Project cost and funding mix
Ghandikota (2002) notes that the original project cost was $ 3.1 billion. It was subsequently reduced to $ 2.65 billion. The project was sponsored by well-known players in the sector with a solid technical and financial reputation. These include Enron Power Corporation (80%), Bechtel Enterprises Incorporated (10%), and General Electric Company (10%).
According to Clifford (2020), loan commitments of $ 643 million and equity contributions of $ 279 million for Phase I of the project. $ 279 million equity from the three sponsors (Enron – $ 223 million, Bechtel – $ 28 million, GE – $ 28 million). The major lenders included the Bank of America ($ 150 million), the Overseas Private Investment Corporation ($ 100 million), the Export-Import Bank of the United States ($ 300 million), and various Eurobank guarantors and Indian creditors.
Joshi (2002) asserts that as a result of negotiations in December 1996, Enron (50%), Maharastra State Electricity Board (MSEB) (30%), Bechtel (10%), and GE (10%) became sponsors. The investment totaled $ 922 Million. The refinancing comprised $ 298 million provided by US Eximbank, $ 150 million from a syndicated loan from a commercial bank led by ABN AMRO and Bank of America, $ 100 million from OPIC, and $ 96 million financed by the Industrial Development Bank of India (IDBI).
Demand, supply, and risks
The project was first regarded as a boon to an ailing energy sector faced with many demand- and supply-driven problems. According to Chen et al. (2017), India’s relatively low consumption rate can be explained not generated by the fact that power demand was quiet but by the fact that there was an insufficient power supply. Thus, there was a problem of excess demand over supply.
Clifford (2020) states that the implementation of this project was associated with many risks:
- Construction risk is associated with the need to build a project within the established cost.
- Risk of completion 33 months after financial close, as if this condition were not met, the company would have to pay MSEB a large delay penalty.
- The operational risk is associated with the need to achieve guaranteed performance.
- The risk of fuel supplies, on which the volume of electricity generation depended.
- The financial risk is associated with the company’s obligation to bear the risk of any change in the rate, terms, and conditions of financing.
Initial problems with the project and final restructuring
As the project’s construction continued, there was a government change in Maharastra, which abandoned the first phase of the project and canceled the second phase. Financing for the project’s first phase in 1995 was the first to close after foreign companies were allowed into the Indian power sector. According to Suazo (2001), the project has been plagued by willful default by the Maharastra State Electricity Board (MSEB), the main off-taker; defaults by both federal and state governments on their guarantees; and the bankruptcy of Enron, the principal project developer.
Ghandikota (2002) states that in 1995 the Maharashtra government established a group to negotiate with DPC to revive the project. The following proposals for the project’s revival were made during these negotiations:
- The company would accept the equivalent tariff after considering the particular infrastructure and tax implication of the DPP, which would be the best comparatively favorable tariff provided by the lately approved new power projects in Maharastra.
- The company would accept to use of Naphtha or LNG received from an Indian supplier and offer up to 30% of the project’s share to either MSEB or an Indian party, significantly reducing the outflow of foreign currency from the project.
- The company would accept the Government’s further proposal on environmental issues. In January 1996, the Maharastra Government approved both project phases. According to Triantis (2018), this project is an excellent example of political risk management in developing countries such as India.
References
Chen Z., Yuan J., & Li Q. (2017) Financing risk analysis and case study of public-private partnerships infrastructure project. In: Wu Y., Zheng S., Luo J., Wang W., Mo Z., Shan L. (eds) Proceedings of the 20th international symposium on advancement of construction management and real estate. Springer.
Clifford, P. (2020). Project finance: Applications and insights to emerging markets infrastructure. Wiley.
Ghandikota, P. (2002). When ‘power failures’ undermine international business negotiations: A negotiation analysis of the Dabhol Power Project [MALD thesis, Fletcher School of Law and Diplomacy.].
Joshi, P. (2002). Dabhol: A case study of restructuring infrastructure projects. The Journal of Structured Finance, 8, 27-34.
Suazo, J.(2001). Stages in project financing: A comparative analysis of independent power projects in three developing countries – India, Indonesia, and Peru [Master’s thesis, Massachusetts Institute of Technology]. Massachusetts Institute of Technology.
Triantis, J. (2018). Project finance for business development. Wiley.