Thoughts & Ideas

Monday, July 21, 2008

Some Thoughts on the Strange case of the Dabhol Power Company (DPC).

With India facing critical and crippling shortage of power on one hand and at the same time having the capital assets of DPC lying idle, it was essential to restart this power plant. It is however debatable whether the actions taken by the GOI and the FIs were in the best interests of the country, its people, and fundamentally in safeguarding the sovereign status of the nation.

All standard text books of economics and business (even American ones) state that equity holders provide the risk capital in any business and stand last in line in receiving the benefits (if any) in functioning of the enterprise. It is therefore surprising that the proposal to restart DPC also envisaged payment of USD 305 mio (approx. Rs. 1342 crores) to the equity holders of this ill fated company. The equity holders GE & Bechtel acquired this equity stake from Enron after the latter company was wound up.

The revival of DPC involved compensating various parties, including the equity holders, on account of the guarantee given by MSEB which was counter guaranteed by GOI. As such, it seems that GOI was willy-nilly obliged to keep up its promises if it desired to maintain its respectability in the world forum. This also made the US based stake-holders in DPC claim that India should “uphold their legal rights and abide by international obligations”.

Now, basic contract law states that any agreement is voidable in case the agreement has been arrived at, inter alia, through fraud or coercion. As such, the GOI would have been well within its rights to repudiate its commitments under the counter guarantee since the guarantee was obtained by both fraud and coercion, and evidence to both is available in the public domain.

Fraud can be established by insisting on details of payments made to Indian politicians and bureaucrats as mentioned in the audited financial statements of Enron Ltd., being made public. And coercion is clearly indicated if one refers to Joseph Stiglitz’s, “The Roaring Nineties”, Chapter 10 - Enron, Page 259, where he states that “Why had the Indian government signed the contract when it could get electricity at better terms elsewhere? Part of the answer was: the United States put on political pressure. Enron officials joined a cabinet trip to India, and direct pressure was put on India by the American ambassador”.

It was therefore incumbent on the GOI, if it was to uphold its duty to the Constitution of India of maintaining India’s sovereignty, to have repudiated the counter-guarantee and unilaterally nationalise the assets of DPC. There were risks in taking such action, but the only way to handle bullies is to call their bluff. The Indian Government preferred to take the softer stand and paid off the bullies and the assets of DPC were taken over by the Ratnagiri Gas & Power Pvt. Ltd. How much power the company is generating now 3 years after is there for everyone to see!

We see the same drama being played out again in the Nuclear Power Deal.


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