Lessons Learnt from Dabhol Project
Lessons Learnt and exit strategy: What are the crucial lessons of the DABHOL power project for other strategic initiatives in India? How do you address the risk inherent in such enormous global projects? How do you immunize against such risks? If you are proposing a new project of this nature what other strategic, financial and regulatory initiatives would you recommend for such projects to succeed?
The crucial lessons learnt from the DABHOL power project are: 1. The dependence on a single buyer is always risky especially when the obligations exceed the capacity of the buyer. The investors should realize the fact that though focus on favorable terms to increase shareholder value is primary they should not ignore the capacity of the buyers. Also it is always better to find alternative buyers before deciding to make such large scale investments. 2. Though MSEB was forced by circumstances to enter into contract with payments in US dollars, it could have hedged the rupee depreciation by using foreign exchange contracts. 3. No matter how much you use risk mitigation tools, if there is fundamental flaw in the techno- commercial evaluation of the project , it is ought to fail. Enron’s vested interests in securing LNG supply lead to high tariff which was not feasible to be paid by the consumers. The project is designed for base load whereas Maharashtra suffers to cater peak load. The take-or-pay PPA did increase the overall average cost by five times which cannot be afforded by MSEB or pass through to end consumers. 4. Lack of transparency, open and competitive bidding and contracting leads to bad deals. The contract was signed DPC with sole negotiation without involving the competitors. There was a lack of transparency and legitimacy among consumers. The politicians exploited the lack of legitimacy for their vested electoral interests. 5. Unethical and corrupt practices make any business proposition unsustainable in the long run. 6. The
The crucial lessons learnt from the DABHOL power project are: 1. The dependence on a single buyer is always risky especially when the obligations exceed the capacity of the buyer. The investors should realize the fact that though focus on favorable terms to increase shareholder value is primary they should not ignore the capacity of the buyers. Also it is always better to find alternative buyers before deciding to make such large scale investments. 2. Though MSEB was forced by circumstances to enter into contract with payments in US dollars, it could have hedged the rupee depreciation by using foreign exchange contracts. 3. No matter how much you use risk mitigation tools, if there is fundamental flaw in the techno- commercial evaluation of the project , it is ought to fail. Enron’s vested interests in securing LNG supply lead to high tariff which was not feasible to be paid by the consumers. The project is designed for base load whereas Maharashtra suffers to cater peak load. The take-or-pay PPA did increase the overall average cost by five times which cannot be afforded by MSEB or pass through to end consumers. 4. Lack of transparency, open and competitive bidding and contracting leads to bad deals. The contract was signed DPC with sole negotiation without involving the competitors. There was a lack of transparency and legitimacy among consumers. The politicians exploited the lack of legitimacy for their vested electoral interests. 5. Unethical and corrupt practices make any business proposition unsustainable in the long run. 6. The