India's Dabhol Power Plan! Conlrovcrsy: Actors and Motivations
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Dabhol Power Corporation (DPC) project toJM-megawatt (MW) power plum in ihc Indian Male of Maharashtraemnant of lite effort by the Government of India in ihco solve its eleciric power secior challenges through the privaie sector. The projeci liastormy history since Ihe original agreement was signedncluding arcncgotuied contract5 that failed loput to rest charges of price gouging and suspicion* of corruption, or allay fears over foreign ownership in India
trigger for ihe current crisis is ibe calculation by the Maharashtra State Electricity Boardsoleii will not be able to afford all of DPC's power whenW of phase II completes' the project in June this year. Beginning last November. MSEB stopped paying its bills to DPC in an effort io force the central governmeni io become involved and provide relief.
The aticmpis of the parties io resolve this business problem are doggedomplex tangle of competing policy and political goals of the actors involved. On the political front:
DPC's long historyightning rod foranlt-foreign and anlt-mullinatiorul corporal ion sentiment makes it difficult for cither the slate or central government to deal with DPC without attracting charges of "selling-out" to foreign interesis or bowing lo 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 intervening, r
On the policy front:
Delhi is trying to instill fiscal responsibility in the stales by misting appeals for bailouts. The center wants lo avoidrecedent thai it will be the purchaser of lasi reson when states run inio irouble wilh tlicir private power project*.
India's ccnlrjl bank and Ministry of Finance burcaucrais now expcci commercial and development bank*ieei international standards of credithift away from iheir earlier practice of using these instiluiiomupport and subsidise favored mdusin.il project-.
New Delhi vulucs what il perceive* lo be warming relations with the US and wants to uvoid anything thai niiphl weaken lliis ircnd.
New Delhi and Mumbai both reason thai the con(roversy surrounding the DPC run been so weil-puhlici?cd and hat persisted for .so long, that it is unlikely to affect other potential foreign investors. However, both know that extended and acrimonious negotiations will no) help either'* long-term reputation and could complicate efforts to attract Urge foreign investors in the future.-
With MSEB and (he Government of Maharashtra perceiving ihal their financial backs are against ihe wall, ihe outcome of ihe controversy rests ultimately wiih the central government. This report outlines the political economy of Maharashtra and the electric power sector, identifies key decision maker* and their motivations, and examines the financial relaiionships between the center and Ihe states, f
CONrWNTIAI
India's Dabhol Power Plant Controversy: Actors and Motivations I-
Maharashtra: Ruling Government Grappling wUbClinllcnBesI
Mah-irudura Chiet Minister Vilasrao Deshroukh af ihe rolme Democratic From (DF) government busairly secure hold on power since coming into officeom hi ago after cobblingoalition led by hi* Congress Pany and ihe
Congress Partyhe Front remains united largely by its common rejection of thehared reform agendaood working re lai ions hip between the Congress Chief Mintiicc and NCP Deputy Chief Minister bul significant challenges remain.
The Shiv Pany> alliance, which ruled lhe state59 under Sena leader Bal Thackeray, is the main opposition to roe From. Voter disenchantment wkh failure of ihe Shiv Sena/BIP government to deliver on promises, blatant corrupt ton and the balkHming ol state deficiu, contributed to the From's victory during9 state assembly elections^
* The Deshmukh govemmeni has taken several steps forward on social and political issues, including ihe leestaWishmem of protection for mtnoriiywhich were widely believed io have suffered under the previousreform and de vohilion of spending and decisi auihority to local service sectors,
Despite thesehmukh faces pressure to live up to the expectation* of voters and
coalitionistract eleciioiiN across the Mate this summer will beenchmark for gauging Mippon torihe government.
assessment was prepared by lhe Office of Near Eastern. Soolh Asian, and Africanand queries are welcome and may be directed ioon
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The opposition Shiv Sciui often lakes coMiudtctory but politically expedient stances on issue* to aliack ihe Deshniuk govemmeni. In April, to* eaample. ihe Shiv Senaenera! sn ike lo protest Ihe "ami-labor" polices ot ihe slate and central governments andancellation of Ihe Enron project, even though the puny approved lhe project when l( was in power.
Despite being traditionally critical ol foreign Invest mem. Shiv Sena Ic.wtti Uodhav Thackerayipartisan approach lo working throafli ihe Unron dispute la si December.
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Economic Overview
%econd mosi populous state
wilh y>illion residents(nearly three lintcs ihc so* ofnd is ihird msirejuucc mile* -sli^ily larger lhan Aruona. The
Murmxti metropolian nreii comprisesillion people and is India'sity. Maharashtra ranks
tounh among nates withercent literacy, above ihe all-lndai averageercent. Female Ulerecy.ai nX pcrccnl.well ahead of die national average Ol'M perceni. [
Maharushira'i grots domestic product in fiscal7 perceni of India's gross domestic produa (GDP) and making it Ihe Uracil state economy in India. Per capita GDP inbove India'ss. Sectoral shares of GDP have remuirwd Kable throughout, with acrvkes aiercent, indusiry atercent, and agriculture atercent. Roughlyerceni of the stale popubiion is employed in ihe agriculture sector.
In theears since India began economic reforms. Maharashtra haseading destination for invest mem and industry. Maharashtra ha< attractedercent ofillion In foreign direct investment lhal has gone lo Indiand leads ihe rest of ihc country in domestic investmeni.7 percent of all approvals. Withercent of India's industrial unitsercent of all industrial output, Maharashtra has had success in chemical, petroleum, plastic, textile and steel industries, and.ed the nation in production of sophisticated electronics, phji mace tits. and computer software.
Business nnd industry have nourished in Maharashtra due io (It state's many advantages:
Maharashtraarge pool of educated workers,
Mumbni is the home of India's two largest stock exchanges, the Sccurilics and Exchange Board of
Indiahe Rescue Rank of India, nnd other trujot financial institutions.
Maharashtra is ahead of mosinfrasirucurcm of paved0 MW in poweim of fiber optic ranks,of India's largest pons, and reliable trainpomiiion networks.
Alihough Maharashtra lias been far ahead of other stale* throughout mostthe past decade. Ms economic advantagesether Indian states have been erodedombirun.on of complacency and competition from ihe rapidly growing southern states of Tamil Nadu, Kamaiakn, and Andhra Pradesh.
Although Maharashtra's infrastructure is good by Indian standards it is not world class and modern businesses coop lam about the state's inefficiem power transmission and distribution system, and poorly maintained roads.
In contrast to the rising southerr states, Maharashtra's political leaders have not been aa aggiestive in seeking out mvenment opportunities, often waiting forparties to seek opportunities there instead.
Maharashtra's highly bureaucraiaed udminitiraitve system, repeated policy changes, arbiirary taxation, costly power, water, and land resources, and less-atiraeiive subsidy packages for businesses have abo contributed to companies dec>dingjon more business-friendly environments.
The cuirent government led by Chief Minister Vibtsrao Deshmukh has tned io remedy the situation follow kg ihe US Presidential visit io Mumbai kieshmukh came to the United Stales hi the summer0 to woo investors. The government has since instituted theeform plan, which aims to increase per capita income from0. boost the state's annual economic growth rate from8 toercent, and reduce the poverty raie fromoercent"
Mahiinishtra's fiscal hciillli is in poor stupe, however, as nellecied In lhe recently2 stale budgei. whichillion. Ovei the past year, ihe state's revenue deficit has increased by 4ft percent, to an esiimatedillionromises0 percent reduction in fiscalnyear have been mei withsince ll failed lo reach List year'seiceni UfffrL
Indian and internal tonal economic analysts ivmuin concerned by the slate's slow power sector reform and lackiable plan to reduce the tisc.il delicii. These problems are compounded byct thatercent of Maharashtra's revenue is devoted io servicing and repaying state dent. In addition, inwo Indian credit ruling agencies downgraded lhe Siaie's credit-worthiness ruling four levels to "speculative.'* in response to Maharashtra's failure lo fulfill its contractual obligationshe DabhoJ Power Corporation when the Mahaiashtra State Electricity Board defaultedonthly payment.
The Indian Electric Power Industry In Ihc Post-Past Track Environment
fneliii< Power Situation and Needs. India hat aboutW of installed electric capacity, but sullen, widcuptcud biown- andhe Ministry of Power estimates India is aboutpercent short of capacity and expects the situation to get worse ovei Ihc new several years. CDP growth ai the targeted levelercent per ycai requires lhat India increase capacity by aboutercent each year. The Central Electricity Authority (CF.A) estimates thai India will need to add over IfJO.OOO MW of generating capacityut capacity growth has averaged just0 MW pet yearef) below whatneeded. |
India's power needs are far beyond the ability ol the centtul and state govcmmeniK to pay. New plants cost an 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 with defense and interest payment* on die national debt. State governments are in worse shape, relying on grants and loans ofillion each year from Ihe center to stay allocil financially.
Tast-truck"a. Shortly after ihe economic reformshe ceiiier pinned its hopes on encouraging ihc private sector to build new capacity. The initially weak response of potential invcitors forced the government to recognize several structural weaknesses in theresult of decades of governmeni ownership andneeded to be addressed before ihe sector couM attract privaie investment. The problem of ensuring paymentandacute.
The usual customerrivate power producer is the local State Electricity Boardll of the SEBs in India operate in the red nnd most arc insolvent.andhave encountered serious difficulties raising funds from bunks and other financialr
concern thai the SEBs will not pay ihc contractor* who will then Ik unable io repay their loans.
' The SGBs arc insolvent because political mterterence Norn state politicians has forced senate of power tariffs far be low costs -or even providedprivileged groups such as agriculture and householdower authorities also oftenlind eye toward power ihcfl by bolh ihc poor and the politk-ully well connected.
To circumvent the SEB problem and create wine .success siorle* io encourage follow-on investors, ihe centml government offered to guarantee payment for eighi power projects. Bui (he issuance of these so-called "counierguacantees" was only an eipedicni. and New Delhi knew early on it could not fund all of its power needs in this manner.
too likely, in the views of the government and internationalforce New Delhi to drain its foreign currencylo make good on itso foreign contractor* The potentially costly counierguaranlccs would, in turn, harm India's international credit rating.
a Current Indian government policy guarantees only the foreign loan portions of existing projects and docs not issue guarantees for new project t
the fast track program was not the resounding success New Delhi had hoped. Someever teceived iheir counierguarantces, while some of those thatas linmn andrun afoul of local polk leal ot environmental interests.
The center also tried to encourage private Investors by transferring substantial project approval authority from the center to the states. To expedite projects. New5 delegated to ibe states authority to give environ mental approval ia all cases, and authority to approve new projectsnd renovaikm and modcrruiaaion projecti for existing plants.esuh. therelethora of plans, projects, and nwrnoranda of understanding at the stale
many that ihe World Bank and others expressed concerngold-rush" menuility hud set in which would result in numerous project failures and haphazard development. TTheic lean were borne out in Februaryhen over Km projects in several suite* were scnipped because proinotcrs had foiled to secure lhe proper agreements and llnancing
Subacguciuhe Indian government has tried to iirfdresf the problems of the sectorere highlighted by the "fast-track" program, but progress has been agonizingly slow. Inew Delhi onrsouciced thai the Chief Ministers of the siatcs had agreedoordinated program of resiructuring the SEBt; unbundling generation, trantmission and distribution; and ralotwllring tariffs. In particular, the practice of providing ogriculture with cheap or free power would be curtailedranirnum ofupees per 1one third the average cost ofbe charged the agricultural sector. Implementation of the agreement has been unsatisfactory, however. Although fourteen states nave established State Electricity Regulatory Commissions (SERO. which are intended to set electricity tariffs without political tntetferencc. there has been little progress on the key issues ol metering and charging realistic roles.
The central government renewed its attempt to press the stales to reform the SLBs in ihe spring1 with another Chief Ministersihey again pledged to carryercent metering by1 and chargeew plan lhat linked substantial financial incemivet and penalties to SEB reform. Power Minister Prabtiu told reporters, however, that until SEB reform had progressed to the point were private investors were willing lo deal with them. Ihe public sector would nave to cany the brunt of the country's electric power capacity expansion, f
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TIAL
The Indian Lender's Perspective
Indian financial Institutions with cKpcnuic lo flic Dubftol project respond to guidance from the Reserve Dank ol India (RHIt and to treuewn commercialsis. They inter piet ine* commercial raeresis from ihe perspective of their onsoinj lettruciuring away Irom government support and nunagemcni ami. except foroward iheir expected role as effective playersompetitive financial lecioc.
Of the five nujor Indian tenders, only ICICI if not ditectly or indirectly owned by the Indian government, but the Ministry of Finance does not usually have an active role in decisions about making or restnxiorwig individual loam, lhe insiitotionssometimes meet wiih Indian ministries lo discuss ihe financial feasibility of policy approaches, but appear able lo resist arrange ine nis that would jeopardize their own creditworthiness. t
The RBI and Mutuary of Finance bureaucrat* no longer view ihe development banks ns channels for supporting and subsidizing industrial projects Moreover, the RBI probably would intervene informally to help lhe commercial and development banks resist any central governmentis not evident soincrease suppon tor an unviable foreign project.|
The policy environment and the business plans of the Indian lenders suggest ihe following priorities during negotiations about restructuring or closing the Dubho!
energy projects that sell tout would be
The insiiiuiioos will expect in meet their guarantee obligations to international lenders once the legal obligation to do so is clear. They will not want to jeopardize iheir own credit standing on International payment obligations. The RBI will share this view.
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less concerned about having lo (real (heir enisling kkinshc Dtibhol pro jet: us non per lor mine.
Ilet'.oise ihe financialcueky (ot thctr
n mortgages on the Dabhol properties ihey probably want construction of ihc liquefied natural gas (LKGl facilitiese sufficiently eomptcie to
seable asset ihai could be sold i( buyers lor gat can be identified. IDBI's recent movesmermination notice may reflect this concern as well as Us willingness to gain lime lor
Ministry of Finance officiulsevelop an Indian government position.
The Indian lenders probably would not support operation off ihcof LNG imported under long termwilling buyers with funds can be found for Ihe additional electricity. They mightuick setltemcni. evennetime loss, thai would permil sale of assets and recovery of pan of their losses. After Dabhol stops imeresi payments, the institutions will' won! to avoid protracted legal wrangling.
' If the RBI approves, the institutions would be willing to reschedule some of their own loans to the project io reflect their own lower borrowing cosis. RBI approval seems likely if Dabhol negotiations are viewed as an effort to prevent bankiuptcy and maintain operation of part of ihc project.
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Background on Centcr-Slalc Financial Relations
estructured Project
Under the federal relationship established In Ihe Indian Constitution, taxes nnd duties collected by (he Ceniral Government are shared with the stales. In addition, Ihe Consllf ution allows for funds to be apportioned to stales in lhe form of grants and loans.
A stale's share of taxes, duiies. andetermined by an independent Finance Cornmrnion. which mini meet si least once every five years. This sharearge portion of many stateercent of the funds available lo the Maharashtra government.
The central govemmeni provides grants und loans io help states meet the cost of their "Plan* spending on development and welfare. These fundi are allocated among ihe states accordingormula based on population, per capita income, and perforrruusoe.
In addition, lhe central govemmeni pjovides lunch for iis own projects and renually-spomored projects, some of which are implemented by Male governments. The ceniral government has considerablellocating ihi* support among the Mates, p
A Glance al Maharashtra's
tinder ihe terms of the central governmenturrent counter-guarantee of payments to the Dab hoi project, any "bailouts'* the Center might provide would be deducted front the ccnlral government support for Maharashlra Plan spending on development and welfare.
New Delhi cooH support Dabtml phase II thiough an expanded counicr-guarantccIf MSEB and the Maharashtra govemmeni default in payments tor electricity available Horn full operation ol the project. New Delhi would pay and deduci an equivalent amount from central support for Iht Maharashtra sure Plan.ublt sector organization 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 io deviate from the formula Hun allocates suppon for state government plana and provide additional funds for Maharaslnnt.
Inudget,ercent olillion Plan expenditure was allocated to Maharashira. The Center's fiscal budgetillmn in Pbn expenditure. of whichbillion rs slaied for development in Maharashtra
Approvals for projects requiring additional assistance are judged on an ad-hoc basis, upon recommendation by the Planning Commission, which must also approve such financial iransfcis.
Shore Central Taxes Grams in Aid Loans from Center
S8)illion (IS%)
Central Govemmeni has demonsirated 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, ii wouldetermination by the highcsi policy levels of the Indian government that such an action would be in ihe national inicrest.
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Original document.
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