Enron India Case Study

Enron in India: The Giant's First Fall

BySandip Roy / Pacific News Service

February 7, 2002, 9:00 PM GMT

Enron's collapse may have begun with the kind of misadventures it engaged in half a world away among the quiet coastal villages of Dabhol, India.

In 1992, the Enron Corp. announced it would build a $3 billion natural-gas power plant in Dabhol in the western state of Maharashtra. The project was to be the poster child of economic liberalization in the country -- the single largest direct foreign investment in India's history.

Instead, Enron in India has been an economic disaster and a human rights nightmare.

From the get-go, the Dabhol project was mired in controversy. Enron worked hand in hand with corrupt Indian politicians and bureaucrats in rushing the project through. Charges filed by an Indian public interest group allege Enron and the Indian company Reliance bribed the Indian petroleum minister in 1992-93 to secure the contract to produce and sell oil and gas from the nearby Panna and Mukta fields to supply the plant.

A Human Rights Watch report recounted incidents of farmers' land stolen, water sources damaged, officials bribed and opponents of the project arrested on trumped-up charges. In 1997, the state police attacked a fishing village where many residents opposed the plant. The pregnant wife of one protest leader was dragged naked from her home and beaten with batons.

The state forces accused of abuses provided security to the Dabhol Power Corporation (DPC), a joint venture of Enron, the Bechtel Corp. and General Electric, overseen by Enron.

The U.S. State Department issued the DPC a human rights clean bill of health. Charged with the assessment was U.S. Ambassador Frank Wisner, who had also helped Enron get a contract to manage a power plant in Subic Bay in the Philippines in 1993. Shortly after leaving his post in India in 1997, Wisner took up an appointment to the board of directors of Enron Oil and Gas, a subsidiary of Enron.

Thanks in part to Wisner's positive rights review, Washington extended some $300 million in loan guarantees to Enron for its investment in Dabhol -- even though the World Bank had refused to finance the project, calling it unviable.

A recent Indian investigative committee report exposed an "utter failure of governance" -- bribery, lack of competitive bidding, secrecy, etc. -- by both the Indian federal government and two successive state governments as they rushed the Enron project through.

By June 2001, the Maharashtra state government had already broken off its agreement with DPC because its power cost too much. That was the plant's one and only customer.

By December, news of Enron's collapse was in newspapers across the world. But the company still filed a $200 million claim with the U.S. government's Overseas Private Investment Corporation, a U.S. taxpayer-funded insurance fund for American companies abroad, in an attempt to recoup losses from the DPC. Indian newspapers reported that Vice President Dick Cheney, Treasury Secretary Paul O'Neil and Commerce Secretary Don Evans tried to twist the Indian government's arm into coughing up the money. Otherwise, U.S. officials warned, other investment projects would be jeopardized. International media reported last month that U.S. government documents showed Cheney tried to help collect the debt.

Today in Dabhol, the power plant is considered polluting and undependable. Spring water has become undrinkable, the mango crop is blighted and the fish catch is dwindling. Often at nightfall, the electricity fails.

How did Enron manage to push the project through? By using a time-tested strategy. Centuries ago, the East India Company went to India to trade and stayed on to rule. Before long, Indian money and goods were feeding coffers in London, and the products were sold back to the colony. The DPC was in India, but the money went to Enron's offshore tax shelters. And just like the East India Company, Enron appeared to apply a strategy of divide and conquer. It offered groups of villagers money, hospitals and lucrative labor contracts, with the result that families sometimes became divided against each other.

Enron's collapse may have begun half a world away, in Dabhol India. Mired in controversy from the get-go, the Dabhol project was an economic and human rights disaster.

In the early 1990s, the US energy giant Enron, decided it needed to diversify by expanding its growth abroad with emerging countries. In June of 1992, Enron engaged in negotiations with the government of India. Enron had identified the state of Maharashtra, the third largest state in India with a population of roughly 79 million, and containing India’s commercial capital of Mumbai, to negotiate a major energy project. Maharashtra was governed by the Congress Party.

Negotiations began with both the state government and with the Maharashtra State Electricity Board (MSEB). Enron’s mega project proposal was for the construction of a US$3 billion, 2015-megawatt power plant. As a great deal of liquefied natural gas would be required to power the plant, Enron decided it would import this gas from a joint venture that Enron had with Qatar which was 1200 miles away. Being the largest project ever undertaken in India, Enron proposed that the project be broken down into 2 phases. Initially, in phase 1 they proposed to produce 695 megawatts and would use locally produced natural gas. Phase 2 would produce 1,320 megawatts and for this they would use the natural gas imported from Qatar. Enron chose the town Dabhol, situated on the Indian Ocean as the project site.

The most important element of the deal was to secure a long term purchaser of electricity to lock in long term debt financing and to generate a sufficient return to investors in the project. In order to realise the project, MSEB, the only potential buyer available, would have to enter into a long term contract with the Dabhol Power Project Company. In less than five days a memorandum of agreement was signed. It was agreed that the Dabhol project would charge no more than 2.40 rupees (7.3 cents US) per kilowatt hour to MSEB.

Three problems immediately emerged:

  1. First, the World Bank, acting as a consultant to the Indian government said that the project would produce an excess capacity of electricity for years and would be too costly in comparison to the more traditional sources of fuel, such as coal, already in use. Enron responded by launching a successful campaign by promoting the positive environmental impact of its project.
  2. The second problem entailed the Enron’s projected 26.52 rate of return to its shareholders. India’s central government and the government of Maharashtra disagreed and countered with a 20% return as being more reasonable. Ultimately they agreed on 25.22 %.
  3. The third major hurdle was mounting public opposition to the project and concerns raised over the electricity tariff, government official bribery, and about the project not being open to competitive bidding. 

Despite this mounting opposition, negotiations continued.

Enron joined with two other US firms, General Electric and Bechtel, each holding 10% as junior partners. In December, of 1993, MSEB signed the power purchase agreement with Enron thereby inaugurating the Dabhol Power Project.

As the project commenced, public opposition to the project swelled as activists and an assortment of differing organisations challenging the legitimacy of the project filed suit against the project in the India High Court. As elections loomed in Maharashtra in March of 1995, the opposition parties, the Shiv Sena Party and the Bharatiya Janata Party (BJP) used their opposition to the project as a primary election issue. Focusing on a nationalistic viewpoint they alleged that the proposed electricity tariff was excessive and would hurt the poor. As a consequence, the Shiv Sena and BJP coalition won the elections and tossed the incumbent government. An investigation was carried out into the overall project in May which subsequently resulted in MSEB cancelling the power purchase agreement with the Dabhol Power Company. At this point in the project, US$300 million had already been invested and Enron and its partners were facing a daily loss of US$250,000 each day the project was delayed.

As per the terms of the original agreement, Dabhol and its partners initiated arbitration proceeding against MSEB and the Maharashtra government. The government in turn launched legal action to invalidate the arbitration action alleging that illegal means had been employed to secure the contract. Maharashtra’s government officials responsible for the investigation also stated firmly they had no wish to consider renegotiation.

In the fall of 1995, Enron managed to persuade the government of Maharashtra to reopen negotiations which would take place in the fall. Subsequently, Chief Minister Joshi announced that a review panel would carry out a review of the project. The review panel not only began to discuss the restructuring with Enron executives, they also heard the major opponents to the deal. The major issues entailed the electricity tariff, the capital costs of the project, the payment plan and also the environment.

In terms of the renegotiation, MSEB gained a 30% partnership with Enron and its interest reduced from 80% to 50%. The original electricity the plant would produce was actually increased from the initial proposed outage of 2,015 megawatts to 2,410 after the completion of phase 2. Capital cost was reduced from US$2.85 billion to US$2.5 billion and the tariff was lowered from 7.03US cents to 6.03US cents subject to the cost of fuel and inflation.

In January of 1996, the Maharashtra government agreed to the renegotiation proposal submitted by the review panel. After much internal debate, the Indian government gave their approval and extended their guarantee of Maharashtra’s obligations. Enron dropped their arbitration proceedings and Maharashtra dropped its counter suit. Despite these agreements, the project still could not continue because a host of various groups including unions, activists and other public interest groups filed 24 legal actions in the courts in an effort to stop the project. The courts ruled that the project could not proceed until all these suits were heard. Eventually the courts dismissed the last suit in December of 1996.

In May of 1999, phase 1 of the project was completed and the plant began to operate while Enron sought and obtained financing of US$1.87 billion for phase 2 which they expected to complete toward the end of 2001. Not long after the phase 1 of the plant began to operate however, MSEB was no longer able to pay for the electricity it had negotiated. By 2001, MSEB had accumulated a debt of US$45 million forcing the Dabhol Power Company to close down and file suit against MSEB, the central government and the government of Maharashtra. That same year Enron’s collapse was total. After a string of financial setbacks, Enron declared bankruptcy.

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