Introduction

• In 1992, Opening up the country's power and electricity

sector to foreign investment.
• Foreign companies were permitted full ownership of power
projects and guaranteed the right to repatriate profits
without any export obligations.
• In 1992, Initial memorandum of understanding signed
between Enron and Maharashtra government to build
World’s largest natural gas fired power plant with
capacity of 2000-2,400 MW.
• Instead of going for competitive bidding , the Government
went for M.O.U(memorandum of understanding)
• Early Concerns about the power project:-
 World Bank Report
 Central Electricity Authority delay for clearance
 Criticized for Haste & Lack of Competitive Bidding

 Wor ld Bank Repor t
• Flexibility in changing the price of electricity by Enron ,due
to foreign currency & oil prices fluctuations.


• The power generated by Dabhol would cost five times more

than the coal fired power plant
•
• The Western region had surplus in off load periods, so the
plant was too large for peak load periods
•
• MSEB would have to sell the surplus at a loss
•
•
•
 Central Electricity
Authority
• CEA determined that the tariff from the Dabhol plant was
more than twice as high as acceptable.
•
• The lack of legal framework for regulating the importation
of fuel
•
• CEA forecasted bills of $1.3 billion per year to be paid by
MSEB to Enron ,which was a huge sum for any Electricity
Board in India.
•
• By November 1993, the Ministry of Power had approved the
tariff, and the CEA was apparently abdicated its
responsibility to grant final approval on the cost of power.
•
•
• In November 1993, MSEB signed the final twenty-year
Power Purchase Agreement (PPA) contract with Enron.


• Dabhol Power Company (DPC) was promoted as a 100%

foreign owned private company incorporated in India by
Enron corp. USA, Bechtel Enterprises Inc. USA
(constructing the plant), and General Electric Co. USA
(selling turbines).


• Holding pattern in Dabhol power company, initially

 Enron :- 80%
 General Electric :- 10%
 Bechtel :- 10%


• The project will be done in two stages, with Phase I of 695

MW and an option to expand up to 2015 MW at a later
date.

 Problems with the
Project
 Local Opposition
• Displacement of 2,000 people and
appropriation of land without prior
notification


• Arrest of 300 pacific protesters a day,

average of 8-day detention period,
without trial and with violation of human
dignity


• Demonstrators, mostly women, dragged

from their homes, and beaten (lath
charge, tear gassing, helicopters),
detention, humiliation, intimidation

 Environmental
Problem


• No impact study, No alternative site



• Use of drinking water from pollution

(8300 Liters/Minute)
•
• Pollution of sea-water by used water
•
• Destruction of Plantation and fisheries

•



 Lack of
Transparency


• Under pressure from the Indian press to

reveal the assumptions behind the
calculation of the tariff in the PPA Enron
agreed to make the 300-page document
available. But she allowed the 40
journalists who had waited in line to see
the document only one day to study it.


• By keeping the calculation of power tariff

confidential, it had lost acceptance and
faith of the general public .



 Political Problems


• The Shiv Sena-BJP coalition used public

opposition to Enron to win control of the
Maharashtra government.


• After the election, the new government’s first act

was to open a public review of the project. The
“Subcommittee to Review the Dabhol Power
Project”
•
• The resulting recommendation was to cancel the
project, based on allegations of corruption,
lack of transparency, high project costs and
lack of benefit to the state.
•
•
•
 Renegotiated Deal
• In November 1995, Enron apologized to the
Maharashtra state government and proposed a
revised project plan.
•
• In the renegotiated deal, Enron agreed to change
from distillate fuel to Indian naphtha fuel, and
made the MSEB a 15% equity partner in the
project.
•
• The capital costs were reduced by$330 million to
$2.5 billion.
•
• The tariff denominated in US dollars was still
exposed to currency risk.
•
• The Shiv Sena-BJP agreement increased Phase I to
740 MW and signed the legally binding power
purchase agreement for Phase II, increasing the
total MSEB commitment to 2184 MW.
•
 Details of the Power
Plant
• PHASE -1 • PHASE 2
 Capacity:- 740 MW  Capacity:- 1275
 Cost:- $ 1.078 mw
billion  Cost:- $3.5 billion
 Fuel:- Naphtha  Fuel:- LNG
 Default of Payments
• By the end of 2000, MSEB was falling seriously behind in its
payments-which amount to tens of millions of dollars per
month, due to escalating costs of fuel and to devaluation
of the rupee in relation to the dollar.
•
• Enron sought to invoke legal arbitration against the MSEB.
•
• All this ultimately caused the DPC to shut down the plant's
operations in early 2001.
•
• Phase II was reportedly less than a month from completion.
•
 Le gal arbitration
• MSEB:-
 Its 15 per cent equity in DPC of a face value of Rs 977
crore has been wiped out
 Also paid Rs 495 crore of disputed bills DPC had raised in
the year 2001.
•

• Government of India: -
 Guarantee of $300 million for long-term bonds to pay off
foreign lenders but sovereign guarantee of Rs 1,500 crore
extinguished


•
 Ethics in the Case
• Lack of Transparency
•
• Human rights violation
•
•  Lack of Accountability
•
• Corruption and Bribes
•
•
Shortcomings of the Project
• M.O.U instead of Competitive bidding for the project. The
Enron Dabhol project was the most glaring example of
this pseudo-liberalization.
•
• There was no public participation in the deal. the Dabhol
Power Purchase Agreement was opaque and unavailable
for public scrutiny
•
• Pegging of power in dollars instead of rupees. For example
In India, you don’t pay for Coco-Cola in dollars .
•
• In the clutches of Enron, the MSEB was incurring a loss of
more than Rs.70 0 crore a year: it was paying Enron 15
per cent of its revenue for a measly 5 per cent of its
requirement.
•
 Recommendations
• General
 Transparency is the key to the successful
implementation of any deal.


 Negotiating with investors is a specialized task, and

needs an expert panel and stakeholder representation. In
particular, consumers should have a say in the negotiation
on prices.


• Government
 Government must recognize that investors will be
attracted to credible policy and a transparent investment
environment, not unsustainable artificial incentives
• Consumers
 Consumers need to become more organized and vocal and
push for a greater role in policy decisions.


• Investors
 Investors must learn to accept the commercial risks of
those investments, which are accompanied by high rates of
return. In the long run, this will be in their own interests.
 Investors must recognize that unrealistic commercial
agreements result in enhanced political/social risks. Such
agreements are likely to fail.
