No winners in India`s cancellation of the Dabhol power project

Douglas J. Smith

Managing Editor

In what is seen as more of a political move rather than a strictly business decision, the recently elected Hindu nationalist government of India`s Maharashtra state canceled the (US)$2.8 billion Dabhol power project. The Congress (I) administration, which had signed the contract, was defeated in this year`s elections by an alliance of Hindu nationalists, led by the Bharatiya Janata party.

The Dabhol power project south of Bombay, India`s single largest foreign investment, was being developed by the US-based Enron Corp. L.K. Advani, head of the Bharatiya Janata party, the leading partner in the ruling Hindu nationalist coalition government in the state of Maharashtra, is on record as saying that the project will not be renegotiated.

India currently has an installed capacity of approximately 81,000 MW, and with an average plant load factor of only 57 percent, the generation of electricity is not very efficient. At peak demand, India can only supply 70 percent to 80 percent of the country`s electric power requirements. By the year 2000, peak demand is expected to reach more than 91,000 MW. In order to meet the increasing demand, India will need to add at least 2,500 MW of new capacity annually over the next few years. However, the likelihood that India can develop this new capacity without the help of overseas investors and developers is questionable.

When the Dabhol project was canceled, Enron had invested (US)$300 million in the first phase of the project. Plans called for the project to be constructed in two phases. Phase one was the construction of a 695-MW oil-fired power plant scheduled for completion in 1997. A second phase would have added a 1,350-MW liquid natural gas (LNG)-fired power plant.

Since 1991 when the Congress Party of Indian Prime Minister P.V. Narasimha Roa launched its market reforms, the central government in New Delhi has given priority to opening up the country`s electric power generation and supply industry to overseas investors. The 2,015-MW Dabhol project was the cornerstone of the government`s foreign-investment program. Dabhol was the first of eight so-called “fast-track” electric power projects that the New Delhi government wanted to construct quickly.

India`s central government chose the “fast track” approach as a way of getting a number of foreign-supported electric power projects into commercial operation in the shortest possible time. For this reason, the central government chose to negotiate deals with several large international power groups, one of which was Enron, instead of going out to competitive bidding. The aim was to speed up the financing and construction of power projects that are sorely needed in India.

No country likes to be captive to another, but as we move into the 21st century, countries cannot afford to isolate themselves. We must all be willing to work together, otherwise everyone loses. Today India needs additional electric capacity, while the world`s major equipment suppliers and power plant developers have an immediate need to sell their equipment and services.

Unless the state government of Maharashtra and Enron can come to an agreement, India`s credibility in the world will be compromised. Unfortunately, with elections coming up in the early part of 1996 for a new central government in India, the prospects for renegotiating the Dabhol contract will almost certainly be put off until after the elections. I hope I am wrong, because as I said at the beginning, there will be no winners, only losers.