Search the Internet          Tips  Sites: Finance, Investment

Dabhol, Enron's white elephant in India

On the Arabian Sea coast south of Mumbai sits India's biggest elephant -- a white elephant built by Enron Corp, the bankrupt US energy giant.

The $2.9-billion Dabhol power plant and adjacent LNG pier and storage facility have sat idle since June when the plant was shut down and construction halted after its sole customer fell behind on paying its bills -- just as the project neared completion.

The resulting dispute spawned a flood of lawsuits and countersuits, and once high-flying Enron has since been searching desperately for a buyer.

"Everybody involved is going to have to take a helluva haircut," says Abhay Mehta, using bankers' slang for the losses investors and lenders incur to salvage a project through debt write-offs and other means.

Mehta, author of the 1999 book Power Play which predicted the failure, says no sale may be possible until Enron and its partners agree to write off an estimated $1 billion investment.

The plant's operator, Dabhol Power Company, an Enron subsidiary, halted operations after the lone customer, a nearly bankrupt state utility, fell $240 million behind on bills for power from the 740 MW phase one, which began operating in May 1999. The 1,444 MW phase two was due to begin operating in June.

Enron, which filed the largest ever US Chapter 11 bankruptcy petition this month after a series of murky off-balance-sheet financial deals led to a crisis in investor confidence, owns 65 per cent of Dabhol.

General Electric Co and construction firm Bechtel Corp each own 10 per cent and the state utility, the Maharashtra State Electricity Board, owns the remaining 15 per cent.

On December 14, after two days of talks in Singapore, Dabhol Power Co, its Indian and foreign creditors and two potential bidders agreed on a process to resurrect the power project.

Bankers said private Indian power utilities BSES Ltd and Tata Power Company would study the project finances and books over the next two months.

"The two companies have agreed to complete due diligence and make their final offers in 60 days," said P.P. Vora, chairman and managing director of the Industrial Development Bank of India, one of the lead lenders to the project.

Indian newspapers reported that Enron, which had been the world's dominant energy trader, wanted $1.2 billion for the foreign stake, but Indian bidders were prepared to pay less than half that amount.

Mehta says the bidders may eventually offer even less because the MSEB has rejected another of their key demands -- rights to an exclusive distribution zone.

Some hard facts

Everyone agrees the most important task is to bring down the cost of the power produced by Dabhol. Since the first phase began operating, the MSEB has paid Rs 4.4 to Rs 26.6 ($0.09-0.56) per unit, making it some of the most expensive power in the world.

Even the lowest rate was almost three times more than MSEB's average acquisition cost, and six times more than the cheapest - Rs 0.7 a unit for power from older hydroelectric plants.

The take-or-pay agreement with Enron obliges MSEB to buy an average 21.6 hours a day of output -- or 90 per cent of the plant's rated capacity -- whether it needs the power or not.

Maharashtra state has a total installed generation capacity well above the highest peak demand ever recorded, meaning Dabhol's power is only needed occasionally to meet peak demand when other plants are shut down for maintenance or fail.

Once the second phase started operating, MSEB would have been paying at least $1.56 billion a year, or 73 per cent of its $2.13 billion in revenue last year, for power it could buy a lot cheaper elsewhere.

Sweetheart deal

Today, the Dabhol plant stands idle, its six massive chimneys threatened by corrosion from salt-laden sea air.

That is partly because economic conditions are far different from those envisioned in 1995 when Houston-based Enron negotiated the sweetheart deal that still represents the largest direct foreign investment in India.

Maharashtra, one of India's most industrialised states, was projected to need all the power Dabhol could produce and more.

India, with a domestic market of one billion people, gruesomely low wages and tens of millions of English-speaking graduates, was just opening up to foreign investment and being touted as a budding industrial superpower.

The Indian economy did grow at over seven per cent for three consecutive years in the late 1990s, but growth has since slowed steadily, particularly in Maharashtra.

Two weeks ago, DPC laid off most of its remaining employees, keeping just a skeleton staff to provide security and perform minor maintenance like watering the flower beds and hedges surrounding the plant's main office.

Thousands of people in the area have also lost jobs because of the closure, leaving men like M.M. Shirke, a father of two, scrambling just to survive and repay loans taken out in anticipation of better times.

Shirke used to make Rs 12,000 ($250) a month, about six times the national average, hiring out his multi-utility vehicle to DPC.

He's now lucky to earn even half that amount, chauffeuring around the few outsiders who still come to see the area's main attraction, the wounded White Elephant of Dabhol.

YOU MAY ALSO WANT TO READ:
The Enron Saga

Tell us what you think of this report