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January 14, 2000
The whole world’s full of broken IPP deals
A World Bank study has found that IPPs, which were sold to most developing country govts in a way to bring the rigours of market forces into inefficient electricity sectors, in fact stifle competition and hamper efficiency
The Maharashtra government’s decision to pay Dabhol Power Company’s (DPC) arrears has temporarily defused the situation, but the problem of unaffordable power continues to grow. Since the Maharashtra State Electricity Board (MSEB) and the State government are bankrupt, dipping into State contingency funds has paid Dabhol. But this cannot go on. Already the State has frozen the dearness allowance and bonus for government servants and is unable to meet overtime payments to its over-worked police force. The next blow will be a stiff dose of additional taxes. In the absence of political will to clean up the power sector, it will not be long before Maharashtra heads towards irrevocable 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 track record speaks for itself. It has large chunks of the media and the politicians completely under its sway, but 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 allegedly has equally close links with the Republican government to be headed by George W Bush. The question is, can a bankrupt Maharashtra afford to bend to Enron’s pressure? The answer is no.
A study by Kate Bayliss and David Hall, PSIRU, University of Greenwich, titled Independent Power Producers: A review of issues (November 2000), compiles a list of countries which signed similar expensive Independent Power Projects (IPPs) and have cancelled or renegotiated them. The study shows that IPPs, which were heralded as the start of liberalisation and subsequent privatisation of electricity have been the subject of protracted legal, political and economic battles in many countries or crippled their electricity utilities.
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. In fact they are worse than government owned public sector undertakings. A World Bank study too has found that IPPs, which were sold to most developing country governments in a way to bring the rigours of market forces into inefficient electricity sectors, in fact stifle competition and hamper efficiency. Most IPPs around the world have also been mired in allegations of corruption. These countries have gone ahead and cancelled or re-negotiated projects; often economic realities forced investors to the negotiating table. Here are a few findings of the study:
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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. In fact, the Indonesian example proves that even where the court rules in favour of the investors, it does not mean they will be paid - because the utility simply does not have the money. Some IPPs, including MidAmerican Energy Holdings (formerly CalEnergy) in Indonesia, sued the electricity utility for non-payment of dues and won a US$573 million-worth arbitration law suit, but it has no way of enforcing payment. Indonesia, is re-negotiating its power purchase agreements (PPAs) and forcing companies to lower tariffs. In one case, it has effectively negotiated the nationalisation of a power plant at a price which made the station’s output attractive - and also gave the State utility the flexibility that comes with ownership. This is cearly an option for India.
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In Croatia, it was a trip to the White House and other goodies which persuaded a former President to sign a deal with Enron. In August 2000, the new Croatian government tore up the contract saying it is unaffordable and had been signed in politically dubious circumstances. This was done despite pressure from the US ambassador. Croatia successfully forced Enron to abandon the original agreement and signed a new one, but it is not clear that this too will ever be implemented.
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In Pakistan, both the Nawaz Sharif 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 issues of 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.
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In Costa Rica, clauses relating to rates levels in 15 private sector power generator contracts lack legal status. The situation is under investigation by the state power company Instituto Costarricense de Electricidad’s (ICE) administrative board. 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.
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In Dominican Republic, disaster that has followed electricity liberalisation (including placing up to 40% of national power generation in the hands of IPPs) leading to massive power blackouts 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 mediate consumer concerns.
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In the Philippines, Napocor, the State electricity utility is discussing terms of restructuring payments with 32 IPPs. In September 2000, to avert the financial burden caused by the IPP deals, Energy Secretary Mario Tiaoqui said the government will not renew these contracts.
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The Hungarian government has decided not to sign any more Power Purchase Agreements (PPAs) because they are inherently anti-competitive and are incompatible with the spirit of the EU electricity directive. It says that they also carry the risk of state-guaranteed “stranded costs” - the compensation paid if, in a free market, new power providers undercut the previously contracted generators. This brought it into sharp conflict with multinationals AES and Tractabel. In July 1999 the Hungarian parliament had already declared that a PPA signed with multinational RWE was unconstitutional and void; RWE stated that it would bring a law suit to demand the return of its $26 million.
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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 deal. It all depends on whether the politicians see the writing on the wall or ignore it and wait for further financial ruin.