Enron Versus Bombay Politicians
Enron Versus Bombay Politicians
On August 3,1995, the Maharashtra state government of India, dominated by the nationalist right-wing Bharatiya Janata Party(BJP), abruptly canceled Enron’s $2.9 billion power project in Dabhol, located south of Bombay, the industrial heartland of India. This came as a huge blow to Rebecca P. Mark, the chairman and chief executive of Enron’s international power unit, who spearheaded the Houston-based energy giant’s international investment drive. Upon the news release, Enron’s share price fell immediately by about 10 percent to $33.5. Mark sprang to action to resuscitate the deal with the Maharashtra state, promising concessions. This effort, however, was met with scorn from BJP politicians. Enron’s Dabhol debacle cast a serious doubt on the company’s aggressive global expansion strategy, involving some $10 billion in projects in power plants and pipelines spanning across Asia, South America, and Middle East Enron became involved in the project in 1992 when the new reformist government of the Congress Party (1), led by Prime Minister Narasimha Rao, was keen on attracting foreign investment in infrastructure.
After meeting with the Indian government officials visiting Houston in May, Enron dispatched executives to Indian to hammer out a “memorandum of understanding “in just 10 days to build a massive 2,015-megawatt Dabhol power complex. New Delhi placed the project on a fast track and awarded it to Enron without competitive bidding. Subsequently, the Maharashtra State Electricity Board (MSEB) agreed to buy 90 percent of the power Dabhol produces. Tow other U. S. companies, General Electric GE) and Bechtel Group, agreed to join Enron as parents for the Dabhol project. In the process of structuring the deal, Enron made a profound political miscalculation: It did not seriously take into consideration a rising backlash against foreign investments by an opposition coalition led by the BJP. During the state election campaign in early 1995, the BJP called for a reevaluation of the Enron project. Jay Dubashi, the BJP’s economic advisor ,said that the BJP would review all foreign investments already in India, and “If it turns out that we have to ask them to go ,then we’ll ask them to go.”
Instead of waiting for the election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way. Enron was not very concerned with local political sentiments. Enron fought to keep the contract details confidential, but a successful lawsuit by a Bombay consumer group forced the company to reveal the details: Enron would receive 7.4 cents per kilowatt-hour from MSER and Enron’s rate of return would be 23 percent, far higher than 16 percent over the capital cost that the Indian government guaranteed to others. Critics cited the disclosure as proof that Enron had exaggerated project costs to begin with and that the deal might have involved corruption. The BJP won the 1995 election in Maharashtra state and fulfilled its promise. Manohar Joshi, the newly elected chief minister of Maharashtra, who campaigned on a pledge to “drive Enron into the sea,” promptly canceled the project, citing inflated project costs and too high electricity rates. This pledge played well with Indian voters with visceral distrust of foreign companies since the British colonial era. (It helps to recall that India was first colonized by a foreign company, the British East India Company.)
By the time the project was canceled, Enron already had invested some $300 million. Officials of the Congress Party who championed the Dabhol in the first place did not come to rescue of the project. The BJP criticized the Congress Party, rightly or wrongly, for being too corrupt to reform the economy and too cozy with business interests. In an effort to pressure Maharashtra to reverse its decision, Enron “pushed like hell “ the U.S. Energy Department to make a statement in June 1995 to the effect that canceling the Enron deal could adversely affect other power projects. The Statement only compounded the situation. The BJP politicians immediately criticized the statement as an attempt by Washington to build India. After months of nasty exchanges and lawsuits, Enron and Maharashtra negotiators agreed to revive the Dabhol project. The new deal requires that Enron cut the project’s cost from $2.9 billion to $2.5 billion , lower the proposed electricity rates , and make a state-owned utility a new percent partner of the project. A satisfied Joshi, the chief minister, stated:” Maharashtra has gained tremendously by this decision.” Enron needed to make a major concession to demonstrate that its global power projects are still on track. The new deal led Enron to withdraw a lawsuit seeking $500 billion in damages from Maharashtra for the cancellation of the Dabhol project
Please write a two-page essay to discuss the following points. 1. Discuss the chief mistake that Enron made in Indian
2. Discuss what Enron might have done differently to avoid its predicament in India. You can look through the mini case and also search the related materials online in order to prepare the essay, but be sure to specify the information sources in the end of essay.