It was to be a $3 billion showpiece of India's power sector privatisation. Instead, it has become India's most expensive symbol of controversy.
And last week, the controversy -- and the complications -- experienced a power surge of sorts when GE and Bechtel, 20 per cent stake-owners in Dabhol Power Company, acquired permission from a US bankruptcy court to buy Enron Corporation's 65 per cent stake for $20-odd million.
So what does this mean for this 740 MW power plant based in Ratnagiri, Maharashtra, for which the lights went out over a payments dispute with the Maharashtra State Electricity Board more than two years ago?
So far, the one clear answer is that GE and Bechtel, as de facto new owners, are in a far stronger bargaining position than MSEB or the half-a-dozen Indian lenders to the project, who have a collective exposure of Rs 6,200 crore (Rs 62 billion) in DPC.
GE and Bechtel's acquisition is a two-part deal. In the first part, they will acquire 39 per cent stake and in the next step the remaining 26 per cent . The complication in the deal is that these shares are pledged to the lenders and much depends on whether they will enforce the pledge.
So far there are faint indications, though no one is admitting it openly, that both sides will go in for a negotiated settlement.
But first, some background. Last week's deal entailed a complex three-tier structure in which the two US-based companies picked up a 49 per cent stake in Atlantic Commercial Finance, whose subsidiary, Offshore Power Production, owns Enron Mauritius, which in turn has a 65 per cent stake in DPC.
But there are many questions attached to this award. For one, a higher bid for around $25 million by the Reliance group was rejected by the US bankruptcy court.
Indeed, MSEB chairman Jayant Kawale does not believe that it was a simple case of paying $20 million and ending up as the owner of an 85 per cent stake in DPC. He suggests that the two had struck earlier deals with the US government agency, Overseas Private Investment Corporation.
The agency has twin roles in the project -- as a lender and the political risk insurer to Enron, GE and Bechtel.
When the project stopped generating power, GE and Bechtel had launched arbitration proceedings against OPIC for claiming insurance. If they had won, OPIC would have had to shell out at least $60 million.
Both GE and Bechtel dropped the arbitration proceedings as part of a settlement that was struck ahead of the approach to the bankruptcy courts.
"Enron, GE, Bechtel and OPIC entered into a deal in March. Last week, they only sought formal ratification of the deal in the US bankruptcy court," says Kawale.
Nevertheless, it is curious that MSEB, which holds a 15 per cent stake in DPC through a special purpose vehicle, did not bid. What's more, the Indian lenders did not submit a bid either.
The criticism that is being levelled against the Indian lenders and MSEB is that they forfeited a golden opportunity to buy Enron's equity cheap. Gaining control of this equity would have put them in charge of DPC and helped them find a buyer.
On the other hand, by virtue of this deal, GE and Bechtel are in a position to call the shots in any future sale. Also, now that DPC has a strong owner the various cases against MSEB, the state government and the Union government will be vigorously pursued and this in turn only strengthens the bargaining position of the two US companies.
Why did MSEB not bid? Kawale explains that under the terms of the settlement, GE and Bechtel will pay up to $342 million if they win, as the arbitration had been launched by Enron against the Union government which had counter-guaranteed the project. "Do you think we can be part of such a deal?" Kawale asks rhetorically.
Enron, GE and Bechtel are engaged in litigation with the Union government, the state government, and MSEB after the board rescinded the power purchase agreement in 2001 and the two governments did not honour the guarantees given to DPC in the event of the payment defaults.
Enron is no more a party to the DPC tangle after the deal struck last week. It is learnt that a prime consideration for this deal was that GE and Bechtel had nightmares about DPC becoming a part of Enron's bankruptcy proceedings. The settlement in the bankruptcy court now has completely ruled out that possibility.
What about bargaining power and the pursuit of legal cases? GE said in a statement issued soon after the deal, "Our position continues to be that a consolidation of foreign equity moves Dabhol closer to restarting -- and that means important progress for the people and business life of Maharashtra."
Phiroze J Nagarvala, managing director of Bechtel Enterprises India Pvt Ltd, is only willing to say, "We are very keen to have a negotiated settlement as far as possible. Further, we are ready to negotiate with the government of India or the new buyer of DPC to re-start the project on a commercial basis."
The point of concern, however, is that these shares are pledged with the lenders. So what happens if the lenders enforce the pledge and take over the company and then go ahead with a sale? More complications, for sure.
Remember, DPC has been incorporated as a company with unlimited liability. This means that the claims made on it can be unlimited. In the case of a company limited by shares, the liability of the shareholder can at best be equal to the company's paid-up capital. Even two years ago, DPC's liabilities were a minimum $300 million.
If this was such a simple option then the pledge would have been enforced a long time back. Also, in the event of sale and transfer of Enron's shares to the new owners, the consent of GE and Bechtel will be required.
The Indian lenders to DPC clearly have a lot riding on the eventual outcome, especially the Industrial Development Bank of India.
IDBI is yet to classify its exposure as a non-performing asset. SBI and ICICI have, however, provided for their exposure to DPC on their books.
In late 2001 when Enron, GE and Bechtel decided to exit the project, discussions had reached an advanced stage with prospective buyers when Enron went bankrupt. The uncertainty following this resulted in the sale talks being called off.
In 2002, the institutions led by IDBI invited bids. India's two largest industrial houses, the Reliance and Tata groups and global majors like British Gas and the Gaz du France had evinced interest at the time.
However, the sale process had been called off following disagreements between Enron and the lenders over sharing the sale proceeds.
The change of ownership represents one more opportunity for a solution as there are now two strong sides in the fray. The question now is: will they seize the moment ? Or will it be one more round of legal battles? No clear answers are immediately available.
Ask Kawale whether MSEB would move the courts against the stake transfer he says, " Yes and no. Although we are interested in a negotiated settlement, we cannot close the legal options."
The game of offering to negotiate even while keeping the powder dry continues. Meanwhile, a 740 MW power plant that can generate 2,184 mw of power with some additional investment continues to gather dust even as the state experiences peak time power shortage.
The question that is now being asked is, with GE and Bechtel now inking the deal with Enron, are we witnessing the dénouement or simply another twist in the tale?
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