What goes around

BS OPINION

What goes around, the old saying goes, must come around. And so it has in the case of Enron's Dabhol power project in Maharashtra.

The plant has been shut since May 2001, after the Maharashtra State Electricity Board (MSEB) stopped buying power from it and terminated the power purchase agreement with Dabhol.

Given that the government's case didn't look particularly strong "" the BJP, when it came to power in the state, had tried to prove corruption in Phase I of the project, but couldn't, and eventually signed on to the bigger Phase II "" it made sense to try and settle out of court with Enron, particularly since the cost of keeping the plant idle is about half a million dollars a day.

Based on just the interest costs, that's wasted capital of $400 million so far, or about half the money that Enron was believed to have been willing to settle for in 2001.

Indeed, the cost of settling out of court would have reduced further, once all the information on Enron's workings came out and the company shut down.

Yet, the government appeared in no hurry to settle "" indeed, it took many months for even a contract to be given to a Delhi-based firm to just maintain the plant, to stop it from being corroded by the breeze from the Arabian Sea once the Enron team walked out of India.

Even today, after an international consultant has been hired to help sell the plant, little material progress has been made in getting the governments in Maharashtra and Delhi to freeze the concessions they will make for the plant; unless this is done, no bidder can realistically be expected to bid.

While items like the interest write-downs need to be decided by the financial institutions, all others need a proactive decision by the state and central governments "" this includes tax write offs, duty waivers on imported gas, and so on.

While the government has been lethargic on the matter, it is now faced with the probability of the Overseas Private Investment Corporation (OPIC) in the US slapping it with a $57 mn (Rs 280 crore) bill "" OPIC sold political risk cover to two of Dabhol's investors, GE and Bechtel, and once the Dabhol plant shut down, both investors asked OPIC to pay up.

The two parties went in for arbitration which went against OPIC, and the tribunal ruled that 'total expropriation has taken place in violation of international law' by the Indian government.

OPIC hasn't asked the government to pay up yet, but it will since it has signed an agreement with the government to treat US investment fairly "" indeed, it was after the agreement was signed that OPIC issued the cover to GE and Bechtel.

Two things will happen as a result. One, the cost of political risk cover for investments into India will go up. Second, if push comes to shove, and the Dabhol matter does reach international arbitration courts, this arbitration award will make the Indian case that much weaker.

And there's no point hoping the case will go away now that Enron is being wound up "" since Dabhol represents one of the few areas where Enron's creditors can still get some big money, they're going to pursue it.