The making and unmaking of the Dabhol project
In 1991, a minority Congress government, applauded by the ringmasters of the neo-liberal circus, embarked on the wholesale liberalisation of the Indian economy. In many respects it was a wholesale enterprise in the literal sense of the term, as the managers of the political-economy hawked public assets and prospects to private promoters on terms and through procedures that, in any realistic assessment, call to mind the bargains of middle-men with no interest in the merchandise after the profit has been fetched.
If the pre-liberalisation period was the time of crony capital, the decade of liberalisation saw the emergence of the crony state. The announcement of economic deregulation, ostensibly in the interest of attracting greater private, particularly foreign, participation in the economy, and, by extension, of introducing market efficiency, was followed by a series of clandestine measures by the custodians of this crony state that, to the detriment of both productive investment and efficient markets, simply rearranged the country to the convenience of corporations.
Much of what transpired was a breach of mandated procedures and responsibilities, sound judgement, and the established proprieties of the public sphere. Good faith concerned only the secretive parties to the transaction — the ‘divesting’ state and the ‘investing’ corporate — to the exclusion of the general public. And while this loot of public property and the exchequer was going on, glorified town criers sermonised about fiscal discipline, the regulatory role of the state, the efficient virtues of private capital and miscellaneous market truths. Intellectuals stampeding across the policy divide echoed the refrain and sustained a crescendo that drowned dissent. Given the secrecies of the process, why things transpired the way they did must, for the moment, remain an imponderable. But how they did happen is best illustrated by a simple recapitulation of Enron’s success in undermining both the state and market in India.
Until its recent dramatic global collapse, Enron’s investment in the power sector was widely advertised by publicists of India’s new dispensation as the largest influx of foreign funds into an Indian project and as conclusive evidence of the validity of the new economics. Unfortunately, the compulsions of cronyism and the pretensions of the ‘efficient’ argument are reciprocally exclusive matters. Productive efficiency and private profit are not necessarily the same thing. Even taking all the claims made on its behalf at face value, Enron’s venture constituted neither a market operation nor an inflow of foreign direct investment (FDI). If anything, it exemplified the opposite — the largest outflow of foreign exchange and the subversion of all that is reasonable in regulation, private capital and the market. Most of all, it taxed the logical faculties.
Terms of endearment
Enron came to India on 17 June 1992 and within 72 hours had signed a Memorandum of Understanding (MoU) with the Maharashtra State Electricity Board (MSEB), the public sector utility responsible for power distribution in the state. The MoU specified that MSEB would for 20 years buy electricity from Enron, which would build, own and operate (but not transfer) a plant of about 2000-2400 megawatts (MW) (nominal) capacity. The power station, to be set up near Dabhol about 300 km south of Bombay, was to run on imported liquefied natural gas (LNG) and was to be introduced in two phases. Eighteen months later, this agreement was to crystallise into a contract between the Board and Enron Corporation’s Indian subsidiary, the Dabhol Power Corporation (DPC).
The Power Purchase Agreement (PPA) signed in December 1993 contained the financial and legal dimensions of the transaction between the sole supplier DPC and the sole purchaser MSEB. The only redeeming feature of this document was that it pertained only to the first phase of the project for the supply of 695 MW of power. Among the striking aspects of the PPA was that MSEB would at the then-prevailing dollar-rupee rate (since payments to DPC were linked to the dollar rate) make an annual payment to the DPC of USD 430 million irrespective of whether it drew all the 695 MW of power or not. Under the terms of the agreement, MSEB had promised to pay not just for the purchase of electricity but also for the Dabhol plant’s total electrical generating capacity and fuel. The PPA also exempted the DPC from sales tax or duties on electricity and offered income tax concessions and an extendable tax holiday through 1998, the year in which the plant was to commence operations. Even more intriguingly, in addition to these benefits and guaranteed returns the PPA allowed DPC to make a sizeable margin in the event of delays in construction or shortfall in capacity. The document also permitted DPC to make an annual fuel management charge of USD 2.5 million on MSEB.
Since the capital cost, whose precise extent remained undisclosed, was not the ceiling, costs could and did increase in the absence of a cap on capital expenditure. More importantly, the variables used in calculating the capital recovery charge included the dollar to rupee ratio, the rate of Indian inflation, the rate of US inflation, the US labour inflation index and the US materials inflation index. As a consequence, between 1993 and 1998, on account of just one of these variables — the dollar-rupee valuation — capacity charges increased by nearly 40 percent. Quite predictably, the PPA, containing as it did so many deviations from the standard norms governing power transactions, was treated as a ‘top-secret’ document and neither DPC nor MSEB was willing to make it public. Effectively, retail consumers of power were being asked to pay an inordinately high tariff without being informed of its basis. According to DPC, this ‘sensitive’ agreement was such a closely guarded secret because “in a competitive environment, a power purchase agreement (PPA) is the one document that affords companies an edge over other players in the field”. Ironically, the question of the “competitive market” simply did not arise, since the DPC had not secured the contract in open bidding and in any case the monopolist was selling to the monopsonist; all its output was being purchased by just one customer, the MSEB.
To ensure that there would be no loss to ‘Enron’s investments’ in the event that MSEB failed to fulfil its demanding financial obligations to the DPC, the Congress administration in Maharashtra, in its capacity then as a caretaker government, signed a guarantee on 10 February, 1994 to “irrevocably and unconditionally” pay “any and every sum of money” which MSEB owed to the DPC under the PPA. The total contingent liabilities assumed on account of this guarantee at the then prevailing exchange rate of INR 36 to the dollar added up to the staggering sum of 35 billion US dollars. With a depreciating rupee the total contingent liabilities would only mount. This guarantee was further guaranteed by the Government of India (Gol) through a tripartite agreement involving the Government of Maharashtra (GoM), GoI and the Reserve Bank of India (RBI). Enron had made a failsafe ‘investment’ that entailed no risk whatsoever.
A little over a year after the acceptance of the PPA by all the concerned authorities, the terms of the agreement ran into local political difficulties. The Shiv Sena and Bharatiya Janata Party coalition, which came to power in Maharashtra in early 1995, declared the project closed in August of the same year, on the ground that it had been conceived in fraud and transacted in secret. It went a step further and declared that the matter was not open to further negotiation with Enron after a state cabinet sub-committee’s report concluded that previous negotiations were conducted with the “sole objective” of ensuring that Enron was “not displeased”, in circumstances that lack[ed] transparency”, in violation of “standard and well-tested norms of propriety for public organisations”, and involving “several unseen factors and forces [that] worked to get Enron what it wanted”. This was the first and only explicit admission from within the insulated interiors of the state that the conduct of business involved lapses of so serious a magnitude as to warrant the invalidation of contract.
Enigmas of reversal
This ought to have brought matters to a satisfactory conclusion, at least from a larger national perspective. It did not, and to comprehend such illogical denouements, the intrigues of Indian politics have to be reckoned with. Exactly three months after the annulment, Rebecca Mark of Enron met the leader of the party heading the coalition government in Maharashtra. What transpired then still remains a matter of speculation, but, within the week, the state government had reversed its earlier decision and constituted a renegotiation committee mandated to discuss Phase One (the scrapped project) and Phase Two (which had till then been optional). Within two weeks the committee renegotiated the deal. An ultra-nationalist state government that was so vociferously opposed to doing business with Enron for a ‘mere’ 695 MW of power on account of its adverse consequences to the state and the nation, had with astonishing haste not only recanted its position, but also, by way of expiation, enlarged the ambit of the contract to include the much larger second phase.
MSEB was left now with no option but to absorb, irrespective of the actual level of consumer demand, over 2000 MW of the most expensive power in the world, year- on- year for 20 years, at a minimum annual cost of USD 1400 million. A government of the two most ‘patriotic’ parties in the country had, in a matter of two weeks, handed over the largest commercial contract in the history of India, involving minimum total payment of 35 billion US dollars, to a private company, the combined generating output of all whose plants the world over did not add up to the output of this single supply-line to a single public utility in a single state. If this is travesty then India clearly has a limitless flair for it: this extravagant contract was made cast iron a few months later in the most devious manner possible and at no less a level than the highest executive decision-making body of the country.
Precedent had already inverted the principle of assurance. Enron, to whose exclusive benefit the contract was, and which, within the terms of the contract, bore no financial risk, had nevertheless to be indemnified against risk. The counter-guarantees that had lapsed, when the old contract was superseded by the new agreement, required renewal. In May 1996, a minority MPShiv Sena government (the same combination that was in power in Maharashtra) assumed office at the centre, after the general elections of the same year, and was asked to demonstrate its majority in two weeks. Though this government, which lasted 13 days, failed, despite persuasion and inducement, to secure the confidence of Parliament it clearly managed, through spectacular benevolence, to secure the gratitude of Enron. Its last act, on the last day of its misbegotten existence, with Parliament repeatedly reminding it of its minority status, was to convene for “lunch”, just prior to tendering its own resignation, and, in flagrant violation of all parliamentary norms, extend a sovereign guarantee to Enron on behalf of the Republic of India, staking all its assets, save military and diplomatic, as surety for the payments due to the Dabhol Power Corporation by the Maharashtra State Electricity Board. The future of India is sometimes settled in decidedly casual ways, even when ‘heartland’ nationalists are at the helm. All it takes is a USD 2000 million investment and a little bit to spare for sundry expenses.
A single investment for an 18 percent increment in one state’s electricity generation capacity underwritten against all the assets of the entire country must surely have been perched on many flimsy fundamentals, and involved violations of the law so extensive as to bring with it the foreknowledge of ‘post facto, extra-contractual’ risks. It is as well to examine some of these, if only to get an idea of the anatomy of decision-making in this part of the world.
Given adequate monetary inputs, juridical laws are obviated easily enough, but economic laws cannot be bribed into making investments and expenditures productive. The Enron project was based on inverted economic fundamentals and the most cogent criticism of this was made by the World Bank in 1993. To elucidate the Bank’s position it is necessary to digress briefly into some basic aspects of the demand and supply of power.
Since electricity qua electricity cannot be stored, its generation must depend on demand, which varies according to more or less predictable short- to mediumterm patterns of constant and peak hour demand. Much of the electricity shortage in India arises from the failure of installed capacity to meet peak hour demand. Hence, the bulk of new power sector investments is normally geared to either replacing depreciated capacity or increasing capacity to meet intermediate and peak period demands. Investment involves an appropriate combination of technologies to ensure an efficient grid that is at all times prepared to modulate its supply to match this variable demand. In India, which has adequate stocks of coal, constant demand is met by coalfired thermal stations which produce relatively cheaper energy but take longer to come on-line (roughly two weeks from a cold start) and has greater thermodynamic inefficiencies. These plants, being constantly on-line, are called base-load plants. Hydroelectric and gas-fired plants are costlier to build and run, but are more fuel efficient and can come on-line at relatively short notice and hence are ideal for meeting sudden surges in demand. The economics of power supply is such that a grid must have an ideal ratio of capacities in the different modes so that idling costs are minimised and excess of capacity over constant demand is not of an order or type that will detract from the financial viability of the grid.
The arrival of Enron in Maharashtra did precisely that, as the World Bank’s analysis of the project so categorically pointed out. The Bank, in response to Gas request to finance the project, noted that there would be no option but to “run the plant in base-load” on account of its operational design. Consequently, while it would help increase the load in peak periods, it would also “displace lower cost coal-fired generation in offpeak periods. Operating the Dabhol plant as a baseload station would “worsen the already existing imbalance between base-load generation (mainly coal) and peak-to-intermediate load generation (mainly hydro supplemented by natural gas in combined cycle generation). There would be surplus power in off-peak periods.” As a result, the Bank pointed out, MSEB would incur grave financial losses. Given the existing and projected availability of lower-cost coal-fired base-load generation during off-peak periods, combined cycle stations of the kind designed at Dabhol are economically attractive mainly in intermediate load service. The Bank, therefore, advised “modifications in the project design and size as well as in the PPA” to take advantage of this. On the issue of the “cost and value of LNG power” the Bank’s report concluded that consumers would not neither be willing nor able to pay the price of power being purchased from Enron. Therefore, its “standard project economic analysis” argued “the project is not viable”.
On other and related matters, the Bank unequivocally dismissed MSEB’s projection of an increase in demand of 2100 MW by 1997, exactly the amount to be generated by the Dabhol plant at roughly the time that it was due to start generating. Besides, the stipulations of MSEB’s power operations indicated that the project would add more capacity than needed to meet this projected load growth in 1998. Most significantly, the Bank’s report argued that the “implementation of the project would place a significant long-term claim on India’s foreign exchange resources” with the “estimated annual fuel cost” being about USD 500 million, “subject to escalation”.
It is worth noting in passing that the reforms that enabled the Enron investment were ostensibly prompted in the first instance by a foreign exchange crisis. A related point of interest is that about the time that government of India was signing away its assets to Enron, the government of Pakistan cancelled a PPA with Enron for a USD 670 million, 782 MW residual-oil fuelled power plant as it found the cost of the project prohibitive. The tariff in that instance was actually lower than the Dabhol tariff!
Bonfire of violations
For a fraud of such proportions to be so easily perpetrated, both the parties to the contract and many others had to collude in violating the law. The law, as amended in 1991 to increase private participation in the power sector, provided a set of generous terms by which electricity from private plants could be sold to the state electricity boards, (SEBs) and prescribed procedures that were considerably more lax than Enron would have encountered in the US. Power could be sold on a costplus basis, ie, after accounting for all costs and a reasonable rate of return. A 16 percent return on the equity investment was assured by law. It also lays out certain procedures for proposals involving capital expenditure above a certain value. The generating company has to submit to the Central Electricity Authority (CEA), the statutory body that verifies the techno-economic feasibility of projects, a detailed scheme which includes revenue details (and therefore tariffs), the financing arrangements, the costing of the project, the need for extra electricity supply and the generation estimate, among other relevant particulars. Before submiffing the scheme, it is to be notified and advertised to enable the public to make representations for a period of two months. Further, a generating company can enter into a contract only to sell the electricity that it actually generates and not its generating capacity. It is also required to maintain substations and main transmission lines and to follow the directions of the purchasing SEB to ensure integrated operations. And, importantly, the primary factors determining the sale price of power to the SEB are the capital cost of the project and the financial package. The project on receiving technoeconomic clearance has also to recieve environmental clearance from the Ministry of Environment and Forests (MoEF) after being examined by an Environmental Assesment Committee (EAC).
The Enron power purchase agreement was made in violation of the procedural provisions, and the terms of the contract more or less explicitly renounced the regulatory law. The notification to the public was misleading and representations either opposing or seeking modifications to the project were not entertained (under pressure from the CEA, the DPC eventually admitted to receiving 34 representations, of which the state government claimed to have responded to 37 of them!), and the land for the project was acquired by arbitrary executive order. The MoEF granted environmental clearance even before the evaluating body had submitted its report. A range of executive and political luminaries brought enormous pressure to bear on the CEA, which was the only institution, other than the World Bank to raise doubts about the economic viability of the project. The CEA eventually gave only a technical clearance, as against the mandated techno-economic clearance, as by then all concerned had agreed that the financial aspects would be examined and cleared at other levels. The MSEB had to build, at its own cost, the 400 KV transmission lines from the plant to its load centres, besides also surrendering its right to inspect the power station and the fuel tanks. The contract unambiguously barred the board from exercising its “statutory power to require DPC to perform the duties of generating companies” as set out in the Electricity Supply Act, “any exercise of the said act” being deemed “to be a change in law”. Operationally, the MSEB was reduced to a non-entity. As far as the financial aspects of the project were concerned, the ceiling cost was undefined, the capital expenditure on the plant was not declared, the tariff figures were discrepant at various points, the difference between the permitted annual outflow of foreign exchange and the actual minimum outflow was of the order of 40 percent in the first year itself, and the return on equity, on an inflated project cost, was 32 percent as against the permissible limit of 16 percent.
To be fair to Enron, these violations of the law were consistent with its stated position. After a study conducted by its lawyer, Adrian Montague, a partner in the English firm Linkletters and Paines, the company, in a note called “The Problems Concerning the Application of the Indian Electricity Acts” addressed to the Power Ministry and other related organisations, converyed its acute displeasure with Indian laws. It, among other things, strongly resented its activities being regulated; it did not want to follow the directions of the operational authority; it did not care much for the dispute resolution process; it did not approve of tariff controls; it was unhappy with the existing allocation of judicial functions and it had strong objections to the enforcement of provisions requiring it to operate and maintain the power station “in the most efficient and economical manner”. Consequently, government of India was asked to change the laws to suit the company’s tastes. Since the PPA could not be brought into conformity with the law, the law had to be made consistent with the PPA. The breach of law by the document would be retrospectively rectified since the state government had, in the light of Enron’s instructions, approached the central government to make the necessary amendments. Enron also decided that any dispute arising out of the contract would lie within the exclusive jurisdiction of English courts. It is just an incidental point that until then, Indian law had been good enough to govern the creation andoperation of over 60,000MW of capacity.
Enron’s antipathy to regulation is entirely understandable. It is the enthusiasm of the regulators to abdicate their responsibilities that requires explanation. Clearly, Enron had an enormous capacity for persuasion, and enjoyed an unparalleled reach within the state apparatus. Its project had, from the very beginning, the support of practically the entire political-executive complex, and this despite the doubts expressed by the World Bank. It was the beneficiary of interventions by two chief ministers of Maharashtra, the leaders of two of the most virulently nationalists parties in the country and of successive central governments, each opposed to the other, but all united in their concern for the company. The MSEB was, to the exclusion of its statutory duties, solely concerned with doing things “acceptable to foreign promoters” going so far as to project an estimated growth of electricity that amounted to exactly the quantum to be generated by the Dabhol plant. The Ministry of Power strenuously exerted itself to ensure that the CEA would not hold back clearance. At one stage, salaries to the CEA were withheld. The Foreign Investment Promotion Board, a body that has no statutory locus standi in the matter, assumed the functions of the CEA to endorse the financial aspects of the deal. The Finance Secretary made fictitious statements about the cost of power and compared it favourably with other imaginary projects of a “similar nature” in Maharashtra .
When, despite these ‘personnel resources’ at its command, the project did run into difficulties, the company was able to mobilise an impressive array of international supporters. In 1995, when the project was temporarily cancelled, its progress was being monitored by the then US President’s Chief of Staff in close coordination with the US Ambassador to India, Frank Wisner, who, interestingly enough, joined Enron as a director the day after he completed his diplomatic term. The US Energy Secretary publicly warned India that “Failure to honour the agreements between the project partners and the various Indian governments will jeopardise not only the Dabhol project but also most, if not all, of the other private power projects proposed for international financing”. Seeing Enron’s plight, even the British Chancellor of the Exchequer, Kenneth Clarke, on a visit to India, was moved to issue a few polite threats.
Return of res judlcata
For sheer corporate charisma there is no other equivalent instance, considering the number of senior functionaries of the state who were willing to lie under oath to two of the highest courts in India, which in their turn were prepared, despite compelling evidence of mala fides, to preserve the sanctity of the contract. The history of litigation pertaining to the project is indicative. A 1994 writ petition challenging the legality of land acquisition for the project and pleading for resettlement was dismissed by the Bombay High Court. A subsequent writ, in the same year and before the same court, challenging the contract itself was dismissed on the ground that there was ” total transparency” at every stage of the negotiations and that nothing was done secretly. This ruling was to have an adverse impact on all further attempts to seek redressal, as the principle of res judicata (whereby an issue between two parties, once decided by court, will not be eligible for retrial at the instance of the same litigating parties) was invoked, without due consideration of its applicability, both by Enron’s counsels and by the high court to disregard a petition already admitted in court against the renegotiated contract.
The petition, filed in the Bombay High Court in 1996 by the Centre for Indian Trade Unions and this writer, was declared tenable before a single judge bench by the well-respected Justice Srikrishna. In response to a memorandum submitted to the chief justice of the High Court in his chambers by the counsel for Enron DPC and GoM, the petition was mysteriously transferred by an office order of the court, overriding a judicial decision, to a division bench led by the same Lordship who had dismissed the first petition of 1994. Predictably, res judicata triumphed to Enron’s advantage.
The bench, even while observing that the contract was shrouded in secrecy and that Enron had conquered much more than it did earlier, dismissed the petition in December 1996. A few months later, the Supreme Court of India, in one of its strangest decisions to date, (and there have been many), barred any argument on the issues raised by the High Court’s ruling and the supporting documentary evidence furnished by the petitioners. It deleted all but one of the respondents from the case, including the government of India, the CEA and Enron, limited the scope of judicial review to the changing positions of the Government of Maharashtra, and appointed an amicus curiae to help the court. Even the restricted issue left to be adjudicated is still pending. Enron’s triumph was final. Judicial review too had failed to resist the charms that so many others had succumbed to. Eventually, it was left to the market-place to undo the anomaly that the combined might of state and capital had contrived.
The appropriate conclusion
In all this there is a recurring question that remains unanswered: how did what is widely regarded as the most powerful and organised state in South Asia so willingly participate in a scheme to defraud itself? More to the point, how did what is known to be one of the slowest and most unresponsive bureaucracies and judiciaries in the world proceed with such speed to process Enron’s requirements? The rules of evidence do not easily admit certitudes. But there is an interesting piece of information whose bearing or the lack of it on the project will depend entirely on whether one is disposed to a reasonable inference or a generous attitude. In 1995, Linda Powers, an Enron employee, in her sworn testimony to the US House Committee on Appropriations, said “Working though this process [of the evolution of Enron’s Dabhol project] has given the Indian authorities a real and concrete understanding of the kinds of legal and policy changes needed in India, and has given Indian banks a real and concrete understanding of sound project lending practices. Moreover, our company spent an enormous amount of its own money— approximately $20 million—on this education and project development process alone, not including any project cost”.
Among those thus educated, the MSEB by early 2001 had to default on payments on pain of bankruptcy, and two financial institutions, the Industrial Development Bank of India and the Industrial Credit and Investment Corporation of India, which were so assiduously instructed in the science of “sound project lending”, have had their net worth wiped out. The reader is free to draw the appropriate conclusion.