The Hindu : Don't revive Dabhol

Online edition of India's National Newspaper
Friday, Aug 30, 2002

Opinion

Opinion - Leader Page Articles

Don't revive Dabhol

By Kannan Srinivasan

It makes no sense to keep the project alive at the cost of a massive, continuing drain from consumers and public finances.

THE SAGA of the Dabhol Power Corporation is perhaps the most extraordinary in Indian corporate history. The original deal with the Sharad Pawar Government reeked of fraud. So did its scrapping and dramatic revival — clearing Phase Two as a giant bonus — with the blessings of the Shiv Sena supremo, Bal Thackeray, and the former Deputy Chief Minister, Gopinath Munde of the BJP.

This was followed by the disintegration of the Maharashtra State Electricity Board's finances under the weight of its commitment to buy Dabhol Power Corporation power. As this crisis came to a head, the fraud-ridden American parent company itself collapsed.

But even Enron's collapse has not drawn the curtain on this remarkable saga. In fact, a fresh fraud is in the offing.

On August 13, the Maharashtra State Electricity Board filed a petition before the Maharashtra Electricity Regulatory Commission to buy power from the Dabhol Power Corporation on the excuse that it wants to avoid "a deterioration of the plant and generating machinery". Official sources are quoted as saying that Maharashtra "already has a shortage of 1,500-2,000 MW and we cannot allow 700-odd MW to sit idle".

A massive package of concessions is being prepared, including total waiver of excise on naphtha, exemption of sales tax on fuel, and a reduction of interest rates. These are clearly the preliminaries for a full-fledged revival of the entire project, as demanded by American investors and the United States' Ambassador to India.

However, it makes no sense to keep the project alive at the cost of a massive, continuing drain from consumers and public finances. Public interest demands a directly contrary course, as recommended by the power expert, Pradyumna Kaul. That would be to take a one-time hit and not to buy power from the Dabhol Power Corporation. The Industrial Development Bank of India and other lenders can recover some of their money from the sale of the plant.

The Maharashtra State Electricity Board is reported to have offered to buy power at Rs. 2.25 per unit. The final figure will work out higher than that. But there would be a heavy price to lowering the price of Dabhol Power Corporation power. The firm's costs are so inflated that to bring down the tariff from Rs 3.20 to, say, Rs 2.50 would involve a loss of Rs. 1,100 crores in sales tax, customs duty and subsidising the rate of interest of loans to Phase One and Two of the project. The Godbole Committee Report and the Maharashtra State Electricity Board White Paper reveal that buying power from Phase One would mean a loss of Rs. 500 crores for Maharashtra, and from Phase Two a loss of Rs. 1,000 crores for Maharashtra and other States.

The Dabhol Power Corporation has set up two-and-a-half times the liquefied natural gas capacity it needs. The excess capacity would have to be sold to industrial consumers such as the fertilizer company, Rashtriya Chemicals and Fertilisers, which would otherwise use natural gas and coal. There is no demand for fuel at the price at which the DPC proposes to sell liquefied natural gas. Using the Dabhol Power Corporation's liquefied natural gas would cost Rs. 5,000 crores — Rs. 1,500 crores more than domestic coal lying idle in Maharashtra and Chhattisgarh.

The Industrial Development Bank of India, as lead banker, wants to raise another Rs. 3,500 crores to complete Phase Two of the project. This would vastly increase the burden on the Maharashtra Government's finances. The pressure for this criminal waste of public funds comes from the United States, particularly the Overseas Private Insurance Corporation (OPIC), which has given significant insurance guarantees to American investors in the project.

Let us determine what should be the public interest. To do that, we should net out the losses to the public made on one account (say, the losses of the Industrial Development Bank of India) with the gains on another account (to consumers and public finances). No doubt the IDBI and the consortium of Indian banks would take a hit of Rs. 1,800 crores if the Dabhol Power Corporation were scrapped. However, this would avoid an annual outflow of Rs. 5,000 crores in capacity charges and fuel charges to be paid by the Maharashtra State Electricity Board.

This would amount to half of the Board's budget, or almost all of Tamil Nadu's or Delhi's budget. Scrapping the Dabhol Power Corporation would also avoid a loss to the exchequer of Rs. 2,600 crores (Rs. 1,500 crores in electricity charges and Rs. 1,100 crores in sales tax, interest and customs duty concessions).

In the last eight years, Enron has been paid around Rs. 5,000 crores in excess by Maharashtra consumers: Rs. 1,000 crores in equity and Rs. 3,500 crores of excess payments in bills, and Rs. 370 crores on transmission lines for a project which the State did not need. As a result of Enron's Dabhol Power Corporation project, 500 MW of capacity of gas-based power is lying idle at Uran, and Koyna Phase Two has been postponed by 10 years.

The Industrial Development Bank of India should in the meantime go to court to gain protection against the invocation of the guarantees of Rs. 4,400 crores which it has made to the project; it can say the contract itself was fraudulent, so it should not be bound by these guarantees. Even if one assumed that it was bound to lose Rs. 6,200 crores — or the entire guarantees plus the amount it has already advanced to the project — that is still better than the recurring annual losses which would be incurred by the exchequer.

The Industrial Development Bank of India and the other lenders should instead salvage what they can from the sale of the assets. Comparison with the Tata Power Project Phase V reveals that the salvage value of the Dabhol plant would not be Rs. 10,000 crores, but about a third of that.

The losses to the public as a result of the Dabhol deal have been massive, and it is important to proceed against those responsible for the entire matter. There is no justification for compounding the original offence.

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