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    Class 17 - Dabhol Case Study PDF

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    BaljeetSinghKhosla
    1. The Dabhol Power Plant project in Maharashtra, India aimed to address India's growing power needs in the 1990s through a partnership between Enron and state entities. 2. However, the project faced political opposition and was cancelled in 1995 over concerns around costs, transparency, and environmental issues. After international arbitration and renegotiations, a revised agreement was reached in 1996. 3. But the project continued to face payment issues. When MSEB defaulted in 2001, the contractual guarantees failed, leading Enron to ultimately withdraw from the project despite attempts to resolve it through arbitration again.

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    Class 17 - Dabhol Case Study PDF

    Uploaded by

    BaljeetSinghKhosla
    128 views28 pages
    1. The Dabhol Power Plant project in Maharashtra, India aimed to address India's growing power needs in the 1990s through a partnership between Enron and state entities. 2. However, the project faced political opposition and was cancelled in 1995 over concerns around costs, transparency, and environmental issues. After international arbitration and renegotiations, a revised agreement was reached in 1996. 3. But the project continued to face payment issues. When MSEB defaulted in 2001, the contractual guarantees failed, leading Enron to ultimately withdraw from the project despite attempts to resolve it through arbitration again.

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    1. The Dabhol Power Plant project in Maharashtra, India aimed to address India's growing power needs in the 1990s through a partnership between Enron and state entities. 2. However, the project faced political opposition and was cancelled in 1995 over concerns around costs, transparency, and environmental issues. After international arbitration and renegotiations, a revised agreement was reached in 1996. 3. But the project continued to face payment issues. When MSEB defaulted in 2001, the contractual guarantees failed, leading Enron to ultimately withdraw from the project despite attempts to resolve it through arbitration again.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    128 views28 pages

    Class 17 - Dabhol Case Study PDF

    Uploaded by

    BaljeetSinghKhosla
    1. The Dabhol Power Plant project in Maharashtra, India aimed to address India's growing power needs in the 1990s through a partnership between Enron and state entities. 2. However, the project faced political opposition and was cancelled in 1995 over concerns around costs, transparency, and environmental issues. After international arbitration and renegotiations, a revised agreement was reached in 1996. 3. But the project continued to face payment issues. When MSEB defaulted in 2001, the contractual guarantees failed, leading Enron to ultimately withdraw from the project despite attempts to resolve it through arbitration again.

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    © All Rights Reserved
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    Download as pdf or txt
    of 28

    A case study of the Dabhol

    Power Plant
    Agenda

    1. The Dabhol Case


    Case Facts
    Demand for power in India was set to grow in 1995
    Growth of the Indian Power Sector

    160000
    2007
    140000
    Capacity (MW)

    120000
    100000 2002
    80000 1997
    60000 1995
    40000
    20000
    0 1947
    Time
    Case Facts

    Current Power capacity was inadequate to


    meet Indias needs.
    Energy Deficit of 18% was recorded according to
    the 8th Five year plan (1992-1997)
    Frequent Power cuts all over India
    Power Generation in India in 1995

    Private
    4%
    Center
    31%

    State
    65%
    Trend in Power Generation according
    to the 8th Five Year Plan (1992-1997)
    Private Sector Participation
    8.65.9 The public sector alone will find it difficult to raise sufficient
    resources to invest on new power generation projects for meeting the
    rapidly increasing demand for electricity in the coming years. The
    Eighth Plan, therefore, places considerable emphasis on
    attracting private investments for power development. The
    major changes in policy announced recently by the Government are
    expected to promote private sector participation in power development in
    the coming years. As already stated, the feasible addition of 30,538 MW
    during the Eighth Plan includes 2,810 MW of private sector
    projects. It is expected that about 3,000 MW of additional
    capacity will materialise over and above what has already been
    envisaged as indicated above in the private sector during the Plan period.
    This will supplement the capacity additions in the public sector.
    Power Distribution in India
    SEBs (State Electricity Boards) had a monopoly of
    power distribution within the states
    Many SEBs were close to bankruptcy at the time of
    the project as indicated in balance sheet in the next
    slide
    Tariffs were less than operating costs
    Agricultural users got large subsidies (contribute only to
    4% of revenue)
    Industrial users set up captive power plants
    Capacity Utilization was low (Plant load Factor of about
    50%)
    Large T&D losses (22%)
    Regulation of the Indian Power
    Industry
    The Industry was regulated at the Central or
    National Level
    Central Governments Ministry of Power was
    responsible for regulating and were in charge
    of decisions on
    Capacity additions
    Pricing/Tariffs
    Power-related investments
    General Environment in India

    Central Central/State
    Government Government

    State State State Executive Judicial


    Legislative
    Government Government Government Bodies Bodies
    Bodies
    (Administrative (Courts)
    (Politicians)
    Service etc)
    Relatively Autonomous
    Constitutionally Independent
    Reforms in India
    In 1991 the government embarked on a process
    of liberalizing the economy
    Less government control
    More private sector autonomy
    More privatization, more export focus, more FDI
    (100%) in power
    Tariff reforms in the power sector
    Fixed tariff for sunk costs
    Variable tariffs for operating, fuel costs
    More Reforms
    Export/Import reforms were enacted to bring
    down costs in the power sector
    Procedural reforms in the power sector were
    enacted to reduce transaction costs
    Single clearance window was created to save time
    in terms of getting approvals
    Enron
    World-Leading Multinational firm in the natural gas industry
    In 1994
    $ 9 Billion in Revenue, $453 Million Net Income
    Fortune Magazines Americas Most Innovative Company in 1996
    Enron had many subsidiaries, EDC was the subsidiary that
    participated in the Dabhol power project.

    Enron

    EOC ECT EOG EPP EDC


    Enrons Approach
    Enron saw a large opportunity in India
    To provide power
    To earn profits
    To obtain more projects if they were successful with their
    first one
    They seemed quite aggressive about this opportunity
    India fit in nicely with their global objectives at the
    time
    EDC Invested $13.2 Million in feasibility studies
    Enrons Approach
    Why did Enron pick Maharashtra as its entry state
    into India?
    State board was profitable and this reduced the revenue
    risk - the state board could pay Enron for power generated
    A large demand for power existed in the state
    Maharashtra already generated close to 10,000MW (12%
    of Indias generation capacity)
    Location was close to a port making it easy to transport
    fuel for the power plant.
    Maharashtra was one of Indias more developed states
    institutional risks were comparatively lesser
    Enrons Entry Strategy
    IAS officer in charge held talks with Enron
    Enron officials spoke to MSEB who were open to
    entering into an agreement
    Enron proposed a phased 2000 MW LNG plant.
    MSEB agreed to this.
    Phased plan was drawn out to first test the concept,
    and then to develop the complete facility
    695 MW was to be developed in Phase 1
    1320 MW was to be developed in Phase 2
    The contract
    A Power Purchase Agreement (PPA) was drawn
    up wherein MSEB agreed to purchase a certain
    quantity of power from the Enron-led Dabhol
    Power Corporation (DPC) at a certain tariff.
    DPC Ensured that adequate power will be made
    available
    MSEB took care of demand risks with PPA.
    Initial price was Rs 2.4/KwH
    20 year renewable concession was signed
    Dispute resolution was done through international
    arbitration
    Risk Analysis
    Risk Mitigation Borne By Ability to Magnitude
    Strategy bear
    1. Economic/ Through MSEB Questionable High
    Demand Contract -PPA
    2. Currency Through MSEB/GoM/ Questionable Medium
    Contract GoI
    3. Financial Leverage Good
    DPC Good Low
    Credit Rating
    4. Technical Partner with
    DPC Good Low
    GE and Bechtel
    5. Political PRI, Govt OPIC/GoM/
    Good Low
    Guarantees GoI
    - DPC/MSEB/
    6. Social Questionable Medium-High
    GoM
    7. Environ. Lobby GoI, WB DPC Questionable Medium
    Is Enrons Strategy Good?

    Is Dabhol a good project for


    Enron?

    For India? For Maharashtra?


    The Saga unfolds
    Bharatiya Janata Party (BJP), a right-wing
    party defeats the Congress and comes to power
    in 1995
    BJP makes lots of nationalistic noise
    Their leader says we will not be dictated by
    foreign power giants
    Committee prepares a report on DPC
    Project is cancelled in August 1995
    Reasons for cancellation
    Lack of transparency and competition in the bid
    process
    Some clearances were ignored based on the fast-
    track nature of the project
    Cost of the project was greater than comparable
    projects
    Enron cost Rs 4.49 Cr per MW
    Comparable projects cost Rs 3.6 Cr per MW
    Tariffs were too high
    Environmental concerns and concerns raised in a
    World Bank report were not addressed
    The Response
    Enron went to international arbitration which ruled in
    its favour
    The Indian central government maintained that the
    contractual agreement was between Enron and
    Maharashtra govt and not with Center.
    Central Govt refused to interfere
    Govt filed suit in Mumbai High Court challenging
    validity of Arbitration in England which was upheld
    Negotiations were re-opened in late 1995
    A Panel of 6 experts reviews the project
    A Revised proposal with major changes was accepted
    in May 1996
    Details of Revised Contract
    Old Contract New Contract
    Power Tariff Rs 2.4/KwH Rs 2.03/KwH in Ph
    1 and Rs 1.84 in Ph
    2
    Capital Costs Rs 90.6 Billion Rs. 64.2 Billion
    Ownership Enron-80;GE-10, Enron-65;MSEB-
    Bechtel-10 10%, GE,Bechtel -
    10
    Fuel LNG LNG and locally
    available Naphtha
    Environment Enron agrees to
    manage this
    The conclusion
    June 2001 Phase 2 was in Progress and phase 1
    was completed
    MSEB defaulted on a payment
    Counter guarantees provided by the
    government in the contract did not work
    Recourse to arbitration was taken once again
    At this point Enron wanted to pull out of the
    project
    What should Enron
    have done?
    Why governments renege (Ramamurti,
    2003)
    Government Reneging

    Economic Uncertainty Obsolescing Bargain Political Change

    Strategies Strategies
    Strategies
    Comprehensive Contracts Build support among public
    Stagger Technology transfer
    PPA Build support among media
    Undertake investments in
    Payment Guarantee Transparent bidding process
    several stages
    International Arbitration Bilateral ties with home countr
    Invest WB, IMF have leverage
    Enron followed few
    Enron followed most Enron followed none
    Of these
    Of these Of these
    Conclusion
    Enron had initiated this project since it was in line with its
    strategy
    Enron had structured the project as a PPP very carefully,
    building in guarantees into the contract, signing PPAs that
    would ensure that the power that they generated would be
    bought etc. Yet the project failed.
    They may have benefited by slowing down their investment
    strategy
    They should have been more transparent in their approach
    Enron should have made more attempts to garner political and social
    support since these were the key elements that led to project failure
    Trust and relationships and perhaps some innovative and
    flexible contracts might have been more successful than
    relying purely on the contract
    Thank you!

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