Headline: Plug pulled on investment in India; Failure of first and biggest test of reform has many saying the deal looked good at the time.

Source: The Christian Science Monitor, 9 July 2001

URL: http://www.csmonitor.com/durable/2001/07/09/fp9s1-csm.shtml

BOMBAY, INDIA

To hear the superlatives that followed Enron's 1992 decision to build a power plant in India, You'd think the houston-based energy company could do no wrong. They were the largest foreign investment, signing the largest government contract in Indian history. They would be India's first experiment with economic liberalization. In fact, the Enron deal was thought too big and too important to fail.

But like the unsinkable Titanic, Enron's multibillion-dollar power deal in India is taking on water fast. In May, Enron announced it had shut down its power plants and was pulling out of India for good. And where once companies were looking at Enron as a trailblazer into the newly opened Indian marketplace, now many experts are asking, if Enron can't do business in India, who can?

It's a daunting question, not just for Enron, but for Maharashtra, a state that includes Bombay, which currently faces daily power cuts because of unreliable power plants, and for the nation of India itself, which needs to prove to foreign investors that its economic reforms are working. And it's a question that has implications for US investment in India, and could complicate the whole US-India economic relationship. "The investment dispute between Dabhol Power Company [Enron's local unit] and Maharashtra is now casting a cloud over India's investment climate," said Alan Larson, US undersecretary of state for economic, business, and agricultural affairs in Washington last month. "It will be hard for foreign investors to look seriously at India until this dispute is resolved in a satisfactory way."

Who will pay

For the time being, both of the gas-turbine power plants that Enron built in the jungles 200 miles south of Bombay are shut down and gathering rust. Maharashtra, which is nearly bankrupt, has this year defaulted twice on its payments to the company. The central government in New Delhi, which is obligated to pay $30 billion in case the state defaults, is looking into its options, including a long court battle. Enron calls it bad faith. Critics call it a bad deal. And US officials call it bad news for future investment in India.

Asked if he would encourage other companies to invest in India, one senior Enron official says, privately, "Are you crazy?"

At the center of this messy dispute is a 1991 agreement by the state to purchase power from Enron. Under the agreement, Maharashtra's then-chief minister, the Congress Party leader Sharad Pawar, promised to buy power for the next 20 years from Enron's subsidiary, Dabhol Power Co., while Enron promised to build a power plant with a capacity of some 2,100 megawatts. Critics of the deal, including the World Bank, say Enron overbuilt, with the supposed purpose of increasing company profits.

"In reality, we don't need that much power, and we can't afford that much power," confides one senior Congress Party parliamentarian. "One cannot understand what the government ... was thinking when they did this deal. This deal will bankrupt the state."

Mathematically speaking, there doesn't even appear to be a need for the Enron plant. Last month, for instance, Maharashtra's total demand for power was 9,500 megawatts; its supply of power is 14,000 megawatts. But a number of problems, from "unplanned shutdowns," shoddy power lines, and theft of electricity means that the state often is unable to provide even that 9,500 megawatts. Its plants are in such bad shape that they can operate only at about 40 to 60 percent of capacity. (By comparison, in the US, the New England states, with less than a seventh the population of Maharashtra, use about 20,000 megawatts per day in the warmer months.)

Yet even with these problems, Maharashtra doesn't need a large full-time power plant, says Abhay Mehta, author of the anti-Enron book "Power Play." "Eighty percent of the time, we don't even need the thing," he says. But the main problem, he says, is that Enron is providing electricity at much higher rates - anywhere from two to four times what state power plants charge. And because the state has signed a 20-year purchasing agreement, the state is required to buy this power from Enron no matter what happens to the price elsewhere.

For the common Maharashtran, this high-priced power will mean that the state has less money to spend on building new schools, medical clinics, or irrigation projects in faraway villages. "In the old-line market economics, if I don't like Pepsi, I can go down the lane and buy Coke," says Mr. Mehta. "But with Enron, I don't have a choice."

An Enron official, speaking off the record, says critics often skew the numbers. The average monthly price for power from Dabhol has been 4.9 rupees (10.4 cents) per kilowatt hour over the past two years, compared with 4.5 rupees at a similar plant, built at the same time in the southern state of Kerala. And a controversial decision to tie the agreement to the dollar was made at a time when the rupee was too volatile to trust.

Before the hindsight

"One has to look at circumstances we were in," says the Enron official. "Enron was invited into the state ... at a time when the central government was up against the wall in a financial crisis. Less than one month before, the country was ready to sell off its gold. The Congress [Party] government was woefully short of power, they wanted foreign direct investment, and they wanted a fast-track power project."

"Under normal, regular conditions, this project would have been up and running in three to five years," while Enron's plant is still unfinished after almost 10 years, he adds. "Little did Enron know that there is no such thing as normal or regular in this country."

Meanwhile, in the town of Dabhol, the end of the deal means a loss of some 15,000 construction jobs, and bankruptcy for the hundreds of hotels, restaurants, and cinemas that mushroomed around the giant plant. And while some leaders are facing criticism for approving the deal, few are facing actual charges of corruption. Mr. Pawar, the politician who first signed the agreement was voted out of office in February 1995, in part because his rivals from the right-wing Shiv Sena Party charged him with taking bribes from Enron. Such charges were never proved. Now Pawar has broken away to form his own Nationalist Congress Party. Others are quick to point out that the deal seemed like a good one at the time.

"Under the scheme signed by my predecessors, we felt the rates were too high, so we decided to review the agreement, and we brought down the rates," says Manohar Joshi, the former chief minister of Maharashtra under the right-wing Shiv Sena coalition government, which took over from Pawar, pledging to throw the Enron project "into the Arabian sea." After Shiv Sena renegotiated the deal, Mr. Joshi says, Shiv Sena changed its mind on Enron. "At the time, we thought it was a good deal."

But as that deal appears ready to crumble, local politicians are now looking for ways to keep foreign investment coming, while avoiding past mistakes. "This notion that American investment will stop, what bloody nonsense," says the senior Congress politician. "American investment will stop in this deal because it was a bad deal."

-- Andre Weltman (aweltman@state.pa.us), July 09, 2001