The government on Friday decided to stand guarantee to domestic financial institutions to settle foreign debts of Dabhol Power Project as part of its efforts to settle the issue and restart the power company.

"This, it is hoped, will help them (all stake holders) to settle these issues early," an official spokesperson said after the meeting of Cabinet Committee on Economic Affairs.

Speaking after the meeting, Defence Minister Pranab Mukherjee, who is also chairing the Group of Ministers on Dabhol Power Corporation, said, "We are negotiating with all concerned parties for settling the issue amicably."

DPC was set up in two phases. Phase-I (740 MW) was initially based on naptha but to be switched to LNG while Phase-II (1444 MW) was based on LNG from the outset.

A 'take-or-pay' power purchase agreement between MSEB and DPC obliged MSEB to purchase 90 per cent of the power generated by DPC.

Due to commercial disputes between state government and Dabhol over the pricing of electricity, Maharahstra had stopped buying electricity from Dabhol, resulting in a major dispute between the two.

DPC has been lying idle for more than three years now and Indian FIs have an exposure of more than Rs 6,000 crore (Rs 60 billion) in the project and have been struggling to revive it in coordination with majority partners GE and Bechtel. 

The obligations of MSEB under the PPA, for both the phases, was guaranteed by the government of Maharashtra.

The Centre had counter-guaranteed certain specified obligations of GOM for Phase-I, subject to a ceiling of $300 million, in the event of termiation and an annual ceiling determined by the counter-guarantee of Rs 1500 crore (Rs 15 billion) per annum in respect of default in energy payments.

EnronCorp, promoters of DPC, is at present under liquidation while GE and Bechtel have bought 49 per cent of the shares of Shell company and have an option of purchasing the balance 51 per cent as well.

GE and Bechtel have a direct holding of 59 per cent, and effectively control 85 per cent of DPC. This purchase agreement is under judicial scrutiny and Bombay High Court recently held it against the terms of DPC agreement.

The process to resolve the DPC issue was speeded up after UPA assumed office. The new government set up an e-GoM and asked the Cabinet Secretariat to look into the issue.

However, even after holding four meetings, the empowered group of ministers declined to fix a deadline within which the three billion dollar Dabhol power plant issue would be resolved.

The Enron Saga

The e-GoM has asked PSUs like NTPC and GAIL to assist in restarting the power plant. The high-powered panel has also asked domestic lenders to buy the offshore debts.

A special purpose vehicle is to be set up by the Indian PSUs and lead lender IDBI for the purpose. The e-GoM has given in principle nod for this.

The effort to restructure and restart Dabhol power plant comes in the wake of concerns raised by foreign promoters and six billion dollar claims filed by them in international arbitration at London for alleged breach of bilateral investment protection agreement.

One of the main promoters General Electric had shot a letter to Planning Commission recently seeking early resolution of the mega power project, which was showcased as one of the biggest FDI ventures in the country some years ago.

The e-GoM faces the challenge of restarting the plant that is lying idle for over three years, apart from ensuring that lenders get their dues back and promoters earn a decent return from their investment.

IDBI along with ICICI Bank [Get Quote], State Bank of India [Get Quote], Canara Bank [Get Quote] and others have a exposure of over Rs 6,000 crore in the DPC. Offshore lenders like OPIC and a dozen of foreign banks have an estimated loan exposure of over $140 million. While the main promoter Enron has gone bankrupt, GE and Bechtel are looking forward to complete the project and were open to selling their stakes.

Dabhol was showcased as one of the biggest foreign direct investments in power project with Enron, GE and Bechtel commanding 85 per cent stake while the remaining equity remained with Maharashtra State Electricity Board.

According to Finance Ministry's earlier estimates, restarting the power plant would entail a cost of about Rs 1,800 crore (Rs 18 billion) or $390 million.

This is required to complete the Liquified Natural Gas terminal, completion of Phase-II and payment of contractual charges to GE and Bechtel.