The whole world’s full of broken IPP deals

Voice of Electricity Workers

April- June 2001

The whole world’s full of broken IPP deals
Cheques & Balances – Sucheta Dalal

The Maharashtra government’s decision to pay Dabhol Power company’s (DPC) arrears from its contingency funds has temporarily defused the situation, but the problem of unaffordable power continues. But this cannot go on, as both the state and the maharashtra State Electricity Board are bankrupt. The state has frozen the dearness allowance and bonus for civil servants and is unable to meet overtime payments to its police force. The next blow will not be long before maharashtra heads towards irrecoverable financial ruin.

Yet, Enron’s lobbyists and politicians who gained from it, try to convince us that the DPC deal simply cannot be broken without dire consequences. Enron is a powerful company and has formidable political connections; its main trump card is its political connections in the US. Remember how US Ambassador Frank Wisner, joined the company soon after leaving India? It has equally close links with the Bush government to-be in the US.

Can a bankrupt Maharashtra afford to bend to Enron’s pressure? The answer is no. A study by Kate Bayliss and David Hall, University of Greenwich, titled Independent Power Producers: A review of issues, compiles a list of countries which signed similarly expensive IPPs and have cancelled or renegotiated them. It shows that IPPs are high cost, they bind governments in inflexible long term agreements and also insulate the producers from commercial risk and competition. A world Bank study too has found that IPPs, in fact stifle competition and hamper efficiency; Most IPPs around the world have also been mired in allegations of corruption. Here are a few findings of the study:

*The ruling Suharto family in Indonesian signed over 42 IPPs which ruined the State Electricity Sector. Some have been dropped and others have not been paid. Some IPPs, including MidAmerican Energy Holdings in Indonesia, sued the electricity utility for non-payment of dues and won a $573ms arbitration lawsuit, but it has no way of enforcing payment. Indonesia, is re-negotiating its power purchase agreements (PPAs). In one case, it has effectively negotiated the nationalization of a power plant at a price which made the station’s output attractive.

In Croatia, it was a trip to the White House and other goodies which persuaded to sign a deal with Enron. In August 2000the new Croatian Government tore up the contract saying it unaffordable and had been signed in politically dubious circumstances. Croatia successfully forced Enron to abandon the original agreement and signed a new one.
In Pakistan, both the Nawaz Sherif Government and the Benazir Bhutto one, grappled with the Hubco Project. When Hubco attempted to take the dispute to international arbitration, the Supreme Court of Pakistan ruled that the case could not go outside the country because corruption and criminality were at stake rather than purely commercial negotiations. Hubco countered this by serving a Notice of an Exceptional (Political) Event on the government under which the company can suspend dialogue on operations and can seek damage claims from the World Bank with compensation possibly payable by the Government of Pakistan. This only shows that there is not even a consensus on what legal code should govern the contract, but the project has finally been cancelled by General Pervez Musharraf.
In Costa Rica , clauses relating to rates levels in 15 private sector power generator contracts lack legal status. Several of these IPPs have been declared illegal because the rates levels and adjustments sought to guarantee profits of private sector, and not ensure economic benefits to the country or consumers.
In Dominican Republic, Disaster has followed electricity liberalisation leading to massive power blockouts sometime upto 24 hours. Consumers also refused to pay adding to the chaos. This is in part attributed to the absence of regulation or agencies to monitor the power sector and medicate consumer concerns.
In Philippines, the State electricity utility is discussing terms of restructuring payment with 32 IPPS, In September 2000, Energy Secretary Mario Tiaoqui said the government will not renew these contracts.
The Hungarian government has decided not to sign any more PPA’s because they are inherently anti-competitive and are incompatible with the spirit of the EU electricity directive. In July 1999 the parliament had already declared that a PPA signed with multinational RWE was unconstitutional and void: RWE stated that it would bring a lawsuit to demand the return of its $26m.

Clearly there is a long record of broken IPPs and the consequences are certainly not unbearable. We too have a good case for reneging on the one-sided deaf. It all depends on whether the politicians see the writing on the wall or ignore it and wait for further financial ruin.

Courtesy : BSE reshuffles


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