salient features of the new power policy are summarized below: Financial Environment *Debt equity ratio upto 4:1 is permissible for all prospective enterprise entrants. *At least 11% of the total outlay must come through promoter's contribution. Of the balance outlay, an amount not exceeding 40% of the total outlay may come from Indian Public financial institutions, but the remaining amount should be met from other sources. *Upto 100% foreign equity participation can be permitted for projects set up by foreign private investors in the Indian electricity sector. *With the approval of the Government, import of equipment by private utilities electricity project can be permitted, in cases where a foreign supplier(s) is/are extending concessional credit. *Introduction of two-part tariff for new power projects. *Fixed costs including 16% Return on Equity can be recovered at 68.5% PLF. Incentives are prescribed for performance beyond this PLF in the form of additional ROE (0.7%) for each 1% rise in PLF. *Capitalization of interest during construction (IDC) at actual cost (for expansion of projects also) as against 1% over RBI rate as allowed earlier. *Upto 16% return on foreign equity included in the tariff can be provided in the

respective foreign currency to protect return at this level from exchange fluctuations. *Permission for dividend and equity repatriation in the desired foreign currency. *GOI would guarantee fund flows to private sector projects from World Bank and other multilateral bodies which require such guarantee under their charter. 1Source: SCICI Limited: Seminar on Private Sector Investment in Infrastructure, August 19, 1994. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 10 *With effect from April 1992, the Government has substantially hiked the depreciation rate in power sector. This is aimed at ensuring higher non-taxable surpluses for power corporations. *Customs duty on project import in power sector has been reduced from 30% to 20%. Even machinery required for modernization and renovation of power plants will attract a lower duty of 20%. *A five year tax holiday has been allowed in respect of profits and gains of new industrial undertakings set up anywhere in India for either generation or generation and distribution of power. *Excise duty on capital goods and instruments for the power sector has been lowered to 5%. *The operation and maintenance expenditure shall be computed at either 2.5% of the completed project cost or 2% of the completed/contracted project cost plus actual insurance charges, subject to an overall ceiling of 3% of the completed/contracted cost. Administrative and Legal Environment *For faster clearance of private sector projects, a High Powered Board has been established to monitor the issue of clearance including the statutory clearance and resolve any outstanding issues pertaining thereto within a definite time frame. *GOI would extend counter guarantee at the specific request of the state government to effect payments through an ESCROW Account Arrangement to which SEBs, private power company and a reputed commercial bank would be parties, which would be backed by a State Government guarantee. *Establish legally enforceable contract for fuel supply of thermal plants. *The Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 have been amended to bring about a new legal, administrative and financial environment for the private enterprises in the electricity sector. *The Union Government has agreed, in principle, to give counter-guarantee to backup state government guarantee for SEBs payment obligations to private generating companies, on a specific request of the State Government concerned and subject to the state government agreeing to certain terms and conditions.

Two-Part Tariff for Generating Companies The system provides for a contractual agreement, laying down rates for the bulk sale of power by a generating company to an SEB, for a specified period. The first part of the rate ensures recovery of fixed costs (including returns) based on performance at normative parameters. The second part ensures meeting of variable expenses, based on the units of electricity actually supplied. Incentives will be provided for achieving efficiency levels higher than the normative parameters. The sale rate will be calculated with reference to the operational and load factor norms, as well as on pragmatic rates of depreciation to be notified by the Central government. Once the sale rate is fixed, no limits of any sort will be put on actual profits earned by a generating company. Under this two part sale-rate, fixed costs will cover: * * Interest on loan capital Depreciation This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 * * * * 11 O & M expenses Taxes on income if any Return on equity Interest on working capital The variable cost comprises: * * cost of primary fuel e.g. coal, oil or gas cost of secondary fuel. The second part of the tariff will have norms set for consumption of primary fuel and secondary fuel. The norm for primary fuel consumption will depend on the fuel in question as also the distance of the power plant from the fuel sources. The first part guarantees that the fixed cost of any generating company will be paid for by the SEB regardless of the amount of power the SEB is actually able to evacuate. The variable costs have been kept separate as the logic is to ensure that the plant with the lowest incremental cost is utilized first with plants having higher incremental costs being asked to back down. K.P. Rao Committee was appointed to determine the extra remuneration over and above the variable cost that a generating company could recover for operating at an efficiency level above the norms. Keeping in mind the original spirit of two part tariff, the Committee recommended a small but significant extra remuneration for such a case. The recommendation was that a generating company be paid 0.7% return on equity for each percentage increase of PLF over the normative 68.5%. The profitability of any electrical utility will crucially depend on the impact of the new two-part tariff announced by the government. For private sector power companies a minimum 16% return on equity (for post-1992) investments in the power sector) has been assured, provided they

meet the efficiency norms. With in-built incentives to perform above the efficiency norm, a 25% return on equity should be achievable by the new power companies. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 12 Appendix 2 Dabhol Power Company Details of the eight foreign projects cleared by the Central Government Project & State Promoters Capacity (MW) Cost (Rs.crores) 1.Jegurupadu GBPP Andhra Pradesh GVK Industries 235 827 2.Kakinada GBPP Andhra Pradesh Spectrum Power Generation Ltd. 208 748 3.Visakhapatnam Thermal Power Project Andhra Pradesh Ashok Leyland, National Power plc., UK 1000 3000 4.Mangalore Thermal Power Project Kakinada Cogentrix Inc. 1000

5088 5.Ib Valley Thermal Project Orissa AES Corpn. 420 2025 6.Dabhol Combined Cycle Gas based Power Project Maharashtra Enron Power 2015 9051 7.Zero Unit Power Project Tamil Nadu ST Power Systems 210 750 8.Paguthan Power Project Gujarat 655 2178 Gujarat Torrent Energy Corporation Source: CMIE as reproduced in SCICI Limited: Seminar on Private Sector Investment in Infrastructure, August 19, 1994. Appendix 3 Dabhol Power Company List of Power Plants in Which Enron has Ownership Interest Project Nominal Capacity Net Enron Ownership Texas City,Tx *

450 MW 50% Clear Lake Pasadema, TX * 340 MW Bayonne, New Jersey Year Equipment Supplier Natural Gas 1987 Westinghouse 50% Natural Gas 1988 Westinghouse 165 MW 3.75% Natural Gas 1988 GE Richmond, Virginia 250 MW 50% Natural Gas 1992

ABB Milford, MA * 149 MW 50% Natural Gas 1993 Westinghouse Puerto Quetzal, Guatemala* 105 MW 50% Diesel 1993 Wartsila Teeside, UK * 1875MW 50% Natural Gas 1993 Westinghouse Batangas, Philippines* 110 MW 50% Diesel 1993 Wartsila

Subic Bay 1, Philippines * 28 MW Leased Diesel 1993 Nordberg/ Worthington Subic Bay 2, Philippines * 110 MW 50% Diesel 1993 Wartsila Total Fuel 3582 MW NOTE: * Denotes the plants in which Enron is also the O&M Contractor. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 13 Appendix 4 Dabhol Power Company Ownership Structure Enron Bechtel General Corpn. Enterprises Inc Electric Co. 100% Indirectly 100% 100% Bechtel Enterprises Intl. (Bermuda) GE Atlantic Ltd. (Benico) Financing CV

Commercial Finance N.V. 99% 100% 99% 100% Power 1% Power Enterprises Enterprises 100% Corp. (G.P.) (Bermuda) (L.P.) Co. Ltd G.E. Capital India Power C.V. Travemark 0.1% Offshore Power Two B.V. Production C.V. 0.1%

99.9% 100% 0.1% 99.9% Enron Enterprises G.E. Mauritius Mauritius Mauritius 10% 10% 80% Dabhol Power Company

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IIMA/F&A 435 14 Appendix 5 Dabhol Power Company Note on Ownership 1.The shareholders in DPC will be off-shore (Mauritius) affiliates of Enron, GE and Bechtel through a chain of holding companies as given at Appendix 5. For a US investor to realize the benefits of the 5 year 100% tax holiday and accelerated tax depreciation available in India, the US investor must achieve long term deferral of US taxation of earnings generated by the project. 2.In USA tax relief is provided on foreign income to the extent of tax paid in the offshore country. For the first eight years of the project no significant Indian corporate income taxes are projected to be paid (because of 5 year tax holiday/depreciation benefits). Hence during this period no Indian income taxes being payable, the foreign tax credit available to the Investor in USA would be nil. In the circumstances, ultimate US owners would be subject to US income taxes at the shareholder level on the entire amount of any dividend paid by DPC, even when this dividend is paid to another non-US company. All income streams classified as "dividends" for US tax purposes are taxed immediately in the US irrespective of whether the income is brought back to the US. However, income streams classified as "distributions" in the parlance of US tax laws are not taxable in the US until the income is actually brought back to the US. US investors can classify the income from the project as a "distribution" by structuring the project company as a "partnership" under US tax laws. These non-dividend profit distributions can be moved to a central holding company and reinvested outside the US. 3.For US tax purposes if a foreign organization is classified as a corporation, it will have its income stream treated as "dividends" and attract US income taxes immediately. Any foreign organization will be treated as a corporation only if it has at least three or four corporate characteristics. The four characteristics are (1) free transferability of shares, (2) continuity of life, (3) centralized management and (4) limited liability. For a company to be classified as a "partnership" as opposed

to a "corporation", it has to eliminate at least two of four characteristics listed above. Under the existing Indian corporate law, it is possible to eliminate free transferability and limited liability. With two of the corporate characteristics removed, DPC will be treated as a partnership for US tax purposes, thereby avoiding the US shareholder double taxation on dividends between foreign subsidiaries. 4.The decision to organize DPC as an unlimited liability company with restricted transfer of shares was made after a thorough study by the company which determined that it was the only strategy under current Indian law which would work for US tax purposes. Indian law requires that an Indian company be set up as the joint venture vehicle for power project. The alternative of using an Indian general partnership is not available. 5.In addition to the US tax advantage, it is possible to reduce the capital of an unlimited liability company without a court order. This provides a vehicle for accessing cash flow in excess of earnings. 6.Enron's interest in DPC will be owned through the Mauritian company--Enron Mauritius Company (Enron Mauritius). The choice to route the investment through Mauritius was because the Indian revenue authorities have issued a ruling allowing DPC dividends to be distributed to Enron Mauritius subject to a reduced withholding tax rate of 5% under the India-Mauritius tax treaty (as opposed to a 15% under the US-Indian tax treaty). Additionally, Enron Mauritius may sell its shares of DPC without any Indian capital gains tax. Enron Mauritius is not subject to tax in Mauritius on its offshore income. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 15 7.Like DPC, Enron Mauritius has been organized as a unlimited liability company with restricted transfer of shares. This affords Enron Mauritius partnership status so that distributions can continue up the ownership chain to a central holding company without shareholder level taxation for US investors. 8.GE and Bechtel are also in the process of incorporating Mauritian companies on similar lines. Appendix 6 Dabhol Power Company Companies Associated With Project Implementation/Operations Name of Company Activities in the DPC's Project Enron Mauritius Company (EM) Equity participation Power Enterprises (Mauritius) Company (PM) Equity participation GE Capital India Power Mauritius India Ltd (GEM) Equity participation Overseas Bechtel Inc.(OBI) Off-shore power plant and Off-shore ancillary facilities General Electric Technical Services Company (GETSCO) On-shore power plant General Electric International Operations Inc. (GEIOC) Off-shore Power Plant Bechtel International Inc.(BINT)

On-shore power plant and on-shore ancillary facilities Off-shore Power Operations C.V. O&M Contractor Enron Fuels International Inc. Fuel Manager Offshore Power Operations C.V. Purchaser's Representative (Owner's Engineer) - onshore Enron Mauritius Services Co. Purchaser's Representative (off-shore This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 16 Appendix 7 Dabhol Power Company Power Purchase Agreement (PPA) : Salient Features 1. The PPA has been signed between DPC and MSEB on December 8, 1993. 2. The Government of Maharashtra has already executed an agreement guaranteeing the obligations of MSEB under the PPA. The project is also expected to receive a counter guarantee from Government of India for Government of Maharashtra's obligations. 3. PPA covers Phase I and Phase II. However, the Phase II shall commence only if Lenders of Phase I agree for Phase II and subject to clearances from MSEB, GOM. 4. Before the obligations of each party to become operative, there are various conditions to be complied with including financial close, obtaining statutory and non-statutory clearances and guarantees form GOM and GOI. Key Dates (for Phase I) Latest Date for Financial Close 5. 31st July 1994 plus the number of days elapsed between 1st December 1993 and the signing date of the Government Support Agreement. (MSEB can terminate the PPA if Financial Close does not occur by this date plus 274 days). Target Completion Date 6. Date of Financial Close plus 1005 days (about 33 months) plus the period of any delays caused by MSEB, GOM or GOI breach plus the period (with certain limits) of any delays caused by Force Majeure. Latest date for Entry into Commercial Service ("ECS") 7. Target Completion Date plus the period of any delays caused by breach by MSEB, GOM or GOI of their respective obligations to DPC. (MSEB can terminate the PPA if SCS does not occur by this date). Expiry Date of PPA 8. 20 years after ECS of Phase I subject to earlier termination for default by either party or in certain other circumstances. Some Key PPA Provisions Prior to SCS DPC 1)If ECS is not achieved by DPC by the Target Completion Date, penalties will be payable to

MSEB at the following rates: US $ 14,000/day - first 180 days US $ 110,000/day - thereafter 2)DPC may achieve ECS with a tested Baseload Capacity of only 80% of 625 MW). However, it must improve this to 100% within one year of ECS. Failure to do so results in a one-time This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 17 penalty payable to MSEB at a rate of US $100 per kW of tested capacity below 625 MW (Similar provisions apply with respect to peaking capacity). MSEB 1)MSEB/GOI shall provide transmission line/fresh water pipe line respectively to the Site by a specified date failing which MSEB will pay to DPC full capacity payments from the date DPC would otherwise have been able to enter commercial service, or, if later, the Target Completion Date. 2)MSEB and GOM have certain obligations to provide other services to DPC by certain specified dates. In case of failure, MSEB will compensate DPC for any increased costs (e.g. additional interest during construction, additional payments to the Contractor) in the form of increased capacity payments over the life of the PPA. Some Key PPA provisions after ECS Payments to DPC MSEB makes Energy Payments and Capacity Payments to DPC. 1. Energy Payments These are monthly payments made in respect of the energy despatched during previous month. The payment is made in rupees. Part of the payment is indexed to the US dollar by reference to the exchange rate at date of payment. Broadly the payment has the following components: i)Fuel Management Fee. (A US dollar indexed payment). ii)Variable operating costs. This amount is calculated by reference to the units (kWh) despatched in the previous month. (Some portion is indexed to the US dollar). iii)Fuel Costs. This US dollar indexed payment is calculated by reference to the kWh dispatched in the previous month, the price (including import duty etc.) of the fuel in use in that month and the heat rate. Special provisions will be agreed to reflect any take-orpay commitment (of committed fuel off-take) in a Distillate Supply Contract. The heat rate permitted is 7605 Btu/kWh for baseload and 12150 Btu/kWh for peaking. 2.

Capacity Payments MSEB will make monthly payments to DPC in respect of the previous month. The payment is US dollar indexed for part of fixed O&M charge and FC debt apart from elements relating to Rupee fixed O&M costs and Rupee debt service. The payment is the sum of calculations performed for each hour in the month. The calculation is made by reference to an hourly capacity charge which has various elements (some US dollar indexed) and the Rated Baseload Capacity and Related Peaking Capacity ("RBC" and "RPC") expressed in kW, of the Power Station for the hour in question. RBC and RPC are checked by capacity tests from time to time. a) Amount of Capacity Payment This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 18 The capacity charge has been set at a level that, if DPC performs according to base case expectations, will result in monthly capacity payments that will cover fixed operating costs, Rupee and US dollar debt service and a post-tax return on and of equity to DPC shareholders. b) Some adjustments to amount of capacity payments i)There is provision for increases/reductions to the monthly capacity payments (indexed to the US dollar where appropriate) based on actual insurance premium paid. ii)There is provision for increases/reductions in the monthly capacity payments on account of changes in income tax rates in India. iii)There is provision to compensate fully DPC on account of changes in law and changes in tax which result in an increase in capacity charges. c) Effect of below-target performance by DPC Despatches are measured on hourly basis. The Power Station's average availability must not fall short of Target Availability which is :92% - Peak Season (1st October to 31st May) 86% - Monsoon Season (1st June to 30th September) Rebates are payable in respect of each season. For the first 4% of any shortfall, the rebate is equal to the percentage shortfall multiplied by the capacity payments DPC has received. For any shortfall in excess of 4%, the rebate is twice than excess shortfall multiplied by the capacity payments DPC has received in the relevant season. There is provision for bonus payments to DPC in the event of certain above-target availability performance. The amounts are not large. d) Diminished performance for reasons beyond DPC's control i)If this results from breach by MSEB of its obligations under the PPA then the Power Station availability (for example) is calculated so as to compensate for the effect of the MSEB breach. ii)In other cases DPC may declare Force Majeure and reduce the Power Station's RBC and/or RPC to the extent of the Force Majeure. This has two effects: -reduced capacity payment income -restored ability to meet availability targets by reducing the RBC and/or RPC against which availability is measured, to a level that reflects the Power Station's actual capacity. The reduced capacity payment income may be compensated for by proceeds of

business interruption insurance held by DPC (if the problem is caused by an insurable even such as fire or accidental damage-referred to as Industry Force Majeure in the PPA or, if the problem is caused by an even of Political Force Majeure, by special capacity payments from MSEB (see (iii) below). This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 19 iii)Political Force Majeure includes items such as war, blockade, riots, bombs, religious strife, civil commotion; sabotage, terrorism; certain industrial disputes not related to betterment of employment; changes in laws; nationalization, compulsory acquisition, etc. If DPC declares Political Force Majeure, MSEB is obliged to make capacity payments for up to 270 days to DPC. Depending on the type of Political Force Majeure, the amount may be either an amount sufficient to restore DPC's capacity payment income to the level it would have been in the absence of the Political Force Majeure or an amount sufficient to enable DPC to meet debt service, taxes, fixed operating costs plus (after the first 90 days) an amount equal to 35% of the debt service then accruing. Termination 1)DPC has the right to terminate the PPA for, inter-alia,the following reasons: -unremedied breach by MSEB of a payment obligation; -expropriation of DPC's shares or assets; -disruption of more than 270 days of DPC's ability to proceed with the construction or operation of the Project as a result of Political Force Majeure. 2)MSEB has the right to terminate for, inter alia, the following reasons: -unremedied breach by DPC of a payment obligation to MSEB; -winding up of DPC; -Average Baseload Availability of the Power Station is less than 60% of Target Baseload Availability each month for 24 consecutive months or Rated Baseload Capacity is less than 60% of initial tested baseload capacity for 36 months; in each case as a result of Industry Force Majeure (fire, accidental damages, explosion etc.). However, the period of 36 months is extended by the period of any delays in DPC efforts to restore the Power Station that are caused by Political Force Majeure. Termination Payments 1)If DPC terminate the PPA then it has the right to transfer the Project to MSEB in return for a Transfer Amount. The Transfer Amount is payable in rupees (but appropriately indexed to the US dollar) and its exact

amount depends on the circumstances that gave DPC the right to terminate. In any case the amount has a floor equal to the amount of DPC's total debt outstanding (including accrued interest). 2)If MSEB is entitled to terminate the PPA, then it has the right to: -require amendment of the PPA along prescribed guidelines which, inter alia, call for a reduced capacity charge to reflect a prescribed rate of return to DPC on a plant of capital value equal to the Transfer Amount that MSEB would alternatively be entitled to acquire the project for; or -terminate the PPA and acquire the Project for the relevant Transfer Amount. -This amount is calculated in a different manner to Transfer Amounts payable under (1) above. The actual amount depends on the circumstances that gave MSEB the right to terminate. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 20 -There is a floor to the Transfer Amount payable in this situation but it may not be as high as DPC's total debt outstanding. The floor that applies if MSEB has the right to terminate as a result of the effect of Force Majeure for 36 months on DPC's Average Baseload Availability or Rated Baseload Capacity is the amount of DPC's total debt outstanding (including accrued interest) as of the date 18 months after the start of the Force Majeure event. The floor that applies in other circumstances (which are essentially breaches by DPC of its obligations under the PPA) that give MSEB the right to terminate is the Modified Total Debt Amount, which is 90% of DPC's total debt outstanding (including accrued interest) less the expenses of correcting unrestored defects in or damage to the project; or -terminate the PPA and not acquire the project. In this case MSEB must give DPC wheeling rights (at non-discriminatory rates) to sell power to other purchasers. The PPA will be governed by Indian Law. Dispute resolution i)By reference to an Expert for technical matters. ii)By reference to arbitration to be conducted under the New York Convention of 1958 and to be located in London. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 21 Appendix 8 Dabhol Power Company Status of Major Government/Other Clearance I. Power Plant Clearance Authority Status (A) Statutory Clearance a)Cost of project CEA Obtained. To be obtained for revised project cost. b)Techno-economic clearance CEA Obtained technical clearance for both phases. (Copy of CEA letter dt. 26.11.1993 is attached at Annexure XIX). c)Publication/Notification State Govt. Published d)Water availability State Govt./ CMC Obtained e)SEB clearance

SEB/State Govt. Obtained f)Pollution clearance (water and air) State/ Central PCB Obtained subject to stack height being 98 . Company has approached for relaxation. g)Forest clearance State Govt./NOEF Obtained h)Environment and forest clearance NOEF Obtained. However, detailed environmental impact study to be completed. i)Civil aviation clearance for chimney height NAA Obtained j)Registration of company ROC Obtained as Private Company with Unlimited Liability k)Rehabilitation and resettlement of displaced families by land acquisition NOEF/State Govt. Company has taken up matter with

Government l)Hydro projects (mini-micro) Ministry of Water Resources Not applicable a)Land availability State Govt. To be obtained b)Fuel linkage Dept. of petroleum/ONGC Fuel oil to be imported. Agreement to be signed. Govt. approval to be obtained. c)Financing CEA, Dept. of Power, Dept. of Eco.Affairs, Financial Institutions To be obtained d)Transportation of fuel Ministry of Petroleum and Natural Gas, Ministry of NOC obtained B.Non-Statutory Clearances This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 22 Clearance Authority Status Railway, Ministry of Shipping & Surface Transport C.Other Clearances a)Foreign exchange permission To be obtained (RBI letter from RBI dt.May 24, 1994 indicating support for project is attached at Annexure XX). b)Foreign Investment Promotion Board Clearance II. Obtained. However, clearance for the revised cost of project and means of finance is to be obtained. (FIPB letter dt. Feb.3, 1993 is attached at Annexure XXI). Construction of Jetty/Port: To be obtained Major clearance required to be obtained for setting up a Jetty a) Port Dept. State Govt. b) Customs Dept. c) Local Authority like CIDCO - MIDC or Collector d) Approval of water commissioner - State Govt. e) Mercantile Marine Department approval for ships. f) Approval of Ministry of surface transport for ships. III. Status of Major Contracts/Agreements a) Power purchase agreement : Signed

b) Construction contract : Signed c) O&M contract : Signed d) Fuel management agreement : Signed e) Equity subscription : f) Owner's Engineer Agreement To be signed : Signed This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 23 Appendix 9 Dabhol Power Company Assumptions underlying the estimates of tariff calculations and profitability 1.The configuration of the plant is 2 Nos. Frame 9FA GTGs, 2 Nos. HRSGs, 1 No. STG and 1 No. Frame 6B GTG. The entire plant would be commissioned by January 1997. This is based on the assumptions that the financial close would take place by the end of July 1994 and notice to proceed would be issued to the contractor by August 1, 1994. 2. The installed capacity of the plant would be as under: Particulars ISO Rating At Ambient Temperature Base Load (MW) Peaking Load (MW) Base Load (MW) Peaking Load (MW) 2 Nos. Frame PFA GTGs 482.0 482.0 422.5 422.5 1 No. STG 265.8

290.8 232.7 290.0 NA 39.0 NA 35.4 Gross Output 747.8 811.8 655.2 747.9 Less: Auxiliary consumption (22.4) (23.0) (21.8) (22.7) Net Output 725.4 788.8 633.4 725.2 1 No. Frame 6B GTG ISO rating refers to ambient temperature of 15oC at sea level. Ambient temperature at site as provided for in the PPA is 27oC (81oF). For the purpose of profitability, a baseload capacity of 625 MW and peaking capacity

of 70 MW have been assumed, which is guaranteed in the PPA. 3.The plant is assumed to run at 90% PLF, at a capacity of 625 MW. As per PPA, the company guarantees availability of 92% during peak season (October-May) and 86% during off-peak (monsoon season i.e. June-September). 4.The heat rate permitted as per PPA is 7605 Btu/KWh for baseload operation. The heat rate guaranteed by the contractor is 7243 Btu/KWh. For the profitability estimates, heat rate of 7401 Btu/KWh in the first year and 7504/KWh in 10th year assuming a gradual degradation have been assumed. 5.The tariff consists of capacity charge and energy charge. Capacity charge covers the fixed O&M expenses, tax, debt service, interest. Energy charge covers fuel expenses, variable O&M expenses and fuel management fee. 6.The revenue consisting of capacity payments and energy payments as follows: This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 24 Capacity Payment Amount (KW/h) Year Escalation Fixed O&M (Rupees) 0.018292 1993 Indian inflation Fixed O&M ($) 0.005035 1997 US inflation Capacity recovery ($) 0.030649 1997 4% Peaking ($) 0.016438 1997 4% 4.63 1997 -

Variable O&M (Rs/kWh) 0.003784 1993 Indian inflation Variable O&M (Cents/kWh) 0.008590 1997 US inflation Annual fuel management fee ($) 2,500,000 1997 US inflation 5.62 1997 Base Load Energy Payment Fuel ($/m BTU) Base Load Peaking (cents/kWh) For profitability purposes, Indian inflation rate has been assumed at 7% and US inflation rate at 2.5%. 7.The gross unit generation at 90% PLF (optimum capacity) is estimated at 4928 MkWh. 8.All dollar denominated expenses are escalated at US inflation rate and rupee denominated expenses are escalated at Indian inflation rate. The exchange rate assumed is 1 US $=Rs.32. 9.For the purpose of profitability, depreciation has been taken on SLM basis. 10. Interest on rupee term loan has been taken at 17.5% p.a. (repayable in 9 years). 11. Interest on foreign currency loan US Exim

OPIC US Bond Market : 5.95% p.a. (repayable in 9 years) : 10% p.a. (repayable in 12 years) : 10.45% p.a. (repayable in 10 years after 3 year moratorium) 12. Taxation has been taken at 46%. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 25 Appendix 10 Dabhol Power Company Profitability Projections (Figures in Rs.lakhs) 1997 1998 1999 2000 2001 2002 2003 2004 2005 625 625 625 625 625 625 625 625 625 70 70

70 70 70 70 70 70 70 Baseload Capacity (MW) Peaking Capacity (MW) Total Capacity (MW) 695 695 695 695 695 695 695 695 695 90.0% 90.0% 90.0% 90.0% 90.0% 90.0%

90.0% 90.0% 90.0% 4928 4928 4928 4928 4928 4928 4928 4928 4928 65234 65498 65678 65858 65986 66115 65633 65890 66018 O&M Expense 5853 6050 6256

6470 6693 6927 7171 7425 7892 Interest Expense 25021 22463 19832 17245 14704 12178 9667 7171 4491 PBDT 37451 42369 47552 52787 58128 63562 69705 70669

73886 Depreciation 23432 23432 23432 23432 23432 23432 24652 24652 24652 Operating Profit 14019 18937 24120 29355 34696 40131 45053 46017 49234 7433 12148 15816 PLF Units delivered (mill.

kwh) Costs Income tax PAT Total Sales 14019 18937 24120 29355 34696 40131 37620 33869 33419 133560 136380 139317 142360 145511 148782 152175 151156 152288 0.15 0.21 0.27 0.32

0.38 0.44 0.41 0.37 0.37 37451 42369 47552 52787 58128 63562 62272 58521 58071 2.65 2.7 2.76 2.82 2.88 2.94 3.01 2.98 3 Dividends (%) Gross Cash Accrual Tariff (Rs./kwh)

Appendix 11 Dabhol Power Company Balance Sheet Projections (Figures in Rs. lakhs) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 90868 90868 90868 90868 90868 90868 90868 90868 90868 90868 Term Loan 212026 192193

171345 150497 129988 109478 88969 68459 47950 27440 Total 302894 283061 262213 241365 220856 200346 179837 159327 138818 118308 Gross Fixed Assets 294112 294112 270681 247249 223817

200385 191760 168328 143677 119025 Less: Depreciation 0 23432 23432 23432 23432 23432 23432 24652 24652 24652 294112 270681 247249 223817 200385 176954 168328 143677 119025

94373 8782 8782 8782 8782 8782 8782 8782 8782 8782 8782 Maintenance Reserve 0 2318 4694 7129 9625 12184 0 2688 5443 8268 Operating Reserve 0 1280

1280 1280 1280 1280 1280 1280 1280 1280 Liability Share Capital Assets Net Fixed Assets Current Assets This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 26 Cash Balance Total 0 0 209 357 783 1147 1447 2901 4288 5605 302894 283061 262214 241365 220855 200347 179837 159328 138818 118308 Appendix 12 Dabhol Power Company Cash Flow Projections

(Figures in Rs. lakhs) 1997 1998 1999 2000 2001 2002 2003 2004 2005 Gross cash accruals 37451 42369 47552 52787 58128 63562 62272 58521 58071 Repayment of term loans 19833 20848 20848 20509 20510

20509 20510 20509 20510 Contribution to maint. res 2318 2376 2435 2496 2559 2623 2688 2755 2825 14019 18937 24120 29355 34696 40131 37620 33869 33419 42161 47403

52360 57765 63263 60818 57133 56754 208 357 784 1147 1446 2900 4288 Dividend Contri. to gen op res Total 1280 37450 Opening cash balance Surplus/deficit 208 149 427 363 299 1454 1388

1317 Closing balance 208 357 784 1147 1446 2900 4288 5605 This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 27 Appendix 13 Dabhol Power Company `Clandestine and Ruinous' (Economic Times) We welcome the new Maharashtra government's decision to review the ruinous and unconscionable Enron deal by which a Rs.9,000 crore project for supplying 2,000 MW of electricity was privately negotiated in total secrecy by various ministers and officials of the then Maharashtra and the central government. It has become clear that the deal is unconscionable and would spell the financial ruin of the MSEB, and the people of Maharashtra itself. And ultimately the bill for the electricity to be supplied by Enron would have to be footed by the central government. From the analysis of the deal made by the National Working Group of Power the Enron deal envisages and unconscionably high rate of payment towards the electricity to be produced by this project. -In the first place, the capital cost of Rs.4.5 crore per MW which has been allowed to be used as a basis for calculating the cost of electricity is at least 50 per cent higher than the rate at which indigenous companies such as NTPC and BHEL can and have been setting up such plants. -Secondly, the rate of interest allowed to be charged on the foreign loans to be taken for this project is also 3.75 per cent above the US treasury rate, which is 50 percent higher than the rate at which loans are made available by financial institutions like the World Bank and Asian Development Bank for such projects. -The return on equity is not 16 percent as claimed by the power minister but actually goes up from 16 percent in the fist year of operation to 58 percent in the 20th year, averaging about 41 percent. -The MSEB has guaranteed an offtake of 90 percent of the capacity of the plant. This would imply that the electricity board would be forced to purchase Enron power even during off peak hours and at night when it is not required, by shutting down other plants of the Board or of NTPC which are and would be supplying power at 1/4th the variable cost of Enron.

-The fuel allowed to be used for the Enron plant is imported liquid natural gas, the cost of which would be several times higher than the cost of indigenous coal which is available in plenty, or even gas produced from Indian offshore gas wells, one of which has also been leased out to Enron. In fact, even the World Bank cited some of these reasons including the lack of competitive bidding for rejecting the loan application of Enron for this project. These include: *The project is not a least cost choice for base load power generation compared to Indian coal and local gas; *Enron's current proposal would require MSEB to despatch the plant as a base load unit, at 80-85 percent minimum plant factor. This would prevent the utilisation of the operational flexibility of a combined cycle plant, which would be highly beneficial to systems operations; *Simulations of MSEB power system operations indicate that the project would add more capacity than needed to meet the projected loan growth in 1998 and would also result in uneconomic plant despatch. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 28 *Substantial adjustments in electricity tariffs would be required to recover the cost of the project from the consumers and to safeguard MSEB's financial position. The analysis of the National Working Group on Power shows that this deal would cause an annual loss of approximately Rs.2,000 crore to MSEB and an annual foreign exchange outflow of about 45,000 crore. Being fully conscious of the fact that the MSEB would be rendered insolvent within a couple of years after the Enron project goes on steam, Enron insisted on securing a guarantee from the state government and being further conscious of the fact that this may render the state government itself insolvent within another couple of years. Enron further insisted on a counterguarantee by the central government. Enron argues that the cancellation of this contract would render the SEB liable to huge penalties of Rs.300-400 crore. Firstly, the penalty clause is itself unconscionable and against public policy. In any case this should not even for a moment deter any honest government from cancelling a contract which after three years would cause an annual loss of Rs.2,000 crore to the Board. Moreover, there can be no penalty for cancelling a contract entered into in such a clandestine and illegal manner, or if it can be shown that deal was struck for extraneous considerations and we believe that it should not be difficult to show that, if the deal is probed properly. (V R Krishna Iyer, Rajinder Sachar, M Rama Jois, Rajni Kothari, Vandana Shiva, V M tarkunde, Medha Patkar, Swami Agnivesh, C P Bhatt, George Fernandes, Nikhil Chakravarty, Arun Jaitley, D S Tewatia, H D Shourie, Prabhash Joshi, Surendra Mohan, Rabi Ray, Shamsul Islam, Indira Jaisingh, Praful Bidwai, Arun Ghosh, Ashok Rao and 22 others.) This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 29 Appendix 14 Dabhol Power Company `Creating Unnecessary Fear' (Economic Times) The following is an edited version of the reply sent by Dabhol Power Company to the 44 signatories of the statement criticizing the project. Criticism: The Dabhol deal was struck clandestinely, statutory provisions of the Electricity Supply Act were given a go-by. Rebuttal: The deal was not negotiated in secrecy. The Power Purchase Agreement (PPA) took 18 months to negotiate, from June 1992 to December 1993. During that time the MSEB was represented by international experts recommended and financed by the World Bank. The project was constantly reported in the media and the project details were published in the gazette as per the statutory requirements. The government widely publicized their plans for setting up a private power programme and invited participation from companies throughout India and around the world. The issue of having awarded the sponsors the project without competitive bids was the basis of a writ petition No. 1702 of 1994 filed by the late Shri Ramdas Nayak (MLA, BJP) in the Bombay High Court, which the court dismissed. Criticism: The capital cost of Rs.4.5 crore is high. Rebuttal: The cost per MW for Phase 1 of the Dabhol Project (currently under construction) including the cost of ports, harbour and other infrastructure, is Rs. 4.2 crore/MW. If these special infrastructure costs are exchanged (for the purpose of comparison with the capital costs of other power project) the costs are Rs.3.66 crore/MW -- lower than the capital cost of many similar projects. (See Table). Comparison with a number of other power plants indicates that the capital cost of Dabhol is very reasonable. The capital cost of the Dabhol Project has also been examined by -- the report of the standing committee on energy (1993-94) titled Energy for '90s and Beyond: Prospects, Reality and

Challenges (chairman Jaswant Singh, BJP), which noted: "As it happens, capital costs of greenfield and coal-based power stations established elsewhere in the country are tending to range between Rs.3.5 to 4 crore/MW. While therefore Dabhol project is higher than these costs it absolves the government of all responsibilities of coal linkages, transportation, infrastructure as also provides major environmental benefits..." It is very difficult to compare costs of power projects built at different times, in different times, in different countries and using different fuels, without having access to a considerable amount of detail on each project. Capital costs and costs of power produced at Dabhol have also been extensively reviewed by MSEB, the Central Electricity Authority (CEA), the ministry of power and been found competitive. Given the large number of proposals put forward under the private power programme, it has been easy for these agencies to compare the costs of Dabhol with other proposed projects, before granting their approvals. Lastly, as Dabhol borrowed money from international financing institutions, foreign commercial banks and a consortium of Indian financial institutions, it had to pass their scrutiny. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 30 Criticism: The Enron deal delivers high cost power to the MSEB. Rebuttal: This is simply not true. The Dabhol Project sells power to MSEB for Rs2.40/KW in 1997. MSEB is currently buying power for Rs2.39/KW from at least one power producer in Maharashtra. Assuming 10 percent inflation, this would amount to Rs2.89/KW in 1997, more than the cost of power than Dabhol. Similarly, other projects sell power at rates which will be higher than Dabhol in 1997. Any attempt to directly translate the cost of power from a single new facility directly to a price paid by consumers, is invalid and serves only to raise unnecessary fears in the minds of the public. Criticism: Rate of interest allowed to be charged on the foreign loans to be taken for the project is higher than the rate made available by the international financial institutions. Rebuttal: Because of the fixed tariff structure of the Dabhol project, any increase in the interest rates paid on the loans only goes to decrease the returns of the sponsors and has no affect on the tariff. Thus, there is no incentive for the promoters to seek a higher than market rate of interest. The rate of interest was obtained by competitively bidding a number of financial institutions and is representative of prevailing world market rate for power projects. It should also be noted that US Exim Bank and Overseas Private Investment Corporation (OPIC) have lent money to this project at their normal rates for private power projects, and that all interest rates have been approved by the ministry of finance. Criticism: High return on equity. Rebuttal: This contention is based on a misunderstanding of the Dabhol Project. Unlike other projects, the Dabhol Project does not have a guaranteed return. While others are permitted a guaranteed 16 percent return at 58.5 percent PLF, the Dabhol Project makes a return of roughly 11 percent at 68.5 percent PLF. In addition, if the Dabhol Project fails to make its guaranteed PLF of 90

percent it will be subject to severe penalties which will further reduce these returns. It is important to remember that the only guarantee to the project given by the government of India is that MSEB will meet its contractual obligations with Dabhol. Criticism: MSEB has guaranteed an offtake of 90 percent and this will hurt the Electricity Board. Rebuttal: We understand that MSEB has studied the energy requirements of Maharashtra in great detail based upon recent load growth and is confident that it will be able to utilize the entire output from Dabhol easily. Last year itself the energy demand in Maharashtra grew at a rate of over 10 percent leading to apprehensions that even with the entire output of the Dabhol Project Phase 1 and 2, there will be a shortage of energy in the state if new capacity is not built quickly. Criticism: Fuel for the Dabhol Project is imported, and is several times higher than indigenous coal or Indian offshore gas. Rebuttal: What is of primary importance to the electric consumer is not the cost of fuel used to generate power, but the final cost of electricity delivered. The fuel selected for Dabhol (distillate fuel for Phase 1 and liquified natural gas for Phase 2) meets this criteria. Coal is not available and environmentally undesirable on the west coast of Maharashtra. Indigenous oil and gas have no guarantee of availability and therefore are unacceptable for private power plants which are expected to run at high plant load factors. Further, the price of power introduced from imported oil or gas is price competitive with that produced using indigenous coal, oil or gas, and its availability can be guaranteed. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 31 It may be noted that India is not self-sufficient in oil and is constrained to import it for such projects. In fact the government has given a license to Dabhol to import fuel for the project only on the condition that we do not use the public infrastructure facilities and existing port facilities thereby making it necessary for us to develop our own harbour and port facilities for the import of fuel. Further, the report of the standing committee on Energy 1993-94 under the chairmanship of Jaswant Singh says: "The Dabhol project absolves the government of all responsibility for coal linkages, transportation, infrastructure and also provides major environmental benefits, since the entire cycle of coal mining to its burning in the power plant and disposal of flash cause major environmental impacts which unfortunately the current system of pricing coal does not include." The cost of any fuel must be approved by MSEB at all times, making sure that the interests of the consumer are safeguarded. DPC makes no profit on the supply of fuel to the Dabhol Project. Criticism: World Bank rejected the loan for the Dabhol Project. Rebuttal: The Dabhol Power Company has never applied to the World Bank for any loans to the Dabhol Project. The articles in the papers that claim that the World Bank "rejected a loan application" from DPC, reproduce a letter from the World Bank to the ministry of finance. The letter itself contains the answer to the confusion. Firstly, it appears from the letter, that a request was made by the ministry of finance to the World Bank to "examine" a single phase 2000 MW gas based project, and the published letter is a response to it. The World Bank letter recommends that indigenous fuels be considered, and suggests that 2000 MW of power by 1996-97 may not be necessary for Maharashtra. Secondly, the letter notes that the World Bank would be prepared to re-examine this opinion should the project be "restructured". After discussions between the World Bank, MSEB and the sponsors regarding the

need for 2000 MW of power in the 1996-97 time frame, the Dabhol Project was restructured into the current two phases. The first phase of the project is 695 MW and is currently under construction. The second phase of 1320 MW is under development. Whether it was necessary to divide the project into phases is an open, though a moot question at this time. Criticism: Counter guarantees have mortgaged the future the country's economic future to Enron and other foreign companies. Rebuttal: The Dabhol Project and other fast track projects have been given a `performance guarantee' and not a `sovereign guarantee' by the GOI. There is a very important difference. In a sovereign guarantee, the government directly guarantees the debt obligations of the project. India has given sovereign guarantees in the past, for example, to guarantee the obligations of Indian Airlines when it purchases airplanes. In contrast, a performance guarantee, such as the one given to the Dabhol Project, only guarantees payment of amounts validly due to the Dabhol Power Company by MSEB in the event the latter fails to pay for power consumed. In the Dabhol Project, unlike most of the other private power projects under discussion, there are no guarantees of any specific return on equity. Further, in the event that the Government of India has to make payments under its performance guarantee, they will own the power produced by the project and could thus sell it through the grid to other customers or states willing to pay for the power produced. This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012

IIMA/F&A 435 32 Worst case estimates which forecast a doomsday scenario assume that MSEB will be unable to pay for delivered power for the entire 20-year contract period! Dabhol Phase I - Plant Capital Cost Comparison With Other Power Plants Project & Size (mw) Developer Crores/ MW* Expected Start Date CRS/M W** Gandhar (648) NTPC 3.53 1994 4.7 Kathalguri(291) NEEPCO 4.15 1995 5.02 Jagurupadu(216) GVK 3.82 1996

4.2 Godavari (208) Spectrum 3.60 1996 3.96 Gandhar (654) Torrent 3.51 Dabhol (695) (without port, harbour) Enron/GE/Becthel 3.65 1997 3.65 lb valley (420) coal AES 4.75 1997 4.75 Neyveli Lignites (250) - coal 5.3 1997

5.3 * Published figures ** based on assumed 1997 start-up date & 10% inflation. Power Plant in Maharashtra Cost at which they sell power to Assuming 10% inflation projected MSEB in 1995 cost of power in 1997 Average cost to MSEB from a private power producer Rs. 2.39/KW Rs. 2.89/KW NTPC Kawas Gas Plant Rs. 2.19/KW Rs. 2.65/KW Dabhol Plant Rs. 1.98/KW (Equivalent cost) Rs. 2.40/KW Nuclear plant at Kakrapur Rs. 2.25/KW Rs.2.61/KW This document is authorized for use only in Project Finance, PGDM, by R. Kannan from August 2012 to November 2012