The Dabhol Power Project Settlement What Happened? and How? Kenneth Hansen, Robert C. O’Sullivan and W. Geoffrey Anderson y late 2001, the $2.9 billion Dabhol Execution of the PPA followed in assumed that these payments consisted of Bpower project had become, for the December 1993. MSEB’s payment little more than bribes to procure official second time, a leading international obligations were guaranteed by both the support for the project. investment disaster. government of Maharashtra (GOM) and, The controversies blew up shortly Six months earlier, cash flow from the subject to a roughly $300 million cap, the after ground was broken, when, in 1995, a Maharashtra State Electricity Board Central Government. change in political control led state of (MSEDB), the sole offtaker, had stopped. Based largely on that PPA and those Maharashtra authorities to cancel the After a year or so of smooth operations guaranties, Enron raised $1.9 billion in project. That dispute was resolved with a followed by months of slow and defaulted project debt. It was raise from a coalition of renegotiation of the tariff, a reduction of payments, Dabhol Power Company (DPC) Indian government-owned banks, export project costs and by the sale by Enron to an sent MSEB a notice of arbitration in May credit agencies, a syndicate of offshore, MSEB affiliate of a 30 per cent equity interest 2001. MSEB responded by, among other commercial lenders and the Overseas in the project for $137 million, reducing things, seeking an injunction to block that Private Investment Corporation (OPIC), the Enron’s interest in DPC to 50 per cent. arbitration and by repudiating the power US government’s development-though- MSEB’s 30 per cent interest was subsequently purchase agreement (PPA). Lacking income, foreign-investment-promotion agency. diluted to roughly 15 per cent upon its failure the 740 MW Phase I power station was shut OPIC supplied, at $160 million, the single to contribute to further equity investments. in June 2001, with all employees terminated. largest offshore loan commitment. It also Nonetheless, there was an expectation Phase II, which would have trebled provided $200 million in political risk creation of a shared interest in the success of the plant’s capacity to 2184 MW, was then insurance for the investments by Enron, GE the project would, going forward, reduce its roughly 5 per cent shy of completion. With and Bechtel as well as roughly $32 million vulnerability to political attack. the shutdown of Phase I, refusals of state in coverage of one of the commercial banks. Construction recommenced. There agencies to approve permits to test the Phase Not everyone was clamoring to get was some cause to hope that the rough II turbines, and the purported repudiation involved, however. The World Bank was times were past. Indeed, Enron’s 1998 of the PPA, lenders suspended funding for approached by India for support. In April annual report noted: “The Dabhol power completion of Phase II. Construction 1993, however, the bank’s manager for project in the state of Maharashtra is the stopped, and the contractors left the site. India concluded that the Dabhol plant was cornerstone of Enron’s activities in India In 1992 the government of India “not economically viable.” and is expected to be a strong contributor announced an invitation to private, Within India, the project was the to Enron’s earnings in 1999 and beyond.” including foreign, project developers and target of political and policy attacks. Critics In early 1999, Phase I achieved lenders to participate in the expansion of noted that there had been no competitive commercial operation and began supplying the Indian power sector through a “fast bidding. Project costs and power tariffs power to the Indian grid. It supplied power track” program. New laws were passed to were higher than other power projects in in a volume, and at a price, that might have assure protection of those investments. India, and the concern arose that the cost of been supportable given the demand Enron responded by quickly signing a Dabhol power could inflate power prices projections taken seriously by both Enron memorandum of understanding with the elsewhere. The cost of fulfilling its take-or- and Indian officials in 1993. That demand government of the state of Maharashtra for pay purchase promise would constitute half did not, however, develop until after the a project that would have included not only of the MSEB’s entire budget. Concerns were subsidence of the Asian economic crisis and the largest independent power generation raised that commitments were made to the until roughly, ironically, the time that the facility in the world but also its own LNG project before an environmental impact project had collapsed. regasification plant, a related gas pipeline, assessment had been undertaken. Finally, it The predictions that the project an LNG tanker to access gas supplies in became known that Enron had allocated a consisted of too much, too soon proved, Qatar and a port at the site to $20 million “education fund” to prepare however, to be prescient. It was clear by 2001 accommodate it. the way for the project in India. Critics that MSEB neither needed, nor could afford, www.infrastructurejournal.com 1 the energy it had committed to buy from the somewhat shocked when OPIC acted to banks, GE and Bechtel, and the GOI could project. The October 2000 payment due block steps being considered to foreclose on agree was that the continued presence of from MSEB went unpaid until January 2001 the project assets and to expel the equity Enron made a difficult situation worse. It when the state Government stepped in to bail holders from further involvement. While would be better for everyone if Enron were out the cash-strapped MSEB. Months of slow the documents provided the lenders such to go quietly, but at what price? No one payments, and non-payments followed. By rights, the technical expertise of, at least, was willing, or expected anyone else to be June, the project had collapsed. GE and Bechtel appeared to be critical to willing, to advance the sorts of funding that Though the allocation of restart the Phase I turbines and put the Lay had sought during his summer 2001 responsibility for the allegedly finishing touches on Phase II, much less to sales tour in India. expropriatory actions taken by Indian undertake the rehabilitation necessitated by In an internal meeting at OPIC during officialdom remains controversial and to the months of abandonment of the project the summer of 2002 the suggestion was some degree uncertain, it was clear that at site and facilities. raised that, notwithstanding the offer price the time Phase II was threatening to achieve of the previous summer, the continued commercial operation (which would treble deterioration of both the project and of the MSEB’s already taxing offtake obligations). apparent prospects for early resolution of the Officialdom came to the rescue with: various claims and disputes might well have refusals to permit the testing, and thus the led Enron’s creditors’ committee to ascribe a operation, of Phase II turbines; repudiation minimal value to Enron’s investment. of Phase I and Phase II payment Quote Perhaps Enron might be bought out for what obligations; and injunctions blocking previously would have been considered a arbitration of the payment dispute and small number. The further idea arose to against taking the steps that would have propose that OPIC might return to Enron triggered MSEB’s obligation to buy-out the the roughly $16 million that had been paid project. With no alternative customers, the over the years by Enron to OPIC for political project was brought to its knees. risk insurance coverage of a portion of Enron, at 65 per cent the controlling Enron investment. Rather than simply project sponsor, might have been expected A key stakeholder whose interests rescinding the contract and thereby resolving to have mounted an aggressive defense of and position were a source of constant the pending claim, the proposal would be the project. That is what had happened in guessing throughout meetings of the project that Enron would turn over to OPIC, or its 1995. Instead, Enron CEO Ken Lay led a lenders was the Government of India designee, its full interest in the project. delegation to India during the summer of (GOI). The GOI was a party not only Enron countered with the request 2001 to seek to close a sale of Enron’s because of its defaulted counter-guaranty of that it also receive interest on the returned equity interest to Indian government the PPA and its inherent interest in seeing premium and also be compensated for interests. The price was rumored at $600 the power needs of the country satisfied, certain outstanding claims which it held million to $1 billion. But India was not but also because of its risk of being held against the project company. It was fairly buying. By December 2001, Enron was no responsible under various international quickly agreed, however, that, in exchange longer capable of maintaining its core agreements to the extent arguments might for the rough equivalent of a return by operations, much less prepared to invest in be successfully advanced that Indian OPIC of the insurance premiums paid by the defense of a large, troubled project. agencies had engaged in behavior that was, Enron, Enron would walk away not only Thus, by late 2001, the fate of the as least in effect, expropriatory. In fact, from its pending $142 million claim against world’s largest independent power project responsibility for Dabhol was passed OPIC but also from its full interest in the and the largest foreign investment in India rapidly through a series of officials, none of project, assigning the Enron-owned shares was put in the hands of creditors, minority whom seemed charged with the issues long to OPIC or its designee.