Asia Inc
Oct 1995

BUSINESS: Enron v India

oct 1995

Enron Versus Quit India
Maharashtra state's cancellation of A $ 2.8 billion power plant threatens to undermine India's economic progress

On a windswept landscape at Dabhol in the western Indian state of Maharashtra, a giant flying saucer appeared to have landed earlier this year. The strange object was actually a 390-square-meter vinyl-coated polyester balloon designed to provide protection from torrential rains. Underneath it, 2,800 employees of an American consortium were, until recently, building the worlds largest combined-cycle, gas-fired power plant Dabhol Power Co.s $ 2.8 billion solution to Maharashtras future energy needs.
Maharashtra is set to be the industrial heartland of 21st century India. Here, sweeping economic liberalization introduced in 1991 by Prime Minister P.V. Narasimha Raos national government would launch a rebirth of the Indian economy. Massive foreign investment would accompany this advance. In the forefront would be Dabhol Power, a U.S.-owned joint venture led by Enron Corp. of Houston, Texas.

Even in Prime Minister Raos more liberal India, bureaucracy is ever-present. But Enron had been persistent. Before it began building at Dabhol last March, the company had rebuffed eight legal challenges and signed one of history’s most comprehensive power-purchase agreements.

Unfortunately, Enrons stubborn efforts could not protect it against rising anti-foreign Quit India forces. As Asia, Inc. Correspondent Salil Tripathi reports from Bombay, those forces now threaten to derail Raos reforms, and the nations economic progress:

In Bombay, 170 kilometers north of Dabhol, Maharashtra Deputy Chief Minister Gopinath Munde is jubilant as he steps into his Contessa Sedan. The object of Mundes excitement this July morning is front-page news: how he had handed his boss, Chief Minister Manohar Joshi, a report by a cabinet subcommittee recommending scrapping the $ 2.8 billion Enron project.

Munde (pronounced moon-day), 45 and clad in the trademark homespun clothes of Indian politicians, has come a long way in a short time. In the late 1980s he was an obscure grassroots worker for the Bharatiya Janata Party (BJP), the Hindu nationalist organization whose growing stridency and influence have recently transformed the Indian political scene. Successful in organizing Maharashtra farmers in their demands for cancellation of debts to local banks, Munde became head of the BJPs state unit. In that position he crafted an alliance with Joshis ultranationalist Shiv Sena Party to mount an energetic campaign to oust the Congress Partys Sharad Pawar, Maharashtras long-serving chief minister.

Opposition to Dabhol and its foreign investors was at the heart of Mundes electioneering: He had promised rallies of passionate supporters that he would throw the plant into the sea. When the opposition coalition dominated by the Shiv Sena swept Pawar and his party from office in elections last March, Munde became the new chief ministers deputy. One of his first assignments: to recommend a course of action on Dabhols future.

Mundes car joins the stream of police jeeps as, sirens blaring, they clear the way for him to proceed down Malabar Hill to the Legislative Assembly. A secretary shows the recently elevated VIP the latest newspaper headlines. An ecstatic Munde mutters to nobody in particular: Munde ne he kela, Munde ne te kela [Munde did this, Munde did that]. Munde, Munde. . . .

Munde was not the only person muttering over the news reports that day. A few weeks earlier, Rebecca Mark, CEO of Enron Development Corp. (Enron Corp.s international business subsidiary), had visited Bombay to call on Joshi and Munde. After exchanging pleasantries, she reminded them of Maharashtras legal obligations under the contract should the deal be scrapped. The state would owe Enron more than $ 300 million, she warned. Through all of Indias recent crises the razing of Ayodhyas mosque in 1992, the ensuing Bombay riots and bomb blasts, the Latur earthquake in 1993, the Surat plague in 1994 Mark had clung to her project. This hard-driving, 41-year-old former Missouri farm girl had talked her way through a maze of bureaucrats unused to relinquishing power. She had not always concealed her frustrations: We were screwed for the last three years by your rules and regulations, she once told an Indian reporter. Time does not seem to be of prime consideration for anyone here. In the end, however, she secured 140 clearances from 27 departments, and Dabhol got under way.

Ultimately, though, the American came up against Chief Minister Joshi. His party, the Shiv Sena (literally the Army of Shivaji, a 17th-century Maharashtra warrior-king), gained political prominence by promoting Marathi-language chauvinism in cosmopolitan Bombay. After studying Mundes report, Joshi rose in the Legislative Assembly on Aug. 3 and issued orders that, if fully implemented, would effectively halt and then dismantle the Dabhol plant. He told lawmakers that the previous government had approved Enrons plans without competitive bidding, and that the company planned to charge consumers too much money for electricity.

The project is against the interests of Maharashtra and its people, said Joshi to applause from government benches. The negotiations were one-sided, and whatever Enron asked for was granted. His orders formally canceled the Dabhol projects second phase and directed the Maharashtra State Electricity Board (MSEB) to begin legal proceedings to cancel the first phase. The legal battle foreshadowed by Rebecca Mark seemed about to begin.

To many observers, especially the Rao government and foreign investors contemplating Indian projects, Dabhols cancellation was all but unthinkable. The 2,015-megawatt (MW) power plant was to be the showpiece of modern India the single largest foreign investment attracted under Indias fast-track scheme to generate sufficient electricity in a country starved of power.

Maharashtra is Indias most industrialized state and most promising area for investment. Moreover, state capital Bombay is home of the largest of Indias 23 stock markets. Finance Minister Manmohan Singh, architect of Indias recent reforms, had called the project the litmus test of Indias resolve to revivify its economy.

Not content with Dabhols setback, however, Hindu nationalists a day after Joshis announcements intensified nationwide campaigns against all multinationals. At the top of their list are Coca-Cola Co. and PepsiCo Inc. (Coca-Cola has been ousted from India before in 1977, after becoming a target of a campaign against cola-onialism. The company returned in 1993, five years after archrival Pepsi entered the market.) Nationalists recently picketed Indias first Kentucky Fried Chicken restaurant, in Bangalore.

The foreign companies most active opponent is the Swadeshi Jagran Manch (SJM, or Self-Reliance Awakening Forum), a wing of Rashtriya Swayamsewak Sangh (RSS, or National Volunteer Corps). The RSS is Indias most powerful Hindu group and the BJPs ideological fountainhead. Some 47 years ago, RSS extremists were implicated in the assassination of modern Indias founding saint, Mahatma Gandhi. Ironically, todays RSS has appropriated the Mahatmas one-word slogan for self-reliance swadeshi, or homemade goods.

The war cry remains as potent now as it was during the independence movements Quit India boycott of British goods. For example, Coca-Cola’s claim that it provides direct employment for 25,000 Indians and indirect employment for an estimated 100,000 more often seems unheard by ears attuned to swadeshi propaganda. This is a poor country, said SJM Organizing Secretary P. Muralidhar Rao in a recent typical blast at the multinationals. For colored water it does not require capital from foreign countries!

Whatever the pros and cons of soda-pop economics, India faces an energy crisis, and Enron claimed to have at least the beginnings of a solution. Brownouts and transmission losses due to theft are frequent in some states. Despite its installed capacity of 81,000 MW, India faces an 8.5 percent shortfall at normal times, and 17.7 percent during peak periods. (Tragically underlining the problem, Minatai Thackeray, wife of Shiv Sena supremo Bal Thackeray, died of heart failure Sept. 6 in a Bombay suburb reportedly because her assistants could not find hermedicine or get her to a hospital in the midst of a power failure.)
A government study in 1991 showed that by 2007 India would need to triple its generating capacity, at a cost of $ 160 billion. The government simply didnt have the money; private and foreign participation was inevitable. But the rules had to change. To lure power-generating majors, New Delhi unveiled a remarkably investor-friendly policy.

Some critics now say the ground rules have been too friendly: Included are generous depreciation allowances and tariffs and a guaranteed 16 percent return on investment, plus a possible bonus for companies generating at least 68.5 percent of their plants load factor. Later, New Delhi also offered controversial counter-guarantees that would assure payment to foreign investors should a state electricity board (SEB) default.

Because the terms were based on the prior performance of plants run by Indias inefficient SEBs, there is indeed an argument for saying they were too good to be true. Indeed, Indian officials involved with negotiations now concede that the terms were generous, but maintain there was no choice. To inspire confidence in India, key projects had to succeed, and Enrons was one of them. But whatever the truth of this complex debate, the central government by last July had received from private investors 196 proposals to add some 78,000 MW of new generating capacity.

Enron is an aggressive independent power operator that promotes natural gas as a clean alternative to coal. Use of natural gas as an alternative fuel is growing: Global installed gas-generated power capacity will rise by an estimated 25 percent this decade. Enron did its sums and recognized that the biggest demand will be from India and China.

Enrons Rebecca Mark was one of those who recognized early the implications of Asias energy deficit. If the company could successfully market natural-gas-based technology and build a flagship plant, it could enjoy healthy income streams especially from India and China for decades.

Enrons political timing, however, might not have been as good as its business vision. Prime Minister Raos reforms have not yet yielded the dramatic increase in living standards that can create a constituency supporting reforms.

Social activists fear that energy-intensive industrialized development will deprive traditional communities of their subsistence lifestyles. Economists concerned about Indias long-term foreign liabilities question the projects high cost. Opposition politicians sense a sure-fire vote-catcher in making innuendoes about imported corruption. As proof of the interlopers vile nature, the Center for Holistic Studies in Bombay meticulously compiled a catalog of U.S. law violations by Enron and its Dabhol partners, Bechtel Enterprises Inc. and General Electric Co., dating back to 1931. The Dabhol project, the center concluded, is nothing but another step in the U.S. Central Intelligence Agencys effort to impoverish the developing world.

Indias emerging middle class may largely support foreign investment, but the gap between the relatively rich and the unquestionably poor complicates Enrons task. Economic reforms have created undreamed-of opportunities for aggressive businesses, and professional salaries have soared (see Upsurge in India, Asia, Inc., January 1994). Projects are in the works to roll out Indian-made Opel, Daewoo, Ford, Peugeot and Mercedes-Benz automobiles. Billboards advertise fancy cellular phones, all targeted at the 300-million-strong middle-class market, arguably the worlds largest. But for the poverty-stricken 26 percent of Indias 920-million population, food, clothing and shelter are dearer, bus queues longer and suburban trains more jam-packed than ever before.

Perhaps not surprisingly, it has been easy to convince many Indians that Enrons project is another example of a big multinational ripping off the country. Memories are long; the manner in which the East India Co. introduced 190 years of British rule can still trouble the national psyche.
Rebecca Mark hoped to overcome such hurdles. A Harvard Business School MBA, she was in charge of Enrons overseas drive. She is a demanding executive who has assembled a high-energy team, says Everett Santos, director of the infrastructure department at the Washington-based International Finance Corp., the private-sector lending arm of the World Bank. In Bombay it was not unknown for her to make 4 a.m. phone calls from the airport, summoning her staff for Sunday morning meetings. Under her leadership Enron set up small plants in the Philippines, Indonesia, Guatemala and China. It owned a huge gas field in Qatar, and India seemed a natural location for a plant using that resource.

Throughout the negotiations with the MSEB, Mark was direct and to the point. She recalls being shunted between the Central Electricity Authority and the Power Ministry, with neither agency being able to decide who shouldered the responsibility. India has an obsession with consensus and procedure. Officials would always look for a precedent, she remarked. This was difficult for a pioneering project like Dabhol. Enron surmounted a host of objections and roadblocks but could not overcome the ultimate test of survival operating in the worlds largest democracy.

Enrons bete noire in the Maharashtra legislature is Munde, veteran of the debt-cancellation campaigns. This is a common, highly effective vote-bribing gimmick through which out-of-power politicians force state-run banks to waive loans owed by farmers. Munde hails from the neglected Vidarbha region in central India, the heartland of RSS nationalism. The RSS has not forgiven the Congress Party for acquiescing in the Partition of India in 1947 and for what it calls appeasement of religious minorities, particularly Muslims. Its political arm, the BJP, is enjoying electoral successes in India and now runs four state governments.

Ahead of the Legislative Assembly meeting at which Joshi announced Dabhols cancellation, the chief minister and Munde were closeted for nearly an hour. Munde told Joshi that the BJP was willing to pull out of its governing alliance with the Shiv Sena if the Dabhol project was not killed. Before the day ended, the Shiv Sena leader had made his cancellation statement. Later, an angry Nani Palkhivala, former Indian ambassador to the U.S. and currently a director on the boards of companies in Indias powerful Tata industrial group, warned: This project is not just important, it is vital for this state. . . . When a new chairman takes over a company, does he renegotiate important deals?

Joshi gave his reasons for canceling Dabhol: lack of transparency, the absence of competitive bidding, environmental impact and the high cost of power. The absence of competitive bidding raised the most doubts among critics. However, in an earlier ruling in favor of the Dabhol power-purchase agreement, the Bombay High Court noted that inviting bids is not an invariable requirement under Indian law. Said the judges: There was total transparency at all levels; nothing was secret. Every challenge to the Dabhol agreement in the Bombay High Court was defeated.

Since 1991 India has shown the world a new face of liberalization. Last year the country attracted $ 6 billion in foreign investment. The Dabhol episode reveals a different aspect to the world. The rule of law is our precious gold medal; we cannot surrender it under any circumstances, says J.J. Irani, managing director of Tata Iron and Steel Co.

Alternatives to cancellation are still possible: Enron has offered to renegotiate Dabhols cost; the project could use Indias naphtha instead of imported natural gas to minimize foreign exchange outflow; and Dabhol Power could sell part of its stake to an Indian operator like the MSEB or Reliance Industries Ltd. (with which Enron has a gas-exploration joint venture).

But whatever the final outcome, tossing Enron into the sea has already hurt Maharashtra and India. Maharashtra will have more brownouts like the one that plunged the state into six hours of darkness the week Joshi canceled the project. Investors are worried: A fall of about 4 percent in the Bombay exchanges stock prices was attributed to Enrons cancellation.
Above all, the nation confronts the continuing possibility of demagoguery triumphing over modernization. BJP national executive member Pramod Mahajan, who brokered his partys alliance with the Shiv Sena, says nationalism is going to be the BJPs main plank for national elections expected no later than May. If ultranationalists prevail, economic prospects would not be pretty. As the father of Indias nuclear program, the late Homi Bhabha, once put it: No power is more expensive than no power.