Manas Chakravarty: The ghost of Dabhol rises again

A brand new chapter in the chequered history of Dabhol is on the verge of being written. A special purpose vehicle (SPV) to take over the plant and revive it will soon be registered.

The Maharashtra State Electricity Board (MSEB), the financial institutions that were lenders to Dabhol Power Company, together with National Thermal Power Corporation (NTPC) and GAIL (India) Ltd, are expected to pump in a sum of Rs 1,500 crore as equity for the SPV, while the government of India has chipped in with a guarantee of close to Rs 3,150 crore.

A settlement has reportedly been hammered out between the government, the domestic lenders and GE and Bechtel, who currently hold 85 per cent of Dabhol's equity.

It has been agreed that MSEB will buy 2,184 MW power from the revived project at Rs 2.30 per unit, at a plant load factor (PLF) of 80 per cent.

GAIL will source the LNG required for the project and will complete the work relating to the LNG terminal, while NTPC will operate the power plant. Both the LNG supply and power generation are expected to start in a year's time.

That's not all. Some reports say that the capacity of the plant will be increased to 5,000 MW, since the LNG terminal has a capacity of 5 million tonnes, which can generate 5,000 MW of power.

At the moment, there are conflicting reports about whether the takeover of Dabhol's assets by the SPV would amount to nationalisation of Dabhol or whether the SPV will merely run the project till operations have stabilised and until a private buyer is found.

Technically, once the SPV takes over the project, it may get auctioned, though it is possible both GAIL and NTPC will be given the project and that is why they have formed a project SPV to run the project.

The power shortage in Maharashtra: The urgency in reviving the Dabhol power project needs to be seen against the backdrop of the massive power shortage being faced in Maharashtra.

The state government has been forced to ration electricity in many parts of the state to just 10 hours a day, sparking widespread protests. Farmers have ransacked MSEB offices and the opposition parties have been quick to stoke popular discontent.

On an average, the deficit during peak and non-peak hours is approximately 3,600 MW and 2,200 MW respectively.

The aftermath of the Dabhol debacle is now being blamed by politicians like Sharad Pawar for the lack of investment in power projects. While Maharashtra needed additional capacity of 400-500 MW every year, all that was set up in the last 10 years was a paltry 400 MW.

Though the argument today is that there is no point in letting the plant rust away, particularly when there's a power crisis in the state, what's critical is whether the cost of power from the revived unit will actually be Rs 2.30 per unit.

The terms of restructuring: Reports indicate that the cost of completing and restarting both phases of the project, as well as completing the LNG terminal, adds up to a tidy Rs 10,600 crore.

And since the SPV's equity will be Rs 1,500 crore, that leaves the project with Rs 9,100 crore worth of debt, or a debt:equity ratio of 6:1, far above the 3:1 norm for power projects.

The debt component includes the current exposure of the financial institutions to Dabhol, and the long-term bonds backed by government guarantee that will be used to buy out the foreign lenders.

With so high a debt-equity ratio, the payback time for the project will be very high. Also, since the debt is a pass-through cost, the effect is likely to be that it will be MSEB, not the equity holders, that will be affected.

Without the LNG terminal, the revived project will cost Rs 3.6 crore per MW, as compared to Rs 3 crore for a brand new gas-based plant.

The issues: Clearly, with such a large capital base, the tariff required to cover the capital charge will also be high. Reports quoting government sources have said that, of the Rs 2.30 per unit tariff worked out for MSEB, Rs 1 would go towards the fixed charge, while the balance would be variable, essentially fuel, charges.

Others contest these claims, pointing out that with crude oil ruling near the $ 60 a barrel level, there's no way the variable charge could be so low, and that it will be nearer to Rs 2 per unit.

Together with the higher capital charge on account of the higher debt-equity ratio, the final cost has been estimated to be around Rs 3.30 to Rs 3.50 per unit, at least a rupee more than what MSEB is willing to pay.

There are other issues. The entire project had earlier been analysed threadbare by the Godbole committee which had made several recommendations for restructuring it.

It now appears that several of those recommendations are being ignored. For instance, the committee had pointed out that, "in an efficiently run system, the plants like Reliance and Enron would be used to meet intermediate and peak loads and, therefore, have lower PLF."

It therefore recommended "lowering PLF to the level of 30 to 50 per cent in the initial years". But at 80 per cent PLF, Dabhol continues to be a base load plant. The Committee also said that "it is worth noting that the LNG Regasification facility which was integrated with the project against the recommendation of the Renegotiation Committee was of the capacity of 5 MTPA (million tonnes per annum), while the project needed only 2.1 MTPA."

Further, the real costs of reviving Dabhol would also need to take into account the sacrifices made by the lenders in terms of restructuring of loans and lowering interest, and also the concessions on duties and taxes, if any, announced by the state government.

It would also need to look to the future, when "open access" comes into force, because a plant supplying costly power is likely to become unviable under conditions where buyers are free to choose.

Conclusion: On the other hand, those who would like the project to be revived point to the losses that will have to be borne by the lenders, and the fact that a distress sale would fetch much less than the loans outstanding.

But perhaps their best argument is that while a greenfield project will take at least three years to be operational, Dabhol can be up and running in less than a year.

At a time when the state is reeling under a power crisis, that is a very persuasive argument indeed.

At the very least, the government needs to follow the Godbole Committee's recommendations on transparency. This is what it said, "While commercial considerations may apply in certain instances, the Committee is convinced that in the case of PPAs [power purchase agreements], this concern is overwhelmingly overridden by the public interest. In a PPA, one of the parties (in this case, a state owned utility, the MSEB) undertakes financial obligations that eventually devolve on the public, either through increased tariffs or increased taxes to finance subsidies needed to be given by GoM, or a reduction in other expenditure by GoM.... The public therefore has a right to know what is being contracted on their behalf."

What was true of the negotiations with Enron is also true of the re-negotiations on Dabhol. The government needs to inform the public about the basis on which the re-negotiations are being done, the assumptions behind the lowering of tariff, and who will bear the burden of a subsidy, if any. There is a great need of a debate on the subject, so that the mistakes of the 1990s are not repeated.