High-Stakes Showdown

Enron's Fight Over Power Plant Reverberates Beyond India

by Celia W. Dugger
The New York Times
March 20, 2001

 

BOMBAY -- K. Wade Cline, a folksy lawyer from Houston with a round face and strawberry blond hair, is fit to be tied. As the top executive here for the Enron Corporation, the American energy multinational, Mr. Cline knows that the largest foreign investment ever made in India - a majority of it owned by Enron - is in trouble again.

The state of Maharashtra has stopped paying its bills for the huge $3 billion power plant that sprawls along the Arabian Sea 100 miles south of here. After the nine tumultuous years it took to bring the project to fruition, the state now says it does not need and cannot afford most of the power. The resulting conflict is fast turning into a messy contractual dispute.

"Gosh dang it," Mr. Cline [actually!!!!] said. "I'm mad because they've waited so late, and we're running up against June when the bills will double."

And that is just for starters. Next year, the amount the state's electricity board owes will more than quadruple to over $1 billion a year as the huge turbines for the second phase of the project come on line. Under the 20-year contract, the state and central governments have guaranteed they will pay the money if the electricity board defaults.

"Free us from Enron." That is the cry of Chief Minister Vilasrao Deshmukh, the top politician in Maharashtra, one of India's most industrialized states and home to Bombay, the nation's financial capital.

But so far, no one has come to his rescue. On March 8, the Dabhol Power Company, largely owned by Enron, invoked the central government's guarantee to pay up since the state had not, a commitment the central government says it will honor.

The stakes in this showdown are very high. The Dabhol project is fast becoming one of the fiercest battlegrounds in the debate about who wins and who loses from globalization. And it has the potential to sour foreign investors on India, a market of a billion people, and to sour Indians on foreign investors.

The worry that Dabhol could chill foreign investment is serious for India. More than 250 million people here live in abject poverty. The country needs to participate in the global economy in a way that broadly benefits society, economists say.

But investments by foreign companies in plants, factories and other projects in India fell sharply to $2 billion in 1999 from $3.6 billion two years earlier. China, the world's other highly populous developing country, attracted 20 times as much money.

The Dabhol project alone makes up more than 10 percent of the total direct foreign investment in India since 1992.

Its woes have again raised questions about the financial wisdom of a strategy pursued not just in India, but in Pakistan, Indonesia and other developing countries. In an effort to attract private capital for electricity and economic growth, governments negotiated long-term deals, often in secret, with private companies for new power plants.

In the early 1990's, after India slowly began dismantling its centrally controlled economy and opening up to foreign investors, Dabhol became one of the first foreign-owned power projects approved by the central government in New Delhi.

The 2,184-megawatt project - which Enron says is the largest gas- fired plant in the world - has produced a raucous collection of anti- Enron crusaders. Among them are leftist political parties, consumer advocates and dogged individuals like Pradyumna Kaul, whose small management consulting office is piled with teetering stacks of documents, many printed from the Web.

Dabhol's opponents contend that the deal was meant to generate not just power, but bribes for politicians - a charge that has never been proved and that Enron adamantly denies. The novelist Arundhati Roy, who has emerged as India's most impassioned critic of globalization and American influence, argues that such deals have benefited corrupt officials and foreign power companies, not the public.

"Once the agreements are signed," she wrote in a recent essay in Outlook magazine, "they are free to produce power at exorbitant rates that no one can afford."

But it is not just the foes of privatization who have questioned the deal with Dabhol, a joint venture of Enron (which owns a 65 percent share), Bechtel Enterprises and General Electric (10 percent each) and Maharashtra's electricity board (15 percent).

Back in 1993, when the project was just a twinkle in an executive's eye, the World Bank concluded that it was "not economically viable." The bank said that the type of plant proposed would produce too much power at too costly a price for the state.

A high ranking state official, who declined to be named, said that senior civil servants gave the same warning. "We knew what would happen, and they did it anyway for reasons they thought best," he said. "You're bankrupting yourself knowingly, willingly, deliberately."

There is also a growing consensus here that the problem with the Dabhol deal goes beyond its particulars. India's power sector - inefficient, corrupt and heavily subsidized - is hemorrhaging almost $5 billion in losses each year.

In Maharashtra, a third of the power is stolen or lost. More than $1 billion in delinquent bills are uncollected. And 9 of 10 customers pay subsidized rates.

The World Bank, said Edwin Lim, its country director for India, now strongly advises governments against guaranteeing contracts for new plants unless they also turn over distribution to private companies, which are more likely to reduce theft and collect bills.

The State of Maharashtra is desperately trying to figure out how to pay for Dabhol. Clearly the preferred solution for the state, the central government and Enron is that another state or company buys the electricity, but so far none have come forward.

In an interview, Mr. Deshmukh, the chief minister, called the power shockingly expensive. This fiscal year, electricity from Dabhol costs more than three times as much as other power in the system, state officials say.

A number of factors have driven up the price. The first phase of the project is 20 fueled by naphtha, which has become much costlier because of rising oil prices. The bills are calculated in rupees, but tied to the dollar, so as the rupee has lost value the price here has risen.

Also, the state's electricity regulatory commission requires the electricity board to buy the cheapest power first, leaving Dabhol at the end of the line. Demand is much lower than the state had forecast. In recent months, the state has been buying only 10 to 20 percent of the power that Dabhol is capable of generating, while paying the plant's full fixed costs, Enron says. In Phase 2, twice as big as Phase 1 and fueled by natural gas imported in liquefied form, the state will also have to pay 75 percent of the fuel costs even if it buys no power.

Mr. Deshmukh, whose Congress Party narrowly holds office in a fractious coalition government, faces unpopular choices. In a country where many consumers are used to cheap or free power, the state can raise tariffs; go after big power thieves, many of them politically connected; collect delinquent bills; or slash spending on schools, hospitals and police.

For the state, the payments due for Dabhol will be huge - more than Maharashtra's entire budget for primary and secondary education.

The chief minister's hope that the central government will save the state is dimmed by the fact that two of the parties in power at the national level, the Bharatiya Janata Party and the Shiv Sena, are his chief political rivals in the state.

The Congress Party itself made the deal for the first phase of the Dabhol project, but it was the Bharatiya Janata Party and the Shiv Sena that agreed on the second phase - after having beaten the Congress Party in 1995 state elections on a platform of throwing Enron into the Arabian Sea.

Suresh Prabhu, the power minister in New Delhi who is a Shiv Sena member from Maharashtra, said that if the state defaults, the central government would pay the bills, but the money would come out of the budgetary allocation to Maharashtra.

"We'll honor our guarantee without excuse," he said.

Mr. Prabhu's position, while reassuring Enron, should give state officials sleepless nights.

The latest crisis officially began in early February, when Dabhol Power first invoked the central government's guarantee to pay the state's $17 million November bill. The state itself subsequently paid up.

But the December payment for $22 million is now more than a month overdue, not to mention the January bill. The state electricity board argues that Dabhol owes it more than $85 million as a penalty for taking a couple of hours too long to fire up the plant. Dabhol Power calls this a frivolous excuse to avoid paying its bills and has again invoked the government guarantee. If the dispute cannot be settled, Dabhol will seek international arbitration, Enron says.

The payments crisis has given a lift to the project's opponents. A coalition of leftist parties and other groups held anti-Enron protests across Maharashtra on March 1. They want what they regard as a sweetheart deal to be canceled.

The Enron imbroglio, in turn, has alarmed American diplomats, who have pressed their concerns with officials in what they see as the interest of closer economic ties for the United States and India. Opponents of the project, like Girish Sant of Prayas, a nonprofit energy research group in Pune, say American government lobbying for corporate interests is unseemly.

Richard Celeste, the American ambassador, warned a gathering of political and business leaders in Bombay in late January that the perception that a legal contract like the one for Dabhol was "fair game for renegotiation" would feed uncertainty about investing in India.

Mr. Celeste, a Clinton appointee who will soon be leaving, said he had delivered the same message in a meeting with Mr. Deshmukh.

"I did tell the chief minister of Maharashtra when we sat down that I had no intention of going on the board of Enron," Mr. Celeste said in an interview.

Mr. Celeste's predecessor, Frank Wisner, joined the board of an oil and gas exploration company after he retired as ambasssador in 1997 that was then majority-owned by Enron; he has been criticized here for the move. But Mr. Wisner, now vice chairman of the American International Group, an insurance company, said that though Enron then owned a majority of the exploration company, their boards were separate.

He labeled as "foolishness" the argument that his membership on the board was a reward for the help he gave Enron in his three years as ambassador.

Earlier this month, Mr. Wisner and a group of corporate representatives from a United States-Indian business group met with N. K. Singh, one of Prime Minister Atal Behari Vajpayee's most influential advisers, to discuss a number of issues, including Dabhol. Among those present were a representative from Enron and Enron's former top executive here.

"Dabhol sends a signal to investors in general and power investors notably that there's trouble ahead for investors in India," Mr. Wisner said. "It's in everyone's interest to see this settled quickly."

If anything, American lobbying on behalf of Enron may become more aggressive under President Bush. Kenneth L. Lay, chairman of Enron, has for years been an informal adviser and close friend to Mr. Bush and an important campaign fund-raiser.

Mr. Cline, Enron India's managing director, said Enron itself had no plans to invest in any more power projects in India for now and that companies in the sector were thinking hard before choosing India.

"When the markets of the world beckon with quicker returns," he said, "most companies are choosing to go elsewhere."


Copyright 2001 The New York Times

FAIR USE NOTICE: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of criminal justice, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.