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Category: Business and Industry
Date Submitted: 09/17/2013 05:27 AM
Politics, Institutions and Project Finance: The Dabhol Power Project
Submitted To: Prof. Vivek Saxena Course In-charge Submitted By: Krishna Bhargav Vasa (238) Merwah Shahid Zubair (245) MBA (F&B), Term VI
1. Analyze and comment on the contractual operational risk management/mitigation arrangements that underpinned the original Dabhol Power Project. Contractual operational risk management/mitigation arrangements:
Off-take contracts:
The MSEB entered into Power Purchase Agreement (PPA) with DPC even if the capacity was unwanted for ensuring constant revenue stream for DPC. The denomination of the tariff for final payment was in USD and the tariff structure was such that it increased every year. This was despite the fact that the cost of power that was generated by DPC was higher than normal cost of generation. The PPA specified the plant load factor that DPC would operate at, but did not specify any penalties if the plant load factor was not met.
Currency Risk:
The PPA also took care of the currency risk. The final price of Dabhol power was in USD and for MSEB it was dependent on the USD-INR rate. Thus, the currency risk for DPC was removed and it was borne by MSEB. All these factors’ risk was borne by the MSEB, central government and state government.
Financial Risk:
Enron negotiated a highly profitable deal for DPC whereby the real post-tax IRR of 26% 32% while the projected IRR of project was 16%. This amounted to annual excess payments of between USD 15.9-20.4 million from MSEB.
Political Risk:
Political insurance was obtained from (Overseas Private Investment Corporation) OPIC for the coverage of equity stakes and loans bought and obtained respectively by the DPC promoters.
Environmental Risk:
There were certain environmental hazards like pollution of sea water and the water discharge by the plant at higher temperatures to the sea thereby affecting the fishing communities. The diversion of water to the plant and thereby non...