Enron Does India, Part One: The Contract for the Dabhol Power Project
January 25, 2002
by Jack Rabbit

The name Enron once meant the seventh largest corporation in the United States; it now means a scandal that will likely see some wealthy men serving prison sentences and hopefully also mean the richly deserved demise of the Bush administration, an administration that came to power with the philosophy that it is the role of government to protect robber barons from public scrutiny and regulation in what is nominally a democratic system.

Enron's corporate philosophy, however they wished to state it, amounted to the idea that the common man was put on earth to pay whatever inflated price can be extracted for whatever product comes under the control of robber barons like Enron. Californians learned all too well last year how potent those corporate and government philosophies can be when the corporation and government act together as a unit. As if to drive their contempt for the common man home, Enron even extended it to their own employees: the common man is also expected to work for this corporate tyrant and fork over his life savings when the tyrant feels a need for it.

It might be of small comfort for Californians and Enron's former employees to know that Enron is no better behaved overseas than they are at home. Enron's lax business ethics and ruthless, selfish philosophy of corporate entitlement were in more than a little evident in the story of the construction and operation of the Dabhol Power Company's plant about 160 miles south of Mumbai (perhaps still better known by its former name, Bombay) on India's coast of the Arabian Sea. It is a story of bought politicians, police state tactics and corporate disregard for the customers who buy their product. In the end, Enron's greed did them in, but not before inflicting pain on the economy of west central India.

Most of the material for this report is from the Human Rights Watch report on the matter and a site called the Enron Saga. The Human Rights Watch report is the principal source for the second part of the series, while clippings found in the press coverage link of the Enron Saga proved most useful for compiling the third part.

In the early nineties, with the collapse of the Soviet Union, it appeared to many that capitalism had won out over socialism and that the best thing to do was to accept this ultimate judgment of history and start selling off state-run assets in a craze of "privatization." In 1992, the government of India announced that foreign investors would be invited to develop India's power and electricity sector. In June, the Enron sent a group of officials to New Dehli to make arrangements to survey the land around Dabhol for the purpose of building a large power plant.

On June 20, Enron and the government of the state of Maharashtra singed an non-binding memorandum of understanding to build the plant. This gave birth to an entity to be called the Dabhol Power Company (DPC), a joint venture of Enron and two other American corporations, General Electric and Bechtel. However, Enron was to be the principal player and as far as most people in India were concerned, DPC was Enron. This was to be one of eight so-called fast track projects the government of India sponsored to promote the development of power infrastructure through forign investment.

The memorandum drew criticism from many observers for several reasons. First of all, the agreement was negotiated exclusively between Enron and the state government; there was no competitive bidding. Second, there was the speed at which the agreement was drawn, only a matter of days. Also, there was the price of the agreement: almost $3 billion. This gave rise to the belief that corruption was involved in the negotiation of the contract. Finally, the agreement ahd a stunning lack of transparency. There was no estimated breakdown of the project costs or the operation and maintenance costs; there were no hard figures or derivation of financial parmaeters for underlaying payment calculations; nor was there a clear description of DPC's project capitalization, capital recovery charges, depreciation, interest capitalization, debt servicing or return on equity.

The government of Maharashtra requested a review of the proposed project from the World Bank. The World Bank said that there were many problems with the proposal. First, the bank noted that India lacked an overall framework for privatizing power. Also, the bank cited a lack of "overall economic justification" for the project. Finally, the bank was concerned that in the deal the Maharashtra State Electricity Board (MSEB) would have to pay Enron at a prescribed rate whether or not the company was actually making electricity available. The World Bank, certainly a big booster of privatization, called the agreement "one-sided" in favor of Enron. These same concerns were also heard from the Central Electricity Authority (CEA) in New Delhi. The CEA also cited concerns that the memorandum provided too few details about the costs of the project or how the state would pay for the project.

In spite of the misgivings, a formal agreement was signed in February 1993 with a few revisions from the memorandum. This agreement called for a plant that could generate about 2000 megawatts at an overall cost of $2.65 billion. The project was to be split into two phases, with the state of Maharashtra having the ability to cancel the second phase. The first phase would consist of building a plant with the capability to produce about 700 megawatts. Even paired down, this was the largest contract in Indian history. The result would be the world's largest gas-fired power plant. The government of India approved the project for Enron and applied for financing with several institutions, including the World Bank. The World Bank rejected the project at the end of April, stating that it was "not economically viable."

One may ask how such a deal can be struck. US pressure may have played a role in the deal, but there is little direct evidence. The US uses diplomacy and covert operations to secure favorable deals for American corporations. For example, on one occasion, the US intercepted faxes and phonecalls between the Saudi government and a European consortium trying to win an airline maintenance contract with Saudi Arabia and found that the consortium was offering bribes to a Saudi official; the US intervened with the knowledge and thus helped win the contract for Boeing.

The use of diplomacy or covert operations seems to be especially true when the corporation involved is Enron. Contrary to what some might believe, this did not begin when George W. Bush moved into the White House. For example, in 1995, Enron won a contract to build a pipeline from Mozambique to South Africa. The Houston Chronicle reported at that time that then-National Security Advisor Anthony Lake put pressure on Mozambique to make an agreement with Enron; pressure was also applied by US Agency for International Development and the US embassy in Maputo. John Kachamila, Mozambique's natural resources minister, defended himself from charges in the press that he was holding out for a percentage of the deal. The Chronicle quoted Kachamila: "Enron was forever playing games with us and the embassy forever threatening to withdraw aid . . . all I wanted was a better deal for the state." (See >)

In addition to diplomats, the US may even call on the security agencies to promote American business interest in the new world economy. The Clinton administration implemented a policy called "aggressive advocacy" to help American firms gain overseas contracts. This policy involved using the CIA and the National Security Agency. An article published in July, 2000, in the London Independent suggests the CIA may have had a role in the Dabhol project. With the rejection of the World Bank, the state government of Maharashtra in Mumbai commissioned a Cabinet subcommittee to review the problem. This committee, known as the Munde Committee, reported many of the same problems that were already known about the project. However, pressure from both Enron and the central government in New Delhi mandated that the project forge ahead.

However, in August 1993, the CEA raised more questions about the financing of the project. The agreement called for all costs of construction and operation of the Dabhol plant to be covered by the tariff the company would charge MSEB for electricity. Of course, the cost of the tariff would be passed on by MSEB to power consumers. The cost of the tariff was agreed to be $1.3 to $1.4 billion a year for the life of the twenty-year agreement. CEA determined that the tariff was too high and that it brought the price of power to approximately twice what the CEA deemed acceptable. On the other hand, a high tariff meant greater profits for Enron. Another concern about the tariff was that it was negotiated in US dollars without regard to currency fluctuations. This meant that any time during the course of the agreement the rupee dropped in value against the dollar, the amount to be paid by the government would increase. Of course, the value of the rupee did indeed go down even before the Dabhol plant went on-line in 1999. However, with such an agreement, Enron was protected from any currency fluctuations.

Consequently, Enron would benefit by negotiating a high tariff. Enron's profits meant little to the CEA and the CEA withheld its approval. Nevertheless, Enron put pressure on the state Chief Minister in Mumbai and the central government's Ministry of Energy to speed up clearance of the Dabhol project. In November, the CEA began a new investigation to determine whether the costs of the project were justified; specifically, the CEA asked whether the construction costs and the date of completion had changed. DPC informed the CEA that it had changed, but that it was of no concern to the CEA since the tariff was guaranteed. Enron argued that since it assumed all risk for capital costs and that changes in capital costs were not to be passed to the customer.

According to critics of the agreement, the capital costs proposed by Enron were very high. Enron's proposed prince per unit was about Rs 4.5 crore; compared to other fast track projects, this came in about the middle. However, it was considerably more expensive than other gas projects and only slightly less expensive than one of the coal projects. This was in spite of the fact that the Dabhol project was a significantly larger project than the other gas projects, a fact that should have brought the cost per unit of the Dabhol project down.

In spite of the fact that Enron refused to provide requested information to the CEA, the CEA did not hold up the project. Instead, under pressure from the central government's Ministry of Finance, the CEA agreed to the Ministry of Finance's positive evaluation of the project costs and the tariff; this in spite of the fact that under Indian law, it is the CEA and not the Ministry of Finance that is supposed to make such evaluations. At the end of November 1993, the CEA gave provisional clearance to the project. It was the largest single foreign investment in India. In early December, the Power Purchasing Agreement (PPA) was finalized and signed by the government of Maharashtra and the Dabhol Power Company.

While the government and DPC publicized the nearly $3 billion cost of the project, they did not publicize the magnitude of capital outflow that the government would provide to the company in order to purchase electricity. The CEA had estimated that the cost to MSEB would be at least $1.3 billion per year over a twenty-year contract. This would be approximately $9 for each dollar Enron would put into the project.

It should be noted that at the time the PPA was signed, MSEB was in poor financial condition. This was typical of state electricity boards in India. These boards would have to borrow money from the state government and other financial institutions at unstable interest rates in order to finance development. Given this, DPC demanded insurance against MSEB defaulting on loans. This insurance was in the form of a counter-guarantee from the state government. Thus, in the event that MSEB was unable to pay its bills, the state would. The central government also provided similar counter-guarantees. These government guarantees come into play in the third part of this series.

Political opposition to the agreement arose. In July 1994, a law suit was filed by Ramdas Nayak, a member of the BJP, then the opposition party in Maharashtra. The suit complained about the agreement's lack of transparency and competitive bidding and that the counter-guarantees to DPC violated provisions of Indian law concerning government borrowing. The suit was dismissed in August. However, the suit served to publicize the agreement; the BJP and their allies used the flaws in the agreement as a campaign issue and accused the Congress-led state government of Sharad Pawar of corruption.

In March 1995, the BJP and their allies won elections in Maharashtra and formed the new government. The new Chief Minister, Manohar Joshi, announced a review of the project by a committee chaired by Deputy Chief Minister Gopinath Munde. In August 1995, the Munde Committee issued its report. The report recommended scrapping the project. Upon that announcement, Enron insisted on arbitration against the state government in order to recoup $600 million it claimed to have spent on the project up to that time; Enron also offered to renegotiate the deal. The state responded by filing suit in September to void the contract.

With the issuing of the Munde Committee report, the Clinton adminstration swung into action to help Enron. Two cabinet members, Treasury Secretary Robert Rubin and Energy Secretary Hazel O'Leary, personally urged India to accept Enron's proposed project. Also, the US ambassador to India from 1994 to 1997 was Frank Wisner. Wisner's prior ambassadorship was in the Philippines, from 1991 to 1992. During his tenure in the Philippines, Wisner used his influence to help Enron get a contract to manage two power plants in Subic Bay.

Wisner was also known to use his influence for Enron in India on several projects. After retiring from the foreign service in 1997, Wisner went to work for Enron. In early November, Enron issued an apology to Maharashtra and again offered to renegotiate the deal. Bal Thackeray, the leader of the Shiv Sena Party, BJP's main coalition partner in Maharashtra, stated that Enron had "accepted nearly all our conditions."

In January 1996, the government announced it would accept a renegotiated contract with Enron. The government made a few spurious claims to savings and committed to the second phase of the project, which had been optional in the original deal. The business press in India was incredulous. Business Line, a major Indian financial paper, called the renegotiated deal "unacceptably advantageous" to Enron.

In any event, the public could smell a rat in the change in the government's position. In April 1996, the Center for Indian Trade Unions (CITU), in conjunction with a young energy analyst named Abhay Mehta, filed a new law suit challenging the renegotiated deal on the grounds that it was unsustainable and obtained by the filing of fraudulent documents. Of course, what CITU was concerned about was the high cost of the project that would have to be born by consumers.

In an attempt to quash the suit, Enron retained or briefed every major lawyer in Mumbai. The petitioners finally found a commercial lawyer named Sunip Sen to take the case. After five days of oral arguments, the case was accepted. Enron then petitioned the chief justice of the court to transfer the case from the justice who had originally accepted it to a two-judge panel. The ruling of the panel could not be appealed. Enron stated that this was necessary because the company was losing money while the project remained in limbo. Although the move was highly irregular, the chief justice consented. After much legal wrangling, the petition was dismissed in December. However, in dismissing the case, the two judges wrote concerning the corruption charges:

"We do find that the statement of the State Government made before this court to the effect that corruption was never alleged by it at any time except in the plaint in the suit and the submission before the arbitrators is factually not correct. We have once again glanced through the Munde Committee report and the speech of the Chief Minister to verify the above claim. We find enough indications in the Munde Committee report which suggest corruption by those who were responsible for the deal and the PPA."

With that, the project was allowed to start construction.

Abhay Mehta, one of the petitioners in the suit, has written a book on the Dabhol Power project called Power Play. Click here for link to the introduction and an interview with the author.

The conventional political and legal channels were now closed. However, with that, the popular opposition to the project moved to the fore. How that was handled will be the subject of part two of this series.

Tomorrow - Part Two: The Popular Uprising Against Dabhol Power Plant