India's Dabhol Power Plant ontroversy: Actors and Motivations
India's Dabhol Power Plant Controversy: Actors and Motivations
v
Dabhol Power Corporation (DPC) project toW) power plum in ihc Indian Male of Maharashtraemnanl of Ilie effort by the Government of India in ihco solve its electric power secior challenge* through the private sector. The project liustormy history since Ihe original agreement was signedenegotiated contract5 that failed io put to rest charges of price gouging and suspicions of corruption, or allay fears over foreign ownership in fndij
trigger for the current crisis is the calculation by the Maharashtra Stale Electricity Boardsoleii will not be able to afford all of DPC's power when- MW of phase II completes' the project in June this year. Beginning last November. MSEB stopped paying its bills to DPC in an effort lo force the central govemmeni to become involved and provide relief.
The aitcmpts of the panics io resolve this business problem are doggedomplex tangle of competing policy and political goals of the actors involved. On the political from:
DPC's long historyightning rod for anti-foreign and artli-mullinational corporation sentiment makes it difficult for cither ihc slate or central government to deal with DPC without attracting charges of "selling-out" to foreign interests or bowing to US pressure.
Rival political parties lead the central and state governments, and each seeks lo derive political advantage from the situation. The central governmentong history of allowing stales led by opposition panics to be overwhelmedrisis before iniervcning. r
On the policy from:
Delhi is trying to instill fiscal responsibility in the states by resisting appeals for bailouts. The center wants lo avoidrecedent that it will be the purchaser of last reson when states run into trouble wilh tlicir private power project*.
India's ccnlrjl bank and Ministry of Finance bureaucrat* now expeci commercial and development bank*eet international standards ofhift away from Iheir earlier praclicc of umii? ihcsc instiluiiorrsupport and subsidise favored indvarial project*.
New Delhi vulucs what ii perceive* lo be warming relations with live US and wants lo avoid anyihing that miphl weaken litis irend.
New Delhi and Mumbai both reason thai ihe com rourrounding the DPC has been so wdl-puhttciTcd and ha* perusied for so lone, thai ii ia unlikely to affect other potential foreign investor' However, both know that extended and acrimonious negotiations will no) help either'* long-term reputation and could complicate efforts to attract large foreign investors in the future.-
With MSEB and the Government of Maharashtra perceiving ihal their nruncial backs are against the wall, the outcome of lhe controversy rests ultimately with the central government. This report outlines ihe political economy of Maharashtra and the electric power sector, identifies key decision maker* and their motivations, and examines the financial relationships between the center and the states, f
India's Dabhol Power Plant Controversy: Actors and Motivations
Maharashtra: Ruling Government Grappling wHbClinllonijes[
hiet Minister Vilasrao DeshroiAh ol' ihe ruling Democratic From (OF) government ru*airly secure hold on power since coming into officeonths ago after cobblingoalition led by hi* Congress Pany and the Nationals Congress Partyhe Front remains united largely by its common rejection of thehored reform agendaood working relationship between the Con press Chief Miniitcr and NCP Deputy Chief Minister bul significant challenge* remain
The Shiv Sena/Bhuraiiya Janata Pany> alliance, which ruled the state9 under Sena leader Bal Thackeray, is the main opposition to ibe Front. Voter disenchant mera with failure of the Shiv Sena/BJP government to deliver onlatant corruption and ihe ballooning of state deficits contribuied to the From's victory during9 state assembly elections/^
* The Deshmukh governmeni hu* taken several steps forward on social and political issues, including ihe leesiaWishment of protection for minoritywhich were widely believed to have suffered under the previousreform and de volution of spending and decisi authority to local service sectors,
Dcspiie these accornplisbmerris. Deshmukh faces pressure to live up to the expectations of voters and
coalition members. District ekciKHh across the Mate Ihis summer will beenchmark Ibr gauging Mippon forihe government.
assessment was prepared by the Office of Near Eastern. South Asian, and Africanand queries are welcome and may be directed toon
C^rsTKuShrnAUr
NT! AI
The opposition Shiv Scrui often lakes contiudtctory but politically expedient stances on issue to attack ihe Deshniuk government. In April, to* example, the Shiv Seruike lo protest Ihe "antt-labor"t ihe >laie :md central governments andancellation of the Enron project, even iltoutfli the puny approved the project when It was in power.
Despite being traditionally critical of foreign Invest mem. Shiv Sena Ic.taei Uddhav Thackerayipartisan approach to wort,hroaeli the Unron dispute last
Maharashtra: Economic Overview
% India's *ccond most populous suic withion residents (nearly three lime* lhelnd i> third msirejuurc milcv slightly larger than Arizona The Mumbai metropoliian arett convptrscsillion people nnd in India'sily. Maharashtra ranks fourth among nates withercent literacy, above ihe all-lodes averageercent. Female luecacy. at ftX percent.well ahead of ttie rtinon.il averageeiceni. [
Maharushiras gross domestic product in fiscal yearillion--accooniing7 percent of India's gross domestic product (GDP) and making it the largest siaie economy in India. Per capita GDP inbove India'sectoral shares of GDP have remained stable throughout, wiih services atercent, industry atercent, and agriculture atercent. Roughlyerceni of the state population is employed in the agriculture sector.
In theears lince India began economic reforms. Maharashtra haseading deitination for investment and industry. Maharashtra ha< attractedercent ofillion in foreign direct investment lhat has gone lo Indiand kadi ihe rest of the country in domestic investment,7 percent of all approvals. Withercent of India's industrial units andercent of all industrial output, Maharashtra has had success in chemical, petroleum, plastic, textile and steel industries, and.ed the nation in production of sophisticated ekcnonica. pharmaceuticals, and computer software.
Business and industry have nourished in Maharashlra due to (It stale's many advantages:
Maharashtrauge pool of educated svorkers,
Mumbfii is the home ol India's two largest stock exchanges, the Sccurilics and Exchange Board of
Indiahe Reserve Bank of India, nnd oilier major financial institutions.
Maharashtra is ahead of rnosinfrastrucurem of paved0 MW in power generation.CMK) kmol fiber optic cables, two of India's largest pons, and reliable iranvpoiiaiion networks.
Although Maharashtra lias been far ahead of other siaie* throughout most ol the past decade. Rs economic advantages over other Indian nates have been erodedombination o( complacency and compel ilion from the rapidly growing southern states of Tamil Nadu, Karraukn, and Andhra Pradesh.
Although Maharashtra's infrastructure is good by Indian standards it is not world class and modem businesses complain about the surte'spower transmission and distribution system, and poorly maintained roads.
In contrail to the rising southern states. Maharashtra's political leaders have not been as aggiestive in seeking out mvesiment opportunities, often waiting for interested parties to seek opponunities there instead.
MahurathtnTs highly bureaucrfltaed administrative system, repeated policy changes, arbitrary taxation, costly power, water, and land resources, and less-atiraeiive subsidy packages for businesses have also contributed lo companies decidingjon more business-friendly environments. "
The current government led by Chief Minister Vibsrao Deshmukh has tned to remedy Ihe situation following the US Presidential visit lo Mumbai kteshmukh came to the Untiedhe summer0o investors. The govcrnmeni has since instituted lheeform plan, which aims to increase per capita income from0. boost the state's annual economic growth rateoercent, and reduce the poverty rale hornnercent"
CONlTOWtTMl/
MahlfMMra's fiscal hciillli is in poor stupe, however, as rellecied in Ihc recently2 stale buduci. whichillion. Ovei ihc past year, the state's revenue delicti bus inciea-sed by 4ft percent, to an estimatedillion dollars. Promise*0 percem reduction in focal deficit iinyenr 'hive been nici wrtlisince It lulled io teach List year'seiceni lanjci.
Indian and internalconomic analysis remain concerned by ihc stole's slow power sector reform and lackiable plan io reduce the fiscal deficit These problems are compounded by ihe fad thaiercent of Maharashtra's revenue is devoted io servicing and repaying state debt. In addition, inwo Indian credit rating agencies downgraded the State's credit-worthiness ruling four levels to'n response lo Maharashtra's failure to fulfill its contractual obligations to the Dabhol Power Corporation when ihc Mahaiushini State Electricity Board defaultedonthly payment.
The Indian Kkclric Power Industry In Ihe I'osl-Pasl Track Environment
India* Power Situation and Needs. India has aboutl' iroialkd electric capacity, but sullen, widespread biown- and blackouts The Minisiry of Power estimates India is aboutperccnt shon of capacity and ctpccu ihe situation to get worse ovci Ihcseveral years. CDP growth ai the targeted levelercent per yeai require* lhal India incrc-ise capacity byercent each year. The Centra) Electricily Authority (CKA) estimate* lhal India will need to addW ot* generating capacityut capacity growth has averaged just0 MW per yearft. well below whatneeded. |
India's power needs arc far beyond the ability ol the cemtul and siate governmeni* to pay. New plants cost tin estimatedillion per megawatt. Annual investment therefore needs beillion per year. Central governmeni revenues from all sources except borrowing are onlyillion, over half of which is taken up wilh defense and interest payment* on the national debt. Slate governments are in worse shape, relying on grants and loan* of aboutillion each year from Ihe center to stay alloal financially.
rnck" Projects Rra. Shonly after ihe economic reform*he ceiiier pinned its hopes on encouraging the private sector to build new capacity. The initially weak response of potential investors forced the government to recognize several structural weaknesses in theresult of decades of governmeni ownership andneeded to be addressed before tbe sector could attract privaie Investincnl. The problem of ensuring paymentandacute.
The usual customerrivate power producer it the local State Electricity Boardll of ihe SEB* in India operate in the red and mosi are mvolveni.foreign andhave encountered serious difficulties raising fund* from bunks and other financialr
concern thai (he SEB* will not pay ihc cotvnicion who will then be unable io repay their loan*.
' The SEB* are msolvcat because political interference tiom state politician* has forced seams of power tariffs far be low costs -or even providedprivileged groups such as agriculture and householdower authorities also oftenlind eye toward power ihcfl by boih ihc poor and the politically well connected.
To circumvent ihe SEB problem and create *ome .success siorks io encourage follow-on investors, ihe ceninil government offered to guarantee payment for eight powerui the issuance of these so-called "counicrguarantees" was only an eipedicni. and New Delhi knew early on il could not fund all of its power needs in this manner.
too likely, in ihe views of the governmeni and internationalforce New Delhi to drain its foreign currency reservei lo make good on its guarantees lo foreign contractors. The potentially costly counieiguaranlces would, in lurn, harm India'* international credit rating.
Current Indian government policy guarantees only the foreign loan portions of caisiing projects and docs not issue guarantees for new projects
the fast track program was not the resounding success New Delhi had hoped. Seme projects never icceived iheircounterguiranices, whik tome of ihose thaias Ennui andrun afoul of local polk leal oi environmental interests.
The center also tried to encourage privaie Investors by transferring substantial project approval authority from the center to ihe states. To expedite projects. New Delhi5 delegated to Ibe states authority lo give environmental approval in all cases, and authority io approve new projectsW and renovation and modemiraiion projecti for existing plants.esult, therelethora of plans, projects, and memoranda of understanding at the stale
TOWtTOENTTAUJ
many thai ihe World Bank and others expressed concerngold-rush" mentality had set in which would result in numerous project failures and ruiphanud development. Their leant were borne out inhen) projects in several .states were stropped because promoters had failed to secure lite propct agreement* and financing
Subsequent Initiatives. Thr Indian government has tried io nddies* ihe problems of the sectorere highlighted by the "fcisl-track" program, but progress has been agonizingly slow. Inew Delhi orinounced lhat the Chief Ministers of the uases had agreedoordinated program of restructuring ihe SEBt; unbundling generation, transmission and distribution; and nwtonHllzJng tariffs. In particular, the practice of providing agriculture wiih cheap or free power would be curtailedinimum ofupees per 1one third the avenge cost ofbe charged the agricultural sector. Implementation of the agreement has been unsatisfactory, however. Although fourteen states have established State Electricity Regulatory Commissions (SERO. which are intended to set eJectricity tariffs without political interference, there has been little progress on ihe key issues ol metering and charging realistic rotes.
The central government renewed its attempt to press the states to reform the SLBs in the spring ofith another Chief Ministersthey again pledged to canyercent metering by1 and charge alland it new plan that linked substantial financial incentives and penalties to SEB reform. Power Minister Prabhu told reporters, however, that until SEB reform had progressed to the point were private investors were willing lo deal with them, the public sector would have to cany the brum of the country's electric power capacity expansion, f
6
tial
The Indian Lender's Perspective
Indian financial Institutions with cKposwc to the Dabhol piuject respond to guidance fiom the Reserve Dank ol India (KHIt and to their own commercial mieresjs. They interpret thckcrjtrinKrcial aaerests from the perspective of their ongoing learucturing away Irom government suppon and managciiieni and. except foroward their expected role as effective playersonipeiitive financial sector.
Of ihe five major Indian lenders, only ICICI is not directly or indtiectly owned by the Indian government, but the Ministry of Finance does not usually have an active role in decisions about making or restruourwic individual loans, lhe institutions do sometimes meet with Indian ministries lo discuss the financial feasibility of policy approaches, but appear able to resist arrange ine nis Ihal would jeopardize their own creditworthiness.
The RBI and Ministry of Finance bureaucrats no longer view ihe development banks ns channels for supporting and subsidizing mdustrial projects Moreover, lhe RBI probably would intervene informally to help lhe commercial and development banks resist any central governmentis not evident soincrease suppon lor an unviable foreign project.|
The policy environment and the business plans of the Indian lenders suggest the following priorities during negotiations about restructuring or closing the Dubhol
energy projects that sell tout would be
The institutions will expect to meet their guarantee obligations to International lenders once the legal obligation to do so is clear. They will not want to jeopardize their own credit standing on International payment obligations. The RBI will share this view.
less concerned iiboul having lo (real (heir existinghe Dtibhol project us nonpcrl'ui mine
Because ihe ricunenlr their
loans r> in mortgages on the Dabhol properties, ihey probably want construction of the Injur lied natural gas (LNGl facilities to be sufficiently compicic to
seable asset ihai could be sold i( buyers for ga* cum be identified. IDBI's recert move*iallpreliminary termination notice may reflect tinsell as Us willingnessitin lime lor
Ministry of Finance officials to develop an Indian government position.
The Indian lenders probably would not suppott opt ration olf ihcof LNG imported under kxig termwilling buyers with funds can be found for Ihe additional electricity. They might preuick settlement, evennetime loss, thai would permit talc of assets and recovery of pan of their lenses. After Dabhol stops imeresi payments, the institutions will' want lo avoid protracted legal wrangling
' If the RBI approves, the institutions would be willing to reschedule some of iheir own loans to the projecteflect iheir own lower borrowing cosis. RBI approval seems likely if Dabhol negotiations ore viewed as an effon to prevent bankruptcy and maintain operation of putt of ihc project.
Background on Center-Slate Financial Relations
estructured Project
Under the federal relationship established In Ihe Indian Constitution, taxes and duties colksted bymiiiGovernment are shared with the stales. In addition, Ihe Coittlilulion allows for funds to be apportioned to stales in Ihe form of grants and loans.
A state's share erf taxes, duties, and kvies is determined by an independent Finance Commission, which must meet at least once every five years. This sharearge portion of many staleercent of the fund* available lo lhe Maharashtra government in
The central government provides grants and loans to help stales meet lhe cost of their "Plan" spending on development and welfare. These funds are allocated among the states accordingormula based on population, per capita income, and perfcernance.
In addition, the central government provides lunch for its own projects and centrally-sponsored projccls, some of which are implemented by state governments. The ceniral government has considerable discretion in allocating ihls support among the states, p
A Glance at Maharashtra's
Under ihe terms of the ceniral gos'ernmcnturrent counter-guarantee of payments to the Dab hoi project, any "bailouts'* the Center might provide would be deducted from the central government support for Maharashtra Plan spending on development and welfare.
New Delhi cooH support Dablml phase II through an expanded counter-guaranteeIf MSEB and lhe Maharashtra government default in payment! for electricity available from full operation ol the project. New Delhi would pay and deduct an equivalent amount from central support for the Maharashtra state Plan.ubis sector ore an nation could acquire equity in the project and New Delhi could then provide support as pan of the central government's own Plan spending. Or, less likely. New Delhi could agree to deviate from the formula that allocates support for slate government plans and provide additional funds for Maharashtra.
In iheudget,ercent ofillion Plan expenditure was allocated to Maharashtra. The Center's fiscal budgetillion in Pirn expenditure. of which approximately SI billion is slated foe deselopmeni in Maharashtra.
Approvals foe projects requiring additional assistance are judged on an ad-hoc basis, upon recommendation by the Planning Commission, which musi also approve such financial transfers.
Store Ceniral Taxes Grams in Aid Loans front Center
S8 millionillion
Ceniral Government has demonstrated budgetary flexibility over the past several years when propping up favored state governments or programs through off-budget measures and creative financing, leaving open the possibility that extraordinary funding for Dabhol could be available if essentialatisfactory resolution to the problem However it wouldelerrrnnation by the highest policy levels of the Indian government that such an action would be in the national interest.
Original document.
Comment about this article, ask questions, or add new information about this topic: