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The Dabhol Power

Project

Q1

Analyse and comment on the contractual


operational risk management/mitigation
arrangements that underpinned the
original Dabhol Power Project.

PESTLE Risk Analysis


Politics

Insured by OPIC for


coverage of equity stakes
Loans bought and
obtained by DPC
promoters
Government guarantees
used as a mitigation
strategy

Economic

Currency risks taken care by PPA


The final price of Dabhol power was
in USD and for MSEB it was
dependent on the USD-INR rate.
Thus, the currency risk for DPC was
removed and it was borne by MSEB
Risks borne by MSEB, central and
state governments
Mitigated through contracts

Social

Risks borne by
MSEB/DPC. Ability to
bear risks brought into
question
No mitigation strategy in
place
Impact of risk is high

PESTLE Risk Analysis

Technical

Set up two LNG terminals


and re-gasification units
Dabhol plant to be built,
owned and operated by
DPC. So, all technical risks
to be borne by DPC
Enrons risk mitigation
strategy was to have GE
supply gas turbines for
Dabhol and Bechtel to be
the turnkey engineering
procurement and
construction contractor

Environmental

Legal

Enron faced several legal


issues while proceeding
with Dabhol
Legal issues to be sorted
by means of state and
centre approval

The plant would discharge


several pollutants
These would have to be
borne by the DPC and
regulated by the Pollution
Control Board

NO DETAILED STUDY

NO COMPETITIVE BIDDING

Suggest approaches to manage


risks
in an unstable political and
The MOU was signed between Enron and
institutional
MSEB in less environment
than 3 days in a matter
involving a project
the value of over USD
associated
withofnon2.5 Billion and also neither
central nor state
recourse/limited
recourse
government engaged independent technical
finance.
assistance or competitive of any kind.

EXCESSIVE COST

Dabhol plant was planned as a base load


power station when Maharashtra faced
electricity shortage only during peak hours.
So the project will produce a surplus power
at much higher cost and also Maharashtra
Government has to buy that Power at much
higher agreed cost.

Nobody bothered to know the details about


Enron i.e. what its history is, business or
accomplishments. Neither the balance sheet
and annual accounts of Enron, nor any
information about its activities, area of
operation, its associates etc, was obtained
by the government
NO LAW COMPLIANCE

The central government has approved the


project despite of the fact that CEA approval
is mandated by law in such scenario.
Audit provision in not mentioned in the MoU
and also it did not specify when the 20 years
contract would begin

Assuming that the measures for


mitigating operational risks that
underpinned the Dabhol power
projectwere a problem, discuss how
Enron may have demonstrated "credible
commitment to the Dabhol power
The Dabhol Power Company (DPC) formed to operate the plant was 80% owned by Enron along with GE (10%) and Bechtel
project.
(10%).The total equity investment done by the 3 foreign companies
was USD 276 million.

Q2

Enron agreed to invest a sum of over USD 3.1 billion in India in a matter of 3 days.
Two months after signing the MoU, Enron submitted detailed implementation proposals to Indias Foreign Investment
Promotion Board, and on its recommendation, split the project into two separate phases.
With completion of Phase II of Dabhol project, it would run on Qatar sourced LNG, where Enron had extensive interest.
To proceed with the Dabhol project, Enron needed to secure more than 150 federaland state level clearances. They had to deal
with various land and legal issues.
Enron persevered to educate the Indian public about the benefits of the project by running full page advertisements in leading
newspapers dailies

Q3
Suggest approaches to manage
risks in an unstable political and
institutional environment
associated with nonrecourse/limited
recourse
ENRON could have
been transparent in communicating the terms and conditions
to MSEB .
finance.

All the Terms and conditions should have been thoroughly examined by MSEB
before getting into a contract involving Foreign investment.
Instead of foreign currency denomination of tariff payments, DPC could have
allowed MSEB to pay in local currency i.e INR so that the rate will turn out to be
low for the consumers and the foreign exchange risk will be minimized.
It could have included local investors and diverse political parties and make
them stake holders so that incase of a change in government ,any risks related
to policy decisions could be mitigated.
ENRON structured the deal in their favor which was later identified by CEA &
World Bank.They could have made the deal beneficial to both the parties.
In order to avoid such risks, project should have been audited by an independent
auditing agency involving risk managers and financial agreement experts so that
any future event related to political instability doesnt hamper the project.

Suggest approaches to manage


risks in an unstable political and
institutional environment
associated with nonrecourse/limited
recourse
The Shareholding
distribution should have a sizeable representation from the
local nationalized company to ensure the interests of both the parties.
finance.

While engaging large projects for national benefit, payment guarantees should
be ensured along with a competitive bidding process involving multiple
companies interested in the project.

Thank you