It is deal-making time in Dabhol

D. Sampathkumar

THE Enron-promoted Dabhol Power Company continues to navigate choppy waters, in its quest for the safe harbour of unhindered domestic operations. If the uncertainty over cancellation by the Maharashtra State Electricity Board (MSEB) of its power purchase agreement with the company is not enough, there comes the news that MSEB, a 15 per cent stakeholder in the company, refuses to participate in the deliberations of the company's Board.

Its tactical compulsions in this regard are entirely understandable. It does not want to be even remotely seen as party to decisions of the company that could compromise its claims against the company at a later date.

But the continuing standoff between the MSEB and the overseas promoters notwithstanding, a unique combination of circumstances has provided the right conditions for an amicable resolution of the messy tangle that the project is enmeshed in, at the moment.

Each of the parties with a stake in the project has its own compulsions in seeking a resolution of the dispute and thereby put an end to the uncertainties facing them **vis-a-vis their financial exposure to the project. For all the bravado, the basic fact remains that none of the parties involved in the deal can afford to dig their heels in and refuse to go along.

Leading the list is Enron, the project's principal promoter. Its claims to being the injured party in the game of political football that the project has become, has lost some of its strength in the wake of troubles confronting it at home. Its non-energy business is largely in tatters and controversies over accounting policies and disclosures of performance, are developments it could have done without in its quest for an image of purity of a fresh driven snow.

In a recent interview in an American publication, Enron's chairman is reported to have admitted to some strategic blunders in the company's choice of investments. A company that by its own admission has misspent resources cannot afford any searching questions about the actual quantum of expenditure incurred by it in the Dabhol project. In particular, questions are bound to be raised, should the matter ever get to the stage of international arbitration, about the monies reported to have been spent in political education and training in India.

Adding a new dimension to the issue is the news of takeover of Enron by Dynegy Inc., a much smaller rival in the industry but without any of the excess baggage of questionable investments of the former. This is a positive development. Dynegy would have its hands full managing the merged business with all its inherent complexities.

The position domestic financial institutions find themselves in, in this imbroglio, is even more untenable than that of the overseas promoter. Servicing of debt would be the first casualty in any termination of the commercial contract between the Maharashtra Electricity Board and Dabhol Power Company. With their balance sheets already in a precarious position the implications for provisioning for non-performing assets that a default occasions are truly horrendous.

The size of exposure of domestic financial institutions in a project whose specific contours were justified on the grounds of paucity of domestic resources, is nothing short of the scandalous. But that is an altogether different aspect of the rot that has set in in the political decision-making process in the country.

As for the Central Government, its position as merely the counter guarantor of MSEB's payment obligations under the power purchase agreement does not offer it much room for comfort. A festering dispute involving a US company and, that too, one located in the presidential heartland _ Texas _ is not going to do anything to help the delicate Indo-US relations in the post September 11 geo-strategic situation. Also, while in theory, the Centre can pay and recover it out of the finances devolving on Maharashtra from the Centre, in practice, this may prove to be politically infeasible.

As it is, some of the more prosperous states in the federal set-up feel they are contributing far more to the cause of balanced regional development than they can reasonably be credited with. The extraction, by way of counter-guarantee obligations, is certain to stoke fissiparous regional sentiments besides handing out a stiff price to the party in power at the Centre when it is election time in that region.

What, then, could be the contours of a possible deal among the interested parties? If the deal is to be sold by each party to its constituents, it must be seen as a fair one and yet recognise the harsh commercial realities that characterise the present situation of each of the parties to the dispute. The project with its integrated structure of power generation, port handling and regassification can no longer be sustained if domestic bidders are to be roped in as new promoters.

For then, the financial outlay implicit in a project of such a composite nature is beyond the capability of most domestic players in the power utility business. It hence needs to be rebundled into two components _ namely, the generation assets and support infrastructure such as gas terminal and regassification plant.

Second, differential treatment in the valuation of assets in the two phases of the projects is a must. Enron, after all, is in possession of a counter-guarantee for the investment made in the first phase of the project. Hence, the broad principle of international market price for assets taken over will have to be tempered by the recognition that insofar as the first phase is concerned, the valuation is not so much for pieces of generating equipment as for a stream of guaranteed cashflows from a commercial contract.

The political education expenses that Enron has admittedly incurred cannot completely be ignored as some Indian entities appear to have been the beneficiaries. Sensitivity to these aspects provides a possible framework for resolving the dispute.