Reflections on Enron


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OVER the last decade, private ‘investment’ in infrastructure development and management, in particular relating to the power sector, has been in the news in one form or another. In the process a series of myths have sprung up around the sector, ranging from power shortages to the absolute necessity to somehow rope in foreign investment.

This article takes up the first, and arguably the most controversial, private power project in India since 1991 being set up by the Enron Corporation in Maharashtra. The progress of events relating to this project chronicles one of the most interesting chapters in the history of post-independence India. The saga is still unfolding and the last word has yet to be written.

The events of 1991 proved to be a watershed for India. The country plunged into a deep financial crisis brought about by profligate spending particularly on defence imports, the dwindling reserves of foreign exchange and the flight of capital from the country. The government of Narasimha Rao was forced to adopt a substantial change in course. It can perhaps be argued that the policies adopted were, in more than one sense, simply a continuation of the previous government’s policies, particularly those of V.P. Singh’s. After two to three years of token opposition from both the left and the right, a national consensus on this issue seems to have evolved. A discussion of the macro-economy, though relevant to the present study, is beyond the scope of this article.

Private foreign capital was invited to extend its participation in the economy, even in sectors that were hitherto off-limits, particularly in the areas of power, petroleum and telecom. The entry of foreign private capital in these sectors is a radically different event, it is in fact unprecedented. In other sectors, particularly consumer goods, a case can be made that despite the loosening of barriers precluding direct entry, the apparent shift was really a continuum.

The entry of foreign capital in countries across the globe is best illustrated in the financial markets. The 1980s heralded the largest transfer of capital from the developed countries to developing countries. In particular, institutional money targeted at emerging markets is noteworthy. Between 1991 and 1996 for example, American institutions had invested about 400 billion dollars in emerging markets. The sum total of American investment in the Indian stock markets is not even a relevant fraction of that number, in this case, of the order of one per cent or less.



The official view taken was that the barriers against the entry of foreign private capital were lifted to augment available resources in the face of a resource crunch. The triggering point in India was the conditionalities attached to the tranche of loans from the World Bank (WB) that the country had taken to stave off the crisis of 1991. Private capital in specific sectors was demanded by covenants and conditionalities of specific loan agreements, for example, the petroleum sector. However, it needs to be noted that in other sectors, particularly power, there was not only no explicit compulsion from the WB but that the change in policy in the power sector had already been planned by the Indian government.

After 1991, the new power policy announced by the Government of India (GoI) allowed for additional private participation in the power sector. Thereafter, in 1993, a contract was signed in Maharashtra between the state owned electricity board (MSEB) and the Indian subsidiary of the Enron Corporation, the Dabhol Power Company (DPC) for the supply of 695 mega watts of electricity.



The contract between the two parties was finalised after purportedly detailed examinations of various aspects of the project by both the central and state governments. It was also claimed that all necessary clearances that the law required had been obtained. In particular, the ‘techno-economic’ clearance was purportedly issued after an examination of the technical and economic aspects of the project by the sole authority under the law, the Central Electricity Authority (CEA).

Even as this was going on, there was a great deal of opposition to the project on ideological, economic, political and environmental grounds from diverse quarters. These included political parties, a loose-knit coalition of former chairmen of the CEA and various State Electricity Boards, environmentalists, consumer organisations, individual academics, and even the World Bank.

The diversity of issues raised by the opposition corresponded to the variety of the grounds from which these issues stemmed. The World Bank, for instance, was explicitly against the project. Its comments were invited on at least three different occasions and on each occasion the Bank took a strong stance against the project on purely economic grounds. The World Bank’s analysis remains the most coherent critique of the project and its consequences.

The World Bank’s institutional and operating mandate has been to support, expand and, if necessary, force the entry of foreign private capital into countries that are averse to such an entry. In this case, however, the brutal analysis of the World Bank is damming. To any unbiased observer of the project, the World Bank’s irrefutable critique should have sounded the death knell for the project.

Most of the parties in the opposition including the Shiv Sena and the Bharatiya Janata Party (BJP) opposed the project for a number of reasons (economic as well as on the issue of possible malfeasance in the contract). The alliance of the Shiv Sena and the BJP when it assumed power in Maharashtra in April 1995 undertook to re-examine the terms and conditions of the contract.

After a detailed examination by a special cabinet committee, the Government of Maharashtra (GoM) came to the conclusion, inter alia, that the contract was not in public interest. It decided to cancel the contract in August 1995.



The state government first cancelled the project on grounds that it was unsustainable, that it would ‘adversely affect Maharashtra,’ that it was against ‘public policy’ and ‘public interest’ and ‘against the interest of the state.’ In a solemnly verified suit, filed by the government itself, the GoM submitted on oath to the Hon’ble Court that ‘the said Agreement is null and void ab-initio, inter-alia, on account of its being violative of several statutory provisions, public policy, consumer interest, public interest and interest of the state, suffers from the vice of misrepresentation by ...Enron and is conceived in fraud.’

Within three months of that decision, for reasons that are still not fully clear, the government backtracked on its decision without assigning any reasons and went on to ‘renegotiate’ the contract. It turns out that not only were no changes made in the old contract but the government ended up signing a contract whose value was three times the old one.



Following the so-called renegotiated agreement by the GoM, the other parties involved in the whole issue viz., MSEB and DPC, signed an agreement in August 1996 for the supply of about 2000 mw of electricity to the MSEB in the form of available capacity and gas for a period of twenty years.

What was signed is a contract simpliciter between two parties: A contracting party (Enron) agreeing to sell to another (MSEB) a commodity (electricity) for a price (US $0.0872 a unit) in a fixed quantity (1728 crore units) for a period of time (20 years), i.e., MSEB is liable for $1.4 billion plus (Rs 6,500 crore plus) a year, year on year for the next 20 years. These payments are indexed to just about all possible economic indices. The rise in payments in rupee terms is minimally 12% a year. The payments due on the renegotiated contract constitute one of the largest contracts (civilian or military) in world history, easily the single largest contract in India’s history.

Such terms for the purchase of a commodity are unprecedented in the country’s history, perhaps unparalleled in the recent annals of commercial history the world over. The purchase of electricity by MSEB and the payments due therein are governed by various agreements signed. These agreements include the PPA, the guarantee by the state of Maharashtra, the state support agreement, the counter guarantee by the Union of India and the tripartite agreement between the GoM, the GoI and the Reserve Bank of India.

These terms include a guarantee from the GoM that in the case of default in payments by the MSEB, the state of Maharashtra would be liable for all and any payments due to DPC by the MSEB under the terms of the contract. The state government has put a lien on all its assets: past, present and future in this respect. The interpretation of the state guarantee is through the application of English law in exclusion to Indian law.

The Republic of India, in turn has counter guaranteed the payments due to DPC. In the event that the Government of Maharashtra defaulted on its guarantee, the Government of India would be liable for some of the payments due. The GoI would directly deduct from the constitutionally sanctioned share of revenues due to the state of Maharashtra in case of having to make any payments. The Republic of India too has staked all its assets (including those abroad, save diplomatic and military) in surety of the payments due to DPC by MSEB.



There is no set of economic circumstances (growth rates, industry off-take) or even political ones (MSEB ‘reforms’) that would justify the purchase of this power. The basic premise that there are buyers for outrageously expensive base-load power is itself fundamentally flawed. Even in the most power-deficient state, there is no shortage of power at night. However, the Enron meter keeps on ticking: at the rate of US $ 0.184 million an hour, hour upon hour for 21.6 hours a day. There is no scope for payments of this magnitude even under ideal circumstances.

Additionally, the terms include the de facto import of nearly everything, including equipment and fuel, involves no transfer of technology, and guarantee payments more or less totally in foreign exchange.

It is not, repeat not, a foreign investment even trivially. The substantial over-capitalisation (over 60-70%), the direct lending by Indian FIs (about 55% of the over-capitalised capital costs), the indirect lending (guarantees by Indian FIs to foreign FIs, about 18% of project costs) and MSEB’s own equity investments implies that all the money is Indian. The net effective investment on Enron’s part is close to zero or even negative.



Few of us accept responsibility ourselves and prefer instead to take a much softer alternative, that of blaming the ‘other’. These could be ‘outside forces’ or the usual gang of suspects – the IMF, World Bank and WTO or Enron itself – as a villain par excellence. However, in my opinion, most of the problems lie with us – the Indian nation state and all that the term represents or should represent. At the core of the problem lies the refusal to deal with ourselves and to take responsibility for our actions or the lack thereof.

Consider the complete and total abdication of even a semblance of what could be construed as governance. There was a complete failure of the entire institutional structure – the government, the press, the courts, in short, the total failure of institutions: constitutional, statutory or executive. The institutions that were subverted, bypassed, simply ignored, or else chose to look the other way is almost unbelievable. These include the CEA, the MoP, the judiciary, even obscure departments of the GoM like the ports department, the MSEB, the law ministry at both the centre and the state, the IDBI, GoM, the FD, central and state cabinets, the department of Industry and Energy in Maharashtra, MoF, the press, two all-party parliamentary committees, the Auditor General of India, the Accountant General of Maharashtra – the list can go on ad nauseum. The number of institutions is noteworthy and the extent of their failure abysmal.

For the record, I must make it explicit that the problem is not with privatisation per se, at least in the author’s view: it is the manner in which it was done.



The policy adopted in 1991 was purportedly with the noble and honourable intention of unshackling the economy and loosening the state’s hold on industry. The catchwords were liberalisation, privatisation and markets. Of operative concern is that what followed was to the contrary – a guaranteed purchase of commodities at unprecedented high prices and obscenely excessive payments at the expense of the exchequer to specific private parties. The sums involved were mind boggling; they make crony capitalism look good. The eight fast track projects in the power sector alone involve payments of 150 billion dollars or 600,000 crore rupees or 40% of our GDP. One can cite several dozen examples besides the case of Enron, where in the name of liberalisation and privatisation, even the semblance of national interest was thrown to the winds; where there has been a breach of every conceivable law, regulation or norm, as well as simple self-interest (either private or that of the exchequer). The difference in scale at this level is bound to have considerable, long term and detrimental effects on the economy. Furthermore, the Indian private sector will be hit very hard.

This is not to say there was no corruption before 1991. But the difference in scale is magnitudes apart. The Hawala papers revealed that payments ranging from several tens of thousands of rupees to at best a few crores were made to various officials, bureaucrats and ministers in the power sector. However, the contracts were largely for the supply of equipment running at best into a few hundred crores. These were one time payments, and however reprehensible the conduct of the officials and institutions concerned, once paid for the power stations or whatever else were ours and ours alone. Post 1991 the government went overboard, as was evident on several occasions, consciously and deliberately. In the Enron case, there were several instances which showed that there was application of mind to the interest of a specific party and to the exclusion of national interest of any kind, at any level.

Consider the Mukta Panna case where a perfectly acceptable policy formulation for the ‘opening up’ of the petroleum sector was not only specifically overruled but that the government subsequently went out of its way to abnegate and abdicate even minimal traces of responsible governance in the terms allowed to specific parties. This is not to suggest that corruption is the preserve of the private sector. Some well-known public sector outfits (ONGC in this case), though profitable, are not immune to corruption.



Another noteworthy point is that given a political system bereft of any ideology, the policies referred to are pursued irrespective of the purported ideological shade of the party in power. Enron and the shameful behaviour of the Shiv Sena and the BJP is an obvious example. To illustrate, consider the actions of the May 1996 minority government headed by the BJP at the Centre. This government lasted for precisely 13 days. It resigned before facing a vote of confidence in the Lok Sabha. In an extraordinary and historically unparalleled decision, on its last day in office, while the debate on the no-confidence motion was underway in the Lok Sabha, the cabinet met at ‘lunch’ and ratified the counter-guarantee to be given to Enron. Following this decision, Vajpayee went on to tender his government’s resignation on the floor of the Lok Sabha.



In this respect the conduct and policies of various parties in successive governments at the Centre, e.g. the Janata Dal government (of which the communists were a part) were no different from the earlier governments of the Congress or the BJP. To illustrate, the instructions given to the Counsel by the Janata Dal government in the court cases, the approval and re-approval of the guarantees and counter guarantees shows a consistent continuity. The particular interest shown by Deve Gowda in the Cogentrix case is also noteworthy This was true even at the state level in Karnataka, irrespective of the Congress or the Janata Dal being in power. Or the indefensible act of the Andhra government under N.T. Rama Rao in signing MOUs for power projects that involved payments of a sum several dozen times greater than the state GDP.

Another curious phenomenon is that, across the board, the word ‘liberalisation’ cannot be challenged in any form, not even in the specificities of what actually transpired. I am not advocating a return to the pre-1991 days or for that matter to another system, but I do believe that the sense in which this word is currently deployed represents the worst of both worlds. What happened after 1991 makes some of the most awful economic excesses of the state pale in comparison. We are left with the worst of both worlds, i.e., neither a regulated ‘free market’ nor even the vestigial traces of state intervention as was practised in this county until 1991. Is it surprising that liberalisation, privatisation, and free market globalization have become dirty words?