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`Failed business model' for Dabhol

Our Bureau

MUMBAI, April 9

EVEN as the wrangling continues over the Dabhol power project, financial analysts, in consultation with legal experts, are trying to identify means by which the feuding parties can back off after cutting their losses.

One proposal that has been put forward is by Mr Pradyumna Kaul, management consultant and anti-Enron activist. Mr Kaul has suggested that the project be treated as a ``failed business model''. In other words, a sick company.

In his deposition before the Godbole Committee, set up to examine the Enron issue, Mr Kaul examined various alternatives available, and homed in on the ``open market'' method. The model suggests restructuring the project in consultation with lenders, as the ``minority shareholders have developed serious differences with the majority stakeholders''.

Mr Kaul has argued that Dabhol Power Company (DPC) must not be allowed third-party sale of power (as suggested by it as a possible solution) as that would wean away the high-paying customers of the Maharashtra State Electricity Board, paving the way for its bankruptcy.

``A Greenwich University report speaks about 8-10 ways adopted by different countries for cancelling IPP contracts. The most common one is a legislative fiat -- Parliament or a State Assembly pass a law declaring the project illegal ab initio, and, there fore, void ab initio. No rights would accrue to any of the parties involved in the contract,'' he told the panel.

He cited the example of Pakistan which cancelled six projects already producing power at one stroke through this route and the nation ``remained unaffected''.

A ``workable private sector cure'', according to Mr Kaul, would be to reduce the ``over-invoiced'' capital cost. The share capital, by way of illustration, can be written down from Rs 10 to Re 1. This has happened in Far East Asia, he said. To deal with the debt, loans have to be restructured and interest deferred.

The capital cost of phase I of the Dabhol project is around Rs 3,760 crore, comprising 30 per cent (about Rs 1,100 crore) equity and the rest debt (around Rs 2,600 crore). ``The equity has to be written down by a factor of 10 to about Rs 100 crore and th e debt has to be brought down by half. The interest has to be deferred,'' Mr Kaul suggested. This depends on the Government and MSEB playing a major role.

First, power purchases from DPC have to be stopped. ``A situation has to be created to establish that the current business model is unworkable. If MSEB was kept autonomous, it would have, like a rational businessman, concluded that it cannot buy from DPC because it has access to cheaper sources of power,'' Mr Kaul said.

Once the business model is declared unviable, MSEB, the 30 per cent stakeholder, can exercise its rights, under company law, as the dominant minority shareholder. The project would be treated like a BIFR case and would have to be restructured. ``At this stage Enron and the other foreign partners may not want to be part of the project and it would be cheap for MSEB to buy out their stake,'' Mr Kaul summarised.

Mr Kaul maintained that the ``game has to be played according to the private market rules, and this plan is perfectly in accordance with every one of them''.