Does India, Part One: The Contract for the Dabhol Power Project
by Jack Rabbit
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
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
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.
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
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
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
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
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
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