| Richard Celeste | ||||||
Doing business with politicians is a wretched business, as independent power producers in the Indian subcontinent have learnt lately.
Last December the state government of Maharashtra declared that power purchased from the Dabhol Power Company (DPC), the Indian subsidiary of Texas-based Enron, the largest foreign investor in the country, was too expensive and announced a review of the second phase of the project. Many dismissed it as a political ploy by the newly-elected Congress coalition to embarrass its predecessor, now the central government, which had cancelled and then renegotiated the Dabhol contract six years ago.
But by January, the Maharashtra State Electricity Board (MSEB), the state’s distribution company and the sole buyer of Dabhol’s power, had not paid for power it had bought in November. A partial bailout by the state government allowed MSEB to part-pay its total dues of Rs3.07 billion($65million) to the company in mid-January, but the row is far from resolved. On January 25, the day MSEB failed to pay its next bill for power purchased in December, DPC retaliated by invoking the state government guarantee. Wade Cline, Enron’s managing director for India, also says that Indian and foreign lenders to the project could freeze disbursements of around $400 million to the second phase of Dabhol which is expected to come on stream in June. More worryingly, the government’s announced review of Phase II by a committee of experts has not yet begun.
Speaking at a reception at the American consulate in Mumbai on January 22, Richard Celeste, the outgoing American ambassador to India, did not mince his words. “Neither MSEB nor any other state electricity board can succeed if they are not permitted, indeed encouraged, to recover the full cost of the power they distribute,” he said. MSEB recovers just half of what is owed to it from the sale of power, largely because of subsidies and theft of power, often at the behest of politicians. In December the state government added to that burden by granting more subsidies to powerloom units in the state.
Celeste warned: “The world is watching. Perceptions among American and other foreign investors will be affected by the challenge to Dabhol, and how it is resolved…Especially when it involves a multi-billion investment such as that made by Dabhol…It regrettably feeds the concern among American businessmen that India remains a less than reliable destination for their investment dollars.”
Conceived in the early 1990s as part of nine fast-track projects to showcase India’s power reform, Dabhol has become a casualty of India’s failure to push ahead with those reforms.
Indian and foreign lenders have committed $2.1 billion to the $2.94 billion project, of which about four-fifths has already been drawn down. International lenders – including around 15 banks such as ABN Amro, Standard Chartered ANZ, Citibank, Bank of America, Credit Lyonnais and CSFB – met in New York on January 10 to take stock.
Says one US banker: “Enron explained the latest developments on Dabhol to the bankers. The covenants built into the loan agreements of Phase I clearly indicate the time lines for payment. Securities get triggered if payments are not made.”
Yet he points out why there might be cause for worry. The central government counter guarantee on MSEB’s payments does not extend beyond Phase I of Dabhol, in effect restricting its exposure to one third of the project. Unlike the last time when the contract was cancelled and renegotiated, most of the money is now disbursed. “Our only comfort is that most of the debt has been put up by Indian banks and they will be the biggest losers if the project is jeopardised,” he adds.
Indian banks – mostly large state banks – are major investors with about $1.2 billion tied into the project by way of rupee, foreign currency loans and guarantees to the export credit agencies. In December, DPC convinced Indian lenders to cut the fixed interest rate on their rupee loans to Phase I from 21.5% to 16%. These savings, says Cline, have been passed on to MSEB that owns 30% of Dabhol’s Phase I.
Apart from being tied into the project financially, the Bharatiya Janata Party-led central government is unlikely to risk losing the confidence of foreign investors completely. Faced with interminable delays and litigation, Cogentrix walked out of a power project in the southern state of Karnataka a couple of years ago.
For that reason the government needs to negotiate with DPC. Once it does, two major issues need to be sorted out. These relate to the purchase and price of Dabhol’s power. MSEB stopped purchases of Dabhol power in January, citing the fact that cheaper power is available to it. This is worrying DPC because the bigger 1,444 mw second phase of the 2,184 mw project goes on stream later this year and as per its contract it can only sell power to MSEB.
Selling power directly to other state electricity boards will be difficult as their creditworthiness is worse than MSEB’s. Feeding power into the national grid managed by the central government could be a better option but needs to be worked out. DPC hopes that the central government, whose financial liability is a counter guarantee to Phase I and a limited guarantee to Phase II, might be persuaded to buy the power from Dabhol.
The second issue will be a possible renegotiation of the price of power from Dabhol. Enron points out that Dabhol’s power will be cheaper early next year once its plant switches to natural gas which is about 25% cheaper than the naphtha it now uses. Hedging the fuel exposure (LNG will be imported from Oman) could help reduce costs. However, Indian officials might hope that, just as Pakistan renegotiated the financial terms of its power contract last December with Hub Power Company (HUBCO), the biggest foreign investor there, Enron could be persuaded to cut its internal rate of return (currently it is guaranteed a 16% return in dollars). Dr Kirit Parikh, an economist who helped renegotiate the project in 1995, says it should do so.
Refinancing some of the foreign dollar debt in rupees could be an option, given that rupee interest rates are lower and depreciation of the rupee adds 5% a year to the cost of dollar debt. Moreover, foreign lenders are unlikely to offer better terms for the higher credit risk that MSEB and the Maharashtra government now entail. One foreign banker rules this out as India risk has worsened from investment grade when the first loans were negotiated six years ago to non-investment grade after the economic sanctions imposed in 1998.
As Enron’s Cline says, the four parties involved – Enron, MSEB, the Maharashtra and central governments – must “get into a room to sort out the issues soon”. Then, much will depend on their relative negotiating power. The sooner this is done and with as little acrimony, the better for India. As one Indian lender puts it, “The cost of contention or scrapping the deal is prohibitive. The only sensible way out is to work at its components.” Try telling that to politicians.
Kala Rao
