Enron's India Disaster
By Sam Parry
December 30, 2001
Enron's sudden fall from grace has made it a dirty word in American business, associated with cooking its books and spreading money around to friendly politicians.
But in India, the Houston-based energy-trading company has long been viewed in much that way, as a heavy-handed U.S. corporation, expert at manipulating local politicians and callous in overriding the interests of everyday citizens.
For many on the Asian subcontinent, Enron epitomized the downside of the modern global economic system where powerful corporations from the West often bully their way into development projects that fail to live up to shiny promises.
A case in point was Enrons investment in a $3 billion, 10-year liquefied natural gas power plant development project, the largest development project and the single largest direct foreign investment in Indias history.
Begun in 1992, the Dabhol power plant near Indias financial capital of Bombay in Maharashtra state was to have gone online by 1997. It was supposed to supply energy-hungry India with more than 2,000 megawatts of electricity, about one-fifth the new energy needed by India each year.
But endless disputes over prices and terms of the deal turned the venture into a symbol of what can go wrong in large-scale development projects when cultures collide. As Enron files for bankruptcy and looks for ways to divest itself of its Dabhol interests, the project is still unfinished and has produced no electricity.
Enrons Dabhol project took shape after the fall of the Soviet Union. India, a longtime Soviet ally and a socialist country in its own right, faced tough questions about how it would adapt to the post-Cold War world. With the Soviet Union gone, India began looking to the West to develop new international partners.
An exploding population also was putting pressure on the nation's natural resources. One of the top needs was energy.
In 1991, a government led by Prime Minister P.V. Narasimha Rao of Indias longtime majority Congress Party introduced two major structural policy changes to spur economic growth. Narasimha decentralized government control over industrial licensing and opened the country more to foreign investment.
In Comes Enron
On the surface, Indias deal with Enron to build a power plant seemed to offer big advantages to both sides. The 2,184-megawatt Dabhol plant would help India meet its national energy needs while expanding India's trade relations with the U.S. [BusinessWeek, Dec. 3, 2001]
For Enron, the upside was equally clear. Entering the Indian market, which offered vast growth potential, would position Enron well in the global marketplace.
The U.S. government also saw benefits from U.S. companies gaining access to business in India, the worlds largest democracy. The Enron deal was the jewel of Americas economic engagement with India.
International observers and many in the energy trade press considered the deal a match made in heaven. "The power plant will provide desperately needed electricity for the growing Indian economy," wrote the Energy Daily.
"As an integrated gas and power project, the facilities will contribute significantly to the development and expansion of both the natural gas and power sector in India," declared Enrons Chairman and CEO Kenneth Lay. [Energy Daily, Dec. 9, 1993]
In a joint venture with U.S. companies General Electric and Bechtel, Enron created an Indian subsidiary, Dabhol Power Co. DPC, which was 65 percent owned by Enron, was to build the power plant. Enron was to develop and operate the plant. Bechtel was to design and construct it, with GE supplying the equipment.
To secure supplies of liquefied natural gas for the project, Enron lobbied New Delhi to change its tariff system, which had been designed to discourage energy imports. Enron got India to slash its duty on imports of liquefied natural gas from 105 percent to 15 percent.
With those changes approved, Enron brokered a deal with Qatar to provide the Dabhol plant 2.5 million tons of liquefied natural gas per year for 25 years, starting in 1997.
While many observers hailed the project and its promised benefits, some economists doubted its feasibility and some Indian citizens bridled at Enron's highhanded behavior.
In April 1993, a World Bank analysis questioned the project's economic viability, citing the high cost of importing and using liquefied natural gas relative to other domestic sources of fuels. Because of those findings, the World Bank refused to provide funds for the project. [http://www.altindia.net/enron/Home_files/WBreport.htm]
Other critics charged that the project had not been open to competitive bids and that the deal was too costly. Some expressed concern over the terms of Indias agreement to underwrite the project. With the World Bank declining to provide loans, India was forced to take on even greater risk.
In 1993, Prime Minister Narasimha Rao overruled objections from his own Finance Minister to give state guarantees for both foreign and domestic investors in energy projects. The guarantees could be counted by lending institutions as additional state debt. [Independent Power Report, 3/12/93]
While demonstrating its political pull in New Delhi, Enron brushed aside local questions and concerns.
The law required Enron to solicit public comments in the two months after agreement was reached on the land and water acquisitions. Instead of seriously addressing concerns raised by local residents, Enron sent out "a form letter stating that the villagers inquiries would be looked into and that there would be no negative impacts on the area," Human Rights Watch reported.
At the end of the two months, Enron told the local government that the company had complied with the public-comment law and had received no objections. In reality, Enron had "received 34 complaints and queries," Human Rights Watch said. [http://www.hrw.org/reports/1999/enron3-0.htm]
With the Indian government onboard and the local population relegated to the caboose, the Dabhol project had moved onto a fast track. Construction was set to begin in early 1994.
By March 1994, however, momentum was slowing as financial questions reemerged.
"Price is becoming a sticky issue," the Financial Times reported. "Indian officials see the price as very high compared to domestic gas and imported and indigenous alternative fuels." [FT International Gas Report, March 18, 1994]
In July 1994, the U.S. government extended a helping hand. The Overseas Private Investment Corporation (OPIC), an independent agency established by the U.S. government to promote American business interests overseas, provided loan insurance and granted a $100 million loan guarantee to support the Dabhol project.
The national government of India, the state government of Maharashtra and Enron also went to work on rescuing the project. For the first time ever, the Indian government agreed to underwrite the liabilities of a private company. [Independent Power Report, Sept. 23, 1994]
The guarantees firmed up the financing, but other problems emerged. Critics charged that the power plant threatened the local environment and didn't adhere to government environmental standards.
One concern was the safety of importing and storing liquefied natural gas, which is cleaner burning than coal or oil, but can emit volatile vapors that can ignite and explode. Other critics said Dabhol could harm local farms and fisheries.
Protesters took to the streets to support demands for changes in the plant's design and -- more broadly -- to oppose the Indian governments economic liberalization policies. Social activists, lawyers, villagers and farmers banded together in groups opposed to the Enron project.
One of the protesters was Medha Patkar, a 1992 recipient of the Goldman Environmental Prize, which is often referred to as the Nobel Prize for the environment. Well known in the world community for her non-violent work in the Ghandi tradition, Patkar joined the protests, charging that the project was approved without adequate study of economic, environmental or social consequences.
"We -- national organizations, especially the National Alliance of People's Movements -- felt that we must not allow the local organizations to lose this battle. It is symbolic and important," Patkar said. [Multinational Monitor, Nov. 1997]
Another opponent was Professor Sadanand Pawar, an economics professor from Bombay who analyzed the impact that the devaluation of Indias rupee would have on the electricity from the Dabhol plant. The devaluation meant that Dabhol's energy prices would soar to between two and five times the average price in the area, Pawar said.
The Rise of Nationalism
Equally significant to the battle over Dabhol was the interest of two conservative Hindu nationalist parties.
The Bharatiya Janata Party (BJP) and the Shiv Sena accused the ruling Congress Party of selling out the people of Maharashtra. Local BJP leader Gopinath Munde threatened to "throw Enron into the sea."
Opposition to the project spread throughout India in early 1995. On April 27, 1995, The Times of India ran an editorial by columnist Praful Bidwai calling the project "irredeemably flawed."
Bidwai accused Enron of reaping "unearned, windfall super-profits" and concluded that "India's stature will be enhanced, not lowered, if it tells the world that it is no pushover, no banana republic ready to accept an outrageous deal."
The name Enron soon was synonymous with waste and abuse across India.
By mid-1995, after local elections, the state government of Maharashtra was in the hands of a BJP and Shiv Sena coalition. Under new political direction, the state electricity board was bringing the dispute to a head. A three-line letter to Dabhol Power Co. called for a cessation of construction because the cost for building the plant and generating the electricity was too high. [Bloomberg Business News, Aug. 7, 1995]
Friends in Washington
As opposition to Dabhol mounted, Enron turned to the Clinton administration for help in pressing the Indian government. U.S. officials -- from Energy Secretary Hazel OLeary to Treasury Secretary Robert Rubin -- threw their weight behind the project.
"Failure to honor the agreements between the project partners and the various Indian governments will jeopardize not only the Dabhol Project but also the other private power projects being proposed for international financing," the U.S. Energy Department said on June 5, 1995.
The Clinton administration was driven by a belief that India was the best U.S. opportunity to beat Japan in an emerging market in Asia.
"India has become one of the few emerging Asian markets where American companies have bounded in ahead of Japanese competitors, with Clinton administration officials regularly leading groups of executives there," reported the New York Times. [Nov. 22, 1995]
The project's defenders inside India also counterattacked. They dismissed anti-Dabhol protests as political posturing, seeking to exploit public worries about the economic liberalization policies of Prime Minster Narasimha Rao and the Congress Party.
"Ever since the BJP replaced the Congress Party early this year in Maharashtra, the BJP has done what it can to discredit the Congress Party before next year's (national) election," wrote Indian political observer Marilyn Raschka. "These are mere opening samples of the BJP-sponsored attacks. As elections get closer, the attacks will get worse." [Washington Report on Middle East Affairs, Nov./Dec. 1995]
Also trying to undercut the opposition, Enron renegotiated parts of the deal. On Jan. 8, 1996, Enron and the state government of Maharashtra reached a new agreement that would shift some of the construction costs and lower the electricity tariffs. Enron said work would resume within three months.
While the new terms suited the state government, other critics felt betrayed. They said the new deal was worse than the original because it allowed for the construction of a larger power plant and still failed to address the underlying cost concerns.
Growing opposition to the Congress Party's policies touched off seismic changes in the world of Indian politics. In May 1996, the BJP picked up seats in national elections and toppled the Congress Partys ruling coalition. The Congress Party had ruled India for almost the entire 50 years since the nation gained independence from Great Britain in 1947.
By early 1997, Enron officials thought the project was back on track, however. Rebecca Mark, chairman and CEO of Enron International, told BusinessWeek that Enron succeeded in winning over the new government of Maharashtra.
"I think what worked was that we never stopped talking," Mark said. "Our contract allowed us to arbitrate through legal international means, so we did, through Indian and international courts. Everyone realized a solution was necessary. Once the project got started, there was a layer of people [in government] who supported it. Our faith was in these decision-makers." [BusinessWeek, Feb. 24, 1997]
Enron's optimism, however, failed to take into account a budding social movement in Maharashtra. With political and legal recourses exhausted, protesters took to the streets -- and were met with force.
Several non-governmental organizations were formed to oppose the Dabhol project, including the Guhagar Taluka Enron Vaa Salagna Prakalp Virodhi Sangharsh Samiti (Guhagar District Peoples' Forum for Opposing Enron and Other Related Protects) and the Enron Virodhi Sangharsh Samiti (Organisation to Oppose Enron). These groups were made up of thousands of affected villagers, farmers, social and environmental activists and lawyers.
Non-violent protesters were arrested on the pretense that they might commit acts of violence. In May 1997, in the town of Mahad near the Dabhol Power Co.'s project, police served Medha Patkar and other protest leaders from the National Alliance for Peoples Movements a prohibitory notice.
According to Human Rights Watch, the police "then surveilled, arrested, beat, and detained the activists -- on the eve of her departing for Raigad and Ratnagiri districts with plans to lead a series of protests against the DPC project and other industrial projects."
Amnesty International joined Human Rights Watch in condemning the use of force against the protesters. In a 1997 report, Amnesty took the unusual step of accusing the companies involved in the project of colluding with local police to stop the protests. Amnesty International also reported that the police used excessive force to beat and arrest peaceful protesters. [http://www.web.amnesty.org/ai.nsf/index/ASA200311997]
Two months after the May 1997 incident, the National Human Rights Commission of India found the tactics of local police forces to be "unjustified" and criticized Maharashtra Chief Minister Manohar Joshi for giving orders to target the activists. At the time of the arrests, Joshi was embarking on a five-nation tour of Asia to attract foreign investment and promote the business interests of Maharashtra. The law-and-order tactics may have been meant as a statement to potential investors. [http://www.hrw.org/reports/1999/enron/enron5-2.htm]
In June 2001, with the project about 90 percent complete, development was again put on hold amid new disagreements over the price of energy. Work has not resumed.
In the weeks before Enrons Chapter 11 bankruptcy filing in November, negotiations were underway to sell Enrons stake in the project. The stake's estimated value was between $500 million and $1 billion. [Reuters, Dec. 10, 2001]
Enron and its U.S. partners, Bechtel and GE, have filed claims with OPIC to collect $200 million in compensation for losses suffered in the Dabhol project. [Bloomberg News, Dec. 21, 2001] That money ultimately might come out of the pockets of U.S. taxpayers, though the outcome of Enron's end game is not clear.
Yet, by any measure, the near-decade-old project to build Indias largest power plant has been a disaster. Dabhol, which was expected to deliver much-needed electricity to an energy-thirsty country by 1997, has produced no energy and is facing an uncertain future.
The company that started it all -- a company that as recently as April ranked as Americas seventh biggest corporations and counted George W. Bush among its closest political allies -- is bankrupt after admitting that it overstated earnings by $586 million since 1997.
The lessons of Dabhol may be like the larger lessons of the Enron debacle. A company known for its hubris tried to accomplish too much, too quickly, playing fast and loose with the financial realities and counting on political allies to clear the way.
In the end, Enron found that even its enormous political clout could not override the rules of economics and the resistance from everyday citizens of India.
Back to Front