Plug pulled on investment in India
Failure of first and biggest test of reform has many saying the deal looked good at the time.
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.Skip to next paragraph
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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.)