India can extricate itself from the Dabhol mess

With some creative thinking on annulling or renegotiating the PPA

Narasimha Rao

A few years ago I attended a case study of the Dabhol project at Harvard Business School and was alarmed to see students snicker at the absurdity of the Dabhol power purchase agreement (PPA). In all my discussions with well-informed people in the US, no one supports the contract and most wonder why the government got the country into such a mess. If India scraps or renegotiates the PPA it will likely face international arbitration and potential sanctions from the Bush administration, given George Bush’s close ties to Kenneth Lay (Enron’s chairman, who was one of Mr Bush’s nominees for Energy Secretary).
If the PPA is left untouched and Dabhol Phase II goes into operation, the dues on the project will increase more than five-fold. With Phase II, total payments, regardless of whether it generates even one unit of electricity, will amount to over Rs 6,000 crore a year (current fuel and exchange rates). This is over half of the Maharashtra State Electricity Board’s revenues, and 2-3 per cent of Maharashtra’s state income, while providing at most 20 per cent of Maharashtra’s energy needs.
Which is the lesser of the two evils? The answer is painfully simple: despite the consequences of reneging on a signed contract, the PPA has to be at least changed if not annulled. If not, besides the obvious financial damage, India will have set an absurd precedent for future foreign investment and shown disdain for its own laws and people.
There are ways for India to get around the wrath of Uncle Sam in extricating itself from this predicament. It can force a complete annulment, though that would almost certainly lead to international arbitration. The only hope of surviving arbitration is if any Indian court recognises and upholds the illegality of the contract. Recall that the Central Electricity Authority never gave economic clearance to the PPA, which is a violation of the Electricity Supply Act. The Supreme Court is currently considering an appeal by the Centre of Indian Trade Unions (Citu) and Abhay Mehta on such a claim of illegality. If the Court rules in favor of Citu then India may have a legal basis for prohibiting enforcement of PPA provisions.
Admittedly, the Supreme Court’s recent record in protecting public interests, as evident in the legal history of this project and in Narmada, leaves something to be desired. However, we are in a financial crisis, not just predicting one, and public and political pressure will have to be mobilised to put pressure on it — the recently established Review Committee being a good candidate.
Second, information can be fed to America’s Securities and Exchange Commission (SEC) to bring charges against Enron under the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits public and private US companies from making corrupt payments to foreign officials for obtaining or retaining business. There is in all probability sufficient evidence accessible to the Indian government of the unspoken and unproven kickbacks, given that the BJP government filed a 600-page suit alleging, among other things, corruption in the initial contract negotiations.
Furthermore, reference was made in a US Senate subcommittee hearing to a curious $20m incurred by Enron in educating Indians. If sufficient evidence can be channeled to the SEC to merit an investigation, the SEC would itself carry the case forward.
Clearly, Indian politicians and the SEC will be hard pressed to co-operate in such a scheme. However, Indian officials can co-operate without fearing exposure of their own culpability since they are not accountable to US courts. As for the SEC, it has in the past brought criminal charges against US companies, the more recent case of Triton Energy’s corrupt practices in Indonesia in 1997 being a case in point. If indicted, penalties could range from a trivial $2m to the entire value of the contract (over $13bn). The challenge in the Enron case would be for India not only to prompt an SEC investigation but to extract the highest possible penalty.
Third, the Maharashtra Electricity Regulatory Commission (MERC) could unilaterally modify the contract on the basis of a fresh economic and policy analysis of the project. This option has been discussed in a previous article in Frontline (Feb 17-Mar 2) and should be explored.
Regardless of the legal battles and their outcomes, India may still face significant pressure of US economic sanctions if it annuls the contract. Given Indian interests in US investments, the DPC could be allowed to pursue its investment interests under the following conditions, which may both protect India’s reputation and provide Maharashtra with something closer to what it needs:
Abolish Phase I but resize (reduce drastically) Phase II on the basis of an in-depth analysis of Maharashtra’s power needs; change the technology to a peaking facility, from a combined cycle (combination of steam and gas turbine) to a simple gas turbine; change the terms of fuel purchase to a fixed price contract so that the MSEB is hedged against currency and fuel price risk. Let DPC maintain its current equity ownership, but require a competitive bid orchestrated by the Indian government for project equipment and construction, and reconstitute transparent contract terms based on other prototypes from countries such as Malaysia.
This will achieve the following: typical capital costs for peaking facilities in the US and UK range from $350-$400/kw, as opposed to the $1,400/kw embedded in the Dabhol PPA. A gas-fired facility would enable the government to eliminate all costs associated with the LNG port and regassification facility. Although gas turbines are slightly less efficient than combined cycle facilities, the cheaper and less volatile fuel price would offset this decrease in efficiency.
The technology, which can turn on and off rapidly, is more suited to the power needs of the state. The current debate on whether Maharashtra has excess capacity is misplaced. It has sufficient baseload capacity, but has a shortage of capacity during peak times. The Dabhol project, a baseload plant, does little to alleviate this peak shortage because it cannot technologically operate as a peaking facility.
(This article concludes on the on Monday)