But Enron’s woes didn’t start last summer when insiders began to question the shifting of losses from one company to another. In fact, one of the energy titan’s biggest and most ballyhooed projects began suffering both a financial and political malaise years ago. Although it’s impossible to say whether or not the American media and Enron’s investors should have heeded the troubles at Dabhol, in hindsight it’s easy to see the Enron imprint that led to disaster in India.
In a low-key merger in 1985, Houston Natural Gas coupled with Oklahoma’s InterNorth to create Enron Corp. The budding brainchild of Houstonian Ken Lay, Enron rode Wall Street’s bull market of the 1990s to mega-stock status. Enron begat smaller companies, which begat other companies, and the entire structure began to look like so many Chinese puzzle boxes: every time you looked inside one, there was another staring you in the face.
Enron proper was divided into three sectors, one of which — Enron Global Services (EGS) — headed the International Division, managing all power plants, pipelines and distribution companies outside of North America. That included assets in 20 countries and territories.
As Enron grew it devoured new challenges and new markets — and one that seemed ripe for the picking was post-Soviet Union India. American economists saw India as a way to compete against Japan’s dominance in Asia. After all, India was one of Asia’s fastest-growing economies, one in desperate need of energy sources, and one where the government had decentralized industrial licensing and made foreign investments more attractive with policy changes in 1991.
In what could have been a win-win situation, Enron leapt into a deal with India in 1992 to build the $3-billion Dabhol power plant in Maharashtra. It was — and is — the largest foreign investment made in India. And had things gone as planned, the plant would have provided 2,184-megawatts of power, one-fifth of all new power India needed for its growing population. The Dabhol Power Co. was touted by financial and energy analysts as the biggest thing to hit Asia since Japan built the first transistor. India needed power; Enron saw unlimited growth potential; and America wanted a piece of the new pie.
It also didn’t hurt that Enron smoothed the way through the U.S. administration’s red-tape with contributions of $100,000 to the Democratic Party, a half-million dollars to former President Bill Clinton’s election coffers and an additional $100,000 for inaugural festivities. In the end, it was money that would have been better spent understanding India’s culture and politics.
“It would have been smarter to start with something smaller, and less volatile,” says Michelle Foss, executive director of the Institute for Energy Law at the University of Houston. Foss lays blame on both sides, citing Enron’s American imperial attitude and India’s inability to execute on former Prime Minister P.V. Narasimha Rao’s pro-investment ideas. But she doesn’t think Enron’s failure with Dabhol will keep other American investors away. “I think India is keeping other American companies out,” she says. “The country can’t get out of its own way.” Though things are clearly improving for foreign companies doing business in India, the Dabhol project — fraught with internal Indian political controversy — is not a shining example.
The Dabhol Power Co. was structured such that it owned 65 percent, with 10 percent going to American companies Bechtel and GE for designing and building the plant, and 15 percent to the Maharashtra State Electricity Board (MSEB was to be its biggest customer). Indeed, even as Enron was structuring Dabhol, elements of political opinion inside India were turning against Enron, and away from what some saw as foreign profiteers.
But Enron was still going full steam ahead. With the Clinton administration’s help, the company convinced India to lower its energy import tariffs. It was a move that both American parties saw as financially crucial to the deal; but critics inside and outside of India were questioning the plant’s profitability, even with the lower tariffs because of the high cost of bringing in liquefied natural gas.
In early 1993, the World Bank turned down Enron’s request for financing, citing the prohibitive costs of importing fuel. And later that year, Human Rights Watch claimed Enron was brushing off concerns of local residents who were anxious about high electric bills and the environmental impact of the plant. Nevertheless, in 1994, Enron secured financing from the Oversees Private Investment Corporation (OPIC) which provided a $100-million loan guarantee.
Enron broke ground on the Dabhol project in 1994, and was to have gone online with Phase One in 1997. If you look at Enron’s Web site today it says, “The project’s first phase is operational with a capacity of 740 MW power to supply Maharashtra State Electricity Board.”
True, there was a brief shining moment when the plant was running and MSEB paying for energy, but not for long, and not today. “Phase One is not generating power,” admits Enron’s Manager of International Public Relations Johan Zaayman. “The whole issue has been about sanctity of contracts.” Foss agrees that “one of the core issues is how states do business as opposed to federal governments.” What both Zaayman and Foss are alluding to is that despite lofty initial goals, MSEB’s relationship with Enron quickly started to sour.
A change in the national ruling party, coupled with mounting local protests by organized environmentalists and nationalists, created an image problem Enron never even bothered to address. Further, MSEB began to balk when analysts claimed the price of Dabhol power was three to five times more than the average price for fuel. They wanted to renegotiate the contract with Enron. Work at Dabhol stopped in 1995, then resumed again in 1996. By 1997, Rebecca Mark, then chair and CEO of EGS International, told BusinessWeek that things were back on track with Dabhol. “Our contract allowed us to arbitrate through legal international means . . . Once the project got started there was a layer of people who supported it. Our faith was in these decision-makers.” That faith was obviously misplaced. Phase One fired up, briefly, and Phase Two was never finished.
Amid public outcry and spiraling energy costs, MSEB, which already owed $45 million in power bills to Enron, stopped taking power from Dabhol. By May 2001 both sides were threatening to pull out of the project all together, and threats of suits and counter-suits flew. Many Enron executives quietly left India. By early July even Enron’s president and CEO of the Dabhol Power Co. had resigned. Lay himself tried smoothing the waters, traveling to India to meet with Suresh Prabhu, the country’s power minister. “It was a productive meeting and we had constructive discussions,” Lay told CNN.
But work at the power plant had already ceased, and back home Enron’s house of cards was starting to collapse. The shell game of hiding losses to boost assets and stock prices had been found out. By last November, as Enron’s stock began its terminal slide, the company had Dabhol on the market, estimating its 65 percent stake at somewhere between $500 million and $1 billion. But there were no takers.
Today Enron’s Zaayman says, “Enron is still looking at selling its stake. There have been some interested parties, like Tata Power in India. We are hopeful a buyer will come forward.”
That’s not likely at anything like $1 billion. “That plant is just not worth its book value,” says Foss. And Enron’s reputation is worth even less. That said, Royal Dutch/Shell, TotalFinaElf and French utility Gaz de France, as well as Indian entities BSES Ltd., Tata Power Company and the Gas Authority of India Ltd. look to be the lead contenders to pick up the Enron stake.
By Dec. 2 it was all over for Enron. With its stock at junk status, the company filed for Chapter 11 bankruptcy (although the Dabhol Power Co. — as an independent company — is not part of those proceedings). Thousands of employees lost not only their jobs, but also more than $1 billion in retirement accounts. Investors lost even more.
But amid the late-breaking headlines, the daily flurry of press releases and the multiple congressional committee inquiries, Dabhol sat strangely silent — the proverbial white elephant, abandoned in the Houston to Washington melee. The power plant that was to be the shining example of American investment in India produces nothing.
Enron went into India with a Texas brashness, says Foss. “They went in big, high profile. That’s kinda the style of the company. And that was Enron’s mistake.”
