Case Study: Enron in India

The Beginning
Enrons Dabhol project took shape after the fall of the Soviet Union. India, a long time 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 long time majority Congress Party
introduced two major structural policy changes to spur economic growth. Narasimha decentralized
government control over industrial licensing and opened the country to more 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. 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.
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.

Early Scepticism
While many observers hailed the project and its promised benefits, some economists doubted its feasibility
and some Indian citizens bridled at Enron's highhanded behaviour. 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. 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.
The following traces the history of the troubled project:

May-June, 1992: India invites Enron Corp to explore the possibility of building a large power plant in
Maharashtra.

1|Page

June 20, 1992: Initial memorandum of understanding signed between Enron and Maharashtra
government for a plant with capacity of 2000-2,400 MW. The Maharashtra State Electricity Board is
expected to pick up a 10 per cent stake.
Jan 2, 1993: The Foreign Investment Promotion Board clears proposal for a 1,920 MW plant,
expandable to 2,550 MW.
Dec 8, 1993: The power purchase agreement signed between Dabhol Power Company and MSEB for
a 2,015 MW project to be implemented in two phases.
March-June, 1995: Following state elections, a new Maharashtra government, headed by the Shiv
Sena, scraps the project, alleging corruption and high costs.
Nov 1995: Project re-negotiated with a final capacity of 2,184 MW. MSEB's stake is upped to 30 per
cent -- 15 per cent in the first phase, and a further 15 per cent upon completion of the project.
May, 1996: India extends counter-guarantee to the project, under which the federal government
promises to cover any defaults by the state utility.
May, 1999: Phase one of the project with a capacity of 740 MW begins operating.
June-Oct 2000: Maharashtra government allies demand scrapping the project because of the cost of
the power it produces.
Oct, 2000: MSEB defaults on its October payment to DPC.
Dec, 2000: Maharashtra state announces plan to review the project, stating that the tariff is too high.
Jan, 2001: Enron invokes the Maharashtra government counter-guarantee after MSEB defaults on both
November and December payments.
Feb, 2001: The Credit Rating Information Services of India Ltd cuts ratings on bonds issued by
Maharashtra government due to defaults on payments owed to Dabhol. Enron invokes the Union
government guarantee.
April, 2001: Enron issues a notice of arbitration to the Indian government to collect on the December
bill of Rs 1.02 billion.
April, 2001: Enron invokes the political force majeure clause in its contract with MSEB, stating that
unfavourable political conditions have prevented it from fulfilling contractual obligations.
April 23, 2001: DPC and its lenders meet in London to discuss the payments issue. Enron seeks lenders'
permission to issue a notice of termination.
April 25 2001: The board of Dabhol Power Company authorises management to terminate the contract
any time it chooses.

October, 2005: The project was taken over by a conglomerate that included public sector
banks, MSEB, GAIL, NTPC and some financial institutions.
May, 2006: Ratnagiri Gas and Power Pvt Ltd (RGPPL), a special purpose vehicle started
operation.
4 July, 2006: RGPPL shutting down the plant due to a lack of naphtha supply.
April, 2009: The Dabhol Power Plant Project is operational with 900 MW RLNG fired running
capacity.
31st March, 2010: Ratnagiri Gas and Power Pvt Ltd (RGPPL) the company that now owns the
project made all six gas turbines operational earlier this year, achieving full capacity of 1,940
MW (de-rated from the original installed capacity of 2,184 MW because of problems with
equipment).
November, 2010: half yearly profits at Rs 220 crore during the current fiscal.

PPA Details
o
o

Power purchase agreement for 20 years.

Implemented on BOO (build-own-operate) basis.
2|Page

o
o
o
o
o

MSEB Guaranteed to buy 90% of electricity produced.

MSEB to receive 30% profit of DPC annually.
MSEB to bear any increase in fuel prices.
MSEB to guarantee a minimum fuel purchase.
MSEB to pay DPC $220million/year

Within India, the project was the target of political and policy attacks. Critics noted that there had been no
competitive bidding. Project costs and power tariffs were higher than other power projects in India, and the
concern arose that the cost of Dabhol power could inflate power prices elsewhere. The cost of fulfilling its takeor pay purchase promise would constitute half of the MSEBs entire budget. Concerns were raised that
commitments were made to the project before an environmental impact assessment had been undertaken.
Finally, it became known that Enron had allocated a $20 million education fund to prepare the way for the
project in India. Critics assumed that these payments consisted of little more than bribes to procure official
support for the project.
The GOI was a party not only because of its defaulted counter-guaranty of the PPA and its inherent interest in
seeing the power needs of the country satisfied, but also because of its risk of being held responsible under
various international agreements to the extent arguments might be successfully advanced that Indian agencies
had engaged in behaviour that was, as least in effect, expropriatory. In fact, responsibility for Dabhol was passed
rapidly through a series of officials, none of whom seemed charged with the issues long enough to take a position
or, in the rare occasion when a position was taken long enough to follow through on it.

Why Was the Workout So Difficult?

1. Poor Economic Assumptions: It is an unenviable fact that all the stakeholders in Dabhol, whether debt,
equity, or government guarantor, miscalculated, perhaps badly, concerning the assumptions and financial model
they believed would produce enough revenue under the power purchase agreement to run the plant, service and
repay the debt, provide a sufficient return on equity, and provide for future capitalization. The financial
agreements called for the $2.9 billion project to be funded by $1 billion in equity from Enron (80 per cent),
Bechtel (10 per cent), and GE (10 per cent); $1.2 billion of project debt was to come from the Indian Banks,
$160 million from OPIC, and the remainder from a syndicate of offshore lenders and export credit agencies.
Had any stakeholder opted out, as the World Bank did based on their study that concluded the project was likely
to fail, that stakeholder would have saved time, money, and economic opportunity lost by those stakeholders
who stayed in the project.
2. Failure of the GOI: When Enron, Bechtel, and GE secured the impressive guaranties and economic
concessions from the GOI, its hard to imagine that they foresaw the upcoming failure of the GOI to honour its
financial and contractual obligations, much less the GOIs course of conduct that was deemed expropriatory by
an American arbitration panel. In addition to failing to honour its counter-guaranty, the GOI also, through its
judiciary, improperly thwarted international arbitration panels from proceeding. Most importantly, however, the
GOI refused to commit the resources to solve the problems raised through the projects failure. For four years,
the GOI presence consisted of representatives without sufficient negotiating authority who frequently were
replaced by new representatives, who similarly lacked negotiating authority.
3. Failure of the GOM: The government of Maharashtra was the sole purchaser of power under the PPA, and
was also, ultimately, a 15 per cent equity holder in the project. Through its subsidiary, MSEB, the GOM was a
prime mover in every aspect of the deals completion, and was the chief beneficiary of the PPA due to the states
energy starvation. When it refused to honor its financial obligations, including a direct, unlimited financial
guaranty, the GOM threw a massive obstacle in the path to a fair workout. This unforeseen contractual breach
was followed by the GOMs participation in important arbitrations and lawsuits, sometimes willingly,

3|Page

sometimes not. The GOM also utterly failed to participate or assist the long workout efforts. Their absence was
as confounding as it was difficult to work around.
4. The positions of GE and Bechtel: The differing negotiating positions of the sponsors during the workout
cut both ways on this issue. They took an aggressive stance in litigation and arbitration, pursuing claims against
the GOI, GOM, MSEB, and MPDCL through a variety of causes of action and venues.
It is difficult to measure the cost to India of Dabhol, particularly with the overlay of the economic boom
that is now being enjoyed. There can be little doubt, however, that, all else equal, the experience of Dabhol
makes investors wiser and slower, in committing their resources to India. The attraction is still there, but
the calculation today has to compensate for risks that, before Dabhol, would not have been given as much
weight.

4|Page