Dabhol Case Study
Conclusion Overview: rhea Electricity Act was amended in March 1992 to provide incentives and a fixed component of 16% rate of return to the investors, following this act a delegation of central government officials visited the USA and I-J to woo the foreign investors and this in-turn instigated the confidence of foreign investors. This can be substantiated by several MOUSE being signed after the event. Contractual operational risk management/mitigation arrangements a.
Reduced Financial Risk Status of “Pioneer Project” Fast track projects: This project was categorized as a fast rack project and for such fast projects the central government decided not to follow the standard public tendering process instead it would negotiate with the Pips for individual projects. The rationale was that government was not in a strong negotiating position and therefore the financial risk to the Pips had to be reduced to entice them to invest in India.
Project Site of your choice Government’s invitation to visit India and investigate power plant development opportunities – Given a free hand to choose potential site. C. Response of Central rent Highly favorable response of Central Government and State Government officials in the Maharajah’s State Government to the proposal of Enron stating to build the largest of its kind gas fired power plant. D.
Formal MOM signed In May 1992 India invited Enron Corp. to explore the possibilities of building a large power plant in Maharajah’s and the following month a memorandum of understanding was signed.
In December 1993 Maharajah’s State Electricity Board MIMES) signed a power purchase agreement with a newly formed company called Oddball power corporation (DIP) where Enron held 80% of the equity and its two ratters, General Electric and International Generation company each held 10%. E. Fast paced clearance to proceed with the project rhea project went forward even though the World Bank team and the GO’s Central Electricity experts hinted on many irregularities in the agreement and that it was a one sided agreement in favor of Enron.
Speedy approval process by Foreign Investment Promotion Board asking the Central Electricity Authority to give clearance to the Oddball project without the detailed information on economic and technical clearance normally required. However, final clearance would still be necessary at a eater date. Fast paced clearance to proceed with the project: Major government approvals were in place by March, 1993. F. The Contract rhea power purchase contract itself was very rigorously designed and was supposed to give the Oddball decent commercial risk cover.
The Maharajah’s State Electricity Board is the sole purchaser of the Dip’s product – electricity. To mitigate the commercial risk DIP needed to sign a very binding power purchase agreement (APP) Ninth its customer. The first Power Purchase Agreement was signed between the DIP and MESS on 8th December 1993. The APP was renegotiated after the newly elected Maharajah’s state government scrapped the agreement in second quarter 1995.
Revised 20 year agreement was signed in November 1995 with final capacity of 2,184 MEW implemented in two phases, the first being 740 MEW.
At the time of signing the average cost of power was calculated to be around RSI 2. 4 per skew produced assuming 90% load. The APP was formulated as take-or-pay deal in forcing the MESS to buy or pay for 90% of the power DIP is able to produce. DIP was to receive capacity availability payments fixed with USED exchange rate plus variable fee for actual energy produced. In case of arbitration the court of London was to be used.
APP liabilities were guaranteed by the owner of MESS, the State of Maharajah’s, counter-guarantees were also provided by the Government of India.
G. Currency Risk Cove red APP adjectively transferred the currency risk trot C to MESS because most to the payments were tied to the USED and they were thus not influenced by the fluctuations in the currency market. Financial Protection in the form of guarantees signed by Central Government to assure Enron in the event that MESS was unable to make its aments. H.
Memorandum of Understanding (MOM) According to MOMS, Enron has to be paid the same amount regardless of the Maharajah’s State Electricity Board’s consumption of energy I. E.
MESS had to pay for energy produced by 90% capacity of the power plant even though its consumption Mould correspond a minor capacity. Case Question #2 Assuming that the measures for mitigating operational risks that underpinned the Oddball power project were a problem, discuss how Enron may have demonstrated ‘credible commitment” to the Oddball power project. Conclusion
Enron may have demonstrated “credible commitment” to the Oddball power project in the following ways: More accurate analysis of political risk rhea deal was criticized for its high cost, lack of competitive bidding, negative environmental impact, accusations of bribing etc. BGP/ Ship Seen made it a part of their election campaign to throw out Enron. Enron failed to understand that power and politics have a major role to play in permeating deals with governments. It should have done a better analysis of the political environment of India and analyses the impact of change in power.
The Power Purchasing Agreement between Enron and MESS was a secret deal and thus it created conflicts among politicians who are elected democratically. The communication and transparency were clearly lacking in this project. Enron should have been more transparent in dealing with the politicians in order to create an environment of confidence. Involvement of a local partner Enron was not familiar about the Indian situation. It should have involved a credible local partner in a Joint Venture in order to understand the Indian scenario, bureaucracy and government better.
Better Dealing of MOM & APP .
Enron should have mentioned the specific details about the project costs (detailing the Civil costs, mechanical costs, electrical, instrumentation costs with further break Jp for engineering, procurement and construction) as required by the Indian Law. 2. Enron should have set a competitive pricing for the generation of electricity. 3. Enron should have mentioned in MOM when the 20 year contract would begin and when the electricity supply or payment would commence.
4. Enron to secure all the approvals taken from federal and state approvals. 5.
Enron should have negotiated he APP in such a way that it would supply part of its power supply (say 40%) to MESS and remaining part to other power deficit states. 6. Considering the fore risks, Enron should have dealt the APP in INNER instead of US dollar.
7. Enron may also have considered merchant power trading (variable unit rate of power based on demand) n the APP instead of going for only fixed pricing irrespective of demand. 8. Enron should have shown its credibility of the project by show casing its usage of technological and efficient equipment in producing the electricity over the peers.
Case Question #3 Suggest approaches to manage risks in an unstable political and institutional environment associated with non-recourse/limited recourse finance.
Conclusion Mitigating political risks ay including the government in the deal in order to gain access to the Indian market the venture kept a potential threat close to it. As government has a stake in the denture, they should have done everything to keep it afloat. Unfortunately for Enron, their partner’s other interests got in the way.
Questions that arise for the case are Neither Enron was fully aware of the financial credibility of India in the international arrest, whether they had considered alternative sources of financing and the problems with the feasibility report that Enron originally used (a report for the World Bank revealed doubts about it). The problem could have been solved if the central government would have allowed its own utilities like the Power Trading Corporation to buy power from Oddball, so that it could have reduced its dependence on MESS.
However, central utilities were as reluctant to buy high cost power as MESS.
Possibilities for Enron in avoiding the political risks in the first place are involving the Nor Bank, the Inter-American Development Bank or some other multilateral financing agency in the project more strongly by borrowing from them, through thorough gauging of the environment and political situation and adapting to the circumstances. The arrangements with the host country government were not sufficient to reduce substantially, or even eliminate, the political risk.
The secrecy of the APP creates conflicts with the deals with the politicians that are elected democratically. Thus communication and transparency are critical for the success of project. However, there were several problems on the customer’s side.
Solutions loud be making Subs commercially autonomous, profit-seeking bodies, making reforms in their political economy and guidelines, promoting competition to get better deals by changing the mind-set – invite competitive bids only for the price of power and letting private plant operators sell power directly to customers.
Mitigating economical risks Rigid contractual framework dealt with most of the commercial risks adequately. Failures in invoking guarantees can be considered more as legal or political than as economical risks. However the failure of MESS, the customer, is part of the commercial risk – there is no solvent customer. DIP could have dealt with MESS liquidity risk by for example negotiating the APP to include clauses giving DIP right to sell all excess electricity to other customers.
As Enron has considerable knowledge in operating in the energy business it probably has skills needed by the Mess’s operative management. Enron could have demanded a position in the MESS or at least required it to regularly give status report and give some means of influence or clauses of required financial status of the customer. By these arrangements the Enron could have ensured its customer’s ability to pay bills and ask for more.