1

THE FLETCHER SCHOOL OF LAW AND

DIPLOMACY












When Power Failures Undermine
International Business Negotiations: A
Negotiation Analysis of the Dabhol Power
Project

A MALD Thesis

Presented to
Jeswald Salacuse

By
PRIYA GHANDIKOTA
April/2002




2












Abstract: The purpose of this paper is to investigate the institutional factors that lead to the collapse of
international business deals. To develop a working framework from which to discuss this problem, the Enron-
promoted Dabhol Power project in Maharashtra, India will be discussed as a case study. Traditional business
strategy fails to internalize the social, cultural, political and ideological dimensions of complex business
transactions. A preliminary examination of the Dabhol case reveals that many of the problems that led to the
inability and unwillingness of the parties involved to implement a business agreement can be explained by
negotiation theory. Negotiation theory accounts for the personality of the players, asymmetrical power relations, the
lack of cultural know-how, and other complex issues in the pre-negotiation, negotiation and post-negotiation phases
that lend insight into why international business agreements may fail. This paper begins with a translation of the
history of the Dabhol project, continues with the application of negotiation theory to analyze the problems that arose
and concludes with a model that attempts to correlate factors explained by negotiation theory that collectively
produce a successful international business negotiation strategy.


















3
When Power Failures Undermine International Business
Negotiations: A Negotiation Analysis of the Dabhol Power
Project

TABLE OF CONTENTS

PART I. INTRODUCTION........................................................................................................................................................ 6
PART II. THE HISTORY OF THE DABHOL POWER PROJECT ............................................................................ 9
A. INDIAS ENERGY SECTOR.............................................................................................................................................9
An Energy Sector in Need of Investment........................................................................................................................... 9
The Move Towards Reform...............................................................................................................................................11
B. THE SIGNED MOU WITH ENRON...............................................................................................................................12
C. EVENTS LEADING UP TO THE SIGNED PPA.........................................................................................................13
Public Protest......................................................................................................................................................................13
The World Banks Initial Conclusions............................................................................................................................13
The Initial Findings of the CEA.......................................................................................................................................14
The World Bank Report .....................................................................................................................................................16
C. NEGOTIATION OF THE PPA.........................................................................................................................................19
Sovereign Guarantees........................................................................................................................................................20
D. CANCELLATION OF THE PPA ....................................................................................................................................20
The Results of the 1995 Maharashtra State Elections..................................................................................................20
The Report of the Cabinet Sub-Committee to Review the Dabhol Power Project...................................................21
Termination of the PPA.....................................................................................................................................................22
Arbitration............................................................................................................................................................................22
A Review Panel is Struck ...................................................................................................................................................24
D. RE-NEGOTIATION OF THE PPA .................................................................................................................................24
E. NON-PAYMENTS AND ESCALATING HOSTILITIES ..........................................................................................25
Invoking the Sovereign Guarantee...................................................................................................................................26
The Godbole Review Panel..........................................................................................................................................27
Pre-Termination Notice.....................................................................................................................................................30
Subsequent Rounds of Arbitration.............................................................................................................................31
Enrons Exit Strategy.........................................................................................................................................................32
Final Termination Notice.................................................................................................................................................33
The Singapore Meeting......................................................................................................................................................34
The Downfall of Enron.......................................................................................................................................................35
PART III. APPLYING NEGOTIATION THEORY TO EXPLAIN THE FAILURE OF THE DABHOL
DEAL................................................................................................................................
A. UNDERSTANDING BATNA AND BATRNA..............................................................................................................38
The Indian Teams BATNA ...............................................................................................................................................38
Enrons BATNA...................................................................................................................................................................40
The Indian Teams BATrNA..............................................................................................................................................40
Enrons BATrNA.................................................................................................................................................................42
B. TIME DEFICIENCIES .......................................................................................................................................................44
Speed.....................................................................................................................................................................................44
When the Time is `Ripe.....................................................................................................................................................48
C. RESOURCING THE NEGOTIATIONS.........................................................................................................................48
Institutional Endowments..................................................................................................................................................49
4
Corruption............................................................................................................................................................................49
Technical Endowments......................................................................................................................................................51
Inflationary and Deflationary Expectations...................................................................................................................52
D. ASYMMETERICAL POWER RELATIONS................................................................................................................54
Terms of the agreement......................................................................................................................................................54
E. TRUST AS A STABILIZING FORCE IN NEGOTIATIONS ....................................................................................56
F. INCORPORATING STAKEHOLDERS.........................................................................................................................58
Local Community................................................................................................................................................................59
The World Bank...................................................................................................................................................................62
The Bureaucracy.................................................................................................................................................................62
Indian Financial Institutions.............................................................................................................................................63
The Non-Resident Indian Community.............................................................................................................................64
When Stakeholder Interests Hold the Negotiation Process Hostage.........................................................................65
G. MORAL BASED POSITIONING VS. INTEREST-BASED POSITIONING........................................................67
The GOMs Changing Interests .......................................................................................................................................67
Enrons Interests.................................................................................................................................................................68
Surmounting hostilities - Blaming the other Leads to Moral Positioning...........................................................70
When Inflexibility of the Agreement Contributes to Inflexible Positioning ..............................................................73
Personality of the Players.................................................................................................................................................75
The Hand of the White House...........................................................................................................................................79
H. NEGOTIATING WITH CULTURAL BLINDERS......................................................................................................81
Theory...................................................................................................................................................................................82
Cultural Limitations in the Indian Teams Negotiating Strategy...............................................................................82
Cultural Limitations in Enrons Negotiating Strategy .................................................................................................84
I. ORGANIZATIONAL CONSTRAINTS AND INSTITUTIONAL MEMORY AS DEBILITATING FACTORS
......................................................................................................................................................................................................85
Organizational Precedents................................................................................................................................................86
Institutional Memory As a Constraint in the Decision-making Process...................................................................86
J. THE IMPORTANCE OF EFFECTIVE AND BROAD-BASED COMMUNICATION.........................................87
Theory...................................................................................................................................................................................87
The Breakdown of Effective Communication between the Negotiating Parties.......................................................87
The Breakdown of Effective Communication with Stakeholders................................................................................88
K. SUMMARY..........................................................................................................................................................................90
PART IV - CONCLUSION......................................................................................................................................................92
A. VERNONS OBSOLESCING BARGAINING FRAMEWORK...................................................................................................92
B. AN INTEGRATIVE APPROACH TO ANALYZING BUSINESS TRANSACTIONS...................................................................93
C. CONCLUDING REMARKS......................................................................................................................................................96













5

TABLE OF FIGURES

FIGURE 1 - REGIONAL POWER CAPACITY.............................................................................10
FIGURE 2 - BREAKDOWN OF RESPONSIBILITIES OF JV PARTNERS (1993) ....................20
FIGURE 3 - CAPITAL COST, ENERGY COST AND SIZE OF "FAST TRACK" PROJECTS IN
INDIA....................................................................................................................................22
FIGURE 4 - INDIA'S BATNAS .........................................................................................................38
FIGURE 5 - RAYMOND VERNON'S OBSOLESCING BARGAIN MODEL................................................93
FIGURE 6 - BALANCING CONSTRAINTS TO NEGOTIATE A SUCCESSFUL BUSINESS DEAL...............96































6

When Power Failures Undermine International Business
Negotiations: A Negotiation Analysis of the Dabhol Power
Project

PART I. INTRODUCTION

"The end crowns all, and that old common arbitrator, time, will one day end- William Shakespeare, Troilus &
C, Act I V, Sc.V

The purpose of this paper is to investigate the institutional factors that lead to the collapse
of international business deals. To develop a working framework from which to discuss this
problem, the Dabhol Power project will be discussed as a case study. The Dabhol Power
Company (DPC) was established as a joint venture between the Enron Corporation, General
Electric and the Bechtel Corporation. A Power Purchasing Agreement (PPA) was signed
between the DPC and the state Government of Maharashtra in India to generate a 2,015 MW
base load power project at Dabhol in the Ratnagiri district, approximately 300 km south of
Indias commercial and financial center of Mumbai. Divided into two phases, the project
succeeded a re-negotiation of its terms, two changes in government, and twenty-four lawsuits.
Nevertheless, the DPC ultimately collapsed, with the future of its assets still uncertain.
The Dabhol Power project was chosen as a case study because of its significance to the
development of Indias foreign investment policy and the unprecedented size and scope of the
project. Indeed, this project is the largest single foreign investment project in Indias history.
Furthermore, it is a significant case study because the project was first regarded as a boon to an
ailing energy sector faced with a myriad of demand-driven and supply driven problems. The
company was created to serve a sector in India that is highly politicized, fraught with corruption
and a sector that was expected to provide maximum linkages to other sectors of an economy that
was poised for growth. The state electricity boards have suffered from consistent losses and
7
approximately a quarter of the power stations in India are over twenty-five years old and the
inefficient maintenance of these stations has led to the breakdown of equipment and the shutting
down of plants.
1
Power shortages have had serious repercussions for Indias program of
development since industry and transport account for seventy per cent of Indias power
consumption.
2
Finally, not only was the Dabhol deal expected to heal an ailing energy sector, but
it was also touted as a symbol of economic reform, as it rode on the coattails of the aggressive
liberalization reforms pursued by the Government of India (GOI) after 1991.
From an international business perspective, the Dabhol Power project is an exemplary
case of how and why international business transactions fail in large part due to a lack of
strategic negotiation acumen. While the Enron-promoted project in Maharashtra is unique with
respect to the size and scope of the project, it is not unique with respect to the institutional
factors that led to its demise. Many of the problems that explain why the agreement was never
fully implemented are problems that have surfaced in numerous other cases where international
business deals have been negotiated, both in India and in other countries. For example, the
problems inherent in the Dabhol deal have manifested themselves in other deals such as the
Government of Indias failed negotiations with Bechtel Enterprises from 1963-1965 and the
controversial energy agreement now the subject of dispute between US-based AES and the state
government of Orissa in India.
3

Traditional business strategy, which is dominated by an applied microeconomic or
macroeconomic approach that originates at the firm level or at the country level, provides only a

1
Abhay Mehta, Power Play: A Study of the Enron Project (Abhay Mehta. Power Play: A study of the Enron Project
(Hyderbad: Orient Longman Ltd, 1999), p.12.
2
Harvard Business School, Enron Development Corporation: The Dhabol Power Project in Maharashtra, India
(A), Case No. 9-797-086 (Cambridge, Massachusetts: Harvard Business School Publications, 1997), pg. 6
3
Ashok Kapoor provides an excellent analysis of the events leading to the failed mfp signed between the GOI and
Bechtel Corporation. See Ashok Kapoor, International Business Negotiations: A study in India (New York: New
York University Press, 1970).
8
limited explanation of the structures and events that lead to the failures of international business
deals. Specifically, this discipline fails to internalize the social, cultural, political and ideological
dimensions of complex business transactions. A preliminary examination of the Dabhol case
reveals that many of the problems that led to the inability and unwillingness of the parties
involved to implement a business agreement can be explained by negotiation theory. Negotiation
theory accounts for the personality of the players, asymmetrical power relations, the lack of
cultural know-how, and other complex issues in the pre-negotiation, negotiation and post-
negotiation phases that lend insight into why international business agreements may fail.
This paper begins with the history of the Dabhol project, continues with the application
of negotiation theory to analyze the problems that arose and concludes with a model that
attempts to correlate the factors that collectively produce a successful international business
negotiation strategy. This model attempts to bridge the gap between negotiation analysis and
traditional business strategy, where the latter is defined by a distributive bargaining framework,
which features the competitive behavior and interests of the firm and the industry or country as
key players.
















9


PART II. THE HISTORY OF THE DABHOL POWER PROJECT
`Enron came, they saw, and they conquered
Maharashtra Chief Minister Manohar Joshi, Speech to the Maharashtra State Assembly

A. INDIAS ENERGY SECTOR

The Dabhol Power Company (DPC)
4
is a fascinating case study primarily because the
project was created to serve a sector in India that is highly politicized, fraught with corruption
and a sector that was expected to provide maximum linkages to other sectors of an economy that
was poised for growth.
An Energy Sector in Need of Investment
The DPC was first regarded as a boon to an ailing energy sector faced with a myriad of
demand-driven and supply driven problems. At the time that an investigation was underway to
study the viability of the project, per capita consumption of power in India was only 190KwH
compared with 600 KwH for Malaysia, 3,000 KwH for Taiwan, and 10,000 KwH for the United
States. Indias relative low consumption rate can be explained not by the fact that demand for
power was low but by the fact that there was an insufficient supply of power generated. In 1991-
1992, demand for power throughout the country exceeded supply by 22.5 billion KwHs and grew
to 23.8 billion KwHs the year after.
5
Power demand in India today outpaces supply by 11.1 per
cent during peak periods.
6
These shortages have had serious repercussions for Indias program of
development since industry and transport account for 70% of Indias power consumption.
7




4
In popular press, the Dabhol debacle is also referred to as the Enron debacle; therefore, throughout this paper,
references will sometimes interchangeably be made to the Dabhol Power Company and Enron.
5
Harvard Business School, Case (A), 6.
6
P.N.V Nair. Power Sector Needs Urgent Reforms, November 26, 2001 (accessed December 5, 2001); available
from www.projectsmonitor.com.
7
Harvard Business School, Case (A), 6.
10

Figure 1 - REGIONAL POWER CAPACITY
Region Central
Government
Capacity
Total Regional
Capacity
Northern States 9287 MW 23820 mw
Western States 5512 MW 24301 MW
Southern States 4640 MW 19459 MW
Eastern States 2730 MW 12302 MW
N. Eastern States 356 mw 1282 MW
(Source: Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra,
India (A), Exhibit 2)

The problem of energy shortfalls in India can be explained not only by the phenomenon
of demand outpacing supply but also by the inefficient management of existing power plants.
Specifically, India suffers from one of the highest transmission losses in the world and has one of
the worlds lowest utilization of installed capacity.
8
According to one estimate, by 2007, the
additional installed generating capacity required will be 85,000 MW accounting for a GDP
growth rate of six per cent per year and 100,000 MW if the growth rate is eight per cent per year.
At a relatively low fixed capital charge of US$1 million per MW, this additional capacity would
require an investment of $85 to $100 billion US.
9
Peaked demand is not met primarily because
power stations in India run on coal and coal is often not delivered on time because of a failure to
pay or due to the unavailability of transport. The State Electricity Boards (SEBs) themselves lack
the ability to pay their principal supplier, the National Thermal Power Corporation (NTPC),
which prevents the NTPC from paying Coal India (CIL) and other suppliers of fuel. In 1987-
1988, the State Electricity Boards had operated consistently at a loss except for the State of
Andhra Pradesh and Orissa in 1990-91, Maharashtra in 1986-87 and 1987 88 and Kerala in
1985-6. The total outstanding debt of all the SEBs to various suppliers equaled Rs18, 500 crore

8
Mehta,, p. 9.
9
Kirit Parikh, The Enron Story and its Lessons, The Journal of International Trade & Economic Development 6,
no. 2 (1997): 210.
11
at the end of October 1998.
10
The problem of unprofitable SEBs is compounded by the fact that
approximately a quarter of the power stations in India are over twenty-five years old and the
inefficient maintenance of these stations has led to the breakdown of equipment and the shutting
down of plants.
11

Official sources estimate that SEBs currently experience an average transmission and
distribution (T &D) loss of 22 per cent. Unofficial reports estimate this figure to be 48 per cent.
12

The primary reason for these losses can be explained by politically driven subsidies offered to
wealthy farmers and domestic consumers.
13
Concessional power amounts to as much as 46 per
cent in some states.
14
According to The Economist, the SEBs have also become job creation
centers for friends and relatives of politicians.
15
As one author states, the Delhi Electricity
Supply Undertaking is one of the most corrupt and bankrupt organizations in the country.
16
In
addition to politically driven subsidies, T & D losses can also be explained by transmission theft.
In New Delhi, transmission theft accounts for nearly fifty-four per cent of all T & D losses.
17


The Move Towards Reform
During the Fifth Plan of the National Planning Commission, electricity was included in
the minimum needs program.
18
In the hopes of addressing the major structural deficiencies
confronting the energy sector in India, the Electricity Supply Act (ESA) of 1948 was amended in
1991. The revised Act adopted a cost-plus approach and assured a return of equity of 16 per

10
Mehta, 12.
11
Ibid.
12
Yamini Narayanan. Privatization of the Electric Utility Industry in India: A Case Study (Ph.D diss, University Of
Oklahoma, 1998), p. 35.
13
Ibid., p. 21.
14
Ibid., p. 35.
15
Ibid., p. 36.
16
Mehta, 9.
17
Ibid., 8-9
18
Narayanan, 19.
12
cent on investment in this sector.
19
In May and June 1992, the Government of India established a
team to visit the United States in pursuit of attracting foreign direct investment for Indias energy
sector. The Houston-based energy company, Enron Corporation, responded favorably to the
Government of Indias proposed reforms and expressed an interest in setting up a power station
in India based on the import of liquefied natural gas (LNG).

B. THE SIGNED MoU WITH ENRON

Almost immediately after the Indian delegations promotional trip, representatives from
Enron and General Electric arrived in India to survey sites for a potential project. Three days
following their survey, on June 20, 1992, they signed a Memorandum of Understanding (MoU)
with the Maharashtra State Electricity Board (MSEB) to build the Dabhol Power Project. The
operating entity of the project would be the Dabhol Power Company (DPC), a joint venture
between the Enron Corporation, General Electric and the Bechtel Corporation. The MoU,
although not a legal document, stipulated that the company would establish a 2,015 MW base
load power project at Dabhol in the Ratnagiri district, approximately 300 km south of Indias
commercial and financial center of Mumbai. DPC would lease the project site from the
Maharashtra Industrial Development Corporation.
20
. The project was initially established to
generate 2,550 megawatts (MW) at a cost of $3.1 billion. Acting upon the recommendations of
the Foreign Investment Promotion Board, the proposed project was later scaled down to 1,920
MW, at a capital expenditure priced at $2.65 billion dollars and most importantly, the project
was split into two phases. Phase I would run on imported distillate oil until LNG supply

19
Mehta, 24.
20
Siva Y Sankar. Dabhol Power Co to export fruits, flowers; available from
www.rediff.com/money/2000oct/06dabhol.htm).
13
contracts were secured and a LNG re-gassification plant and storage and harbor facilities were
developed as part of Phase II.
21

C. EVENTS LEADING UP TO THE SIGNED PPA

Public Protest
The statement by Maharashtra Chief Minister Joshi that Enron came, they saw, and they
conquered,
22
while extreme and lined with political pretension, reflected the attitude of many
opposed to the Enron deal. In light of this fact, it is remarkable that the Dabhol Power project
steam-rolled ahead, at the pace that it did, in an environment where public and political
opposition were fierce and where there was a low estimation of the benefits of the project and its
viability amongst various local stakeholders. On July 7, 1994, Ramdas Nayak, a member of the
BJP, a Hindu nationalist party, filed a High Court case against the Indian Government and the
DPC on the grounds that the project was tainted by a lack of transparency and competitive
bidding. Similarly, local residents and activists launched appeals to the Government of
Maharashtra (GOM) to halt the project on the shared belief that environmental standards had
been violated. Between 1992-1993, through the forum of public hearings and written
correspondence, many local residents expressed the fear that the construction of a mega-power
project in Dabhol would threaten their economic livelihood.

The World Banks Initial Conclusions
After the Memorandum of Agreement (MoU) was signed amidst public protest, the GOM
requested the World Bank to review the project. On July 8, 1992, the World Bank concluded,
this large project which is nearly 20 per cent of its (MSEBs) installed capacity is likely to have

21
Harvard Business School, Case (A), p. 3
22
The GOMs translation of Chief Ministers Statement in the Maharashtra State Assembly; available from
http://altindia.net/enron/Home_files/doc/gomSuit/Cmstate.html
14
an adverse financial impact.
23
The World Bank cautioned the Maharashtra State Secretary for
Energy and Environment that the MoU was one-sided in favor of Enron and encouraged the
government to verify Enrons experience as an electricity generating company before
proceeding with the project.
24


The Initial Findings of the CEA
The amended Electricity Supply Act of 1948 specified that companies submitting
proposals of projects exceeding a capital expenditure of twenty five crores were obligated to
submit a scheme to the Central Electricity Authority (CEA) which included revenue details,
financing agreements, costs, and supply and generation estimates. The CEA was therefore
approached in early August 1992 by the Indian Secretary of Power to examine the technical and
economic viability of the tariff, the cost considerations, and the welfare impact of the Dabhol
project on Maharashtra. Similar to the World Banks analysis, the CEA concluded that the
Dabhol project was not economically or technically viable. Specifically, the CEA estimated the
cost of the plant to be Rs.1.81 crore per MW and Rs. 1.91 crore per MW, according to an
estimation of December 1996 and December 1997 completed costs, and not Rs. 4.49 crore per
MW as approximated by Enron.
25
This significantly lower deduction in costs led the CEA to
conclude that the DPC tariff structure needed to be significantly reduced to a more realistic
estimate of total real costs. The CEA further argued that that the MoU did not produce pertinent
details of the project including the total costs of the project, when the contract would begin, or
when the electricity would be made available. There was a minimum level of cooperation
exercised between Enron and the CEA as Enron insisted on providing lump sum estimates of

23
Mehta, 28.
24
Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 1999
(accessed December 5, 2001); available from http://www.hrw.org/reports/19999/enron/enron2-1.htm.
25
Mehta, 52.
15
its costs. On November 10, 1993 in a letter addressed to respond to the CEAs request for a
segmented breakdown of project costs, DPC officials replied, It is important to notethat
capital costs are irrelevant to CEA
26
. DPC further claimed, (y)our request for more detailed
project costs of equipment/system/works other than those provided in the capital cost summary
cannot be supported and is not deemed necessary.
27


Concerns Raised by Enrons Legal Team
As the CEA continued to express its reservations about the project and as the agency
began to re-consider the total foreign exchange outgo upon request by the Indian High Powered
Board, Enrons London-based legal team at Linklaters and Paines submitted a report to the
Government of India outlining what it deemed to be legal and regulatory impediments to foreign
investment in India. The report, entitled, Problems Concerning the Application of the Indian
Electricity Acts, was submitted on September 4, 1992. One of the main concerns of the report
was that the tariff regulations raised by the Government of India were found to be incompatible
with the financial structure of a power station project in light of the assumed load factors, the
admissibility of foreign exchange variations, the permitted return on equity, and the five year
term of the tariff as stipulated in the pricing provisions of the PPA.
28
The legal team raised the
additional point that the indiscrete power afforded to the MSEB and the CEA to regulate DPC
activities constituted a conflict of interest, as the CEA was the administrative agency selected to
exercise juridical functions over any disputes arising between the DPC and the MSEB. In
addition, Enron expressed concern about the remedies available for breach of a statutory duty.
29

Finally, the Enron legal team raised objection to the fact that under the Electricity Acts, the DPC

26
Mehta, 61.
27
Ibid.
28
Ibid., 32.
29
Ibid.
16
would be obligated to furnish to the CEAaccounts, statistics, returns of other information
relating to the generation, supply and use of electricity, adding to the DPCs existing
obligations under the Companies Act.
30


The World Bank Report
On March 12, 1993 the Finance Ministry formally approached the World Bank to finance
the project. When submitting his report on April 30, 1993, World Bank India Country Director,
Heinz Vergin, wrote to M.S. Ahluwalia, Secretary to the Department of Economic Affairs in the
Indian Ministry of Finance, Our analysis based on the parameters provided to us indicated that
the LNG-based project as presently formulated is not economically viable, and thus could not be
financed by the Bank.
31
The World Bank submitted its full report on April 30, 1993 to the
Finance Ministry, which then forwarded the report to the Secretary of Power. In the report, the
World Bank expressed concerns about the fact that a LNG plant was being promoted instead of a
combined cycle production plant with coal, since LNG generation at a variable cost of about 150
k/WH is much higher than coal-based production of 30 k/WH.
32
Coal production would also
allow the electricity boards to achieve significant cost advantages by relying on domestic
equipment and domestic suppliers, thereby decreasing foreign exchange outgo.
33

The World Bank further argued that the willingness of industrial consumers to pay for
electricity had been estimated at Rs. 2.2 kWH in the western region of Maharashtra, and 2.4
kWH in Bombay, which were amounts substantially lower than the Rs. 4.6 kWH stipulated in the
DPC proposal. According to the Bank, consumers had expressed a willingness to pay higher

30
Ibid., 32-33.
31
Letter of April 30, 1993 signed by Heinz Vergin, India Country Director at the World Bank, addressed to
Secretary of the Department of Economic Affairs, Indian Ministry of Finance; available from
http://www.altindia.net/enron/Home_files/Wbnote.htm.
32
The World Bank, India: Dabhol Power Project, April 30, 1993; available from
http://www.altindia.net/enron/Home_files/Wbnote.htm, line item 5.
33
Mehta, 40.
17
tariffs only for guaranteed and/or additional supply during peak periods.
34
The World Bank
further critiqued the viability of the project on the grounds that the implementation of the
project would place a significant long-term claim on Indias foreign exchange resources with
the capacity payments (starting) at about US $175 million in 1996 and escalating at 5% per
annum, reaching $US 400 million in 2015.
35

Responding to allegations that the MSEB overestimated growth of demand for energy,
the MSEB maintained that there existed pending applications from certain industries for
additional supply amounting to 4,100 MW, thereby increasing the peak load by 2100 MW by
1997.
36
Addressing this point, the World Bank argued that there was no substantive evidence
determining that there were pending applications and even if the peak load was expected to
increase, the LNG-based power plant was not the least cost option to meet surplus demand.
37

The World Bank concluded its report by advocating that investment needed to be targeted
towards alternative energy projects (e.g. coal production).
38
Enron management did not perceive
the report to be entirely damning or immovable. In a letter addressed to the head of the MSEB,
Joseph Sutton, Vice-chairman and head of the Enron Development Corporations Asia
Operations, confidently wrote, I recently met with the World Bank and have been following the
articles in the India papers. I feel that the World Bank opinion can be changed. We will engage a
PR firm during the next trip and hopefully manage the media from here on.We need now to
put the PPA behind us.
39


34
The World Bank, India: Dabhol Power Project, line item 13.
35
The World Bank, India: Dabhol Power Project, line item 7.
36
Mehta, 40-1.
37
Ibid., 41.
38
The World Bank, India: Dabhol Power Project, line item 11.
39
Mehta, 199.
18
Taking the lead on this confident note and in the first of many strategic miscalculations to
follow, the Chief Minister of Maharashtra Sharad Pawar decided to overlook the
recommendations of the World Bank and the CEA and in an August 1993 meeting with the High
Powered Board, announced that the issues raised by the CEA were all issues that could be
examined in a final review and were minor issues to be clarified.
40
The project was
subsequently approved by the various departments of the state government, the State Cabinet
Ministry of Power and Finance, the Central Government and the Foreign Investment Promotion
Board which was comprised of a high level committee of secretaries of the Central
Government.
41

On November 26, 1993, the CEA in principle granted provisional clearance. This
clearance, however, was not a final determination and was made with significant reservations. A
study of the correspondence between the GOM and the CEA, and Enron executives and the
GOM during this period suggest that the clearance was executed under pressure by Enron and
the GOM so that Enron could finalize its financing for the project. In a letter to Chief Minister
Pawar, Rebecca Mark wrote:
The remaining concern seems to reside with Mr. Beg, Member Planning for Thermal Projects.
He continues to hold up the project approval based upon the question of demand for power in
Maharashtra .we have a project under the governments fast track program, approved by FIPB,
but the CEA refuses to grant a clearance.It is critical that we get the Power Purchase
Agreement approved and signed now and that we start Phase I financing immediately. Because of
GOM delays in approval and the associated negative press of the last few weeks, the project is in
danger. We are working on financing arrangements prior to project approval but the banks in
India and externally are losing their enthusiasm based on lack of progress.We need to make
immediate progress.
42


The CEA clearance was conditional on a readjustment of the price of electricity, the policy of
importing liquefied natural gas and on DPCs ability to obtain other government permits from

40
Ibid., 53.
41
Ibid., 142.
19
the Ministry of Environment and Forests and the Port Trust for construction of their harbor and
port facilities.
43


C. NEGOTIATION OF THE PPA
On December 8, 1993, a week after the CEAs preliminary clearance was issued, the
Purchasing Power Agreement (PPA) of the first phase of the project was signed. DPC would
build, own and operate a plant of approximately 2,000-2,400 MW capacity, which would be run
on liquefied natural gas (LNG). The LNG plant would maintain an average plant load factor of
ninety per cent.
44
The Dabhol project would cost Rs. 4.36 crores/megawatt (MW) and the DPC
would sell to the MSEB at a rate of Rs. 2.65/kWh in 1997 and the rate would increase after that
date. The MSEB and GOM were responsible for building the transmission lines from the power
station to its power grid. By the time DPC was ready for commercial production, the MSEB
would still be obligated to make the capacity payments irrespective of whether the State followed
through with its infrastructure commitments. The MSEB was required to purchase power from
the DPC under a two-part tariff. The first part of the tariff was determined by established base
load and peaking capacities. The second part of the tariff was determined by the actual output of
power. The PPA further stipulated that after twenty years from the commencement of
commercial production, the MSEB would have the option to extend the contract for five or ten
years.
45

Loan commitments amounted to $643 million and equity contributions amounted to $279
million for Phase I of the project. The major foreign lenders included the Bank of America, the

42
Ibid., 204.
43
Human Rights Watch, The Enron Corporation.
44
Average plant load factor is an indicator of operational efficiency as it measures the actual energy produced by the
power plant as a percentage of the maximum capacity of the plant. Break down of Average Plant Load Factor (PLF):
92 per cent during the eight peak non-monsoon months and 86 per cent during the off-peak months.
20
Overseas Private Investment Corporation, the Export-Import Bank of the United States (EXIM
Bank) and various Eurobank guarantors. The Indian creditors included the Industrial
Development Bank of India (IDBI), the State Bank of India, the ICIC, the Industrial Finance
Corporation of India and Canara Bank, with the IDBI assuming maximum exposure of risk.
Figure 2 - BREAKDOWN OF RESPONSIBILITIES OF JV PARTNERS (1993)

(Source: HBS Case A, Exhibit 1)

Sovereign Guarantees
On February 10, 1994 the State of Maharashtra issued a sovereign guarantee, assuming
liability for all of MSEBs dues to the DPC under the PPA. On June 24, 1994, the State Support
Agreement was signed between the GOM and the DPC. On September 16, 1994, the Union
Ministry of Finance, on behalf of the Government of India, signed a counter guarantee.

D. CANCELLATION OF THE PPA

The Results of the 1995 Maharashtra State Elections
In an interesting sequence of events, the February 1995 State elections in Maharashtra
brought the project to an abrupt halt. The Hindu nationalist party, the Bharatiya Janata Party
(BJP), won the Maharashtra elections to form a coalition government with the more conservative
and fundamentalist religious party, the Shiv Sena (SS). The BJP-SS alliance officially took over
the political reigns of power in April 1995. The new nationalist, swadeshi-oriented
46

government produced a different trajectory in the states vision of development and foreign

45
Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India
(B) Case No. 9-797-085 (Cambridge, Massachusetts, Harvard Business School, 1997), page 11.
Company Enron Power
Corporation
Bechtel Enterprises
Incorporated
General Electric
Company
Equity $223 million $28 million $28 million
Responsibilities Construction management,
operations and
maintenance, fuel
management
Construction and
Contractor
Construction
21
investment. Bal Thackeray, leader of the Shiv Sena party, often preached on the evils of foreign
investment and rendered popular the slogan, Justice to All, Appeasement to None. With
respect to the Dabhol project, the two most immediate mandates of this government were to
replace the chairman of the MSEB and to establish a cabinet sub-committee to review the
project. This committee was established on May 3, 1995 and was headed by Deputy Chief
Minister, Gopinath Munde.

The Report of the Cabinet Sub-Committee to Review the Dabhol Power Project
The Report of the Maharashtra Cabinet Sub-Committee to Review the Dabhol Power
Project recommended the termination of the project based on the conclusion that the cost of the
project was inflated at least by twenty-five per cent
47
and that there was a lack of competitive
bidding and transparency that resulted in a one-sided agreement which favored Enron and its
partners. The committees report specifically cited regulations that had been relaxed to expedite
the project. The Cabinet Sub-Committee, also known as the Munde Committee, further argued
that a proper environmental impact assessment of the project was not executed. Finally, the
Committee determined that the Dabhol project was more expensive than other fast-track
projects (see Figure 3 below).













46
Swadeshi translates to home rule and was one of the nationalist slogans employed during Indias Independence
movement.
47
This estimate is based on a study of the US based Advanced Light Water Rector Program (ALWR) which cites
other projects such as the Jerapadu and Godavari gas-based projects in the range of 3.52-3.60 crore per MW.
22

Figure 3 - CAPITAL COST, ENERGY COST AND SIZE OF "FAST TRACK"
PROJECTS IN INDIA
48

Project Size (MW) Capital Cost (Rs.Crore
per MW)
Cost of Energy (Rs.
Per KW)
NTPC-Gandhar 648 3.53 --------
GVK-Jegurupadu 216 3.52 2.21
Spectrum-Godavari 208 3.60 1.87
Torrent-Gandhar 654 4.27 2.17
Enron-Dabhol 695 4.49 2.40
Congentrix-Mangalore* 1,000 5.08 2.59
AES-Ib Valley* 420 4.82 2.39
Ashok Leyland-Vizag* 1,000 5.81 ----
CMS-Neyveli 250 4.50 3.10
NTPC-Kayamkulam* ----- 3.20 2.61
NTPC-Faridabad ----- 3.00 2.12
(Source: HBS Case Study-B; referencing the Ministry of Power, Dabhol Power Company)
*Coal Powered Projects

Termination of the PPA
The report of the Munde Committee symbolized the first of many events that effectively
rendered the agreement void. Based on the Committees findings, on July 8, 1995, the new Chief
Minster, Manohar Joshi, announced to the Maharashtra State Assembly that the Government of
Maharashtra had decided to cancel the second phase of the project and halt directives associated
with the first phase of the project. Chief Minister Joshi in his admonishment of the project made
what is now an often-cited declaration (from) the speed with which this process was completed,
one can say that `Enron came, they saw, and they conquered.
49
Joshi continued to state that the
decision to cancel the agreement was, not against the United States; but against the Dabhol
project. The deal is against the interest of Maharashtra. Accepting this deal would indicate an
absolute lack of self respect and would amount to betraying the trust of the people
50

Arbitration
The PPA included an arbitration clause that committed the MSEB and DPC to dispute
resolution should the two parties not be able to resolve the conflict through non-legal means.

48
These projects were under negotiation at the time that the case study was written (December 1996).
49
The GOMs translation of Chief Ministers Statement in the Maharashtra State Assembly
23
Arbitration would be conducted in London and would be presided over by a panel of
independent experts in accordance with the United Nations Commission on International Trade
Law (UNCITRAL) rules of arbitration and the 1958 New York Convention. The DPC chose to
invoke this clause by initiating arbitration in London against the MSEB and the GOM to claim
damages well over $300 million (Rs. 1,000 crore).
51
Throughout the arbitration proceedings,
however, Enron repeatedly and publicly expressed its willingness to renegotiate the terms of the
agreement.
52

In response to the DPC initiating arbitration, on August 3, 1995, the Government of
Maharashtra filed suit against the DPC in the Bombay High Court seeking cancellation of the
PPA on grounds of fraud, corruption and a lack of competitive bidding. The Government of
Maharashtra argued in court that the PPA was null and void on the basis that it violated several
statutory provisions, including sections 18, 29, 30, and 43A of the Electricity Supply Act, and
that the PPA suffered from the vice of misrepresentation by Enron and was conceived in
fraud.
53
On August 19, 1994, the Bombay High Court ruled that an open invitation for
competitive tenders should have occurred to ensure the transparency of the deal.
54

Enrons commitment to the project was demonstrated by its efforts to resuscitate
negotiations by engaging in significant diplomatic maneuvering after the cancellation of the
project. Joseph Sutton, Scott Bayman from General Electric, Ashok Mehta , Vice-President of
DPC, and Sanjay Bhatnagar from the Enron Development Corporation made a trip to New Delhi
during the second week of April 1995 to meet with the Union Minister for Power, N.K.P Salve,

50
Harvard Business School, Case B 4.
51
Jeswald W. Salacuse, Renegotiating International Project Agreements, Fordham International Law Journal 24,
no. 4. (April 2001): 1352.
52
Chris Ayres. Enron to pull out of Indian project, The Times (London), November 6, 2001 (accessed December,
2001); available from Lexis -Nexis Academic Universe.
53
Mehta, 147.
54
Ibid., 141.
24
Finance Minister, Manmohan Singh, and the General Secretary of the BJP, Pramod Mahajan.
55
.
The DPC team received the assurances it needed from the Center to forge ahead. Specifically,
Salve was forthright in his declaration that the Center was committed to continuing the project
and that the State of Maharashtra should honor the pact because a renouncement of its
contractual obligations would have adverse ramifications for the entire nation.
56
On November 7,
1995, Rebecca Mark met with Bal Thackeray, founder and leader of the Shiv Sena party in
Maharashtra. Thackeray was an important political figure with whom to reconcile differences, as
he remains an influential nationalist, with little sympathy for foreign investors and he has
immense political connections throughout Maharashtra. Despite having missed a scheduled
meeting with Manohar Joshi, Mark was later able to secure a commitment from the Chief
Minster that the GOM would explore the possibility of recommencing negotiations.

A Review Panel is Struck
On November 8, 1995, the GOM commissioned a Review Panel, comprising of
government officials, academics and industry experts.
57
Based on its negotiations with the Enron
team and principal critics of the project, the panel submitted a proposal to the GOM on how to
restructure the Dabhol deal with recommendations to restructure the electricity tariff, capital
costs, terms of payment and delineation of environmental responsibilities.
58



D. RE-NEGOTIATION OF THE PPA

The renegotiated agreement transformed the Dabhol deal into the single largest foreign
direct investment project in Indias history. The recommendations put forward by the Review

55
Mehta, 143-144.
56
Ibid., 144.
57
Salacuse, Renegotiating International Project Agreements, 1353.
58
Ibid., 1353.
25
Panel lay the foundation for the amendments made to the PPA. Specifically, the total capital cost
of the plant was reduced by $330 million to US$2.51 billion.
59
The plant was reconfigured to be
a multi-fuel generating plant, which would run on naphtha during Phase I. This adjustment had
the benefit of reducing Indias dependence on imported fuel and lowering the capital costs of the
project. Additional capacity was negotiated from 695 MW in Phase I to 740 MW and in Phase II,
from 2,015 MW to 2,184 MW. The committee also fixed a price of 5.9375 cents/kWhr for Phase
I and 5.906 cents/kWhr for both phases.
60
The load factor remained set at eight-six per cent.
61

Responding to criticism about the environmental impact of the project on local horticulture and
fishing, the renegotiating committee arrived at an agreement whereby there would be regular
monitoring of marine life and whereby the DPC would plant one hundred and fifty hectares of
mango and cashew trees in the area.
62
One of the most important features of the newly structured
deal was the allocation of thirty per cent equity in the project to the MSEB, and a reallocation of
Enrons equity holding from eighty to fifty per cent.
On May 27, 1996, the Union Cabinet issued an extended counter guarantee. In August
1996, each party withdrew their respective suits in their courts to sign the renegotiated PPA. By
May 1999, final construction of the project had completed and the project received financing for
its second phase. By March 1999, Phase I was well underway while Phase II was expected to
commence in 2001.

E. NON-PAYMENTS AND ESCALATING HOSTILITIES

In October 1999, a new government came into power in the State of Maharashtra. This
government, led by the Democratic Front (DF), was fragile and politically dwarfed by its many

59
Parikh, 216.
60
This amount translates to Rs. 1.90k/Whr for Phase I and Rs.1.89/kWhr for both phases. See Parikh, 217.
61
Ibid., 217.
26
alliances and coalitions. Inheriting an incredible deficit of 9,848 crores from Chief Minister
Joshis government, the newly elected Democratic Front government in Maharashtra, led by
Vilasrao Deshmukh, discovered that it could no longer sustain payments to the DPC. In February
2001, Chief Minister Deshmukh remarked (l)et us face it. We cannot afford the power given to
us by the DPC. The MSEB is in no position to pay the monthly power bills Dabhol sends to us.
We have asked the Centre to buy all the power generated by Enron, from both phases of the
project and distribute it through the NTPC (the National Thermal Power Corporation) grid. If we
want power for the state, we will buy it from NTPC.
63
Deshmukh also declared, we have given
all the necessary powers to the MSEB Chairman to take any action, including disconnection of
power supply lines, against defaulters. We need full police force for this. We are prepared to do
this.
64
Even the Indian Finance minister admitted that the cost of power supplied by the DPC
was too high and the government would have to see if the state can use all the power generated
and that if the excess power can be wheeled out to needy states.
65


Invoking the Sovereign Guarantee
During the first week of February 2001, under pressure from its lenders, the DPC
responded to the MSEBs refusal to pay its dues by invoking the GOIs counter-guarantee.
66
The
GOI argued that it would not pay the estimated amount of Rs. 1.02 crore (15 million pounds) on
the grounds that Enron engaged in certain technical violations.
67
Specifically, the GOI

62
Ibid., 220.
63
Raghunatha, TN. Empowered to overpower problems, The Pioneer, Feb. 18, 2001 (accessed December 5,
2001); available from www.dailypioneer.com.
64
Siva Y. Sankar. Maharashtra move may help solve Enron tangle, February 7, 2001 (accessed December 5, 2001);
available from www.rediff.com/money/2001/feb/07enron.htm.
65
Binoy Sharma. Centre to send sole representative, April 25, 2001 (accessed December 5, 2001), available from
www.dailypioneer.com.
66
Sujata Anandan, Enron willing to amend Power Purchase Agreement, The Hindustan Times, February 9, 2001
(accessed December 5, 2001); available from www.hindustantimes.com.
67
Khozem Merchant, Enron Dispute heading for Court, April 9, 2001 (accessed December 5, 2001; available
from http://globalarchive.ft.com.
27
concurred with the MSEBs allegation that the DPC had fallen short in its guaranteed supply of
power and therefore was subject to the RS. 401 crore non-performance penalty as stipulated by
the PPA.
68
On September 11, 2001, the DPC invoked a letter of credit (LoC) from the Canara
Bank accusing MSEB for non-payment of dues. The MSEB countered this action by restraining
the DPC from encashing the LoC by obtaining an injunction from the Mumbai High Court,
which was later upheld by the Supreme Court on September 21.
69
That same week, the DPC
invoked its second federal counter-guarantee.
70

The Godbole Review Panel
To respond to tensions mounting between the DPC and the MSEB, a review panel was
established by the GOM. The panel was headed by Dr. Madhav Godbole, former finance
secretary, and was comprised of energy experts.
71
In April 2001, the Godbole Panel submitted its
review report of the Dabhol project. In this report, the panel recommended de-linking the LNG
terminal from the project, restructuring the loan repayment clause in the PPA, and removing the
dollar-rupee denomination of payments. Probably one of the most significant statements made by
the Godbole Review Panel Report was its resignation of the fact that though development of
DPC has been fraught with infirmities, its existence cannot be wished away and it now stands as
a near completed project on Indian soil.
72
The Panel, therefore, arrived at the conclusion that a
restructuring of the Dabhol project was needed.


68
Centres firm no to DPC, The Pioneer, August 18, 2001 (accessed December 5, 2001); available from
www.dailypioneer.com.
69
SC decides to continue interim order, The Statesman (India), November 3, 2001 (accessed December 5, 2001);
available from Lexis -Nexis Academic Universe.
70
Khozem Merchant, India to hold inquiry into Enron Affair.
71
Energy experts on the committee included N. N. Lele and R N Pachouri, long associated with Tata Electricity and
Kirit Parikh, of the Indira Gandhi Institute of Development Research.
72
Godbole Panel Stresses on negotiation with DPC, The Pioneer, April 13 2001 (accessed December 5, 2001);
available from www.dailypioneer.com
28
The Godbole Re-Negotiating Committee
Chief Minister Deshmukh ultimately resigned himself the fact we can not bring down
the cost of power (sold by the DPC) unless the PPA is re-opened. The issues like the rupee-dollar
parity which has contributed to the hike in the power rates will have to be considered while
undertaking re-negotiations.
73
At the end of April 2001, his government, acting on the
recommendation of the Mumbai High Court to arrive at an amicable settlement, commissioned
the Godbole panel to form a committee to renegotiate terms of the PPA with Enron. Pressured
from the leftist groups in Deshmukhs coalition government, the committee was commissioned
to ultimately bring down the cost of power by restructuring the tariff rate, to explore the options
of attracting third party purchasers of the energy, and to ultimately soften what had become to be
perceived as a hardliner stance developed by Enron.
Recognizing that other state electricity boards could share in absorbing excess capacity
generated by the Dabhol plant during off-peak periods, the Godbole committee immediately
began to organize simultaneous meetings with the SEBs. Representatives of the state electricity
boards from Madhya Pradesh, Karnataka, Delhi and Punjab met the Madhav Godbole Committee
on July 26, 2001 to negotiate buying power from the DPC but their expectation of price and
supply was too low to ease the financial pressure of the Maharashtra government. With the
exception of the SEBs of Madhya Pradesh and Punjab, which were willing to pick up
approximately 200 MW as base load power, the other states were seeking a power arrangement
that would meet seasonal shortfalls of power.
74

The efforts of the Godbole committee to arrive at a renegotiated settlement was severely
hampered by the various legal acrobating that was simultaneously taking place in London and i n

73
Maharashtra softens stand ahead of London meet, The Pioneer, April 26, 2001.
29
Mumbai by the GOM, DPC and Indian creditors. Furthermore, three of the committee members
resigned from the committee in an act of protest directed towards the leadership of Dr. Madhav
Godbole and the political interference exercised by the Center. One of the members of the
committee who resigned, R.K. Pachauri, argued that Dr. Godboles suggestion of a judicial
enquiry into the DPCs activities, would have the unintended consequences of driving the Enron
team farther away from the negotiating table. In one interview, he stated (h)ow long do such
judicial enquiries in India normally take and how many have achieved anything tangible? Can
the government of Maharashtra renegotiate a deal with Enron if a judicial enquiry is in progress,
and would the public accept any such deal till the enquiry is over? And till it is over, the
Government of Maharashtra would continue to run up huge bills even as the State is unable to
absorb the power generated by Dabhol.
75

On May 3, 2001, the efforts of the Godbole committee became further impeded when the
Enron team backed out of a meeting scheduled for May 5 with officials of the state government,
the MSEB and members of the Godbole committee to re-chart the renegotiation process.
76
Even
when the energy company initially agreed to meet, it cautioned, the published terms of
reference of the Godbole report do not represent an acceptable basis for further
discussionsThis meeting should in no manner be construed as an open offer from DPC to
renegotiate the terms of the contract.
77
The Dabhol team made clear that any specific proposals
brought forward for renegotiation should be premised on the principle of lifting the entire base

74
Julie Earle. Enron wants out of Indian Power Project in The Financial Times (London), July 27, 2001 (accessed
December 5, 2001); available from Lexis -Nexis Academic Universe.
75
R K Pachauri rejects Godboles suggestion to institute `Judicial Enquiry, available from
http://www.teriin.org/news/may012.htm
76
Agenda for fresh talks with Enron chalked out, Business Line, May 5, 2001 (accessed March 31, 2002);
available http://www.blonnet.com/businessline/2001/05/06/stories/14065607.
77
DPC agrees to meet govt panel as a `courtesy: Godbole terms of reference not acceptable, rediff.com, May 4,
2001 (accessed December 5, 2001); available fromhttp://www.rediff.com/money/2001/may/04enron.htm
30
load power produced at the plant.
78
They further reasoned that no exercise of re-negotiation
would be fruitful for them without a basic assurance of payment for the second phase of the
project, which was due to go online on June 7, 2001. Since the MSEB could not provide for
these assurances, the Enron team decided to issue its pre-termination notice.
79

Before the pre-termination notice was actually issued, several attempts were made by the
Center to engage officials from the DPC, the MSEB and the GOM in a dialogue to resolve their
differences. On May 11, 2001, officials of Enron India and the Godbole committee met to
discuss the future of the Dabhol project with no headway, as the MSEB continued to reiterate its
stance that the DPC should adjust its dues owed by the MSEB for not achieving peak supply
levels.
80

Pre-Termination Notice
On April 26, in a decision of six to one, the Board of Directors of DPC had authorized
Neil McGregor, Managing Director, to issue a notice of intent to terminate the PPA at a future
date to be determined by the DPC management. The MSEB was not allowed to vote on the issue
because of its status as an interested party.
81
On May 19, the DPC issued its pre-termination
notice. The pre-termination notice attributed the decision to terminate the project to the failure of
the MSEB to pay its dues amounting to two months of electricity payments, and to the MSEBs
unwillingness to increase the size of the letter of credit and provide escrow cover as provided for
in the PPA. According to clause 17.8 of the termination procedure outlined in the PPA,
following the giving of a preliminary termination notice, the parties shall consult for
a period of six months (or such longer period as they may agree) as to what step
shall be taken with a view to mitigating the consequences of the relevant event

78
Dabhol issues termination notice still open to `solutions minus Godbole report, Business Line, May 20, 2001
(accessed March 31, 2002); available from http://www.blonnet.com/businessline/2001/05/20/stories/14205601.htm
79
Dabhol issues termination notice.
80
Talks begin on Dabhol Issue, Business Line, May 12, 2001, (accessed March 31, 2001); available from
http://www.blonnet.com/businessline/2001/05/12/stories/14125602.htm
81
DPC board authorises MD to issue PPA termination notice, Business Line, April 27, 2001, (accessed March 31,
2001); available from http://www.blonnet.com/businessline/2001/04/27/stories/142756dh.htm
31
having regard to all the circumstances..
82


The DPCs pre-termination notice, therefore, would expire on Nov.19, 2001, after which the
DPC board would have to approach its lenders for approval to issue a final termination notice.
As the MSEB continued to rescind on its contractual payments and its unpaid bills escalated to
approximately $185 million, DPC officials decided to shut down the first phase of the project
(740 MW) in May 2001.
At the end of July, Enron CEO, Kenneth Lay, formally announced Enrons intention to
sell its equity stake, signifying a formal departure from the project. Lay reported We have made
it pretty clear to the government leadership we are now at a point where we would like to be
taken out and we think most of our partners do.
83
Wade Cline further explained we are not in
the business of litigation but of selling energy worldwide. November 19 is our exit path and no
way are we going to take a merchant risk in the power purchase agreement. I surely have a
distressed asset but not a distressed PPA.
84

Subsequent Rounds of Arbitration
The DPC resorted to arbitration against the State Government, again on the basis of a
breach of contract. The company had accused the Government of not honoring its guarantees and
supplemental support guarantees by refusing to pay the amount due for MSEBs December and
January bills. The GOM responded to the arbitration proceedings again by filing its own suit in
the Bombay High Court alleging that the DPC had misrepresented terms of the agreement by
inflating the operating characteristics and scope of the project.
85
The GOM further supported the

82
Ibid.
83
Earle, Enron wants out of Indian Power Project.
84
Enrons exit countdown begins from November 19, The Pioneer, August 13, 2001 (accessed December 5,
2001); available from www.dailypioneer.com
85
MSEB forced to rescind PPA?, The Pioneer, August 6, 2001 (accessed December 5, 2001); available from
www.dailypioneer.com.
32
MSEBs argument that the DPC was required to adjust payments due by the MSEB according to
a Rs.401 crore penalty for performance default, as stipulated in the PPA. Furthermore, on
September 19, 2001, Indian authorities announced that they were to launch a judicial
investigation into the origins and legality of the $2.8 billion company. Fearful that this initiative
was an attempt to stall arbitration proceedings in London, by declaring DPC activities illegal, the
commercial court in London passed an ex parte order in October 2001 against the State
government restraining it from taking any legal action against international arbitration initiated
by DPC.
86

Enrons Exit Strategy
Wade Cline, of the DPC, articulated the desire that apart from deflating the sale price of
its assets from $3 billion to $1 billion, at the end of the day, they wanted to complete the project
before leaving Dabhol. Though we are looking at exit routes, DPC is ready to get the original
contractors and ensure completion of the project as the original designs and drawings of the plant
are not with the company, but with them.
87

Once it was clear that the GOI would not purchase Enrons equity stake in the company,
on January 30 2002, the IDBI invited Expressions of Interest (EOI) for acquisition of eight-
five percent stake in DPC from domestic and international companies with a minimum net worth
of $200 million or its equivalent in Indian currency or from a consortium with a net worth of
$400 million having requisite experience in managing and operating power and LNG plants.
88

Three bidders, Tata Power Company, BSES Ltd. and the Gas Authority of India submitted their
EOIs. For practical reasons, Enron preferred selling its assets to a local Indian buyer. Wade Cline

86
India: Arbitrators meet in Singapore on Dabhol, Business Line, November 23, 2001 (accessed December 5,
2001); available from Lexis -Nexis Academic Universe.
87
Enrons exit countdown begins from November 19.
33
argued that if a local buyer bought the project, the rupee-dollar parity, that became an issue of
contention in negotiations between the GOM and the DPC, would disappear if an Indian
company bought the project. Cline further maintained that the project then also could be run on
a 30 per cent plant load factorbelieve me no foreign guys are going to do that.
89

Final Termination Notice
On November 6, 2001 Enron officially announced that it would serve its final termination
notice to close the power project after November 19, when a six-month deadline for resolving the
payment dispute would end.
90
Enron served a notice to transfer the 2,184MW asset to MSEB and
was willing to demand compensation based on independent valuation.
91
Domestic lenders,
including the State Bank of India, ICIC Ltd., the Industrial Development Bank of India and IFCI
Ltd., filed a lawsuit in the Mumbai High Court. The creditors demanded the immediate re-
commencement of the plant to protect their investments.
92
On November 9, 2001, the Mumbai
High Court ruled in favor of the Indian creditors and issued and issued a stay order against the
DPCs final notice of termination. This action prevented the DPC from issuing its final
termination notice until a hearing was called, which would not take place until December 3,
2001. The Court further ruled that the fourteen-day period beginning November 19, during
which the DPC could file the final termination notice as per the PPA, would not expire.
93


88
Expression of Interest Invited for DPC Sale, IndiaInfo.com, January 30, 2002 (accessed March 31, 2002);
available from http://finance.indiainfo.com/news/2002/01/30/30enron.html
89
Enrons exit countdown begins from November 19.
90
Enron India Units lenders issue court challenge to prevent project pullout, AFX EUROPE, November 8, 2001
(accessed December 5, 2001); available from http://globalarchive.ft.com
91
Sanjeev Srivastava, Enron set to leave India, BBC News.com, November 6, 2001 (accessed December 5, 2001);
available from http://news.bbc.co/uk/hi/english/business/newsid_1641000/164100.stm
92
Enron delays closure notice for Indian plant after legal action, Agence France Presse, November 19, 2001
(accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
93
Indian Court Bars Enron From Serving Financial Termination Notice, Asia Pulse, Nov. 12, 2001 (source:
http://globalarchive.ft.com)
34

The Singapore Meeting
Following the action of the Indian financial institutions of filing a suit against the DPC,
the DPC decided to `boycott` the November 10-12 meeting held in Singapore where the DPCs
institutional lenders, including Citibank, ABN Amro and Bank of America and the IBDI and the
State Bank of India, met in a final attempt to discuss the financial restructuring of the DPC. After
the DPC received personal assurances from the Center and the financial institutions that they
intended to present new proposals at this meeting with respect to a negotiated settlement to the
dispute, the DPC agreed to attend the meeting.
94
At the meeting, the lenders were concerned
about facilitating the sale of the Dabhol assets with prospective buyers, including Tata Power
and BSES. The financial institutions also devised a proposal that was ultimately rejected by the
MSEB. The proposal called for the MSEB to off-take power from Phase I and relinquish to the
potential new buyer its exclusive distribution area where there are key industrial centers. The
MSEB rejected this proposal with the argument that if it forfeited these prized areas, then it
would not be able to absorb the power from DPCs first phase of 740 MW. The MSEB further
protested the fact that FIs did not call us to the Singapore meet and had no right to make such an
offer without consulting and taking MSEB into confidence.
95
An official at the MSEB went on
to declare that (f)inally, if things get sorted out and DPC is taken over by another company, it is
MSEB which is going to be the largest consumer of the plant, and strangely despite having a 15
per cent stake in the company, it is not even involved in DPCs sale process.
96



94
Singapore meet spills over; no proposals given, says DPC, in rediff.com, November 9, 2001 (accessed
December 5, 2001); available from http://www.rediff.com/money/2001/nov/09enron1.htm
95
`FIs completely ignored us in DPCs proposed sale says MSEB, The Press Trust of India, November 23, 2001,
available from Lexis -Nexis Academic Universe.
96
Ibid.

35
The Downfall of Enron
One of the most interesting developments that emerged in this case, is the downfall of the
energy giant Enron. Enrons declaration of bankruptcy on December 2, 2001 signified the largest
filing of bankruptcy in US history. The question of finding a local buyer through the Singapore
negotiations assumed less importance with respect to time and investment as Enron became
embroiled in a series of US federal investigations on the transparency of its accounting practices
and dealings. It was revealed that Enron had been omitting from its balance sheet financial losses
incurred in relationships with private partnerships run by some of its own corporate officers. As
Enron shares plummeted from $82 in January 2001 to $11.82 on November 5, 2001
97
, Kenneth
Lay announced to Enron shareholders that Enron would regain billions from, among its many
assets, sale of its broadband telecommunications and its assets in Dabhol.
98

One analyst states the Dabhol investment played an insignificant or no role in the
collapse of Enron. Several analysts concur with this argument maintaining that the company
went down under the collective weight of its extraordinary corporate ambitions and the
cumulative effect of sharp practices.
99
On the other hand, some Wall Street analysts had been
complaining that Enrons complex web of businesses had contributed to lack of clarity in its
financial reporting. An analyst at Salomon Smith Barney argued that the lack of strategic focus
in acquisitions and operations contributed to Enrons undisclosed financial losses. Raymond
Niles specifically argues that among other unrelated projects, power plants in India are
unrelated, or only tangentially related, to their core merchant energy business.
100
The Enron

97
Ayres, Enron to pull out of Indian project
98
Stacie Babula, Enron falls amid concern debt threatens Dynergy bid, Bloomberg News, November 20, 2001
(accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
99
The Enron Collapse and India, The Free Press Journal, January 23, 2002 (accessed March 12, 2002); available
from www.samachar.com)
100
Simon London and Sheila McNulty. Enron flickers: Once a paragon of the new economy, the US energy group
is under scrutiny for its opaque accounting and free-wheeling management, The Financial Times (London) October
29, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
36
collapse, however, did play a significant role in the fate of the Dabhol project. Specifically,
under pressure to sell its assets quickly to raise much-needed cash, Enrons bargaining position
was significantly depressed vis--vis DPCs potential local Indian buyers and the GOM. Amidst
allegations that Enron was over-leveraged and under pressure to cut costs in various business
segments, Enron highlighted the Dabhol project as one of its most notably poor investments and
noted that it would accelerate the process of trying to dispose of these failed assets to raise cash
to pay its $12 billion debt. As Ronald Barone of UBS Warburg states Tata would be a faster
exit and resolve it once and for all. It is better to take a small loss and move along. Dabhol
periodically becomes a problem and an issue, and it depresses the stock.
101
As a result of this
decline in Enrons bargaining position, subsequent negotiations of the sale of the Dabhol assets
involved a sale price that was substantially discounted.
















101
TATA in talks to buy Enron power plant, The Financial Times (London), October 15, 2001 (accessed
December 5, 2001); available from Lexis -Nexis Academic Universe.
37
PART III. APPLYING NEGOTIATION THEORY TO EXPLAIN THE FAILURE OF
THE DABHOL DEAL

In fact, the entire negotiation with Enron is an illustration of how not to negotiate, how not to take a weak position
in negotiations and how not to leave the initiative to the other side Report of the Munde Committee (August 1995)

When discussing the importance of the pre-negotiation phase, Harold Saunders outlines
four steps necessary to produce a commitment to a negotiated settlement: that it no longer serves
either partys interest to pursue the present situation (i.e. conflict situation); that the alternatives
to a negotiated settlement (BATNA) are not better than a foreseeable settlement; that each side
makes its own estimates of whether the other side would accept a negotiated solution and is
willing to reach a compromise; and finally, that an equal power balance exists to permit a fair
settlement.
102
This framework of analysis captures several of the reasons why the Dabhol deal
failed, for even though a settlement was ultimately reached in the form of a negotiated PPA and a
renegotiated PPA, the agreement was undermined in various stages because it served the
interests of the ruling government to contest the PPA, because `compromise became an ugly
word when the Dabhol project became politicized and when mistrust escalated on each side and
furthermore when compromises were made, the right kind of compromises were not made and
finally, because the PPA reflected an asymmetrical power balance as it was negotiated with a
supply-side bias.
Elements of Saunders framework and other frameworks that draw from negotiation
theory and the field of conflict resolution will be explored in this section, as they lend insight
into the failures of the Dabhol project in India, and ultimately why international business
transactions can fail.



102
Harold H. Saunders, We Need a Larger Theory of Negotiation: The importance of Pre-negotiating Phases in
Negotiation Theory and Practice, eds. William J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The
Program on Negotiation at Harvard Law School, 1999), 65-68.
38
A. UNDERSTANDING BATNA and BATrNA

In Getting to Yes: Negotiating Agreement Without Giving In, Roger Fisher and William
Ury, argue that the best way to estimate a negotiated agreement is to measure it against what
would be considered to be the parties best alternative to a negotiated agreement (BATNA).
103
In
the Dabhol case, the concepts of BATNA and what I refer to as BATrNA (Best Alternative to a
Renegotiated Agreement) help explain how and why both parties were willing to enter into
negotiations to construct the power project in Dabhol and ultimately why the parties agreed to
renegotiate the PPA in an environment of escalating hostilities.

The Indian Teams BATNA
The table below is a summary of Indias alternatives to a negotiated PPA with Enron and its
partners.
Figure 4 - India's BATNAs

Ranking Alternatives
Best
Alternative
Contract a domestic private investor to build, own and
operate the energy plant
2
nd
Best
Alternative
Domestic company becomes majority partner in power
project
3r
d
Best
Alternative
Tap into alternative forms of energy sourced domestically
(e.g. coal production)
4th Best
Alternative
Have another foreign investor build, own and operate the
energy plant

The Best Alternative and 2
nd
Best Alternative in this case were untenable in the Indian
context as Supriya Roychowdhury states, the ...private corporate sector in India has in general
failed to demonstrate the characteristics of a vigorous entrepreneurial class, has grown based on
state support and speculative behavior in a range of activities relating to underutilization of
capacities making quick profits in a protected market, using its monolithic structure to preempt

103
Roger Fisher and William Ury. Getting to Yes: Negotiating Agreement Without Giving In, 2
nd
ed, ed. Bruce
Patton (New York: Penguin Books, 1991), 97.
39
competition and to perpetuate a market of shortages.
104
A study done by Yamini Narayanan
reveals that on a cost basis alone, there were incentives to pursue Enron as the lead supplier
instead one of Indias leading national suppliers of energy, the National Thermal Power
Corporation (NTPC)
105
, as Enron had the capacity and resources to supply power at a cost 8.45
million dollars less than that of the NTPC.
106
The reconstruction and revitalization of SEBs have
been ear-tagged as investment risks by the World Bank, which made it difficult for the state
governments to borrow for electricity generation and therefore placed a premium on the need for
foreign investment.
107
The GOM and the MSEB quickly disqualified the third best alternative
noted above, as demonstrated by their disregard of recommendations to explore domestic sources
of energy production such as coal production. Consequently, the merits and downfalls of this
third best alternative did not influence or inform their decision to enter into negotiations with
Enron. Finally, Enron, when compared to other foreign energy companies, was poised to be the
lead contractor, as it possessed a portfolio of international projects similar in size and scope to
Dabhol in developing countries and had a sizeable cost advantage as a large multinational in an
industry that is highly capital intensive. Moreover, the GOIs search for a foreign investor was
limited by the fact that only six companies in the world produce power generation equipment.
108

Considering the varying degrees of viability of implementing these four options, it is easy to see
why the GOI and the GOM aggressively pursued an agreement with Enron and its partners for
the establishment of the Dabhol power plant.

104
Supriya Roychowdhury, State and Business in India: The Political Economy of Liberalization, 1984-89. (Ph.D.
diss., Princeton University, 1992), 126-7.
105
In 1995, the Central Government owned and operated approximately 31% of the national capacity under the
National Thermal Power Corporation (NTPC) while the states operated the other 65%. See HBS, Case A, 4.
106
Narayanan, 19.
107
Ibid., 2.
108
Mehta, 13.
40
Enrons BATNA
At the time of negotiations, Enron was negotiating a deal in Qatar with the state-owned
Qatar Gas & Pipeline Company to create a LNG facility. To avoid suffering from major financial
setbacks, Enron needed to find a large supply of consumers for the LNG produced at its Qatar
facility. Rebecca Mark, President and CEO of Enron Development Corporation
109
, had looked
for countries where there was a huge amount of LNG consumers. The three candidates were
Israel, India and Pakistan. Israel, however, had retracted its commitment to lift three million
tones of LNG every year and of Pakistan, Rebecca Mark disclosed since the situation in
Pakistan has become unstable after the killing of two Americans there, we arent thinking of any
project in that country for at least two years.
110
Consequently, India became the prime candidate
for investment and, at that time, it was estimated that by 2002, India was expected to consume
nearly ninety-six billion cubic meters of natural gas every year.
111


The Indian Teams BATrNA
When attempting to understand each partys BATrNA in the Dabhol case, D.
Sampathkumar comments each of the parties with a stake in the project has its own
compulsions in seeking a resolution of the dispute and thereby put an end to the uncertainties
facing them vis--vis their financial exposure to the project. For all the bravado, the basic fact
remains that none of the parties involved in the deal can afford to dig in its heels and refuse to go
along.
112

At the height of uncertainty and hostility, the GOMs best alternatives to a renegotiated
agreement included soliciting another investor to take over a project which had become highly

109
Enron Development Corporation is the worldwide arm of Houston-based Enron Corporation.
110
Alam Srinivas. Will Enrons New India Strategy Work?, Business Today, December 7-21, 1997 (accessed
December 5, 2001); available from www.india-today.com/btoday/07121997/enron.html.
111
Srinivas, Will Enrons New India Strategy Work?.
112
Sampathkumar, D. India: It is deal-making time in Dabhol in Business Line (November 18, 2001)
41
scandalized and plagued with financial uncertainties and extracting domestic sources of energy
to meet growing demand. Jeswald Salacuse points out how the practicality of implementing these
agreements was almost negligible. He points out once it (the GOM) fully understood the costs
that it might entail in an international commercial arbitration and the difficulty it would
encounter in attracting other investors, it became considerably more open to agreeing to
renegotiation and to arriving at a satisfactory conclusion to the conflict.
113

Similarly, throwing away the deal entirely was never a best alternative. When the GOM
was contemplating terminating the PPA, former Maharashtra Chief Minister Sharad Pawar
argued, not a single foreign company showed any interest in setting up a power project in India
except Enron. In fact, it was my predecessor who signed the memo of understanding. (the
cancellation) is clearly a political stunt, totally selfish and shortsighted in its aims. By scrapping
Enrons project the national economy will definitely suffer, as will the international image of the
state and the country. I strongly believe the government should not have taken this step.
114

Carolan McLarney and Ramakrishna Dastrala concur with this reasoning. In their article, Socio-
political structures as determinants of global success, the authors point out that, confronted with
a bill of nearly $300 million and bound by its guarantee for liability of non-payments, the
Maharashtra government had no choice but to renegotiate the deal.
115
Terminating the project
would give the impression of instability in the country thereby substantiating the notion of high
risks for potential investors. Furthermore, in a climate of immense competition in the political
arena, instead of discarding the deal, the BJP-Shiv Sena government saw a golden political
opportunity to negotiate a better contract than its predecessor, which made the opportunity for a

113
Salacuse, Renegotiating International Project Agreements, 1367-8.
114
Harvard Business School, Case A, p. 4.
115
Carolan McLarney and Ramakrishna Dastrala. Socio-political structures as determinants of global success: The
case of Enron Corporation, International Journal of Social Economics 28, no. 4, (2001): 364.
42
renegotiated agreement more attractive than any best alternative did. It is therefore not surprising
that on April 6, 2001, the Chairman of the MSEB, declared: The Indian governments stand is
that Enron should negotiate this issue. We have already formed a committee to discuss this
problem and we would like Enron to discuss this issue with us.
116


Enrons BATrNA
When analyzing the matrices of choices facing each player, it is often argued India had
more to lose than Enron by not renegotiating and terminating the project completely. In fact,
Enron had a great deal at stake and was motivated to renegotiate the agreement as its own matrix
of choices and best alternatives resembled that of the Government of Maharashtra with respect to
its financial, reputational, and political constraints.
The transition in Enrons strategy from enthusiastically reiterating its interest to
renegotiate the PPA in the beginning to subsequently revoking its commitment to a negotiated
settlement by developing an exit strategy from India can be explained by a shift in Enrons
BATrNA. Enron originally had indicated that it would be willing to renegotiate even when it
filed for arbitration in London because it was aware that the costs of arbitration were greater than
the procedure of renegotiating the agreement. By December 2001, however, the DPC was
confronted with serious cash flow problems. Dabhol was left with less than $8-$10 million, with
legal fees amounting to $2-2.5 million, and liabilities amounting to $25 million-$30 million
mostly in payments due to vendors, and it therefore no longer became financially sustainable to
maintain operations in India.
117
Furthermore, if the project was terminated, Enrons goal of
sourcing a large supply of consumers for its LNG facilities over a long period of time would
never materialize. As Uttam Gupta, a Chief Economist for the Fertiliser Association of India,

116
Enron issues notices to MSEB for settlement of dues, April 6, 2001 (accessed December 5, 2001); available
from www.dailypioneer.com.
43
points out, the unavailability of LNG would curtail the revenues of industries such as fertilizers
and power.
118

An interesting position raised by Supriya Roychowdhury is that Enron had little choice
but to negotiate with the Governments of India and Maharashtra instead of lobbying for policy,
judicial and economic reform since there is no unified consortium of private investors or
businesses in India with which a multinational could join forces and lobby. Roychowdhury
specifically notes that business influence upon government remained locked in the structural
heterogeneity of the private sector and their competing, often conflicting interests.
119

The DPCs BATNrA of taking advantage of back channel diplomacy to influence reform
as an alternative best strategy to renegotiation became unsustainable. Specifically, Enrons
efforts to lobby the GOI to exert pressure on the GOM and the MSEB on the issue of default
payments, quickly deteriorated vis--vis external events influencing American foreign policy. In
the aftermath of December 13, 2001 when the Islamic militant group, Lashkar-e-Toyeba,
bombed the Indian Parliament, the Indian government received unprecedented support from US
Secretary of State Colin Powell and US President George Bush, as part of their own efforts to
build a world-wide coalition against terrorism. Indeed, Colin Powells statement that the US
government knows of Indias intent and certainly understands their intent to take action
against the terrorists, reveals the interdependent relationship that the Bush administration is
determined to forge with India and has been perceived, as one Indian journalist explains, as if the
US has given carte blanche to the India to go after the terrorists responsible.
120
In efforts to
solidify relations with the Vajpayee government, the US government invited Home Minister L K

117
Dabhol Power Co. in grave cash crisis, India Abroad, December 21, 2001, 32.
118
Uttam Gupta, DPC-MSEB slugfest Needed a conciliatory approach, Business Line, May 11, 2001, (accessed
March 31, 2001); available from http://www.blonnet.com/businessline/2001/05/11/stories/041156ju.htm
119
Roychowdhury, 265.
44
Advani to the US to discuss various steps to strengthen cooperation in countering various steps
of terrorism including cyberterrorism and mechanisms to strengthen border security. The United
States has also offered to sell India sensors and unmanned aerial vehicles for better border
management, especially for the Line of Control between India and Pakistan.
121


B. TIME DEFICIENCIES

The two time deficiencies to be discussed in this case are the deficiencies of speed and
a disregard for timing or ripeness when negotiating an international business deal.

Speed
Jeswald Salacuse makes two important observations when discussing the burden of time
deficiencies in the negotiation process. He discusses `speed as a defect in the negotiation
process, and further notes that this defect can be explained by cultural factors.
122
Specifically he
argues that Asians value relationship-building which takes time during the negotiation process
while North Americans generally want to `dispense with the preliminaries and to `get down to
cases
123
Two examples from the Dabhol case illustrate this culturally-reasoned predicament.
When Indian Power Secretary S. Rajgopal made that initial trip to Washington, D.C. to
encourage foreign investment in the power sector, Rebecca Mark made the pitch that we are
prepared to be the first if you could work on an expedited basis. Almost every newspaper in
India covering Enrons visit to India, however, remarked with dismay that a MoU was secured in
just five days after the Enron teams first visit.
124
Indeed, the 1995 Report of the Cabinet Sub-
Committee to Review the Dabhol Power Project noted that,

120
Aziz Haniffa and Suman Guha Mozumider, title not retrievable, India Abroad, December 21, 2001, p. 1.
121
Josy Joseph, US invites Advani to Discuss Terrorism in India Abroad, Friday December 21, 2001, p. 14.
122
Salacuse, Renegotiating International Project Agreements, 1360.
123
Salacuse, Renegotiating International Project Agreements, 1361.
124
Narayanan, 8.
45

.in a matter of less than three days after its arrival in Bombay, an MOU was signed between
Enron and MSEB in a matter involving a project of the value of over Rs. 10,000 crores at the time,
with entirely imported fuel and largely imported equipment, in which, admittedly, no one in
the Government had expertise or experience. In fact, the file (on the project) does not even show
what Enron was what its history is, business or accomplishment. It looked more like an ad hoc
decision rather than a considered decision on a durable arrangement with party after obtaining
adequate and reliable information. Neither the balance sheet and annual accounts of Enron,
nor any information about its activities, area of operation, its associates, etc. was obtained
by the government then, or even later.
125


Similarly, observing the fact that the renegotiating committee was set up on November 8, 1995
and was asked to submit its report four weeks later, the Bombay High Court noted (b)ut once it
(GOM) decided to revive the project, it acted in the very same manner in which its predecessors
in office had done. It forgot all about competitive bidding and transparency. The only
transparency it claims is the constitution of the negotiating group. The speed with which the
negotiating group studied the project made a proposal for renegotiation which was accepted by
DPC, and submitted its report is unprecedented.
126
In contrast, when asked what went wrong in
India, Rebecca Mark responded in an interview, We were extremely concerned with time,
because time is money for us. People thought we were pushy and aggressive. But think of the
massive bureaucracy we had to move. How do you move a bureaucracy that has done things one
way its entire collective life? You have to be pushy and aggressive.
127

A secondary point is that each party upheld different values of time, which influenced the
positions and vision they developed for the project. While Enron and its partners were
accountable to their shareholders, who were looking for long-term value, the BJP-Shiv Sena
coalition, in a politically competitive environment, was seeking immediate and short-term
political victories to appease its constituents.

125
Human Rights Watch, The Enron Corporation.
126
Mehta, 152.
127
Manjeet Kripalan, Enrons Rebecca Mark: `You have to be pushy and aggressive, BusinessWeek, February 24,
1997.
46
In response to the assertion that the negotiation process suffered from hasty deliberation,
Enron officials cited the fact that twenty-seven different government agencies had looked at the
contract before approving it.
128
Regardless of how many agencies deliberated about the merits of
the project, however, it is evident that a business relationship was not cultivated between Enron
and the GOM, MSEB and GOI. As Salacuse explains, parties take for granted that because an
agreement is signed, a business relationship is ultimately forged and that only during times of
conflict, when misunderstandings surface, it becomes apparent that no business relationship was
ever cultivated.
129
As Salacuse states .after nearly eighteen months of negotiation, Enron
emerged with a contract but no real business relationship. It had no real connection to any Indian
party and had established no basis for cooperation and trust with either (the) Maharashtra State
Electricity Board, the Maharashtra State Government, or the Indian public.
130
There were
opportunities to build a relationship through equity-sharing arrangements. Enron, however,
refused a suggestion submitted by Bechtel, its minority partner, to sign on a l ocal Indian partner
as a minority equity holder in the project.
131
Indeed the deal that was void of a long-term
business relationship, in the Dabhol case, led to serious underlying problems of mistrust between
all parties involved.
To a large extent, all parties to the negotiation were new to the scale, scope and nature of
this deal and could have benefited from an extension of time to extract valuable information
about each others interests, level of commitment and capabilities. As Sucheta Dal points out,
few in India understood the complexities of working out the tariffs and guarantees of an
Independent Power Project. Until Enron came along, most power projects were set up by public

128
Narayanan, 61.
129
Salacuse. Renegotiating International Project Agreements, 1357-1360.
130
Salacuse, Renegotiating International Project Agreements, 1360.
131
Jeswald W. Salacuse. More on Dabhol, Thursday April 4, 2001. Private e-mail communication.
47
sector companies and private ones such as BSES and TEC and could either accept the returns
paid by government or lump it
132
The GOI, according to Kirit Parikh, did not take the time to
consider whether a nuclear plant rather than a coal-based plant required the lowest combination
of capital and operating costs. The GOI further failed to take into account the fluctuations in
demand for power during the day. Accounting for these factors, Parikh calculates that the GOI
could have extracted a more favorable deal with Enron with respect to costs.
133
Some analysts
argue that Enrons pre-negotiation preparation was fraught with miscalculations and information
gaps. For instance, Enrons risk assessment was not properly calculated. The factors that led to
its decision to enter India included the size of Indian market, its western-style legal code and
contracts, the widespread use of English and its democratic polity.
134
When put to the test,
however, these broad guidelines and directives failed to account for the particularities of the
project. Abhay Mehta argues that in its rush to get an agreement concluded, several factors
including the FOREX component, the need for a base-load capacity, and least-cost
considerations were omitted in the preliminary examination of the project.
135
Sanjay Gupta,
former President of Mahindra & Mahindra USA, unequivocally asserts that the primary reason
international business agreements fail is that parties do not do their homework.
136
Inadequate
preparation, as a function of the rapid speed at which agreements are concluded, is a serious
impediment to international business transactions.

132
Sucheta Dalal, The Enron Fiasco, December 20, 2000, (accessed December 5, 2001), available from
www.rediff.com/money/2000/dec/20dalal.htm.
133
Parikh, 227.
134
Harvard Business School, Case A, 7.
135
Mehta, 28-9
136
Sanjay Gupta, Lecture at the Fletcher School of Law and Diplomacy, March 20, 2002.
48
When the Time is `Ripe
Jeffrey Rubin discusses the role of ripeness in negotiations. He notes that there is a
right time to negotiate, and the wise negotiator will attempt to seek out this point.
137
In the
international business scenario, this might translate to the time that there is possibility for joint
gain by both parties.
138
This opportune time may also be defined by the ability of the actors
involved to follow-through with their contractual obligations. Merchant Khozem, an Indian
journalist who has extensively followed the Dabhol negotiations, remarks that a decade ago,
DPC was given fast-track clearance and was advertised as a symbol of Indias economic
awakening. Its withdrawal is now seen as an indictment of the attempts to jump-start economic
growth (emphasis added).
139
Merchants observation raises the question of whether the time
was ripe to negotiate this deal. The poor conditions of the MSEB, the uneasiness of the
government to manage foreign investment of a large scale and the inability of all actors involved
to resource the negotiations are all evidence of the fact that the timing was not ripe for
negotiation of the PPA.

C. RESOURCING THE NEGOTIATIONS

Even if both sides understand their own BATNA and each others BATNA, it is
impossible to negotiate successfully, where success is measured in part by the implementation
phase of the agreement, without understanding each parties resource endowments and their
willingness and ability to contribute to the implementation phase of the contract. In other words,

137
Rubin, Jeffrey Z. Some Wise and Mistaken Assumptions about Conflict and Negotiation in Negotiation Theory
and Practice, ed. William Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at
Harvard Law School, 1999), 10.
138
Rubin, Some Wise and Mistaken Assumptions about Conflict and Negotiation, 10.
139
Khozem Merchant. Utilities in bid for project stake: Tata Power and BSES have offered about half the sum
demanded for a majority shareholding in a controversial Indian power project beset by political problems,
Financial Times, November 12, 2001 (accessed December 5, 2001); available from
http://globalarchive.ft.com/ globalarchive.articles.html
49
all parties to an agreement must have the institutional and technical endowments to actually
provide resources to implement the agreement to provide legitimacy to the deal-making process.

Institutional Endowments
When assessing the Government of Indias and the Government of Maharashtras
institutional endowments, it is clear that there was a significant deviation between what was
agreed to on paper and which terms of the agreement could actually be serviced. Anupama
Dokeniya, who has studied Indias liberalization policy in the telecommunications sector, has
observed that the bureaucracy in India has been progressively weakened in the post-
Independence years with the absence of a checks and balance system between the executive
branch and the legislative branch, which makes it difficult to implement regulatory
agreements.
140


Corruption

No discussion of Indias institutional endowments, or lack thereof, can take place without
mention of the issues of transparency and corruption. Transparency Internationals 2001
Corruption Perceptions Index (CPI) ranks India 71 out of 91 countries with a very low CPI score
of 2.7.
141
Indeed, a top executive at industrial giant Larsen & Toubro notes despairingly that
countrywide corruption is increasing at all levels.
142
A Vice-President of a leading rice
exporting firm notes that businessmen have to deal with sales tax, income tax, excise, customs,
land and quality control, of which not even the slightest progress is possible without greasing

140
Anupama Dokeniya. Re-forming the State: An institutional analysis of telecommunications liberalization in
India (Ph.D. diss., Cornell University, 1999). 53-4.
141
The CPI score measures the degree of corruption as perceived by business, academics and risk analysts and
ranges between 10 (very clean) to 0 (highly corrupt). Indias CPI score resulted in standard deviation of 0.5. See
Transparency International 2001 CPI Index; available from http://www.transparency.org/cpi/2001/cpi2001.htm)
142
Sanjay Kumar, India -Corruption Slows Growth; available from http://mahendra-
agarwalonline.20m.com/PR_CorruptionSlowsGrowth.htm.
50
officials palms.
143
As Sanjay Kumar reports, many Indian businessmen feel that liberalization
of the economy will have no impact on reducing the corruption that has become so well
entrenched.
144

It is important to understand the cultural and political context in India that explains
corruption as a hindrance to growth and investment. Businessmen in India argue that during
Indira Gandhis leadership in the 1970s, politicians and government officials gained almost
unlimited powers to issue licenses, driving the India economy to license-dependency for
everyday market interactions, which today has produced endemic corruption.
145
Jairam Ramesh,
Secretary of the Economic Cell of the All India Congress Committee (AICC) explains corruption
in India differently. He makes the distinction between needs-based corruption and greed-
based corruption where the emergence of needs-based corruption is largely explained by the
fact that there is no transparent way to finance the Indian electoral system. He further comments
that Indians are comfortable with the bazaar economy mindset and not a market economy
where there are rules and regulations and standards.
146

Corruption serves as a severe institutional constraint when it impairs the states ability to
negotiate and legitimize international business deals. The resignation of three members
147
of the
Godbole Renegotiation Committee was in part an act of protest against the political interference
of the central government in what was supposed to be the unbiased processes and findings of the
committee.
148
The patron-client relationship nurtured in the State Electricity Boards (SEBs)
constitutes an additional institutional factor that impairs the tenability of investment deals

143
Ibid.
144
Ibid.
145
Ibid.
146
Interview with Jairam Ramesh, Thursday Nov. 29, 2001, Harvard University
147
These three members were Mr. Parikh, head of the Indira Gandhi Institute for Research and Development, Mr.
Pachauri of Tata Energy Insittiute, and Mr. Sharma, former Union Energy Secretary and member of the Andhra
Pradesh State Electricity Board.
51
concluded in this sector. As V. Rahuraman, senior advisor of the Confederation of Indian
Industry, comments state governments have to discipline themselves, and they should know
how to pay for power purchased from private companies instead of blackmailing the Center to
pay for their dues.
149
Amid charges of corruption, the state of Maharashtra lost two lucrative
foreign investment contracts to the state of Tamil Nadu and to the state of Andhra Pradesh. Its
volatile politics have undermined the rule of law and foreign investors are alarmed by official
abuse of the sanctity of contract, reports journalist Khozem Merchant.
150
International business
deals cannot be negotiated in full faith and in full sincerity when the agreement is not resourced
with tools to guarantee implementation. Indeed, Enrons response to allegations of corruption in
India is thats not the way we do business here or anywhere in the world. Out policy is to walk
away rather than pay a bribe.
151


Technical Endowments
G.V. Ramakrishna, Member of the Planning Commission of the GOI, declared in a 1994
public address that the commercial losses of the SEBs are mounting every year.
152
Indeed,
many of Indias SEBs are close to insolvency. Almost all the SEBs, including the MSEB, are as
Kirit Parikh notes, over-staffed and plagued with political waywardness as they pander to the
agricultural lobbyists who were able to extract significant subsidies from 1950 and onwards
153


148
Three Quit Panel on Enron Deal, The Asian Age, May 15, 2001.
149
Exit of Enron to tarnish Indias image for foreign investment, Netpilgrim, May 22, 2001; (accessed December
5, 2001); available from www.netpilgrim.com/articles/2001522/NetArticle5244.asp)
150
Khozem Merchant. Maharashtra pays the price for bad governance: Dispute with Enron has called into question
its status as Indias preferred home for investment, Financial Times (London), May, 22, 2001, Asia-Pacific Section,
p. 11; available from Lexis -Nexis Academic Universe.
151
Harvard Business School, Case B, 1.
152
Naryanan, 36.
153
Parikh, 223.
52
The MSEB is currently undertaking reforms to improve its billing and collection systems, in an
effort to capture lost revenues.
154

With respect to technical considerations, it is questionable whether some of the terms of
the PPA could realistically be serviced. Operating on a base load capacity meant that Dabhol
power would be running for most of the day. The GOM justified this on the grounds that
neighboring states could absorb surplus power. The problem with this suggestion was that
Dabhol did not have dedicated lines to other states and surplus power during non-peak periods in
Maharashtra would have to be transferred to a common pool. During peak periods, these states
might have only required a small quantum of power that could be obtained for a lower cost than
what Dabhol was offering or which could be countered through load management or shedding.
The bottom line issued by energy analysts was that power rates must be in accordance with the
payment capacity of the SEBs, which the Dabhol agreement was not.
155


Inflationary and Deflationary Expectations

When attempting to understand the factors that led to the failure of international business
deals similar to the Dabhol deal, a mere assessment of interests and positions is insufficient. Any
study of a negotiated agreement needs to take into account the perceptions and expectations of
the signatory parties. Inflationary and deflationary expectations, in particular, often lead to
unrealistic agreements that cannot be serviced and explain why international business
transactions ultimately collapse.

154
Billing is now being decentralized so that where one regional center used to issue 300,000 bills, each sub-
divisional office will now issue bills to the tune of 30,000 to improve collections and to empower officials to
monitor the situation from the ground. See Sankar, Maharashtra mo ve may help solve Enron tangle.
155
Message from Dabhol, Financial Express, July 28, 2001 (accessed December 5, 2001); available from
www.financialexpress.com)
53
During the pre-negotiation phase, Enron expressed its intention to develop long-term
business partnerships in India. Enrons blueprint for India envisioned laying a pipeline from
Bangladesh to India for tapping the fifteen million cubic meters of gas available in Bangladesh,
setting up power plants in Nepal to export power to India and constructing a national gas grid
connecting all sources of power to consumers.
156
This ambitious blueprint explains why Enron
was aggressive in its lobbying tactics. Even though the 1991 reforms were harked as a positive
step conducive to FDI, Kirit Parikh notes significant problems with the 1991 reforms that he
suggests must have had an impact on FDI projects as large as Enron. Specifically, he states that
the reforms initiated in June 1991 have unwittingly created an infrastructure bottleneck in
India.
157
Parikh goes on to say that the control of inflation and price stabilization hamper
investment as they lead to decreased spending in infrastructure. The government initiates these
reforms with the expectation that private sector investment will supplant public investment in
infrastructure development, which is not the case in India today.
158
Such kinds of inflationary
expectations may result in the belief of either party or both parties that the agreement failed them
because the deal was unable to achieve their unrealistic goals and visions. This belief can lead to
a premature termination of the agreement.
Negotiation strategists intellectualize less about the importance of resourcing negotiations
than traditional business strategists. Nonetheless, there are important lessons to be learned from
the Dabhol case of why business transactions can fail, due to the inability of the parties involved
to service the agreement. The lack of institutional and technical endowments and the
phenomenon of inflationary or deflationary expectations are factors that explain why some
international business agreements never reach fruition.

156
Srinivas, Will Enrons New India Strategy Work?.
157
Parikh, 209.
54
D. ASYMMETERICAL POWER RELATIONS

When tracking the shift in power relations between multinational corporations and host
governments in developing countries, Raymond Vernon argues that over time host governments
have increased their efforts to gain control over raw material projects to reduce their passive
dependence on these foreign invested projects.
159
According to Vernon, governments have
achieved this goal by increasing their voice in the management decisions of foreign companies
and by monitoring prices set by foreign companies. Vernon remarks that pressures from host
governments to share somehow in the downstream profits related to processing, distribution, and
marketing are bound to grow.
160
The tension that exists between the foreign multinational and
the developing country host government is still palpable and has much to do with overcoming a
historically perceived imbalance in power relations.

Terms of the agreement

The PPA was fraught with inequities and a supply-side bias that compelled the
government in power to renegotiate the agreement. The project operated on base load capacity,
which did not take into account actual demand. While capacity charges had to be paid 86% of the
time, the MSEBs real load factor (ratio of average demand over the day to peak demand over
the day) was only 60%. The tariff structure reflected the fixed costs associated with the project
(e.g. operating and management costs, and capital recovery costs). Most variable costs were
passed on to the MSEB making the project virtually risk free for Enron while the MSEB was
required to bear the exchange rate risk to cover all the dollar payments for capacity payments at

158
Ibid., 210.
159
Raymond Vernon, Sovereignty At Bay: The Multinational Spread of US enterprises (New York: Basic Books,
1971), 54.
160
Ibid., 57
55
the prevailing exchange rate.
161
Furthermore, the PPA exempted the DPC from sales tax and duty
provisions on the electricity generated and sold
162
and from tax provisions on the interest payable
on off-shore debt.
163
The GOM in 1993 raised the additional concern that its projected capital
cost comparisons were much lower than Enrons estimates.
164
On the issue of the capital cost
structure, Kirit Parikh makes the fascinating observation that the nature of the fallout originated
from the time that the PPA was first hashed out. The opening bid was structured around the
Chandrapur power plant, which what was thought to be a comparable project. While at face
value, the two projects were projected to be equal in cost, Parikh points out that, in fact, the
Chandrapur plant was a coal-generated plant. This detail proved to be problematic as gas or oil-
based plants are usually twenty per cent cheaper than coal-based plants and therefore, according
to Parikh, the estimated cost of $1300/kW for the Dabhol plant was inappropriately inflated,
`providing a cushion to insure the promoters against uncertainties.
165

Adarsh Kishore, Additional Secretary, Department of Economic Affairs declared when
we read the fine prints of the Power Purchase Agreement, we realize that perhaps the mistake
was on our side as to why did we agree to such exorbitant tariff rates.
166
Kirit Parikhs own
analysis is consistent with this observation as he argues that the GOM and GOI gave unintended
signals to foreign investors that `it was willing to be taken for a ride. According to Parikh, the
GOI was so eager to appear open to foreign investment that it overlooked the fact that it could
not find a cheaper bid simply because all other investors were benchmarking their bids on the

161
Naryanan, 56 and Harvard Business School, Case A, 12.
162
Section 3 of the Bombay Electricity Duty Act of 1958. See Mehta, 101.
163
Section 10(15) of the Income Tax Act. See Mehta, 101.
164
Harvard Business School, Case A, 10.
165
Parikh, 213.
166
Agreeing to Enrons tariff was a mistake: Govt, The Times of India, January 25, 2002 (accessed January 26,
2002); available from www.timesofindia.com.
56
Enron deal.
167
Parikh studies how the renegotiation committee tried to rectify this by setting up
an international benchmark by comparing the DPC project to an Enron plant in Teesside in the
UK.
168
DPC was not amenable to such comparisons because it argued that there were
differences in site condition, country risks, financing costs, time of construction and inflation
while the renegotiation committee argued that it could adjust for these differences.
169

During the renegotiation process several attempts were made to resolve the power
asymmetry embedded in the original PPA. Salacuse points out that an integrative bargaining
framework was applied to the renegotiated settlement. Not only did the amended agreement
reduce the power tariff and capital costs of the project to meet the demands of the Indian
negotiating team, but it also enlarged the project capacity, a term favorable to Enron. According
to Salacuse, a significant portion of the capital cost reduction (was a) result of favorable market
developments with respect to generating equipment, not a transfer of value from Enron to the
state of Maharashtra.
170
Furthermore, an allocation of thirty per cent equity to the MSEB was a
positive measure to rectify the asymmetrical power dynamics imbedded in the original
agreement.

E. TRUST AS A STABILIZING FORCE IN NEGOTIATIONS

When characterizing the multinational corporation, Raymond Vernon, in Sovereignty at
Bay writes: they sprawl across national boundaries, linking the assets and activities of different
national jurisdictions with an intimacy that seem to threaten the concept of the nation as an
integral unit.
171
When making reference to the fact that sixty to seventy per cent of Venezuelas

167
Parikh, 211.
168
Ibid., 221.
169
Ibid., 221-2.
170
Salacuse, Renegotiating International Project Agreements, 1356.
171
Vernon, 5.
57
revenues in 1964 derived from taxes paid through foreign petroleum and iron-ore operations,
Vernon argues that (g)overnments feel constantly threatened by the fact that the flow of money
seems to depend on the sustained willingness of foreign investors to continue their operation.
The size of this putative threat ought not to be overstated.
172
Raymond Vernon notes that the
unease of host governments regarding the multinational enterprise comes close to being
pathological when the suspicion exists that the multinational group is acting in partnership with
some foreign sovereign. In the less developed word, for instance, there are lawyers that fear that
the subsidiaries of US parentsmay be able to sue the US foreign aid program to influence the
outcome of the dispute.
173
The apprehensive and at times belligerent attitudes of the host
government directed towards Enron confirm Vernons theory. Indeed, Bal Thackeray, head of
the regional SS party in Maharashtra cautioned foreign investors, dont come to kill our
products, but if you have anything new, then we welcome it.
174
Returning to Salacuses point
about the importance of cultivating a business relationship, it is evident that a solid business
relationship would have mitigated some of these historical misgivings and underlying emotions
of distrust that characterize many multinational agreements in developing countries and
specifically the nationalist policies of the saffron regime in India.
In the Dabhol case, a positive measure employed to build trust was dividing the project
into two phases so that the GOM would be able to test Enrons ability to service the agreement.
In turn, the two-phase agreement, according to Rebecca Mark, would allow Enron to get us
started, test Indias credit, and convince suppliers of the project.
175
Enron, however, generated
distrust in their negotiating counterparts, who publicly characterized Enrons proposal as

172
Vernon, 52-3
173
Kapoor on Vernon, 286.
174
Harvard Business School, Case B, 1.
175
Harvard Business School, Case A, 9.
58
greedy, by touting the line that excess costs could be explained by its construction of a port
facility, which in reality only represented a fraction of the real costs projected by Enron.
176

Furthermore, Enron, in its initial proposal, had agreed to construct schools, hospitals, community
centers, a polytechnic college, and roads for the benefit of the locals in Ratnagiri district. Asoke
Basak, chairman of the MSEB, later claimed that Enron had not set up the social infrastructure
that it had promised.
177
Also, Enrons earlier promise of employing two hundred local people
was not fulfilled. Instead, Enron hired only one hundred local people due to the problem of a
lack of skilled labor in the area.
178
Preparatory research on the technical expertise and
educational levels of the workers in the area would have prevented Enron from making a
promise that it would later not be able to uphold thereby avoiding greater mistrust of its
activities. Similarly, MSEBs act of reneging on its contractual obligations generated mistrust
within the DPC team during the renegotiation period. Kenneth Lay in a letter to Vajpayee wrote
our experience would indicate that contracts with governmental authorities in India really do
not seem to represent anything more than a starting point for renegotiations, and are broken by
Indian governmental authorities whenever and as often they prove inconvenient or
burdensome.
179


F. INCORPORATING STAKEHOLDERS

Ashok Kapoor in International Business Negotiations: A Study in India , states that the
negotiation process is influenced by a range of divergent interest groups who express their views
in a variety of ways. An understanding of the nature, composition, and orientation of such groups

176
Parikh, 228.
177
Enrons Dabhol Power Plant to light up Maharastra by March end, February 10, 1999 (accessed December 5,
2001); available from www.rediff.com/business/1999/feb/10enron.htm.
178
Enrons Dabhol Power Plant to light up Maharastra by March end.
179
Enron criticizes Indias efforts in Dabhol dispute, Financial Times, September 20, 2001 (accessed December 5,
2001); available from http://global archive.ft.com/globalarchive/articles.html
59
is essential for an understanding of a decision units approach to negotiations.
180
Kapoor defines
Indias interest groups as the World Bank and other multilateral agencies in addition to internal
interest groups such as Indian political parties, Parliament, the press, and business groups.
181
Any
renegotiated deal must be sold by each party to its constituents and must be perceived as fair
while recognizing as Sampathkumar states, the harsh commercial realities that characterize the
present situation.
182
If one adopts Kapoors definition of interest groups, then it is clear that
Enron and its partners and the GOM, in a series of strategic miscalculations, failed to understand
the nature and the composition of interests of several of their important stakeholders. If any one
measure is demonstrative of this fact it is the fact that approximately twenty-four lawsuits were
filed in the Indian courts by public interest groups opposing the project.
183


Local Community
In India, there is a historical distrust of efforts to privatize and attract foreign investment
in the energy sector, as ascertained by public demonstrations of protest. For example, attempts to
raise the electricity rates in the state of Haryana led to riots and several deaths.
184
Abhay Mehta
provides a host of examples of concerns raised by local residents in the Dabhol district. One
illustration is a memorandum signed by V.S. Vaidya and sixty-four other residents in the village
of Anjanvel, which notes we fear that after this project is established, the air in our village will
be polluted and our life would be ruined. We feel that the project will affect horticulture and ruin
our main source of livelihood.
185
In addition to several memorandums and public petitions, the
Maharashtra government was flooded with complaints vocalized at public hearings held at

180
Kapoor, 291.
181
Ibid., 289.
182
D. Sampathkumar, India: It is deal-making time in Dabhol, Business Line, November 18, 2001.
183
Salacuse, Renegotiating International Project Agreements, 1354.
184
Ibid., 1345.
185
Mehta, 93.
60
Sachivalaya in Bombay on November 8 and 9, 1994.
186
At the time that the GOM established the
Godbole Committee to renegotiate the PPA with the DPC, trade unions organized a bandh
(strike) in Maharashtra protesting the overall economic policies of the government in power.
187

When characterizing Indias fragmented society and competing public interests, Supriya
Roychoudhury remarks that within Indias noisy political democracy, featuring powerful trade
unions, competing sections of capital, a wide array of leftists, feminists and environmentalists,
liberalization became a matter of public debate and an object of varying, competing
interpretations.
188

Enron developed a confusing and inconsistent approach to communicating with these
competing interest groups. For example, in a January 2001 interview, when asked whether DPC
was in a mood for international arbitration and whether DPC was willing to enter into another
round of talks with the state government, Neil McGregor, President of DPC, responded with the
statement although we are comfortable with the contractual safeguards in our existing PPA, we
also want to maintain positive relationships with the Government of Maharashtra and the
Government of India. Consequently, we are not always willing to discuss issues with our various
stakeholders (emphasis added).
189
In the same interview, however, McGregor flagged the
participation and inclusion of stakeholders in the negotiation process as a necessary feature of a
winning strategy. McGregor offered his reasoning of why there was an impasse and eventual
default on the part of the MSEB. He revealed that, MSEBs financial predicament is
fundamentally attributable to a multitude of factors relating to transmission, distribution, arrears,

186
Mehta, 90.
187
MSEB, State Govt officials in London to `soften Enron stand, The Pioneer, April 26, 2001 (accessed
December 5, 2001), available from www.dailypioneer.com.
188
Roychowdhury, 17.
189
Siva Y. Sankar `The Dabhol tariff is not the highest in the country, January, 15, 2001, (accessed December 5,
2001); available from www.rediff.com/money/2001/jan/15inter.htm.
61
etc. We believe a lasting solution to MSEBs financial predicament is required and needs to
involve all stakeholders concerned such as state and central governments, political parties, labor
unions, NGOs and others.
190

Immediately after the MoU was signed and after public protest of Enrons presence in
Dabhol had captured media attention and the governments attention, Enron took several positive
steps to address local concerns. For example, to address concerns about water shortage, Enron
agreed to provide clear drinking water through a newly constructed pipeline to all the villages of
the vicinity.
191
It further promised to open schools, an industrial training institute and a hospital
in that area.
192
The DPC also toyed with the idea of producing fruits and flowers in this resource-
rich area for exports as part of its good neighbor policy and in an attempt to upgrade the
regions development as a tool to change peoples perceptions of the company.
193

For every positive step taken, however, Enron made serious blunders that adversely
affected its relations with the local community. For example, Enron executives decided that
money should be invested in activities dedicated to educating Indians on the merits of the
project. The Rs. 4 crore education campaign was widely criticized by the Indian press as an
arrogant effort to bypass legitimate concerns raised and arm-twist local residents into
complicity.
194
Furthermore, the multinational became quickly associated with police brutality
exercised during protests in the Ratnagiri district. In response to allegations of bribery,
corruption and the suppression of civil rights, Enron declared in a letter issued November 17,

190
Sankar, `The Dabhol tariff is not the highest in the country.
191
Narayanan, 63.
192
Narayanan, 63.
193
Sankar, Dabhol Power Co to export fruits, flowers.
194
Binoy Sharma. Centre to send sole representative, The Pioneer, April 25, 2001, (accessed December 5, 2001);
available from www.dailypioneer.com.
62
1997, (b)y law, we are required to offset the cost of police officers placed near our site if police
officials deem it necessary to preserve law and order when protests occur.
195


The World Bank

Successful negotiators, representing parties to an agreement, are not only able to
recognize who their local stakeholders are but they are also well-adept at knowing when and how
to act responsive to their needs in a timely manner so as to produce an agreement that is
perceived to be fair and that has little probability of being contested in the future. When signals
of disapproval emanated from the domestic and multilateral lending communities, such as the
disapproval expressed by the World Bank, there was plenty of time for Enron to act and assess
the benefits of incorporating the recommendations made. Instead Enron quickly dismissed the
merits of the World Bank report as revealed in a letter written by Joseph Sutton to the Chairman
of the MSEB on June 28, 1993. Sutton writes, I feel that the World Bank opinion can be
changed. We will engage a PR firm during the next trip and hopefully manage the media from
here on.
196


The Bureaucracy

Throughout the negotiation process, the Government of Indias policy in informing and
involving the relevant agencies of its bureaucracy lacked coordination and coherency. For
example, the GOI had decided to send only one representative to the high-level Godbole
renegotiating committee that was mandated to rework the PPA with the DPC. This one
representative was unrealistically expected to represent the divergent interests of the Ministries

195
Enron in India: The Dabhol disaster, Corpwatch, July 20, 2000, (accessed January 21, 2002); available from
www.corpwatch.org/issues/politics/featured/2000/enronindia.html
196
Mehta, 47
63
of Banking, Law, Finance, Petroleum and Power.
197
Sources reported that even the Power
Ministry had been kept in the dark on who would be this sole conscience keeper of the
government.
198


Indian Financial Institutions

The most interesting transformation of roles of any of the stakeholders in the negotiation
process is that of the Indian lending institutions. Through their several incarnations as financiers,
mediators and finally third party auctioneers, they significantly impacted the course of
negotiations between the DPC and the Government of Maharashtra.
Approximately seventy per cent of DPC was funded by debt with Indian financial
institutions paying 1.4 billion dollars and foreign lenders the remaining balance.
199
Concerns
raised by an advisory committee, which was compromised of experts from the Industrial
Development Bank of India (IDBI), were nevertheless ignored by the GOI after the committee
protested concessions given to foreign investors. Yamini Narayanan offers the explanation that
the concerns and recommendations of the committee were probably ignored due to pressure from
high-ranking government officials in New Delhi and Bombay.
200
Concerned about protecting its
financial investments in the project, the major lending institutions in India submitted a plea
requesting the MSEB to start buying power and for the power plant to resume operations,
ensuring all the while that they did not press for relief against the MSEB.
201
The Indian financial
institutions once again actively intervened when, at the climax of heightened hostilities between
DPC and the MSEB, the DPC filed its first termination notice. Later on, the consortium of Indian

197
Sharma, Centre to send sole representative.
198
Ibid.
199
TATA in talks to buy Enron power plant, The Financial Times (London), October 15, 2001 (accessed
December 5, 2001); available from Lexis -Nexis Academic Universe.
200
Narayanan, 47.
64
lenders comprising of the IDBI, ICICI, and SBI, filed a motion in the Bombay High Court to
prevent Enron from pulling out. This action had the effect of stalling the transfer of Dabhols
assets.
In April 30, 2001, the fate of DPCs project hung in greater limbo when the Indian
financial institutions decided to stop funding the debt portion of the project, with approximately
seventy per cent of the $1.8 billion total disbursement already absorbed in the project. Naturally
we have stopped disbursement as we think that it is indeed a loss-making proposition, as of now.
If MSEB begins paying, we would go ahead with our funding as well an IDBI official said.
202

This action further aggravated relations between DPC and its Indian partners, as DPC responded
to this decision by canceling a meeting with the Indian lenders scheduled for later that week.
203

In an interesting turn of events, the Indian lending institutions became important
secondary players in the negotiation process when they effectively mediated the Singapore
meetings. When negotiations failed, it is the lending institutions, which were concerned about
protecting their investments, that stepped in to mediate the sale of the Dabhol assets and to act as
a match maker between potential investors, such as Tata Power, and the DPC.

The Non-Resident Indian Community
While not one of the obvious or foremost stakeholder groups in the Dabhol affair, the
Non-Resident Indian (NRI) community has played a significant role in publicizing the downfalls
of the Dabhol agreement to local communities in India, as well as internationally.
204
On February

201
HC restrains DPC from issuing final termination notice, The Times of India, Nov. 11, 2001 (accessed
December 5, 2001); available from http://globalarchive.ft.com/articles.html
202
Enron may switch off Dabhol project in The Pioneer, April 30, 2001 (accessed December 5, 2001), available
from www.dailypionner.com.
203
Enron India Units lenders issue court challenge to prevent project pullout, AFX EUROPE, November 8, 2001
(accessed December 5, 2001); available from http://globalarchive.ft.com
204
The website maintained by this group is an excellent source of primary materials relating to the Dabhol project.
See http://altindia.net/enron.
65
10, 2001, a group of activists from the NRI community placed a notice in Bombays Mid-Day
newspaper on the Dabhol controversy. The advertisement read:


If you are asking why it should concern you, just remember that without the share of
central revenues, Maharashtra will not have any funds left to carry out any development
programmes in the state.Act now and find out why we have signed off all our assets.
205


Om Damani, an NRI, publicly justified the advertisement by declaring, we feel outraged at the
Enron deal. We felt that an advertisement was needed because the press has not sufficiently
highlighted the scale of the contractual obligations.
206
The NRIs, belonging to this group,
expressed their belief that the Dabhol deal should have been scrapped early on. Their arguments
were in conformity with the GOM claim raised in an affidavit filed in the Bombay High Court
that the PPA was 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.
207

The members of this group further argued that the PPA suffered from the vice of
misrepresentation by Enron and was conceived in fraud.
208


When Stakeholder Interests Hold the Negotiation Process Hostage

The omission of stakeholders in a genuine consultative process generated fierce and
extreme political opposition to the project, which later narrowed the range of choices that the
Indian negotiators could leverage. At one point in time, it became political suicide to befriend
Enron and its partners, which explains the basis of the immoderate and now infamous promises

205
India has staked all its assets as surety to Enron, February 15, 2001 (accessed December 5, 2001); available
from www.rediff.com/money/2001/feb/15enron.htm
206
Ibid.
207
Ibid.
208
Ibid.
66
by the BJP-led government in Maharashtra to throw the project in the Arabian Sea.
209
In some
places, MSEB officials were threatened, and even harmed by irate consumers.
210

In the worlds largest democratic polity, party politics and the public, drive economic and
social choices in India. Anupama Dokeniya explains that on the one hand, the responsiveness of
political actors to electoral and populist concerns has dictated the choice of liberalization rather
than privatization as the preferred policy instrument for attracting private investment..
211
An
example of this is the movement that developed within a consortium of nine leftist and secular
parties in Maharashtra.
212
This alliance, which vocalized its concerns under the banner of the
Anti-Liberalisation Action Committee and which supported the Democratic Front party in
Maharashtra, pressured Chief Minister Deshmukh to order the establishment of a Commission of
Inquiry under a sitting retired High Court judge. The Committee would be commissioned to
probe the excesses in granting waivers and clearances to the DPC by the previous Congress and
Saffron alliance governments. These nine parties also argued for the immediate termination of
the PPA.
Raymond Vernon notes a universal trend in developing countries whereby demands on
local bureaucrats have tended to increase while the protection afforded to the foreign investor has
tended to decline.
213
Maharashtra Chief Minister Deshmukh, in particular, has had difficulties
consolidating power in the wake of the Enron crisis. The concessions he could grant to the DPC
team during the renegotiation of the PPA was constrained by his fixation on warding off within
his own party a group of detractors, led by the ambitious Maharashtra Pradesh Congress

209
Mehta, 137.
210
Sankar, Maharashtra move may help solve Enron tangle.
211
Dokeniya, 254-5.
212
These parties include: Peasants and Workers Party, CPM, CPI, Janata Dal, Samajwadi Party, Republican Party
of India, Kamghar Agadhi, Samajwadi Jan Parishad and Lal Nishan Party.
213
Vernon, 197.
67
Committee (MPCC) President, Govindrao Adik. Deshmukh once remarked youll realize that
running a coalition government is not an easy task. Another factor has to be kept in mind, that
ours is a post-poll alliance and not a pre-poll pact. This puts me under additional pressure while
dealing with crucial issues like Enron..
214
The relegation of the Government of Maharashtra to
the extreme of the negotiating spectrum was in part due to party politics. More importantly, the
extreme position established can also be explained by the fact that no consultative mainframe
was developed to genuinely incorporate the interests and recommendations of key stakeholders
in the agreement. The constituents who were plagued by their own frustrations of being neither
informed nor consulted on a consistent and coherent basis helped drive the negotiators to a
deadlocked stance of moral-based positioning.

G. MORAL BASED POSITIONING VS. INTEREST-BASED POSITIONING

Roger Fisher and William Ury in Getting to Yes explain the importance of focusing on
interests versus positions in the exercise of negotiations.
215
When the negotiating parties focus on
interests versus positions, there is greater opportunity to identify and invent mutual gains. In the
Dabhol case, the factors the led to moral-based positioning versus interest-based negotiating
were the role of stakeholders in holding the negotiations hostage through a set of extreme
demands, as described above, the surmounting hostilities which led to `blaming the other party,
the inherent inflexibility of the agreement, the personality of the players, and the actions of the
US government.
The GOMs Changing Interests


214
Raghunatha, TN. Empowered to overpower problems.
215
Fisher and Ury, 40.
68
At the time the PPA was being negotiated, India was trying to carefully build alliances
abroad for foreign investment in other sectors, such as the telecommunications sector.
216
The
GOM was not considering the pure economics of the deal, as measured by their acceptance of an
absorbent high tariff rate. Instead, the GOM and the GOI to a larger extent were motivated by
larger ambitions to demonstrate to the rest of the world that India was a hotspot for
investment.
217
The succession of state power from the Congress party to the Hindu-nationalist
party, the BJP, quickly transformed the states official policy towards foreign investment and the
Dabhol project. The issue at hand no longer concerned the economic viability and commercial
merits of the project; rather, the issues at stake concerned safeguarding Maharashtras cultural
and economic interests against the threat of foreign capital. With respect to negotiating the PPA,
the main interest of the GOM was to bring down the tariff structure in addition to the high
preliminary and pre-operation expenses, and to renegotiate the high foreign exchange outgo. The
tariff issue was perhaps the greatest issue of concern to the GOM. At one point, the MSEB
argued that Enrons tariff was three or four times higher than that levied by other power
producers in India.
218


Enrons Interests
As mentioned earlier, Enrons interests at the time of negotiation was to capture a large
market that could consume excess supply generated at plants like the Qatar facility. When one
delves deeper into an analysis of the interests on the table at the time of negotiation and
renegotiation of the PPA, one discovers a `frontier culture that largely informed Enrons overall
business strategy and interests at stake. As one analyst reports, Enron inspired enthusiasm in

216
McLarney and Dastrala, 361.
217
Parikh, 214.
218
Khozem Merchant, Enron Dispute heading for Court, Financial Times, April 9, 2001 (accessed December 5,
2001); available from http://globalarchive.ft.com
69
investors and analysts.
219
The multinational possessed strong core businesses. It was the number
one marketer of natural gas and power in North America and delivered commodities and
financial and risk management services worldwide. Enron was the `frontiersman of the industry,
taking risks with aggressive expansion into new sectors and emerging markets. For instance, in
late 1999, the company re-invented itself as a dot.com with the launch of EnronOnline, the
worlds biggest web based transaction system, trading everything from weather derivates to coal.
As CEO Kenneth Lay once reported, were an energy and broadband company that also does a
lot of other stuff.
220
As they continued their strategy in what one reporter cites as conquering
so many new and unsupervised areas.
221
, they continued to promise their shareholders more and
more. It is evident that from a strategic perspective, one of Enrons motivations to pursue the
Dabhol deal was to confirm its reputation as a first-mover in un-chartered territory.
In Richard II, William Shakespeare writes, (t)he purest treasure mortal times afford is
spotless reputation.
222
William Shakespeare and negotiation strategist Jeffrey Rubin have much
in common when discussing the importance of reputation as a strategic factor influencing
behaviors that govern relationships. Jeffrey Rubin argues that `negotiation is not a one-time-only
exchange and that rarely does one negotiate in the absence of future consequencesour
reputations have a way of surviving the exchange, coloring the expectations that others will have
of us in the future.
223
Both sides in the Dabhol debacle were aware that the world was watching
the events unfolding and both sides were soliciting other investment projects and contracts with

219
Sheila McNulty, Inside Track: A victim of its opacity: ENRON, Financial Times, November 12, 2001,
available from http://globalarchive.ft.com.
220
Ibid.
221
Ibid.
222
William Shakespeare, Richard II (Washington: Washington Square Press, 1996), Act I, Scene i
223
Rubin, Some Wise and Mistaken Assumptions about Conflict and Negotiation, 7.
70
their international partners.
224
The positions they developed, therefore, were very much informed
by their concern for their international reputation. It remains to be determined how successful
each side was in advancing their international reputation. For instance, Enron Corporation was
included on Multinational Monitors 10 Worst Corporations of 1995 list for its role in the
Dabhol Project.
225


Surmounting hostilities - Blaming the other Leads to Moral Positioning
The events leading up to the renegotiated settlement and the final exit of Enron are
tarnished with several acts of blaming the other which in effect led to moral-based positioning
versus interests-based negotiations. These events ranged from very sublime and subtle comments
to harsh retaliatory measures.
The Bharatiya Janata Party and the Shiv Sena colored the Dabhol project as a symbol of
cultural and economic imperialism and came to power in the 1995 elections on a platform of
economic and cultural nationalism in the state of Maharashtra.
226
In his speech to the State
Assembly announcing the cancellation of the project, Chief Minister Joshi stated
From the speed with which the memorandum of understanding was signed it seemed as if
Enron came, it saw, and it conquered.Enron has hypnotised in such a way that the state
government has not seen the shortcomings of this agreement.This contract is anti-Maharashtra.
It smacks of lack of self-respect and is irrational. Accepting it in present form is like betraying
the people of Maharashtra. This agreement is no agreement at all. Therefore, refusing the
agreement even with economic burden is acceptable as it is important to maintain the self-respect
and interests of Maharashtra. Also, it is important to expose the people who have entered into
such agreement.
227
.

This exaggeration of the costs of the deal is an example of what Twight explains as
`manipulated political transaction costs. Twight specifically states politically-relevant
transaction costs are also in substantial part endogenously determined through self-interested use

224
At the time, Enron was bidding for a contract in Indonesia and the Indian government had commenced the
bidding process for projects in its telecommunications sector.
225
McLarney and Dastrala, 361.
226
Salacuse, Renegotiating International Project Agreements, 1351.
71
of the mechanisms of government. Accordingly, political transaction costs sometimes are
increased intentionally. Political actors manipulate them strategically to achieve personal
political objectives. Since information costs and organization costs shape the viability of their
political opposition, political actors often have incentives to try to increase key transaction costs
facing their adversaries, even if the collective outcome is thereby worsened.
228
As expected, the
drawbacks of exaggerated political transaction costs are innumerable. For instance, at the time
that the Munde committee convened the political environment was such that it was politically
necessary to distance oneself from the Enron fiasco. Supporters of the project were now
disclaiming their involvement, such as Sharad Pawar, the Chief Minister of Maharashtra under
the Congress administration.
229
This environment prejudicially set the parameters for the
mandate of the Committee and the scope of what the Committee could ultimately recommend.
The positional-based approach versus the interest-based approach lends itself to the `hard
stick versus `soft carrots stance in negotiations. Jeffery Rubins critique of the `hard stick
approach is that it is far easier to move from cooperation to competition than the other way
around and that the relationship is jeopardized in the long-term.
230
An example of this is how
the hardliner stance adopted by the GOM on the issue of renegotiating the IRR of the deal nearly
drove Enron away from the negotiating table altogether. The Indian Finance secretary had
emphasized the centrality of this issue to the approval of the project. Rebecca Mark was
exasperated by the GOIs hardliner stance on this issue and made repeated claims that Enron
would leave the negotiating table.
231
At one point Mark, referring to the 20 % IRR calculated by
Ranjit Mathrani, the MSEBs financial advisor from Chartered West, London, retorted Ranjits

227
Translation of the Chief Ministers Speech to the Maharashtra State Assembly.
228
Dokeniya, 60.
229
Harvard Business School, Case B, 4.
230
Rubin, Some Wise and Mistaken Assumptions about Conflict and Negotiation, 10-11.
72
numbers are totally offthe worldwide expectation is 30%, plus, particularly in Indiayou are
taking away any incentive to do business here. Its entirely too difficult and just too aggravating.
We might as well pack and go home. We dont have any more room to give. We can only bring
you a deal. We cant get it done for you. Construction costs always go up. Our return of 26.5% is
far from guaranteed. We eat the excess costs of any kind.
232

As misunderstanding and distrust escalated on both sides, each side participated in what
Roger Fisher and William Ury coin as lock-in tactics, making it impossible for either side to
yield to a common denomination of interests and thereby weakening each partys control of the
situation.
233
The post-re-negotiation phase experienced a sharp transition from a willingness to
service the re-negotiated deal to one of hostile positioning, based on a game of retaliation. As
mentioned earlier, the MSEB attempted to restrain the DPC from encashing a Letter of Credit
from Canara Bank by obtaining an injunction from the Bombay High Court. Similarly, in
anticipation of the GOMs move to file a civil suit against the DPC for misrepresentation, the
DPC obtained an injunction to restrain the GOM from filing suits in India to challenge
international arbitration proceedings on the basis that the GOM had no jurisdiction to interfere in
the judicial proceedings taking place in the court of another sovereign.
234
Furthermore, the
MSEB attempted to hijack the final termination process by arguing that any decision to issue a
final termination notice must be done through a unanimous decision by the DPC board, of which
it is a member, and not through the DPCs Managing Director.
235
In addition to directly
challenging Enrons notices of termination, the Government of India chose to adopt defensive

231
Harvard Business School, Case A, 10
232
Harvard Business School , Case A, 10.
233
Fisher and Ury, 140.
234
Bid to gather political support Centre initiative on Dabhol crisis, Business Line, October 14, 2001 (accessed
December 5, 2001); available from www.hinduonnet.com/bline/2001/10/14/stores/1414565db.htm)
235
`FIs completely ignored us in DPCs proposed sale says MSEB, The Press Trust of India, November 23, 2001,
(accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
73
measures in subversive ways. In August, 2001, the Customs Department accused the DPC of
large-scale duty evasion, misdeclaration of value and suppression of vital facts from the
Government and imposed a sixty five per cent duty instead of the twenty per cent previously
afforded to DPC.
236
The Government of Maharashtra also decided to initiate penal action against
it for falsification of statements. Enron responded to the governments claim by stating that the
MSEB is raising frivolous claims in an attempt to avoid payments.
237
Tensions further
mounted when in November 2001, the MSEB chose to abstain from future board meetings of the
DPC. MSEBs reasoning for not attending the meetings was that the DPC has consistently
ignored our rebate claim for their material misrepresentation in the operating capabilities of the
plant. Since there is nothing that we can discuss we see no point in attending such meetings.
238

In short, the relationship between the DPC and the GOM and the GOI quickly deteriorated as a
result of a series of unproductive and retaliatory tactics.

When Inflexibility of the Agreement Contributes to Inflexible Positioning

Traditional business strategists often advocate for fixed, detailed and specific contracts in
the absence of what Dokeniya describes as institutionalized or informal norms or bodies of
administrative law that restrain the arbitrary use of government power even in the absence of
explicit legal restraints.
239
The disciples of this school of thought argue that fixed contracts are
fundamental for contractual stability. On the other hand, strategists concerned with various
phases of negotiation, including re-negotiation, place primacy on the flexible contract to account
for the inevitability of changing circumstances. In his study of the nature and causes of intra-deal

236
Customs Dept slaps DPC with Rs 283 cr fine, The Pioneer, August 9, 2001; (accessed December 5, 2001);
available from www.dailypioneer.com.com
237
Khozem Merchant, Enron Dispute heading for Court.
238
MSEB not to attend DPC meeting, The Economic Times, November 26, 2001 (accessed December 5, 2001);
available from http://economictimes.com
239
Dokeniya, 51.
74
and extra-deal negotiations, Jeswald Salacuse states, today, most contracts explicitly or
implicitly deny the possibility of change and therefore make no provision whatsoever for
adjustments to meet changing circumstances.
240
The PPA, while including a provision on
dispute settlement, did not include opportunity for renegotiation. As Salacuse notes, another
approach to contractual instability is to provide in the contract that at specified times or on the
happening of specified events, the parties may renegotiate or at least review certain of the
contracts provisions. In this approach, the parties deal with the problem of renegotiation before,
rather than after, they sign the contract.
241
The Godbole renegotiating committee criticized the
agreement for being a fixed agreement with fixed terms. The Godbole committee further urged
the signatory parties to proceed on broad guidelines to avoid the costs of another renegotiation.
The transition of leadership from the Congress-led party to the BJP-led coalition in
Maharashtra increased the political transaction costs of the deal for the Indian negotiating team.
The subsequent moral postulations and rhetoric espoused by the GOM reveal how changing
circumstances can lead to inflexible positioning. On this point, Raymond Vernon writes
(n)ational ideologies are ephemeral commodities; as governments come and go, one set of
national tenets displaces another. Accordingly, foreign investors must resign themselves to the
fact that the national goals and preferences to which they were responsive at the time they
entered any country are likely to undergo periodic metamorphoses.
242
While foreign investors
should resign themselves to this fact, Salacuse suggests that incorporating flexibility in the deal
may mitigate some of the risks associated with changed circumstances. Foreign investors may
engineer a flexible arrangement, for example, by advocating feedback loops in the contract and

240
Salacuse, Jeswald W. Renegotiations in International Business in Negotiation Theory and Practice, William J.
Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts, 1999), 346.
241
Salacuse, Renegotiating International Project Agreements, 1362.
242
Vernon, 52.
75
opportunities for renegotiation in addition to negotiating a series of short-term contracts instead
of one long-term contract.
243


Personality of the Players

In their analysis of why negotiations fail or succeed, most negotiation strategists account
for the unique personality traits of the negotiators. As Ashok Kapoor aptly states, the
negotiation process is strongly affected by the respective expectation frameworks of the
participating groups which can be understood through insight into the organizational,
environmental, and personality factors which influence the framework (emphasis added).
244
An
analysis of the personality of the players involved reveal that the senior members of Enrons
negotiating team were aggressive in originally pushing the PPA forward and emphatic in their
criticisms of their Indian counterparts with respect to upholding the terms of the contract.
Similarly, the high-profile players on the Indian side were militant in their disapproval of the
originally signed agreement and employed flamboyant language to convey their disapproval. The
personalities of the key players of both sides explain how the post-negotiation phase degenerated
to inflexible moral positioning instead of interest-based negotiating.
One Indian press reporter described Rebecca Mark, President and CEO of Enron
Development Corporation (EDC), as single-handedly responsible for pushing through the Enron
project by arguing that Enron was investing in India at a time when nobody was willing to look
at investment in India. Mark was known for her abilities to build friendly relations with
politicians and bureaucrats.
245
A local Texas paper remarked that when Rebecca Mark has a

243
Salacuse, Renegotiating International Project Agreements, 1362.
244
Kapoor, 271.
245
Srinivas, Will Enrons New India Strategy Work?.
76
power meeting, she's discussing power.
246
Mark fought hard to keep project alive during its
review process by the GOM after the BJP-led government came to power, but when hostilities
began to mount, it was Mark that swiftly initiated arbitration. When an interview asked Mark
what her thoughts were on what went wrong in India, Mark responded, I think most people
thought [our project] was too grandiose. They said no, you can't do that for India. Another thing
people thought we did wrong was not taking a local partner. But all the local partners with
multinationals in power projects in India have gone nowhere. People also thought we didn't do it
''the Indian way,'' whatever that means.You have to be pushy and aggressive (emphasis
added).
247

Joseph Sutton, who headed EDCs Asia Operations, resigned from his post on November 1,
2000. His pre-Enron career included military service. During his career at Enron, he was charged
with developing Enrons power plant at Dabhol and similar plants throughout Asia. During his
career at the Enron Development Corporation, he adopted a kind of missionary zealousness
about EDCs operations. When commenting on the setbacks experienced at Dabhol, he
remarked, judging from our Philippines experience, the first project through certainly paves the
way. The first one is like a `baptism for the country after that you can use boilerplate
documents; people are educated about the process.
248
He further argued if you cant make
Enron, GE, Bechtel bring in foreign investment, can you be serious about economic reform?.
249

The vision of Enrons CEO, Kenneth Lay, was that Enron would be the first energy company
to supply energy to sectors worldwide that were transitioning to deregulation. He further
envisioned a large role for Enron in a world where natural gas would be the choice energy in the

246
Madeline Baro. CEO Rebecca Mark heads Enron's ventures into foreign markets, November 23, 1997
(accessed December 5, 2001); available from http://www.texnews.com/biz97/mark112397.html.
247
Kripalani, Enrons Rebecca Mark: `You have to be pushy and aggressive.
248
Harvard Business School, Case A, 2.
77
developing world because of its reasonable cost, its ability to power combined cycle plants, and
its environmental safety compared to either coal or nuclear power.
250
Lay, with his important
contacts in the White House, was keen on back channel diplomacy and used aggressive lobbying
techniques to pressure the GOI to abandon litigation and to pressure the MSEB to make
payments. In a major setback to the negotiation process, Lay made the controversial statement
there are US laws that could prevent the US Government from providing any aid or assistance
or other things to India if they expropriate property of US companies.
251
After being accused of
issuing veiled threats to the Government of India, Lay responded that he had merely answered a
question about what might motivate the Indian government to help break the deadlock.
252
While
Lay did not explicitly ask the US government to consider imposing sanctions against India, the
effect of his statement was to further alienate the Indian public, provide anti-American fodder for
the Indian press and it affirmed the GOIs suspicion of Enrons intention to use its political and
financial muscle to bulldoze reform through.
253

When presiding as governor of Ohio, Richard Celeste adopted the belief that honoring
foreign investment agreements was of the utmost importance. When his predecessor had
negotiated a thirty million dollar incentive package to attract a multinational car manufacturer to
build a plant in Ohio, Celeste made the politically unpopular decision to honor the agreement
even though his state was saddled with a one-half billion dollar deficit.
254
Informed by this
experience, as US Ambassador to India, he was determined to protect US interests in the Dabhol

249
Ibid., 9.
250
Ibid., 2.
251
Enron Chief `threatens sanctions , August 25, 2001 (accessed December 5, 2001); available from
www.dailypioneer.com
252
Ibid.
253
Enron Chief backs down, August 27, 2001 (accessed December 5, 2001); available from
www.dailypioneer.com
254
Siva Y. Sankar, US Envoy warns against scrapping of Dabhol phase-II, January 22, 2001 (accessed December
5, 2001); available from www.rediff.com/money/2001/jan/22siva.htm.
78
investment deal. In one interview, he declared, when you consider the gap between letters of
intent or MoUs, and actual investment, there seem to be as many disappointments as successes
I would like to do what I can to ensure that Enrons Dabhol power plant remains a symbol of
successful American investment in India and not a symbol of the impediments that still hinder
even greater foreign direct investment.
255
In the same interview, Celeste noted, India needs
Dabhol power and declared with confidence that the Dabhol Power Company was a world
class capacity represent(ing) an invaluable foundation stone of Indias 21
st
century
infrastructure.
256
The Indian press reacted unfavorably to the crusade initiated by Celeste, Lay,
and Sutton and interpreted their remarks to be one-sided and arrogant in nature. The
controversial statements made by these individuals had the effect of pushing the Indian
negotiating team further into a defensive mindset.
Gopinath Munde, who was the most vociferous campaigner against Enron became
Maharashtras deputy CM under the BJP-Shiv Sena coalition, after serving as leader of the BJP
party in Maharashtra. It was Munde who made the infamous threat, to `throw the Dabhol project
into the Arabian Sea, instead of negotiating tariffs. The BJP-Shiv Senas choice of Munde to
head the Sub-Committee to Review the Dabhol Power Project in May 1995, was contentious
since Munde had been one of the most vocal components of the project under the leadership of
Chief Minister Sharad Pawar. While he was supposed to serve as an impartial investigator, in a
taped speech, Munde is heard to have declared I have come here to promise you that I am not
going to remain in the background of this fight against Enron but would be fighting along with
you till the time Enron is removed from this land.
257


255
Sankar, US Envoy warns against scrapping of Dabhol phase-II.
256
Ibid.
257
Mehta, 137.
79
All of the key negotiators were aggressive in defending their respective positions, as
demonstrated by their efforts to either push the agreement through or stall the negotiation
process. An understanding of the personality of the high-profile players in this case draws a more
defined picture of why this particular deal suffered from position-based negotiating instead of
interest-based negotiating.

The Hand of the White House

Keeping in mind the Indian governments historical distrust of foreign involvement in the
domestic affairs of the state, the involvement of the White House in the Dabhol debacle worked
to the detriment of the negotiation and post-negotiation processes. The strategy employed by
Enron to pressure the Government of India through diplomatic channels made available by the
US government, further politicized the project and resulted in defensive argumentation and
moral posturing by both parties.
With the election of the Bush administration, it appeared as if Enron would experience
greater leverage in its negotiations with the Government of India. Indeed, Enron provided
$114,000 in political action committee money for Bushs presidential campaign, making the
company one of Bushs biggest financial supporters. Enron began to reap the rewards of its
financial contributions during the early years of Bushs administration, beginning with the
passage of the 1992 Energy Policy Act, which forced the established utility companies to carry
Enron's electricity sales on their wires.
258
US Commerce Secretary Donald L. Evans publicly
acknowledged that Lay had called him several times to get the US administration to intervene in
the Dabhol matter. Lays appeals for assistance were not left unattended. When a review of the
project was being deliberated by the BJP government in Maharashtra, the US Energy secretary

258
Robert Scheer, Enron Is a Cancer on the Presidency, LA Times, January 2, 2002.
80
warned the GOM that, failure to honor the agreements between the project partners and the
various Indian governments will jeopardize not only the Dabhol project but also most, if not all,
of the other private power projects proposed for international financing.
259
Similarly, hours
before the GOM was to meet on Jan. 23, 2001 to discuss the future of the DPC, Richard F.
Celeste again issued a stern warning that reneging on sovereign commitments would have an
adverse impact on foreign investments in India.
260
On July 30, a government memo, labeled as a
Confidential Business Communication was distributed to members of the Dabhol Working
Group. The memo disclosed that State Department Official Christina Rocca had met with a
senior aide to Vajpayee. The memo also noted plans to broaden the advocacy related to the
power plant and called for resolving the dispute in a diplomatically correct manner.
261
The
memo suggested enlisting the aid of ambassador-designate Robert Blackwill, the World Bank,
the US embassy in New Delhi and the State Department and the Indian embassy in
Washington.
262
Peter Watson, the President of the Overseas Private Investment Corporation, the
overseas investment agency of the US government, wrote a letter to top Vajpayee aide, Brajesh
Mishra, I ask that you give this matter serious and immediate attention.
263
In addition Vice-
President Dick Cheney was reported to have met with the leader of the Congress Party, Sonia
Gandhi, in order to influence the oppositions position on the project.
264
Even the British
Chancellor of the Exchequer, Kenneth Clarke, expressed his solidarity with Enron. Ari Fleischer,
White House press secretary, reported Its not uncommon for leaders of the United States, no

259
Mehta, 145.
260
Sankar, US Envoy warns against scrapping of Dabhol phase-II.
261
Dana Milbank and Paul Blustein, White House admits that it helped Enron lobby with PM and Sonia for
Dabhol, January 20, 2002 (accessed January 21, 2002); available from www.indian-express.com.
262
Ibid.
263
US Govt, Indias Enron liaison, January 21, 2002 (accessed January 21, 2002); available from
www.dawn.com/2002/01/21/int13.htm
264
The Enron Collapse and India, January 23, 2002 (accessed January 23, 2002); available from
www.samachar.com
81
matter what party they are, to help make certain that if contracts are to be awarded overseas,
theyre given to Americans. Theres a lot of competition.
265
The White House further
maintained that it was appropriate for the US government to intervene to protect the interests of
American taxpayers.
266
While Fleischers justifications may have made sense from a business
and political standpoint, Yamini Narayanan points out that from the perspective of negotiation
strategy, all this only worsened the situation with the (Indian) politicians vowing not to
succumb to foreign pressure.
267
This conclusion certainly holds true for Union Home Minister
L.K. Advani, who warned we will not be dictated (to) by giant powers or power giants.
268

Indeed, the `hand of the White House ended up further driving the Indian re-negotiating team
into a dead-locked stance conditioned by moral defensiveness. This moral defensiveness can also
be explained by cultural factors.

H. NEGOTIATING WITH CULTURAL BLINDERS

Raymond Vernon notes that ..the existing level of tension generated by US-controlled
subsidiaries in host countries cannot be explained merely in terms of conflicts of economic
interest. Cases of such conflict exist; but they are too tangled and the results too obscure to
explain the universality and depth of the reaction. In search for prime causes, one is pushed off
economics to the political, social, and cultural variables. Variables of this sort, of-course, are
difficult to distinguish and difficult to measure(emphasis added).
269
When one disentangles
these variables, however, one finds that cultural and ideological tensions constitute two
important determinants of why the Dabhol deal ultimately collapsed.


265
US Govt, Indias Enron liaison.
266
Ibid.
267
Narayanan, 65.
268
Harvard Business School, Case B, 2.
269
Vernon, 230.
82
Theory
Any assessment of the other partys BATNA or BATrNA is complicated by what
Schelling describes as the self-reference criterion. Specifically, negotiators unconsciously
reference their own cultural habits and norms even when attempting to gauge or anticipate the
actions, interests and positions of their negotiating counterpart. Schelling argues, the larger the
discrepancy in habits, culture, and business conduct between a foreign country and the United
States, the stronger the subjective uncertainty.
270
Similarly, Robert Janosik argues that ones
thinking pattern derives from ones cultural context and international business conflict can often
be explained by the approach of culture as dialectic, as applied by Erik H. Erikson in
Childhood and Society. This approach attempts to define culture by the various competing
tensions that exist amongst subset values or norms and when applied to the discipline of
international business strategy, explains why international business conflict can exist.
271


Cultural Limitations in the Indian Teams Negotiating Strategy
Indian society has suffered from a historical distrust of foreign multinationals. As
McLarney and Dastrala point out, popular belief in India is that any dealings with foreigners are
bound to be either unfair or disadvantageous to India.
272
Indeed, the Indian public had relatively
little experience with large foreign multinationals, as the characterizing feature of Indias private
sector pre-liberalization was the domination of family management and family ownership, as in
the case of the Birla, the Ambani and the Tata families. Public distrust of foreign companies can
also be explained by the fact that India assumed a protectionist ideology post-Independence like
many post-colonial regimes, in an effort to direct its economy towards self-reliance. The cadre of

270
Kapoor on Shcelling, International Business Negotiations: A study in India, 263.
271
Robert J. Janosik. Rethinking the Culture-Negotiation Link, in Negotiation Theory and Practice, eds. William
J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at Harvard Law School,
1999), 239.
272
McLarney and Dastrala. 360.
83
technocrats and professional civil servants educated during this period shared a statist view that
the state would regulate economic and social activity in India. The evolution of this socialist
ideology has had a profound impact on Indias program of liberalization in the 1990s. The
enthusiasm, expressed in the private sector and in some bureaucratic agencies, to foster export-
oriented growth and cultivate large-scale private enterprise, has not been echoed by all
government agencies or even society-at-large which remain firmly entrenched in their socialist
values. This ideological tension has produced an incoherent program of change and
consequently, economic liberalization has never really been understood or promoted as a
national or public project. As Supriya Roychowdhury notes, while the political impact of
liberalization varied, both contraction of the state and greater reliance on private profitability
were interpreted as pro-capital and anti-poor in the language of politics. Thus, for example, the
democratic imperative and the socialist rhetoric of the Congress Party in India imposed very
definite limits on how far privatization of state enterprises could proceed on the adoption of
advanced technologies that threatened to displace labor.
273
Roychowdhury further states that,
populist statism has remained the dominant political catchword not the language of market
economics despite a move towards liberalization.
274

Efforts have not been made by the political leadership in India to move towards
constructing an alternative ideology that could function in Indias new economy. These cultural
and ideological underpinnings in India explain popular backlash against the Dabhol project, why
the Indian government could not sell the merits of the Dabhol project to the Indian public, and
ultimately why Indian negotiators assumed a hardliner stance in their negotiations.


273
Roychowdhury, 2.
274
Roychowdhury, 111.
84
Cultural Limitations in Enrons Negotiating Strategy

Theoretical frameworks that explain organizational culture are useful frameworks to
integrate into negotiation analysis. In their paper, Socio-political structures as determinants of
global success, Carolan McLarney and Ramakrishna Dastrala examine the strategic issues
regarding cross-cultural management to understand their implications on business organizations.
With respect to the inflexibility of the large MNC, the authors cite Pfefer and Salanik who argue
that organizations that are large have more power and leverage over their environments. They
are more able to resist immediate pressures for change, and moreover, have more time to
recognize external threats and adapt to them. Growth enhances the organizations survival value,
then, by providing a cushion, or slack, against organizational failures.
275
McLarney and Dastrala
concur with this analysis as they argue that, ..large multinational companies sometimes become
complacent, and tend to overlook the critical cultural barriers in global strategy.
276
In the
Dabhol case, the authors argue that Enron gave primacy to the political and economic variables
to direct its strategy in India, ignoring the core cultural values as part of its organizational
strategy.
277

While broad organizational culture lends insight into Enrons strategy an examination of
the cultural features specific to Enron need to be explored as well. As one reporter states, Enron
is a bull-market machine. Its investor relations and culture even its business model were
ideally suited to the confidence and ready money that pervaded Wall Street in the 1990s.
278
One
analyst at PriceWaterhouseCoopers described Enron as aggressive in the way it did financing
but it was very much in character because Enron was very aggressive in the way it did

275
McLarney and Dastrala, 357.
276
Ibid.
277
Ibid, 362.
278
McNulty. 2.
85
everything.
279
Enrons own description of its objectives and mission confirms this
characterization. We are a very eclectic bunch with some ex-military people and some ex-
entrepreneurs. We are brought together with a certain amount of missionary zeal which I think
you have to have in this businessI think for us that missionary zeal has three parts first, that
these projects are good for the country. Second, these plants are environmentally safe and
without equal when you consider the options of coal or nuclear power. Third, we are bringing a
market mentality and spreading the privatization gospel in countries that desperately need this
kind of thinking. We are in the business of doing deals. This deal mentality is central to what we
do. Its never a question of finding deals, but of finding the kind of deals we like to do. We like
to be pioneers.
280
An example of the over-exuberant and borderline aggressive tactics
employed by Enron during its deal-making with the GOM is the report authored by its legal
team, contemptuously titled Problems Concerning the Application of the Indian Electricity
Acts (1992). This report was neither solicited nor well-received by a community that has had a
historical distrust of foreign interference in domestic regulations. Enrons Rs. 4 crore campaign,
inappropriately coded as an education campaign, to win over local residents by preaching the
merits of the project and by providing development incentives is a further illustration of the
companys missionary zealousness that did not harmonize well with the Indian cultural
landscape.

I. ORGANIZATIONAL CONSTRAINTS AND INSTITUTIONAL MEMORY AS
DEBILITATING FACTORS

Aharoni observes that the negotiation process is complicated by the fact that it contains
various elements of individual and organizational behavior, influenced by the past and the

279
Ibid., 3.
280
Harvard Business School, Case A, 1.
86
perception of the future as well as the present. It is composed of a large number of decisions,
made by different people at different points in time.
281
Organizational precedents and the
predisposition of organizations to accept precedents as binding and look at standard operating
procedures (serve) as constraints in any problem-solving situation.
282


Organizational Precedents
Enron relied greatly on its management success in other emerging markets as a predictor
of how to guide negotiations with India. Enrons success in China in operating a $135 million
150MW power plant on Hainan Island, an economic free trade zone of the southern coast of
China was an example of its success with fast-track projects.
283
Similarly, Enron had
successfully negotiated PPAs for several fast-track projects with the Government of the
Dominican Republic, Turkey and Indonesia. The commitment that Enron had to accelerating
negotiations with the GOM was most likely influenced by its past successes in negotiating fast-
track projects, as it paid minimal attention to studying the particularities of doing business in
India.

Institutional Memory As a Constraint in the Decision-making Process
The legacy of those killed and injured in the Bhopal disaster of December 1984 that
involved the US chemical company, Union Carbide, continues to be a source of anguish for
Union Carbide employees and the residents of Bhopal in Madhya Pradesh, India. This event had
the lasting effects of increasing public concern nationally about issues concerning due diligence
and increasing the number of public advocacy organizations throughout India. The memory that
lingered from this widely publicized event institutionalized fears about the unrestrained

281
Kapoor on Aharoni, International Business Negotiations: A study in India, 261.
282
Kapoor on Cyert and March, International Business Negotiations, 267.
283
Fast-track projects are projects that generate less than 200 MW and can be completed within t welve to
eighteen months. See Harvard Business School, Case A, 3.
87
sovereignty of MNCs in India. Similarly, the memory that lingered from the termination of the
original PPA, colored Enrons attitudes towards renegotiating with the Government of
Maharashtra. Kenneth Lay reported (w)e have fought this once before, put it back together,
fixed the contracts, but we dont want to do that again and have the same problems in a few
years.
284
The variables of organizational precedents and institutional memory perpetuated
distrust on both sides and therefore need to be taken into account when discussing failures to
international business transactions.

J. THE IMPORTANCE OF EFFECTIVE AND BROAD-BASED COMMUNICATION

Theory
While the intuition of most negotiators would provide that effective communication is an
important feature of any negotiation, the reality is that most international negotiations suffer
from a lack of communication between the signatory parties. Once again, negotiation theory
helps explain why this paradox exists. Fisher and Ury in Getting to Yes explain that
communication breaks down when each side has given up on each other and talks merely to
impress their constituents or third parties. They further note that even if one party engages in
dialogue, the other side might not be listening because it is preoccupied with the concerns of its
own constituents. In both cases, problems of misunderstanding arise.
285


The Breakdown of Effective Communication between the Negotiating Parties
Fisher and Urys explanation is applicable to the Dabhol case. The Government of Indias
affront to what it perceived to be a veiled threat issued by Kenneth Lay that the US government
may resort to imposing sanctions on India is an excellent example of how misunderstandings
arise between parties to an agreement. Furthermore, the flamboyant language and anti-Enron

284
Julie Earle. Enron wants out of Indian Power Project, The Financial Times (London), July 27, 2001 (accessed
December 5, 2001); available from Lexis -Nexis Academic Universe.
88
rhetoric employed by the Maharashtran government is an example of how parties to an
agreement, during moments of extreme hostilities, speak to their political constituents without
regard to the fact that their hostile declamations are simultaneously affecting the strategy and
positioning of their negotiating counterparts.
Effective communication was broken down when the MSEB effectively stopped
communicating with other members of the DPC board by refusing to attend their board meetings
as an act of protest. In situations like this, Ashok Kapoor argues for dialogue to take place
through informal communication networks in order to help relieve tension.
286


The Breakdown of Effective Communication with Stakeholders
As alluded to earlier in this section, the interests of stakeholders were not actively
incorporated in an equitable manner in the decision making process, which caused significant
distrust of the deal within local communities. Neither the merits of the deal nor the conditions
and terms of agreement were communicated to the local communities, which contributed to the
overall untenability of the agreement. The Indian public had learned about the project for the first
time on September 22, 1993 when a notification was published, as required under section 29 of
the CEA.
287
The notification stated that any licensee or any another person interested in taking
objection, if any, in respect of the above scheme may please make representation to that effect
within a period of two months from the date of publication of this notification. Any
representation received after 2 months shall not be entertained.
288
Very little information about
the project was provided in this initial communication. Mehta estimates that approximately
eighty per cent of the letters in response to the public notification were from people seeking

285
Fisher and Ury, 32-3.
286
Kapoor, 281.
287
Mehta, 73.
288
Mehta, 73.
89
information about the overall impact of the project and included requests for technical
literature on the project.
289

In response to the notification, one hundred and thirteen residents in the village of Veldur
signed a petition that stated,
We the residents of the village Veldur, hereby represent to you that we have strong objection to
the Dabhol Power Project that is being set up in the villages of Veldur, Anjanwel and Ranvi
in Guhagar Taluka in Ratnagiri district. While various actions to set up this project were
in progress, we the local people were kept in the dark by the Government.
290


In their Report on Field Visit to Dabhol on February 19, 1994, three members of the
Environmental Assessment Committee (EAC) stated that,
We discovered that local communities were unaware of the DPC plans till very recently. It was,
for instance, only three days before we arrived that the first notices for land acquisition were received
by villagers. This has caused considerable discontent among the villagers and though our itinerary was
not public knowledge we were stopped at least eight times along the route by people protesting the
siting of large-scale projects in and around their lands.
291


One reason why domestic stakeholders were kept in the dark about the agreement is that
both parties were bound by the confidentially clause registered in the PPA to keep the terms of
the PPA classified. Clause 21, the confidentiality clause, of the PPA read
both parties shall at all times during the continuance of this agreement and for a period of
three years following the termination: use their reasonable endeavors to keep all information
regarding the terms and conditions hereof and any data and information acquired under and
pursuant to this agreement confidential and accordingly neither part shall disclose the same
to any other person.
292


Enron further claimed that the confidentiality clause was instituted not for secrecy but
meant to protect the DPC and MSEB during the negotiation period.
293
Instead of learning about
the details of the project directly from their own government, the Indian people learned about the

289
Mehta, 75 and 78.
290
Mehta, 92.
291
Mehta, 86-7.
292
Narayanan, 59.
293
Ibid., 61.
90
project through a leaked report in the press.
294
This development was further complicated by the
fact that the method by which Enron often accomplished its goals was through powerful lobby
techniques, almost bypassing the constituents to whom it was serving. As one journalist states,
so far Enron has maintained a studied silence in public while it continues to lobby hard in
private.
295
Jairam Ramesh explains that the government of India has been accustomed to
brokering deals in confidentiality. It is this public silence that Ramesh cites as necessary to
execute deals in India to cope with Indias diverse political spectrum of voters and its large
bureaucracy.
296
On the other hand, Kirit Parikh, a member of the Indian renegotiating team,
argues the credibility of politicians and bureaucrats in India is such that the public could trust
only competitive bidding with open public procedures. The fact that Enrons PPA was kept a
secret until the new government made it public created much suspicion. There was nothing new
in the PPA that needed to be kept secret, and in my opinion, keeping it so ill-served the interests
of (the) MSEB and even Enron.
297
Both Ramesh and Parikh are correct in their observations.
While elements of the PPA should not have been disclosed, at an earlier stage, greater
information should have been communicated to the local residents of the community to prevent
suspicion and subsequent backlash against the project.

K. SUMMARY
While an agreement and a renegotiated agreement was reached between Enron and its
partners, and the Government of Maharasthra, concerning the establishment of the Dabhol Power

294
The terms of the agreement had leaked to the public on March 21

1995 in Business Line and then in the April 7,
1995 issue of Frontline. See Mehta, 137.
295
Sucheta Dalal. The Enron Fiasco (December 20, 2000); available from
www.rediff.com/money/2000/dec/20dalal.htm
296
Jairam Ramesh. Personal Communication. Thursday November 29, 2002.
297
Parikh, 226.
91
Project in Maharashtra, India, the negotiation process when studied in its totality was tarnished
by an inability and unwillingness to actually implement terms of the agreements.
The story of how and why there was an inability to implement terms of the original and
renegotiated agreement can be explained from the strategic lens of negotiation theory. Firstly, the
agreements suffered from time deficiencies which can be explained by the hastiness and the
lack of timeliness at which the agreements were concluded. Secondly, there was little initiative
taken to resource the negotiations. Thirdly, the process became diluted through an erosion of
trust between the parties in large part due to the fact that no business relationship was developed
as part of the pre-negotiation strategy. This is a significant development as trust is a stabilizing
and powerful factor in negotiations. Fourthly, the terms of the agreement reflected and cultivated
asymmetrical power relations between the actors. Fifthly, the mistake of not incorporating
stakeholders by building a consulting mainframe from the onset came back to bite the
concerned parties and the wound never healed as domestic constraints limited the range of
choices facing negotiators. Additionally, both sides participated in moral-based positioning and
lock-in tactics versus interest-based positioning which contributed to the escalation of hostilities.
Furthermore, the act of negotiating with cultural blinders undermined the negotiation process.
Ineffective communication also became a debilitating factor in the negotiation process both with
stakeholders and between the negotiating parties. Finally, organizational constraints and
institutional memory weakened the tenability of the agreements concluded. The following
section will synthesize the findings outlined in this section to derive a sustainable model that will
address where traditional business theory and negotiation theory intersect to explain factors that
lead to failed business transactions.


92
PART IV - CONCLUSION


In discussing the Dabhol project as a case study, the above analysis attempts to explain
the idiosyncratic and intangible factors that lead to failed business transactions, which for the
most part are accounted for in negotiation literature but not in theories concerning business
strategy. A useful method to make this distinction is to explore theories and frameworks that
illustrate this point. Raymond Vernons theory of obsolescing bargaining is an excellent
example of a theory to study, as it addresses the business risks and uncertainties that inform
differentials in bargaining power between host governments and multinational companies, which
lead to failed business transactions.

A. Vernons Obsolescing Bargaining Framework

Vernons theory was originally conceived to explain foreign investments in the natural
resource sector in developing countries. Over time, however, Vernons model has been applied
to explain other forms of investment including the privatization of infrastructure projects in
developing countries. Vernon explains that when the initial agreement is made between a host
government and multinational corporation, the MNC negotiates with tremendous bargaining
power, as it is furnishes the host country with superior technology, management expertise and
access to capital. As risk and uncertainty are high, the investor is often able to extract favorable
terms from the host government. As the host government gradually acquires its requisite
technology, management skills and capital, and additional investors enter the market to take
advantage of increasing returns of scale from newly-created infrastructure, the quasi-monopoly
of the first investor is gradually eroded. During this period, the bargaining power eventually
shifts from the MNC to the host government, at which point the host government has a greater
propensity to re-negotiate the premium concessions afforded to the investor. In a more extreme
93
example, at the point where the foreign invested project is extremely asset-specific, it is
vulnerable to confiscation and expropriation by the host government.
298
At this point, the MNC
runs down the operations of its project and exits the country to salvage its fixed investments and
sunk costs.

Figure 5 - Raymond Vernon's Obsolescing Bargain Model




(source: Paul Vaaler, EIB231, Session 11, www.murrow.org)


B. An Integrative Approach to Analyzing Business Transactions

While Vernons theory concerns the entire lifecycle of an investment, there are useful
points of comparison that can be made to explain distinctions between traditional business
strategy and negotiation theory.
Firstly, Vernons explanation of the host governments propensity to renegotiate the deal
is built on a distributive bargaining model instead of an integrative bargaining model.
Negotiation strategists often subscribe to the second model, which is premised on the assumption
that transactions can and should occur beyond the zero-sum game reasoning.

298
Vernon, Sovereignty At Bay.
94
Secondly, Vernons theory assumes that the host government and the foreign investor, in
protecting their self-interests, are rational. His theory does not take into account the fact that
players are irrational because they are constrained by nationalist ideologies or domestic
constraints. Actors may also be irrational if there exits an asymmetry of information, which can
occur with new government actors which do not have the same access to information as their
MNC negotiating counterparts.
Thirdly, with its emphasis on asset specificity and sunk costs, Vernons theory describes
the classic MNC concern as centered on its fixed investments. According to Vernon, the transfer
of fixed assets and know-how ultimately alter the bargaining relationship between the MNC and
host government. This analysis ignores other issues that alter the bargaining power of each party,
and which ultimately influences the partys willingness to execute a negotiated deal, salvage a
deal through renegotiations, or exit. These issues include timing constraints, political constraints,
cultural and ideological constraints, communication constraints (e.g. asymmetry of information
because of revolving door governments), organizational constraints, personal constraints (e.g.
managerial action as informed by personal preferences and motivations), constraints that emerge
through vested interests, knowledge, skills, commitment, intentions, and capacity support, and
constraints that are generated by local stakeholders. It is this last deficiency that this paper has
attempted to address.
Figure 6 attempts to explain these constraints in an integrative bargaining framework.
Vernons explicit assumption that there is a trade-off in bargaining power between both actors
during the life of the project is readjusted to account for an integrative bargaining framework
wherein there is a mutually beneficial time to negotiate and execute a deal. This optimal period is
represented by the point (Point C) at which both parties costs or constraints to bargain intersect,
95
which is located at the minimum point in the total bargaining cost curve. Secondly, Vernons
assumptions are readjusted to account for the various bargaining constraints noted above that
inform each partys willingness to enter in a deal and renegotiate the deal, above and beyond the
risks associated with fixed investments and sunk costs.
The beginning point, Point A, on the horizontal axis (time) represents when the host
government first comes into power and/or when the multinational first enters the country in the
pre-negotiation phase. Failed business transactions occur at Point B when negotiations are rushed
in the beginning of the relationship between host government and the MNC, and when the host
countrys bargaining constraints are significantly higher than the multinational due to, for
example, greater vulnerability to extreme demands of its constituents and party coalition
members, as was the case with the BJP-Shiv Sena alliance when it was newly formed. In this
scenario the host country has less bargaining power to negotiate a viable `win-win deal. Indeed,
only after significant time elapsed in office was the BJP-led government willing to renegotiate
the PPA. Similarly, point D represents the point where the MNCs costs to negotiate or
renegotiate a deal increases, when organizational constraints and distrust become further
entrenched, as was the case with the DPCs initial refusal to attend the Singapore negotiations.
Negotiating at any point other than at point C, increases the overall costs and risks of negotiating
a business deal (see `Total Bargaining Cost Curve). At these points, the negotiators, when
failing to integrate successful business strategy with negotiation strategy and when failing to
internalize factors such as building trust, choosing leaders that will not engage in moral-based
positioning, adequately researching the culture of ones negotiating counterpart, will most likely
produce an unsustainable business transaction that may ultimately fail.

96

Figure 6 - Balancing Constraints to Negotiate a Successful Business Deal
























C. Concluding Remarks
An increasing number of governments in developing countries have committed
themselves to programs of privatization, particularly in infrastructure projects. As the transfer of
ownership and management of these assets from the public to the private sector occurs,
multinational companies that have the capital and expertise to service these agreements are
adjusting to the fact that they are operating in highly regulated industries and most often
negotiating directly with the host government.
299
On another note, Jeswald Salacuse notes that
international business deals can be understood as more unstable than domestic business

299
Mirjam Schiffer and Beatrice Weder, Catastrophic Political Risk versus Creeping Expropriation: What
determines Private Infrastructure Investment in Less Developed Countries?, working paper for the World Bank,
December 1999; available from http://www.unibas.ch/wwz/wifor/staff/ms/infra-jan10.pdf.
C (Optimal Time)
Time
Total Bargaining Costs
Bargaining
Costs/Constraints
for the MNC
Examples:
Sunk Costs increase
bargaining constraints over
time(Vernon)
Acclimatizing to local
cultural preferences and
ideologies
Bargaining Costs/Constraints
for the Host Government are
High in the Beginning
Examples:
Asymmetry of Information in
the beginning for `revolving
door governments
Vulnerable to Political
stakeholders holding
negotiations hostage when first
consolidating authority

Total Bargaining
Costs
A B
D
97
transactions due to issues of currency devaluation, radical shifts in governments and government
policies, divergent legal systems and different culturally-reasoned negotiating practices.
300

Understanding these two related points crystallizes an emerging trend in this field:
negotiations that occur directly between host governments and MNCs will increase over time
while risk and uncertainty, when compared to risk incurred in domestic business transactions,
will not decrease in the immediate future. There is every reason to believe, therefore, that an
alignment of interests and positions, as defined by both traditional business strategists who study
institutional factors and negotiation strategists who focus on idiosyncratic variables, is essential
to produce viable international business deals. Without such alignment the consequences can be
damaging and lasting. Indeed, while an eerie calm hangs over the Ratnagiri district that was once
hailed the symbol of development and promise in India, one wonders if and how time, as the
`final arbitrator, ultimately ended and `crowned all the players involved.












300
Salacuse, Renegotiating International Project Agreements, 1341.
98
BIBLIOGRAPHY


BOOKS

Fisher, Roger and William Ury. Getting to Yes: Negotiating Agreement Without Giving In, 2
nd
ed, ed. Bruce Patton
(New York: Penguin Books, 1991).

Harvard Business School, Enron Development Corporation: The Dhabol Power Project in Maharashtra, India (A),
Case No. 9-797-086 (Cambridge, Massachusetts: Harvard Business School Publications, 1997).

Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (B)
Case No. 9-797-085 (Cambridge, Massachusetts, Harvard Business School, 1997).

Kapoor, Ashok, International Business Negotiations: A study in India (New York: New York University Press,
1970).

Mehta, Abhay, Power Play: A Study of the Enron Project (Hyderbad: Orient Longman Ltd, 1999).

Shakespeare, William. Richard II (Washington: Washington Square Press, 1996).

Vernon, Raymond. Sovereignty At Bay: The Multinational Spread of US enterprises (New York: Basic Books,
1971).

ARTICLES IN EDITED BOOKS

Janosik, Robert J. Rethinking the Culture-Negotiation Link, in Negotiation Theory and Practice, eds. William J.
Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at Harvard Law School,
1999).

Rubin, Jeffrey Z. Some Wise and Mistaken Assumptions about Conflict and Negotiation in Negotiation Theory
and Practice, ed. William Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at
Harvard Law School, 1999).

Salacuse, Jeswald W. Renegotiations in International Business in Negotiation Theory and Practice, William J.
Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation on Harvard, 1999).

Saunders, Harold H. We Need a Larger Theory of Negotiation: The importance of Pre-negotiating Phases in
Negotiation Theory and Practice, eds. William J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The
Program on Negotiation at Harvard Law School, 1999).


DISSERTATIONS

Dokeniya, Anupama. Re-forming the State: An institutional analysis of telecommunications liberalization in India.
Ph.D. diss., Cornell University, 1999.

Narayanan, Yamini. Privatization of the Electric Utility Industry in India: A Case Study. Ph.D diss, University Of
Oklahoma, 1998.

Roychowdhury, Supriya. State and Business in India: The Political Economy of Liberalization, 1984-89. Ph.D.
diss., Princeton University, 1992.

99
JOURNALS

Mc.Larney, Carolan and Ramakrishna Dastrala. Socio-political structures as determinants of global success: The
case of Enron Corporation, International Journal of Social Economics 28, no. 4, (2001): 349-67

Parikh, Kirit, The Enron Story and its Lessons. The Journal of International Trade & Economic Development 6,
no. 2 (1997): 209-230.

Salacuse, Jeswald W. Renegotiating International Project Agreements, Fordham International Law Journal 24,
no. 4. (April 2001):1319-1370.

REPORTS

Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 1999 (accessed
December 5, 2001); available from http://www.hrw.org/reports/19999/enron/enron2-1.htm
World Bank, India: Dabhol Power Project, April 30, 1993. Available from
http://altindia.net/enron/Home_files/Wbreport.htm

WEBSITES

http://altindia.net/enron

Transparency International 2001 CPI Index; available from http://www.transparency.org/cpi/2001/cpi2001.htm)

INTERVIEWS/LECTURES
Gupta, Sanjay. Lecture at the Fletcher School of Law and Diplomacy. Boston, Massachusetts. March 20, 2002.
Ramesh, Jairam. Interview at Harvard University. Boston, Massachusetts. November 29, 2001.

NEWSPAPER ARTICLES


`FIs completely ignored us in DPCs proposed sale says MSEB, The Press Trust of India, November 23, 2001.
Accessed December 5, 2001. Available from Lexis -Nexis Academic Universe.

Agenda for fresh talks with Enron chalked out, Business Line, May 5, 2001. Accessed March 31, 2002. Available
http://www.blonnet.com/businessline/2001/05/06/stories/14065607.

Agreeing to Enrons tariff was a mistake: Govt, The Times of India, January 25, 2002. Accessed January 26,
2002). Available from www.timesofindia.com.

Bid to gather political support Centre initiative on Dabhol crisis, Business Line, October 14, 2001 Accessed
December 5, 2001. Available from www.hinduonnet.com/bline/2001/10/14/stores/1414565db.htm)

Centres firm no to DPC, August 18, 2001. Available from www.dailypioneer.com.
Centres firm no to DPC, The Pioneer, August 18, 2001. Accessed December 5, 2001. Available from
www.dailypioneer.com.

Customs Dept slaps DPC with Rs 283 cr fine, The Pioneer, August 9, 2001; Accessed December 5, 2001.
Available from www.dailypioneer.com.com
100

Dabhol issues termination notice still open to `solutions minus Godbole report, Business Line, May 20, 2001.
Accessed March 31, 2002. Available from http://www.blonnet.com/businessline/2001/05/20/stories/14205601.htm

Dabhol Power Co. in grave cash crisis, India Abroad, December 21, 2001.

DPC agrees to meet govt panel as a `courtesy: Godbole terms of reference not acceptable, rediff.com, May 4,
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