Ogden

and the Maheshwar Dam

Poor Economics,
Strong Opposition,
Financial, Legal & Political Risks

To Ogden Shareholders:


On March 23, as part of its new focus on energy, Ogden Corporation signed a Memorandum of Intent to take a 49 percent equity share in the highly controversial Maheshwar Dam in India. The project is saddled by poor economics and faces strong opposition by local people. By investing in this project, Ogden would expose itself to serious financial, political and legal risks.

Investment in the project does not show evidence of the "renewed dedication to enhancing shareholder value" and "clear vision for the future" claimed in Ogden’s 1999 Annual Report. Quite to the contrary, we believe that investment in such a project poses a threat to shareholder value, and may also call into question management’s ability to effectively assess and manage risks in emerging markets.

We hope that you will raise these issues with Ogden Energy and urge them to reconsider this unwise and destructive investment.

International Rivers Network
Friends of the Narmada




Dam-Affected People Face Legal & Human Rights Violations


An estimated 40,000 people face the loss of their homes and livelihoods due to submergence under the reservoir behind Maheshwar Dam. Land affected by submergence is in one of the most fertile tracts in India with abundant irrigated crops of cotton, spices, wheat, pulses and sugarcane. The area also supports a rich and prosperous river-based economy based on sand quarrying, fishing, boat transport and seasonal agriculture on the river bed. None of this has been taken into account while computing the costs of the project.


German journalists have filmed the use of both bonded labor and child labor on the construction site. Both are illegal.


A well-defined legal regime governing displacement, rehabilitation and environmental mitigation for the dam states that people must be compensated for their losses with land-for-land compensation. There are also requirements that land be provided as compensation for people who subsist off the land but do not have land titles.

In spite of these provisions, project authorities have not made a single affected person an offer of cultivable land.

Task Force Report

The report of a Task Force constituted by the Madhya Pradesh government in 1998 clearly stated that there is no land available for people evicted from their lands and that dam construction must be suspended until available land is identified. Instead of following these recommendations, project authorities have tried to intimidate people into accepting cash compensation by refusing to offer them land. Because no land is available for resettlement and rehabilitation, the legal right to rehabilitation is being violated.

Violations of Project's Environmental Clearance

The legally required environmental clearance, given to the Maheshwar Project by the Ministry of Environment and Forests in 1994, may be revoked due to violations of the conditions on which the clearance was based. The environmental clearance required mitigation plans to be in place and the resettlement and rehabilitation of affected people to be completed by 1998. If the environmental clearance is revoked, it is illegal for the project to proceed.

In addition, the techno-economic clearance given to the Maheshwar Project in 1996 is a legally binding instrument and requires that the conditions of the environmental clearance be fulfilled.

Local People Strongly Opposed to Maheshwar

People affected by the Maheshwar Dam are fiercely opposed to the project. Over the last three years, dam-affected people have occupied the dam site at least ten times, barricading roads leading to the dam and stopping all construction materials reaching the site for three months.

Opposition is led by the Narmada Bachao Andolan (Save the Narmada Movement), a people's based movement representing tens of thousands of villagers, farmers, indigenous people and activists opposed to dam construction on the Narmada River. The Narmada Bachao Andolan has an extensive network of supporters around the world who have helped cut off foreign funds for destructive dams in the Narmada Valley.


"The people of this area have no intention to ever let this destructive dam be built and will use all means at their command through direct struggle, legal methods and mobilisation of increasingly larger numbers of people to stop this Project."

-Letter to Ogden from the Narmada Bachao Andolan, April 10, 2000.



Due to massive opposition and the project's poor economics, US power utility PacifiCorp withdrew from the project in 1998. Two German power utilities 'Bayernwerk' and 'VEW Energie' which were supposed to provide the 49% of project equity now to be taken up by Ogden, withdrew from the project in 1999.

In January 1998, thousands of villagers organized a 21-day occupation of the project site. As a result, on January 30, the Government of Madhya Pradesh agreed to suspend construction and initiated a task force to review the project. The task force was comprised of government officials, independent water and energy experts, and representatives of the Narmada Bachao Andolan.

In March 1998, the government broke its agreement and allowed some construction work on the dam. In response, the people of the area once more occupied the dam site for two days in April 1998. Demonstrators were badly beaten up, abused and teargassed. The violence was strongly condemned by the National Commission for Women, a statutory government body, as well as human rights groups in India and outside, including Amnesty International.

Subsequently, from May to July 1998, the people of the area barricaded all five roads leading to the dam site for three months. In October 1998, the task force issued its report recommending that several steps be taken before considering resumption of work on the dam, including the commissioning of a new cost benefit analysis and the creation of a comprehensive plan for rehabilitation.

In 1999, villagers occupied the dam site four times. In one demonstration, villagers went on a 21-day hunger strike.

This year, 4,000 people occupied the Maheshwar dam site on January 11 in spite of a heavy police presence. About 1,000 people were arrested and held for three days.

 

On February 24, affected people organized an indefinite sit-in protest demanding that project authorities demonstrate the public utility of the project and the availability of cultivable land for their rehabilitation. On March 8, after illegally entering private land, police beat and arrested the demonstrators.

Experience with the Sardar Sarovar Dam: World Bank Forced to Withdraw

The Narmada Bachao Andolan, which has led the fight against the Maheshwar Dam, has campaigned for over a decade to stop the downstream Sardar Sarovar Dam. Intense opposition to the dam forced the World Bank to set up an Independent Review to evaluate the project which then led to the Bank's withdrawal of funding in 1993. Japanese activists working in conjunction with the Narmada Bachao Andolan forced the Japanese government to withdraw its financing for the project in 1990.


On March 31, 1993, the World Bank cancelled its loan for the controversial Sardar Sarovar Dam located downstream of Maheshwar due to international pressure.

A World Bank-initiated independent commission found that "the Sardar Sarovar Projects as they stand are flawed" and that "resettlement and rehabilitation of all those displaced by the Projects is not possible under prevailing circumstances."



Currently, the Indian Supreme Court is in the process of ruling on a lawsuit filed by the NBA against the Sardar Sarovar Project. In 1995, the Court suspended construction on the half-built dam, and has allowed the dam to be raised by only 15 feet since then (the dam is supposed to be built to a height of around 455 feet).

Project-related Risks

The Maheshwar Dam is saddled with significant project risks – it is expected to generate much less power than predicted at four to five times the current cost of power in the state of Madhya Pradesh. Cheaper, more efficient energy alternatives are available. While the project has been primarily promoted for the production of peaking power, nearly 78% of the total energy produced will be during the four monsoon months when there is an energy surplus in Madhya Pradesh.

The cost of power from the project would be exceptionally high, approximately 7 rupees per kilowatt-hour (kWh) at the production point. The cost of power for the consumer may be around 15 rupees per kWh. This compares to MPEB's current production cost of 1.25 rupees per kWh.

On March 23, 1999, Indian Central Power Minister Mr. Kumaramangalam wrote to the Madhya Pradesh Chief Minister making an offer of power from a neighboring state at Rs.2.00 per kWhs, saying that "...it is observed that the tentative tariff offer is far below that offered by any other independent power producer in Madhya Pradesh." The National Thermal Power Corporation has made an offer to supply Madhya Pradesh with as much electricity as it can use.

Now that it has become clear that payments to the Maheshwar project will force tariffs to rise statewide, opposition to the project is growing among trade unions and leading political parties. Due to this resistance, the Madhya Pradesh Government may have to pursue cheaper options than Maheshwar - leading to the stalling or abandonment of this project.

Sole Power Purchaser Insolvent, Likely to Default on Payments

The Madhya Pradesh Electricity Board (MPEB), which signed a 35-year agreement to be the sole purchaser of power, is on the verge of bankruptcy and has negative cash flows. According to a 1998 report by the Indian rating agency CRISIL Advisory Services, "There is no cushion available with the MPEB to even partially meet the financial obligations of independent power producers," which includes the Maheshwar Dam.

Four privatized projects including the Maheshwar Project were given letters of intent for escrow cover in September 1998. The MPEB later struck down escrow cover for three of these projects because of its financial crisis, and it does not appear to have the funds to give the Maheshwar Project escrow cover. A letter sent by the MPEB to the State Cabinet on June 15, 1999 states "the present revenue received is not sufficient to meet our revenue expenses, the monthly receipt is short by approximately 1500 million rupees." ($1 = 44 rupees)

An October 1999 CRISIL draft report submitted to the Supreme Court by the Madhya Pradesh Government points out that MPEB’s deficit will increase with the addition of independent power producer capacity and that MPEB will not be in a position to service payments to independent power producers unless tariffs are raised in the domestic and agricultural sectors, and external support is made available. As stated above, it is unlikely that the Madhya Pradesh government will be able to raise tariffs to pay for power from independent power producers. In response to public pressure, the State Electricity Regulatory Commission struck down a tariff increase made by the state government in April 2000.

Thus, the agreement for escrow cover will not be honored, MPEB will default on its payments, and equity holders may be called in to service the creditors.

Unrealistic Rate of Rupee Depreciation

Over the last 16 years the rupee has weakened against the dollar at the rate of 10% on an annual compounded basis. Since 1991, it has weakened at a rate of than 12%. However the rate of rupee depreciation against the dollar which MPEB has assumed for the purpose of calculating escrow cover, is only 4.225%. This means MPEB will either have to increase the average tariff substantially each year in addition to the normal increase, or that the Government of Madhya Pradesh will have to provide the additional subsidy. The former is politically not possible, the latter financially not possible.

Project Promoters: No Experience with Dams, Poor Credit History

The Maheshwar Dam is being built by Shree Maheshwar Hydel Power Corporation Limited, a consortium led by Indian textile company S. Kumars. S. Kumars has no previous expertise in electricity generation. According to Bloomberg figures for 1998, the company is worth $10-12 million.

For the Maheshwar Hydro-Electric Project, S. Kumars has floated a separate company - the S. Kumars Power Developers Ltd. which will have a small equity holding of less than 17 million rupees - less than 9% of total project costs. Accordingly, the liability of the company is extremely limited. Moreover these projects are being financed on a non-recourse basis, meaning that if the loans turn bad, the lenders cannot turn to the project promoters.

S. Kumars has a poor track record of servicing debt. The company has still not paid the MPEB 450 million rupees it has owed since it took over the project in 1994.

The company has made exaggerated claims about having already invested nearly two billion rupees in construction work. In fact, most of the work done until now has been the relatively cheap earth work, and only around 400 million rupees has been spent. The MPEB and the Government of Madhya Pradesh have expressed their objections to S. Kumars' inflated figures and demanded full accounts.

Conclusion

Public opposition to the Maheshwar Dam is very strong and the majority of the landowners and landless families to be affected are dedicated to stopping the project. In the coming year, project opponents intend to employ all weapons they can use, including legal intervention against illegal purchase of lands and dam construction without a rehabilitation plan, continuous political pressure on the elected government, and repeated and continuous physical stoppage of work through non-violent means.

There is no doubt that the project will not be able to proceed without enormous human rights violations, drawing public censure and opposition, nationally and worldwide. The Narmada Bachao Andolan believes that continuous and broad-based public opposition will lead to the project being cancelled or stalled.


For more information:


Friends of the Narmada
www.narmada.org

International Rivers Network
Address1847 Berkeley Way; Berkeley, CA 94703
Tel 510-848-1155
Fax 510-848-1008
Email patrick@irn.org
Web www.irn.org

ANNEX 1: Chronology of the Maheshwar Dam project

ANNEX 2: Ogden's claims and some responses