Dabhol: A big mistake?

The Dabhol project cannot be seen as black or white. We should look at the context in which the project was formulated and the contract for its implementation. In 1991 when the government of India opened the power sector to private investments, a large number of potential investors expressed interest in setting up independent power projects in several parts of the country. However, the initial policy framework developed by the government hardly provided any assurance to developers of IPPs on payment of their dues adequately and in a timely manner. Hence, the so-called fast track projects on which the Government of India focussed initially were considered for provision of sovereign guarantees. In very simple terms, investors interested in developing IPPs were fully aware of the bankruptcy of the SEBs and the risks associated with major investments that were contemplated. The result was that several of those who bid for IPPs initially undoubtedly padded their costs to take care of perceived risks of various kinds, as has been the case in most the countries which invited private sector participation for power generation. Typically, initial IPPs are generally high cost projects, and it is only when a certain level of confidence has been established and competition develops between potential suppliers that costs and prices actually come down. In the absence of a detailed scrutiny of the actual project costs related to Dabhol, it is difficult to say whether Dabhol was a mistake in financial terms. It certainly was not a mistake in political or economic terms. I think it was important to signal to the outside world that India was open to business in the power sector, and we had to make a beginning with a developer like Enron, who showed considerable perseverance and persistence in seeing the project through. It was also important to set up new capacity to meet the growing demand for power in Maharashtra. Even today reportedly there is a deficit of power in several parts of the state, and therefore, in quantitative terms the capacity established by Dabhol was justified and necessary. It is another matter that the entire decision-making for the project and contract negotiations should have been handled in a professional and transparent manner. On the question of whether the tariff should be renegotiated, a contract already exists for the first phase of the project, which clearly cannot be changed unless there is mutual agreement. Enron is interested in going ahead with the second phase, and this may provide an opportunity to come up with totally new contractual terms. This indeed should be done, and the set of issues defining a new contract should be driven by objective and professional considerations rather than political. It is believed that the Government of Maharashtra is planning to set up an expert body to go into some of these issues, and perhaps, that would be the best start for negotiations now. The Dabhol case clearly highlights some of the major failures in past decision making in the power sector. Firstly, we invited developers to set up IPPs without bringing about necessary reforms such as the setting up of independent regulatory bodies with adequate expertise to discharge their functions effectively. Secondly, the basic problem of realization of dues from defaulting customers and poor maintenance of transmission and distribution systems require that reform should begin at the distribution end, so that any supplier of power has assurance that dues will be collected and payments effected for power sold. There is also need to correct the imbalance in terms of base-load versus peak-load power capacity. In the past few years the rate of growth of hydro potential has lagged behind desired levels, while peak load demand has grown faster than base loads. If hydropower potential is unlikely to grow at the desired rate, then, perhaps, we need more gas turbine units to take care of peak demand and much better grid management to ensure transfer of power between states to even out the geographical differences in peak that exist from time to time. Future requirements in the power sector need much more sophisticated analysis and intellectual rigour than we have shown ourselves capable of in the past.