Enron in Maharashtra:

Power Sector Development and National Identity in Modern India

Sylvie Choukroun

A THESIS

in

International Studies

Presented to the Faculties of the University of Pennsylvania in Partial

Fulfillment of the Requirements for the Degree of Master of Arts

April 16, 2002

The Lauder Institute

Professor Emily Thompson

 Table of Contents

Introduction................................................................................................................................. 1

Development of Postcolonial Energy Policy ............................................................................. 6

Economic Liberalization of 1991 ............................................................................................. 14

Origins of the Dabhol Project .................................................................................................. 19

The Renegotiated Deal.............................................................................................................. 25

Mixed Reactions to Enron........................................................................................................ 32

Conclusion ................................................................................................................................. 40

Bibliography .............................................................................................................................. 44
 1

Introduction
In 1993, Enron Corporation signed a contract with the Maharashtra state

government to build a 2,015 megawatt power station. The Dabhol project, requiring $2.8

billion in capital investment, represented the largest contract ever signed in India and the

first foreign investment in its power sector. In the aftermath of India’s economic crisis of

1991, Enron was proposing to build a modern power plant that would satisfy India’s

electricity needs at a time when most foreign companies could not conceive of managing

the risks of investing in India. According to one banker, “to think that Enron planned to

raise, as it had originally contemplated, $1.75 billion in the debt markets at a time when

international banks were making loans to India no longer than 365 days was nothing short

of inspired lunacy. It was visionary.”1 Enron was rewriting the rules of power plant

development for both the Indian government and the international investment

community.

The Dabhol project headlined daily in Indian newspapers from the moment the

first agreement was signed with the Maharashtra state government. As the Indian press

debated the merits and shortcomings of the deal, it did not take long for opponents of

Enron to make their voices heard. Arundhati Roy, the novelist and anti-globalization

activist echoed the opinion of many when she asserted, “It was the biggest contract ever

signed… and probably, no obviously, the biggest con job on an entire nation.”2 By the

time Phase I reached commercial operation in May 1999, the project had survived

allegations of corruption, local government opposition, and renegotiation of the project

contracts. It appeared that Enron had finally convinced the skeptics within both India and

1
Ben Edwards and Mukul Shukla, “The Mugging of Enron,” Euromoney (Oct 1995), 3.
2
Jonathan Rugman. Power Failure. Channel 4 News, Special Reports. 21 June 2000.
 2

the international investment community that it was possible to successfully invest in

India. Yet by June 2000, the Maharashtra State Electricity Board declared that it did not

have enough money to pay its $20 million monthly electricity bill from the Dabhol plant.

In the face of such expensive electricity, Enron’s opponents intensified their campaign.

The plant was generating electricity, but India’s energy problems were far from resolved.

The reasons why India should be left with a well-engineered plant that it can ill

afford are the result of a complex dynamic between politics, technological development

and economic growth in India. As the saga of Dabhol has unfolded, it has often been

analyzed in the press primarily as a conflict between Enron and its detractors. Yet as the

conflicts surrounding the project became more pronounced, the focus shifted away from

allegations about Enron specifically. The debate surrounding the negotiation between the

Maharashtra government and Enron was transformed into a national debate about how

India should expand and improve its power sector. The Enron story tapped the

fundamental issues regarding India’s role in its own modernization and technological

advancement. What emerged from these debates in the Indian press was a philosophical

divide within India about the relationship between technological advancement and

national identity. The Enron project was made possible due to a shift in national policy

away from government ownership of assets in the energy sector toward private

investment. A symbol of progress and technological advancement, the power sector was,

since independence, at the heart of India’s economic soul, literally fueling the economic

growth of postcolonial India. Opening the power sector to foreign investors was

controversial; Enron intensified the controversy by proposing to invest in India with a

project of such magnitude.

 3

As Enron struggled in negotiations with the Maharashtra State Electricity Board,

the state government itself battled with its counterparts from the central government in

Delhi. Caught between opposing camps within India, the Enron project was appropriated

by Indian politicians as they fought their own internal political battles. Enron used these

conflicts to its advantage as it convinced government agencies to help bring the project to

commercial operation in the face of numerous setbacks. For its part, the Indian press was

forming new opinions in evaluating the project as related to larger ideas about electricity

sector development. Because Dabhol was the benchmark project for private power

inIndia, the failures of the project served to clarify issues about the meaning of the energy

sector for India’s future prosperity. The Enron story can be analyzed as the next chapter

in the story about power sector development in India as related to issues of national

identity and modernization that were formulated at independence.

In recounting the history of the French nuclear program, Gabrielle Hecht builds

the connection between “technological prowess and national identity” in post-World War

II France.3 She traces the discourse on French national identity since the 1950’s, relating

it to the development of technological expertise in nuclear energy. Her framework relates

to this analysis of the discourse of power sector modernization in postcolonial India by

providing a link between political agendas and technological progress. Hecht’s

exploration of the “hybrids of technology and politics” also holds for the Indian where

politicians and scientists worked together to build an ideological and political platform

for the newly independent nation. Her framework provides a means by which to

3
Gabrielle Hecht, The Radiance of France (Cambridge: The MIT Press, 1998), 5.
 4

understand the connection between power sector policy decisions and cultural identity in

India at the end of the British colonial rule.

Hecht’s concept of “technopolitics” – “the strategic practice of designing or using

technology to constitute, embody, or enact political goals”4 – elucidates the Enron

controversy as emblematic of the strong link between issues of modernization and

national identity in India. The decision to open the power sector to foreign investors was

made only after long debates about potential solutions to serious operating inefficiencies

in the power companies. Allowing a foreign company to take full ownership of

generation assets in India marked a significant departure from the ideology of self-

sufficiency and government control that was advocated in nationalist circles since

independence. Because the Dabhol plant was an importation of technology by foreigners,

Hecht’s argument that this hybrid made “nuclear technology both French and

indispensable to Frenchness” does not extend to this analysis of Dabhol.5 The notion that

non-Indian companies could successfully be the bearers of modernization complicates

Hecht’s argument as it stands for the French experience.

For India, technology and policy decisions are linked not only to the dialogue on

technological progress for purposes of economic growth, but also to the concept of Indian

self-sufficiency in a postcolonial world. Daniel Headrick has explored the interaction

between the tropical colonies and their European counterparts through the dynamics of

technology transfer under colonial rule. Headrick contrasts the “successful relocation of

European technologies under colonialism and the delays and failures in spreading the

4
Michael Thad Allen and Gabrielle Hecht, introduction to Technologies of Power: Essays in Honor of
Thomas Parke Hughes and Agatha Chipley Hughes, Hecht and Allen, eds. (Cambridge: The MIT Press,
2001), 14.
5
Hecht, 5.
 5

corresponding culture” as a result of the inequality between the colonies and their

European metropoles.6 In order to understand the implications of technology transfer in

the Enron case, it is relevant to explore the similarities of the Dabhol project, the largest

project in postcolonial India, to the development of the Indian rail network, the largest

construction project undertaken within the British Empire. The Indian rail system was a

project of British engineers who convinced the East India Company to subsidize its

construction. Due to high expenses, the British investors received low returns on their

investment. The Indian taxpayers bore the risk when the government had to make up the

difference in order to provide the minimum guaranteed return. In a system that provided

no incentive for cost reduction, Indian government officials complained, “this was an

intolerable burden imposed by British capitalists on the Indian people, part of the

infamous ‘drain’ of India’s wealth.”7 The British succeeded in taking control of the

Indian subcontinent in a new way by linking areas that had never before been connected.

However, in spite of the fact that India had one of the world’s top rail networks at the end

of the nineteenth century, it was the only nation among those with rail networks that

failed to industrialize.8 The railway opened India’s economy to international trade and

increased productivity, yet the proportion of people working in the different economic

sectors of agriculture, trade and industry had not changed by Independence as a result.9

In the Enron case, a similar story evolved in which the goal of improving the economic

condition of the people through foreign investment in a major technological project was

not achieved. As such, the story of Enron’s investment in India must be considered within

6
Daniel Headrick, The Tentacles of Progress (Oxford: Oxford University Press): 1998, 16.
7
Headrick, 71.
8
Headrick, 56.
9
Headrick, 89.
 6

the context of a memory of the destructive impact of foreign technology during the

colonial era. It is the paradox of India as a modern yet underdeveloped nation.

Development of Postcolonial Energy Policy

Integral to the establishment of a new nation was the appropriation of the

technological infrastructure that had, to date, been dominated by British interests. The

networks of railroads, telegraphs, and other public works developed under British

colonial rule had changed the landscape of India. Gyan Prakash argues that the goal of

India’s independence was realized only when the nationalist movement asserted control

over the engineered assets of the colonial establishment. Yet this transition was not

simple, involving “a profound ideological struggle to negotiate the breach between the

cultural imagination of the nation as an archaic community and its existence as a space of

modernity. Such was the process unleashed by the reconfiguration of India by

technology.”10 Only within a postcolonial discourse did the notion of science as a means

to achieve economic development become paramount. India’s uniqueness as a nation was

based on a premise of anti-colonialism. To build an independent nation, the nationalists

believed in the need to control the technical space of the state.

With the establishment of the Indian National Congress in 1885, Indian

lawmakers begun the process of incorporating this new concept of science as a means

toward technical modernization into national policy resolutions. For the electricity

sector, the National Planning Committee created Electrical Utilities Control Committees

in 1938 with the recommendation “to ensure that capital expenditure is in the best interest

10
Gyan Prakash, Another Reason: Science and the Imagination of Modern India, (Princeton, Princeton
University Press, 1999), 161.
 7

of the consumers and to enforce the use of Indian made machinery and plants.”11 This

opinion was established also in the Industrial Policy Resolution of 1948 cautioning

against foreign technology. The Science Policy Resolution of 1958 aimed at promoting

industrial development with the help of science and technology because “the Key to

National Prosperity, apart from the spirit of the people lies in effective combination of

three factors, Technology, Raw materials and Capital… the adoption of new scientific

techniques can in fact, make up for a deficiency in natural resources and reduce the

demands on capital.”12

Yet the relationship between science and the early Indian state is much deeper

than simple reliance on Indian products and industry. Jawaharlal Nehru focused on the

future success of India as contingent upon a modern relationship between development

and science. At the Indian Science Congress in 1947, Nehru articulated the relationship

between science and development to the scientists in the audience: “I firmly believe that

it is through the method and spirit of science that we can ultimately solve our problems.

All the world over it is because we forget the scientific approach that many of our

troubles arise.”13 He felt that, as a politician, he should use science to “remove the fetters

of underdevelopment” and force India to focus on science over religion.14 The expansion

of the electricity sector was fundamental to Nehru’s goals for industrial modernization

after independence. In reference to the debate on pursuing an atomic energy program,

Nehru argued that India “could not neglect [atomic energy] because it may be used for

war…we shall develop it, I hope, in cooperation with the rest of the world and for

11
Keshavendra Govil, Electricity Generation: Policy, Technology and Economy (New Delhi: Venus
Publishing House, 1998), 1.
12
Govil, 2.
13
Itty Abraham, “Science and Power in the Postcolonial State,” Alternatives 21 (1996), 330.
14
Abraham, 331.
 8

peaceful purposes.”15 When he argued this in 1947, the electricity sector, although

underdeveloped in its infrastructure, had a sophisticated regulatory structure under an act

of Parliament.

The original legal framework for electricity regulation passed in 1910 was not

created to achieve a structure for technical self-sufficiency, but instead to organize a new

industry. The provision of electricity for street lighting and other public purposes was

made possible in 1881 in England, and to residential customers several years later.

Electricity was available to Indian industry also in the late nineteenth century, and several

years later, private companies were selling electricity to households.16 When the Indian

Parliament passed the Indian Electricity Act of 1910, it did so to create a regulatory

structure for an industry that, to that point, had always monitored itself.17 The Act of

1910 created an industry structure wherein State Electricity Boards (SEBs) would

purchase electricity from private generators to sell to consumers. The SEBs joined

representatives from the central government, the association of electricity suppliers, and

other major industries on a Central Electricity Board, which had authority to regulate

national electricity policies. Amended several times hence, this Act continues to serve as

the basis for regulation of operating guidelines and the allocation of supply licenses in the

SEBs’ service territories.

While the original law established a regulatory structure for the electricity

industry, electricity was provided by the same private companies that had originally

created the industry. For lawmakers such as Nehru and his cohort, the goals of an

15
Abraham, 331.
16
Asha Hans, The Power Sector in India (New Delhi: Sterling Publishers, 1986), 75.
17
Govil, 62.
 9

independent and modern India could not be achieved without national control over basic

industry. In order to coordinate growth of the electricity industry under one centralized,

national authority, the Indian Parliament passed the Electricity (Supply) Act of 1948 that

gave government entities the ownership and regulation of electricity generation and

supply. The original Central Electricity Board was expanded into the more powerful

Central Electricity Authority (CEA) at the national level, and the government-owned

SEBs now had responsibility at the state level for generation, transmission and

distribution of electricity. As such, the SEBs were converted into vertically integrated

electricity companies. 18 Significantly, the Act provided for both central and state

government control of the power sector, making it one of several concurrent subjects

under the Constitution of India. With this structure, the state governments were charged

with managing and operating the regional utility companies, while the CEA set national

generation capacity targets and budget allocations. Although granted with the motive of

“a sound, adequate and uniform national power policy,”19 the divided authority created

many inefficiencies and conflicts as the SEBs attempted to implement the goals of the

CEA.

The 1948 regulatory framework was patterned after the model of the UK

Electricity (Supply) Act of 1926. While the decision to follow the English framework

may seem contradictory to the goals of independence, it must be seen in a larger context.

At that time, the Britain provided one of the few models for a modern power sector. It

was widely considered self evident that electricity provision should come from the

government, a belief that was maintained until the 1990’s when Britain began to privatize
18
Section 3, The Electricity (Supply) Act of 1948 in Govil, Electricity Generation, 285. Although the Act
allowed for the creation of the SEBs, most of the SEBs were not established until the 1950’s and 1960’s.
19
Govil, 285.
 10

its power sector. In a 1961 Indian report on power development, the author asserted, “in

all progressive countries of the World, power resources are regarded as national assets

and organisations are set up for the conservation, development and proper working of

these resources.”20 The creation of a central authority for electricity regulation put

development of the power sector at the center of India’s national policy, and the English

model of electricity sector organization was the best way to achieve this.

Because the SEBs were building the infrastructure mandated by the central

government, the country would better be able to guarantee economic welfare for its

people. An Indian electrical engineer in 1961 made the following prognosis for the

future:

When Lenin said that “Electricity plus Soviet is Communism”

[sic], he stressed the necessity of placing horsepower in the
people’s hands before a target of industrial production could be
achieved. India similarly cannot thrive unless strong emphasis is
given to the role of electrical energy in raising the standards of
living of the Indian people… India today offers to her power
engineers almost a virgin soil.21

As the Indian power sector expanded from 2000 megawatts (MW) installed capacity in

the entire country at independence, to more than double that in 1961, the symbolism of an

expanded electricity sector as a means to tangible progress is apparent.22 The author of

the Census monograph declared with optimism that “the actual achieved [additional

installed capacity] has fallen short of the target by over 1,300 MW, but the number of

20
M. Datta. Census of India 1961. Electricity Supply in India and an Analysis of Power Development
During the Two Five Year Plan Period (1951-56 & 1956-61). Prepared by the Office of the Registrar
General and Ministry of Home Affairs. (New Delhi, India, 1961), 1.
21
M. Datta, Census of India 1961, 24.
22
Central Electricity Authority, Government of India. Public Electricity – All India Statistics – General
Review in Maya Shah, Growth, Productivity and Technical Progress in Electricity in India 1951-1977
(Baroda: University of Baroda, 1982), 8. The installed capacity numbers cited by Ms. Shah are more exact
and cover a longer time period than those in the Census Report, although both provide similar estimates.
 11

towns and villages electrified has increased from 4,041 in 1950-51 to 23,969 in 1960-61.”
23
If installed capacity remained lower than expected, the government still succeeded in

bringing electricity to more rural areas. Although the absolute level of electricity

consumption per capita in India remained low relative to other countries, the belief in the

expansion of the electricity sector as one of the keys to India’s long-term economic

success was maintained.24

This idealistic vision of the symbolic importance of technology – and the control

engineers have over India’s economic future – recalls similar attitudes from the British

perspective by the engineers who designed India’s railway system. In 1894, George W.

Macgeorge, consulting engineer to the government of India for railways, was convinced

that railroads would fundamentally transform India, even on a moral level:

Under the guiding direction of Providence it is from the

British nation that the vast continent of India has received
the leaven of a new moral and material regeneration, which
can now never cease to operate until it has raised the
country to a high level of power and civilisation.25
As the railway was the major infrastructure project of the British regime, the British

engineers took credit for the transformation of India’s society as a result of its

construction. After Independence, it was the power sector that took this role as the

technological base for modern economic growth, and it was the Indian engineers’ job to

transform their own society.

23
M. Datta, Census of India 1961, 4.
24
In 1961, the annual electricity consumption in the UK was 2 MW-hrs per person compared to only .04
MW-hrs in India. At .6 MW-hrs per person, the world average at that time was still fifteen times greater
than that of India. M. Datta, Census of India 1961, 2.
25
George Walter Macgeorge, Ways and Works in India: Being an Account of the Public Works in that
Country from the Earliest Times up to the Present Day (Westminster, 1894), 300, In Headrick, 87.
 12

Since independence, the energy sector was consistently and generously funded in

the national Five-Year Plan budgets. By 2001, the SEBs had built an extensive network

electrifying 85% of Indian villages, and increased installed capacity from minimum

levels at independence – barely enough generation to provide minimal power to 20% of

the population at the time – to 100,000 MW.26 However, in spite of this growth,

investments by the state governments have been unable to meet the energy needs of the

population, and the country has experienced significant capacity shortfalls and

inequitable distribution of electricity. The official estimate from the Ministry of Power in

1997 for the all-India power deficit was 11.5% on average and 18% at peak times, though

unofficial estimates place the figures at 15% and 30% respectively.27 Some of the

capacity constraints were due to the fact that the SEBs had consistently fallen short of the

infrastructure targets in the Five-Year Plans. Had all capacity targets been reached since

the First Plan in 1950, total capacity would have been 84,000 MW in 1990, yet only

65,000 MW were installed at that time.28 In addition, many of India’s coal-fired power

plants produce much less electricity than their full potential due to lack of maintenance,

breakdowns, and extended outages.

Yet many supply problems were not due to lack of generation, but instead to

weaknesses in the grid itself. While investment targets from the CEA have often focused

on increasing generation capacity, losses in the transmission and distribution system in

India had exceeded 20% of the electricity produced as compared to an average of 6-8% in

26
Tata Energy Research Institute. TERI Energy Data Directory and Yearbook 2001-2002. (New Delhi:
Tata Energy Research Institute).
27
Fourth National Power Plan, 1997-2002. Government of India, Central Electricity Authority, March
1997.
28
Thomas Smith “India’s Electric Power Crisis: Why Do the Lights Go Out?” Asian Survey 33 (April
1993), 381.
 13

a well-functioning network.29 Although some of the losses are due to lack of

maintenance and overextended rural networks, a major portion of the loss was due to

pilferage. Consumers bribed SEB officials to avoid paying bills or they attach wires to

the network to make illegal, free connections. In New Delhi in the 1990’s, an estimated

25% of electricity connections were illegal.30

A key contributor to the constant power shortage is the uneconomic tariff

structure. As electricity usage shifted from large urban areas to smaller towns and rural

areas, a large portion of electrical power was reserved for heavily subsidized agricultural

users for powering their irrigation pumps. Although the SEBs are allowed by law to

determine their own tariff structure, they do so only with approval from the State

government officials who have consistently voted to provide free or below-cost power to

wealthy farmers in their constituency. This has created waste in the system, as farmers

who are charged low, fixed-rate tariffs have little incentive to reduce usage of irrigation

pumps that consume large amounts of power. Further, these same high-usage consumers

are rarely affected by rolling blackouts, another benefit provided by local politicians.

Households as well are charged highly subsidized, below-cost rates. If prices do not rise

when supply is low, consumers have no economic incentive to conserve energy. As a

result, most of the SEBs operated at a loss and fail to meet the modest rate of return on

investments required by law.31 By 1990, with limited capital and outdated equipment, the

SEBs were increasingly unable to provide consistent power on demand.

29
Smith, 383.
30
P. Audinet and E. Fages “Energy Policy of India.” Energy Policy 26 (1998), 671.
31
The Electricity Supply Act requires SEBs to earn a 3% return of profit after interest over fixed assets. In
J. Carstairs and D. Ehrhardt, “Financial Structure in the Indian Power Sector,” Energy Policy 23 (1995),
983.
 14

Economic Liberalization of 1991

The problems in India’s energy sector were exacerbated by a major economic

crisis in 1990. The Indian economy grew over 10% in the decade of the 1980’s and this

growth was funded primarily by excessive public borrowing. In 1990, the World Bank

and IMF had to intervene when the high levels of borrowing could no longer be sustained

and India almost defaulted on its international debt repayments.32 In response to the

serious fiscal imbalances and under pressure from multilateral organizations, the Indian

government led by Prime Minister P.V. Narasimha Rao introduced radical reform

measures representing a fundamental shift in industrial and foreign trade policies that had

been in place since independence. The reforms dramatically reduced the level of

government control over most major industries in a move towards an open, market-driven

economy. The change created a legal framework for foreign investors to enter the Indian

market in earnest for the first time.

Under the rubric of these industrial reforms, a new power policy was passed in

October 1991 which officially opened the electricity sector to private investors. Foreign

companies were permitted full ownership of power projects and guaranteed the right to

repatriate profits without any export obligations. In order to make the investment

environment even more attractive, the government included a provision for full recovery

of fixed costs up to a 15% return on equity based on actual plant efficiency levels. For

the first time since independence, the domain of power plant development was open to

any investor. Although the CEA continued to grant final approvals for new projects,

governmental control over the sector was greatly reduced. If the nationalization of the

32
John Degnbol-Martinussen. Policies, Institutions and Industrial Development. (London: Sage
Publications, 2001), 140-1.
 15

power sector under the Electricity (Supply) Act of 1948 asserted the importance of

energy development for the new nation, the liberalization of the economy in 1991

represented a fundamental shift in the philosophy that India’s own bureaucratic structure

and technological expertise would always be sufficient for growth in the power sector.

When asked how India planned to meet its electricity needs, the minister for power

responded: “The only hope is the private sector.”33

These power sector reforms were sanctioned by the World Bank, which had

declared a moratorium in the early 1990’s on lending to any SEBs that were unable to

operate profitably. The Bank determined that it would lend only to states that agreed to

restructure their electricity boards by separating generation from transmission and

distribution, and to privatize their electricity sectors. In allowing private investors to

build the required new capacity, the Bank believed that the SEBs would focus on

improving their operations to become profitable. The Bank concluded that it “should not

support power generation projects (including private power projects) that supply power to

inefficient, loss-making distribution entities, even if the generation company itself is

efficient.”34

The reformation of the electricity sector in India provoked discussion within the

Indian energy sector. There was a general consensus that the non-commercially minded

business practices of the government agencies were insufficient to maintain growth in the

power sector. In 1994, the Energy Management Committee of the Chamber of

Commerce and Industry organized a conference to discuss new challenges facing the

33
Suman Dubey. “India’s New Power Minster is Seeking Investment Help from Private Utilities.” Wall
Street Journal, 1 February 1993.
34
World Bank Operations Evaluation Department. “Reforming India’s Energy Sector (1978-99)” Précis
No. 206 (Spring 2001), 3.
 16

power sector. The meeting was attended by many high-level government officials and

industry experts, and in its inaugural address Naidu, the Minister for Power, argued for an

increased role of international investors in the power sector as a means to motivate

growth. “We need the dynamism of private investment,” he argued, “to act as a catalyst

in the power sector.”35 Yet at that point, few investors had been able to overcome the

complex maze of approvals and government agencies to begin construction on any

project. Officials debated whether the incentives given by the government to encourage

the foreigners investor were too high, as Naidu commented: “[Many] questions have been

raised on this as to why this kind of pampering is being done to private investors in

power… The Government of India is not pampering but is doing its best to encourage

investment. If somebody calls it in a different way, that is his own way of thinking.”36

The debates over practical issues were centered on short-term issues such as internal

political fights and allegations of bribery, with little view toward the long-term positive

or negative implications of entering into contracts with foreign power developers.

At the other end of the debate at the conference was a view toward demand-side

management, advocating that the answer to India’s energy problems lies in finding

creative uses of energy without increasing the infrastructure. The analysis by the

chairman of the government finance commission can be summed as follows:

If Indian industry is to compete globally then it must

improve the efficiency of energy use. If the Indian industry
is to take the rising tariffs of new power plants in its strike
then too it must improve the efficiency of the use of
energy… If we only add generating capacity at high cost,
who will bear the burden of high costs of power, given the

35
PHD Chamber of Commerce and Industry, Shaping India’s Power Industry. Emerging Role of Private
Sector (Delhi: 1994), 13.
36
PHD Chamber of Commerce Industry, 14.
 17

fact that at least in the near future agricultural tariffs are not
likely to increase significantly?37
While not a rejection of the benefits of private investment, it is an admission that

companies like Enron could not single handedly solve the fundamental structural

problems within the Indian power sector. He felt that reforms must originate, at least to a

certain degree, from within, a sentiment that would become more widespread as the

Enron story evolved.

Similar to the railways, wherein the development of a sophisticated railway

infrastructure did not bring about industrialization in India as it did in other western

countries with developed rail networks, there were fundamental differences between

India’s energy sector reforms and the electricity sector privatization programs in Europe.

The motivation for electricity reform in developing countries was coming from a need to

improve a weak infrastructure and to provide funding from private sources to reduce

government overspending. The result was that “the main driving force for electricity

sector reform in developed countries has been to realize the efficiency gains…that has

been possible because of technological innovation. The main driving force in developing

countries has been to attract private sector investment in the power sector.”38 In 1990,

the UK initiated a similar process of opening its electricity sector to private investors and

privatizing the utility companies in order to reduce costs to end consumers. In India, on

the other hand, the reforms were meant to encourage economic growth by increasing

tariffs to end users up to profitable levels. There was a fundamental difference between

power sector reform in the English economy, where consumers felt the economic benefit

37
PHD Chamber of Commerce Industry ,44.
38
A. Thillian Rajan, “Power Sector Reform in Orissa: an ex-post analysis of the causal factors” Energy
Policy 28 (2000), 657.
 18

of cheaper power, and that of India, where consumers would have to contend with higher

prices as the cost of greater reliability. The power sector, always at the forefront of

economic development discussion in India, became the flagship industry that would bring

significant foreign investment to the country. The logistics of paying for this investment,

however, were not as evident.

Although India lagged in terms of popular access to reliable sources of electricity,

the country opened its power sector to independent power producers (IPPs) early relative

to other countries. The model for IPP projects was only developed in the late 1980’s in

the US, when private companies began to build power plants financed with debt and

guaranteed by the sale of their output through long-term contracts. The major constraint

for power developers in the US was a lack of viable projects due to low demand, given a

highly developed infrastructure. When the IPP model was transferred to developing

countries like India or China, where demand was high, the constraint for investors was a

shortage of available capital to develop the projects. The regulatory and legislative

framework that worked well in the US to encourage IPP development was largely

inadequate in emerging nations where the purchasing utilities were insolvent and

inexperienced with negotiating power purchase contracts.39

When India opened its power sector to foreign investors, it was offered a desirable

emerging market economy to foreign investors. Yet in spite of all the incentives that the

government offered to entice foreign investment, it was still to be determined what lender

would take the risk of financing a power sector project in a country with insolvent utility

companies and below-cost tariffs. The Indian government was under pressure to show

39
Reinier Lock “Financing Private Power Development and Power Sector Reform in Emerging Nations”
Energy Policy 11 (1995), 958.
 19

economic recovery as a result of the reforms. In spite of the debate over how to

implement the reforms, there was a general consensus in India that private, foreign

investment was the only means for India to build the necessary infrastructure to satisfy

growing energy demand.

Origins of the Dabhol Project

In order to solicit interest in the power sector, the Indian government sent a

delegation from the ministry of power to Houston in May 1992 to talk to energy industry

executives. At a time when India’s own power developers were wary of the new

opportunities in their country, Enron’s Rebecca Mark accepted the challenge and acted

upon it. CEO of the new division of Enron formed to invest in international projects,

Mark impressed the Indian delegation with the aggressive, army-like culture of her

company. Not only was she ready to invest in India, she was ready to do so by building

the largest natural gas-fired power plant in the world. The ministry of power announced

to the Maharashtra State Electricity Board (MSEB) that a group of executives from Enron

were coming to discuss a proposed power project in the region. Together with

representatives from joint venture partners General Electric and Bechtel, Enron

executives traveled to Delhi to discuss the project with the central government, and then

made the trip to Mumbai, driving up the coast to identify a location for the plant.40 On

June 20, 1992, the group met with representatives from the Maharashtra state government

40
Under the original deal, Enron was the project sponsor with 80% of the equity. GE, the supplier of the
turbines and Bechtel, construction contractor, each held 10%. An ownership structure wherein equipment
suppliers and turn-key contractors have a minority stake is typical of highly leveraged power projects, as
this structure ensures that the interests of all parties are aligned towards a well-engineered plant.
 20

to sign a Memorandum of Understanding (MOU) for a $3.1 billion 2550 MW combined-

cycle gas turbine generating plant. The Dabhol project was born.41

Although the MOU did not legally bind either party to completing the project, the

project allocation process was immediately criticized due to its haste and lack of

competitive bidding. Neither the winner of the contract nor the location for the plant was

chosen in a public forum. By proposing a negotiated deal between Enron and the MSEB,

the Indian government was in the weak negotiating position of accepting or rejecting the

terms proposed by Enron with no competitive offer for comparison. Today, common

practice is for the privatizing government to release a request for proposal wherein

developers bid against each other. The developer with the lowest-cost plant that meets

the government’s specifications wins the contract. However in the case of Dabhol,

because the process was new to India – and indeed, new in the world – government

officials had not considered the advantages of competitive bidding. The secretive nature

of the early negotiations between Enron and the government of India led many to believe

that Enron was awarded the project as a result of bribery and corruption.

For Enron, Maharashtra was an attractive market in that it was the high-growth,

industrial area of the country. As the sole customer for the electricity, the MSEB had one

of the strongest financial positions of all the SEBs. For the Maharashtra government,

there is also evidence that the state had long viewed its electricity board as unique before

the liberalization of the electricity sector had even taken place. A 1975 report on power

41
The operating entity was known as the Dabhol Power Corporation (DPC), the joint venture of Enron, GE
and Bechtel. In the Indian press, DPC was often interchangeable with “the Enron project”, “Enron”, or
“Dabhol”.
 21

development published by the Maharashtra Economic Development Council asserted the

advanced position of the state and advocated private development:

Maharashtra should be given special consideration in respect of

power development and the criteria which are applied at national
level should not be rigidly applied to Maharashtra. […] There is
ample scope for development in both private and public sectors.
Urgent steps should, therefore, be taken to allow the expansion
of installed capacity in the private sector to augment the supply.42

Further, there would have been personal satisfaction and recognition for the officials who

brought $3 billion of foreign capital to India. Later when the project came online and the

MSEB was no longer able to pay its bills, one high ranking state official implied that the

MSEB had always been aware of the consequences of signing the deal: “We [the state

government] knew what would happen, and [the MSEB] did it anyway for reasons they

thought best. You’re bankrupting yourself knowingly, willingly, deliberately.”43

In 1992, Enron submitted a more detailed proposal to the Foreign Investment

Promotion Board. The Board ruled in December 1992 that the project needed to be

scaled down and split into two phases. Enron agreed to the new terms, proposing to build

the project in two stages, with Phase I of 695 MW and an option to expand up to 2015

MW at a later date. Phase I of the plant would run on distillate fuel oil, and the second

phase would use the natural gas imported from Qatar, for which Enron was building the

pipelines. All power from the Dabhol plant would be sold to the MSEB on the basis of

contracts that committed the MSEB to purchase a set amount of electricity, provided the

plant met its obligations for availability. On February 3, 1993, the project was approved

42
Maharashtra Economic Development Council, Power Development in Maharashtra (Bombay: 1975), 7
& 49.
43
“Enron in India,” New York Times (March 20, 2001).
 22

by the Ministry of Industry, yet still awaited final approval from the CEA. The CEA had

reservations about the feasibility of the project and opened its own analysis of the project.

In April 1993, the World Bank released a confidential report commissioned by the

Maharashtra state government on the feasibility of the Dabhol project.44 The Bank

determined that the MSEB would have little flexibility with a large base load plant as the

addition of a 2015 MW station as forced base-load operation would place constraints on

MSEB’s system. The Western Region system had surplus capacity in off-peak periods

and its power deficit occurred primarily during peak periods. System simulations showed

that the plant was too large for peak-load, capacity forcing the MSEB to substitute

expensive power from Dabhol for cheaper coal-fired power during periods of low

demand. Given the abundance of indigenous coal in India, the existing coal-fired plants

would provide lower cost power for most hours of the day. The MSEB would have to

sell the surplus power to other states most likely at a loss, as the power generated by

Dabhol would cost five times more than the coal-fired power that it would replace. The

Bank concluded “the project is not a least-cost choice for base load power generation

compared to Indian coal and local gas…[The] project would add more capacity than

needed to meet the projected load growth in 1998 and would result in uneconomic plant

44
It appears that the World Bank made several assessments of the project, at least one on the request of the
Maharashtra government. References in the Human Rights Watch publication refer to letters on file in their
archives from July 8, 1992 and later April 13, 1993. The April 13 letter, written to the Secretary of the
Ministry of Finance (available also on the Internet on the site of an anti-Enron organization,
<http://www.altindia.net/enron/>) says that the project “is not economically viable, and thus could not be
financed by the Bank.” However, a quote from a Jean Francois Bauer, head of the World Bank energy
division in “Enron’s Indian Mutiny” Project and Trade Finance, July 1995 says: “The government
approached us early on for advice on the project, but we were not asked to finance it.” He asserted that the
Bank expressed reservations that were incorporated when Enron agreed to decouple the project into 2
phases. It can be inferred that the Bank suggested the project be split in its July 1992 review, and then
made a more detailed economic analysis for April 1993, though it is not exactly clear from the Human
Rights Watch publication.
 23

dispatch.”45 Mark dismissed the World Bank’s report claiming that it used misleading

assumptions. Publicly the Bank did not comment, but privately the economist conceded

that the plant was simply too large to operate twenty-four hours a day.46 Although the

report did not stop Enron and the MSEB in their contract negotiations, the conclusions of

the report were later widely used against Enron by its opponents.

The CEA, for its part, determined that the power tariff from Dabhol was too high

and withheld approval, yet the Maharashtra government asked the central government to

expedite clearance. A major debate between the MSEB and the central government

ensued. The CEA maintained its reluctance to grant approval based on inconsistencies

between their own calculation of the tariff and the calculation prepared by the MSEB,

and the lack of legal framework for regulating the importation of fuel or payments to a

foreign company. This was the first indication of the misalignment of interests between

the state government and the CEA. The concurrent status of electricity under the

Constitution of India meant that the Dabhol project was caught in the political tensions

between state and central government. Although the Congress party’s chief minister in

Maharashtra was backed by his party in the central government when he signed the

MOU, the central government via the CEA was reluctant to grant approval to the project.

The CEA determined that the tariff from the Dabhol plant was more than twice as high as

acceptable. The fact that the negotiations with the MSEB continued pointed toward the

transformation of the project from a controversy about Enron to a controversy within the

Indian political establishment. The Maharashtra government was publicizing the $3

billion investment that would come to India, while the CEA was forecasting electricity

45
World Bank Note, 13 April 1993. India. Dabhol Power Project. Section 18.
46
Ben Edwards and Mukul Shukla, “The Mugging of Enron,” Euromoney, 318 (October 1995).
 24

bills of $1.3 billion per year to the MSEB. The central government wanted to bridge

power shortfalls in the country as a whole, and the officials of the MSEB and the state

government wanted to guarantee that the project be built there. By November 1993, the

Ministry of Power had approved the tariff, and the CEA apparently abdicated its

responsibility to grant final approval on the cost of power.47 When the CEA granted

provisional clearance for the project in November 1993, the MSEB took this as full

clearance, and signed the final twenty-year power purchase agreement (PPA) contract

with Enron.

In spite of Mark’s anger at the World Bank and the CEA for publishing their

findings, the fact remains that the sale of electricity from Dabhol was never directly

related to the demand in the market. The stakeholders in the project – Enron and the

MSEB – were able to structure a deal that brought them no repercussion for building a

power plant that was uneconomical. Due to the risk of investing in India, the contracts

had to be structured in such a way to guarantee a stable income stream for Enron. In such

a risky investment environment, it would have been impossible to secure financing if the

income stream had been left to basic market forces of supply and demand. That is, if the

MSEB needed power from Dabhol, it could buy; otherwise, Dabhol would sell the excess

power to another customer. This model, which succeeds in power sectors with developed

trading infrastructure, was not even fathomable at the time in India. As a result, the

officials in the MSEB were prepared to commit their utility company to purchasing the

amount of power in order to satisfy the lenders’ requirements. The MSEB officials who

signed the deal must not have felt any accountability for the financial status of the utility

47
Human Rights Watch, 21. From Summary Record of Discussion of the 118th Meeting of the CEA on
Techno-Economic Appraisal of Power Development Schemes, November 21, 1993.
 25

company five years hence. Or perhaps they felt that any backlash against the project

would be directed only at Enron. Certainly, there was internal political pressure from the

central government to move forward:

Clearing the project would give a signal to the world that

India is open and that it welcomes foreign direct
investment. In a sense, this signal was given. A spate of
proposals to set up power plants in India followed.48

The Renegotiated Deal

In 1995, when all the contracts were signed and construction work had begun,

political problems were growing in Mumbai. The ruling Congress Party had high stakes

in the project and the opposition coalition of Shiv Sena and Bhartiya Janata (BJP) ran an

anti-Enron campaign. The Shiv Sena-BJP coalition accused the Congress government of

accepting bribes from Enron in awarding it the contracts for the project. In the Indian

press, Shiv Sena’s campaign director quoted a vice president of Enron in her testimony

before the US Senate appropriations committee when she argued for greater budget

allocation for commercial support of US businesses overseas: “Enron spent an enormous

amount of its own money – approximately $20 million – on this education and project

development process alone in India.”49 The campaign worked well, as most Indians had

seen little evidence of such large amounts of money to “educate” them. The party

president L.K. Advani requested, “the country would like to discover the names of the

politicians and officials who graduated from the Enron school of business.”50

The other major argument surrounded the lack of transparency for calculation of

the power tariff. Enron had demanded that the PPA be kept confidential to prevent

48
Kirit Parikh, “The Enron story” Journal of International Trade & Economic Development 6 (July 1997),
214.
49
US Senate Appropriations Committee hearings, Linda Powers testimony, 31 January 1995.
50
Edwards and Shukla, “The Mugging of Enron.”
 26

competitors from accessing proprietary information. Under pressure from the Indian

press to reveal the assumptions behind the calculation of the tariff in the PPA, Mark

finally agreed to make the 300-page document available. But she allowed the 40

journalists who had waited in line to see the document only one day to study it. In

retrospect, it is clear that Enron did itself damage by not revealing to the public the cost

basis for the project. By keeping the PPA secret, Enron had little concrete evidence with

which to disprove its detractors who alleged that Enron had greedily elevated the costs to

increase their own returns. Under the terms of the PPA, the MSEB was contractually

obligated to purchase 90% of power generated by the plant at 7.4 cents per kilowatt-hour,

with the cost of electricity denominated in US currency. The final cost of power to the

MSEB would be higher after factoring in the transmission and distribution costs. Yet at

the time, MSEB’s domestic consumers only paid the utility company the equivalent rate

of 4 cents. Enron’s natural gas fired plant, while cheaper to build than a coal-fired plant,

would be costlier to operate. Shiv Sena argued that the electricity charge from Dabhol

was more than twice the cost from the existing coal plants.

Enron was soon enmeshed in an internal political conflict that Mark and her group

had underestimated. As one advisor to the project remarked, Enron was a high profile,

easy target: “It was always in the headlines. Rebecca Mark is not shy or scared of

speaking her mind, and she’s highly photogenic. It was all calculated to attract publicity,

and at first Enron loved it.”51 Enron had benefited from the attention the Indian press

paid to its project, yet it had done little to actively garner the support of the local

population or develop its own public relations campaign. As construction progressed on

51
Edwards and Shukla, “The Mugging of Enron.”
 27

the plant, the local population was, for the first time, directly affected in their daily life by

the project. In May 1995, local opposition to the plant turned violent when 300

protestors threw stones at construction workers at the plant site after a riot.52 Too late,

Enron launched an aggressive campaign, giving interviews and selling advertisements in

the press, but the damage was already done. Dabhol had become synonymous with

corruption and exploitation and the Shiv Sena-BJP coalition used public opposition to

Enron to win control of the Maharashtra government.

After the election, the new government’s first act was to open a public review of

the project. The “Subcommittee to Review the Dabhol Power Project,” chaired by Deputy

Chief Minister Munde undertook a comprehensive study of the project, reviewing all the

documents and conducting interviews with representatives from Dabhol and other

industries. The resulting recommendation was to cancel the project, based on allegations

of corruption, lack of transparency, high project costs and lack of benefit to the state.

The report concluded: “The arrangement in force is not tenable because of the infirmities

pointed out above in the terms and conditions of the contract. It, therefore, recommends

that Phase II of the Project should be canceled and Phase I should be repudiated.”53

The committee’s decision angered central government officials who were facing

criticism due to the slow pace for implementation of the 1991 reforms. By 1996, not a

single megawatt of power had been generated from any of the projects approved under

the rubric of the reform laws. The power minister Salve stated that stopping progress on

the Dabhol project would be tantamount to an “anti-national act. Contracts have been

52
Ronan Lyons “Enron’s Indian Mutiny” Project & Trade Finance 147 (July 1995), 5.
53
The Munde Committee, Report of the Cabinet Sub-Committee to Review the Dabhol, Bombay, August
1995, 8-12. In The Enron Corporation. Corporate Complicity in Human Rights Violations. Human Rights
Watch. (New York: Human Rights Watch, 1999), 28.
 28

signed and the price of canceling will be very high.”54 India’s ability to attract

investment rested on its democratic structure and reputation for respect of contractual

agreements. Reneging on a legally binding document for a project the size of Dabhol

would have serious repercussions for future investments in India. Although some of the

allegations in the report were questionable, Enron realized that it was designed to fulfill

the political goals of the Shiv Sena-BJP government.55 Caught in the midst of the self-

interest of local politicians, Enron had little choice but to work with them if it wanted to

move forward. Mark conceded, “while we can say that we are extremely content with

our legal position, we are absolutely willing to renegotiate.”56

In November 1995, Enron apologized to the Maharashtra state government and

proposed a revised project plan. By January, after review of the modified agreement, the

government had reversed its position and accepted the renegotiated deal. Although

elected to office on a campaign based on cancellation of the Enron project, the Shiv Sena-

BJP government still had to solve the problem of inadequate supply in the energy sector.

Also, the new government could further advance its political position by renegotiating a

deal with better terms, and taking responsibility for rescuing the project. In the

renegotiated deal, Enron agreed to change from distillate fuel to Indian naphtha fuel, and

made the MSEB a 15% equity partner in the project. The capital costs were reduced by

$330 million to $2.5 billion and the tariff was reduced from 7.4 cents per kilowatt-hour to

5.6 cents.57 The tariff, denominated in US dollars was still exposed to currency risk,

54
“Opposition Shiv Sena and BJP Breath Fire over Dabhol” Business Times 28 April 1995.
55
Edwards and Shukla assert that “the report establishes no legal grounds for cancellation of the contract”
and “parts are simply ridiculous.” Clearly, the report was designed to promote the goals of the Shiv
Sena/BJP platform, regardless of whether its conclusions are correct or not.
56
Rajiv Rao “Enron’s power outage in India.” Fortune 2 October 1995.
57
Mark Nicholson, “Delhi Clears Way to $2.5bn Dabhol Power Plant,” Financial Times, 10 July 1996.
 29

which the MSEB had to absorb. If the Indian rupee weakened against the dollar, the

amount of local currency required to make up the difference would increase. According

to a Congress Party MP who headed a committee on power project, the savings touted by

the BJP were largely symbolic: “In reality they have not achieved anything, apart from

delay.”58

Although the costs appeared to be reduced, remarkably, the new government

committed India to Enron even more than its predecessors had through this renegotiated

deal. While the original deal proposed a 695 MW plant with an option to build Phase II,

the Shiv Sena-BJP agreement increased Phase I to 740 MW and signed the legally

binding power purchase agreement for Phase II, increasing the total MSEB commitment

to 2184 MW. Although Enron agreed to build a bigger plant at a lower cost than the

original deal, the MSEB still increased its commitment to Enron significantly by signing

the binding PPA for Phase II. Enron achieved a large part of its international expansion

goals as a result of this new deal with its promise by the MSEB to buy the electricity

from Phase II, since it provided a customer for the natural gas that Enron was selling

from Qatar. As an Enron executive said in 1999, “The power plant is important…but our

vision all along is to bring gas to India.”59 This was a profitable strategy for Enron, but

was met with opposition given India’s extensive coal resources.

In spite of the political confusion surrounding the renegotiation, India and Enron

learned some lessons since the first contract had been signed. The government ensured

58
“Power Struggle.” The Economist 13 January 1996, 38.
59
“Power Politics: Enron’s Plant in India was Dead; This Month it will go on.” Wall Street Journal, 5
February 1999. To this end in 1997, Enron proposed an additional $20 billion energy package to India to
build gas pipelines, generating plants and fuel supply facilities in Maharashtra and elsewhere in the
country.
 30

that the renegotiation team contained many industry experts who were not elected

officials. The revised project documents were immediately made public so that the cost

base of the project was transparent. Enron showed willingness to lower the tariff and

reevaluate the capital costs as the equipment prices had gone down in the several years

since the original contracts were signed. As a result of the controversy over corruption,

the government ruled that future power sector contracts would no longer follow the MOU

process as with Enron, but would be replaced with mandatory competitive bidding. The

tariff structure was also put under review such as to reduce cost padding. Rather than

paying future investors a premium over their cost base, the final price of power would be

based on the actual delivered unit price, providing some incentive for cost reduction.

Given the tenuous nature of the MSEB’s financial position, the project lenders

and Enron required a counter-guarantee of payment from the state government in case the

MSEB utility company defaulted on its payments. The solvency of the state government

was questionable, so Enron required that this insurance be further backed by a guarantee

from the central government, wherein the Government of India would pay for any

obligations the state could not meet in order to finalize the agreement. This sovereign

guarantee was controversial because the credit rating of the whole of India became

dependent on non-payment by one state, on one project. For the original deal, a

sovereign guarantee was never approved. The World Bank argued against it, and the

discussions fueled the tension between state and central authority. Enron was unable to

secure the sovereign guarantee for the new project in November 1995 when the

renegotiated deal was proposed. It was not signed by the Indian government until 1996

after Rao’s Congress party government fell and was followed by Atal Bihari Vajpayee’s
 31

13-day government. Vajpayee’s final act prior to resigning was to sign the counter

agreement, providing sovereign guarantee of payments for the Dabhol plant, and thus

finalizing the deal. Many in the press were shocked and attributed the MSEB’s inability

to pay directly to the government’s decision: “[with the signature of the guarantee,]

Dabhol was launched. It has bankrupted the most prosperous state of the Indian Union.”60

Although the renegotiated deal was approved on slightly more favorable terms for

both parties, the MSEB was still following Enron’s lead in bringing the project to

fruition. When Enron came to India, there was little regulatory structure in place for

management of the project approval process. Enron made many recommendations to the

Government of India as to how it could improve the process for foreign investors.

Although laws were passed as a result of Enron’s experience with Dabhol, the

renegotiated contract was, for the most part, a new version of the first deal. Since all

other projects in the country were benchmarked against the Dabhol tariff, it was difficult

to judge whether the terms for Dabhol were fair. With the signature of the sovereign

guarantee, much of the commercial risk of the project was shifted away from Enron to the

Indian government. The combination of a take-or-pay contract and a sovereign guarantee

meant that Enron would be paid for the electricity without taking on the risk of reduced

market demand or nonpayment by the MSEB. One of the members of the renegotiation

team told this story in justification of the final tariff agreement:

Finally, one question is left. Did we do the best that was

possible? This is impossible to answer. One can give only an
analogy. If you try to buy a shirt from a street vendor in
Bombay’s Fashion street or Delhi’s Janpath, you haggle. The
shopkeeper would ask for 200 [rupees]. You would say 40
[rupees]. When you finally get it for 40 [rupees] you are still not

60
Mani Shankar Aiyar, “The Enwronging of Maharashtra,” The Times of India, 17 April 2001.
 32

sure if you got the best price. All you can do is ask your friends
if any of them got it cheaper. If not, you feel you have done
well. The renegotiated price is lower than that of any other plan
now being considered in the country.61

The MSEB certainly did not agree to an onerous tariff out of ignorance of business

practice or inability to analyze financial projections, but instead was motivated by factors

beyond fundamental economic variables such as a desire rescue from India from an

energy crisis, and rescue India from Enron.

Mixed Reactions to Enron

When Phase I of the Dabhol plant began to generate electricity in May 1999, the

Indian press was evaluating the controversy over the project as emblematic of the

weakness in the organization of the power sector. While Enron was still widely criticized

in the press –criticisms that intensified as the price of power increased – the focus shifted

toward the lessons that India had learned about managing its own power sector by

integrating technological development effectively into state policy decisions. The

Dabhol project had served both Enron’s interests to develop its natural gas infrastructure

in India, and the local politicians’ interests to win positions in elected offices. Yet the

deal was never structured to provide the reliable source of electricity that would improve

the lives of the people in Maharashtra and lead to economic growth in its industrial

sector. India had embraced the possibility of expanding its electricity sector by putting

faith in private investment, but it soon became apparent that, in order for the private

capital to produce results, the government needed to implement more dramatic reforms

throughout the electricity sector.

61
Kirit Parikh “The Enron Story and its Lessons” The Journal of International Trade & Economic
Development 6 (1996), 221.
 33

As Indian journalists evaluated the project, they were critical of both Enron and

the government officials because neither had been able to bring economic growth to India

as a result of their impressive project. The irony of the dedication ceremony itself was

not lost on critical observers. The ceremony was delayed when the Prime Minister lost

legislative power just before Dabhol “could formally start producing the electrical

variety.”62 Though Rebecca Mark did not attend, as she had by that point been given

another mandate within Enron and taken out of India, representatives from the central

government were in attendance. The MSEB had already begun to accuse Enron of

planning to charge too much, yet the view in India was not blindly taking the side of the

MSEB: “As and when MSEB finds it truly difficult to pay up, politics will again directly

enter into l’affaire Enron, whispers of dirty deals and the rhetoric of [nationalism and

self-sufficiency] will follow.”63 Taking a larger view, some voices in the press called for

the elimination of the guarantee system – wherein private producers were promised full

payment by the state and central government due to the insolvency of the SEBs – and for

full reform of the SEBs into viable business entities that could operate without

government support. “It is a tribute to the stasis of the Indian system that this perverse

arrangement has been allowed to continue for almost nine years… More Dabhols with

less trouble, that should be the government’s aim.”64 Though Enron was not freed of its

complicity in the deal, the press held it accountable within the context of larger issues of

power sector reform.

The anti-Enron stance, which had been so vocally articulated by activist groups

since the earliest days of the project, was also apparent in a less radical demonstration in
62
“Dabhol trouble: Power Minus Politics” The Statesman (India), 26 May 1999.
63
The Statesman (India), 26 May 1999.
64
The Statesman (India), 26 May 1999.
 34

the Indian popular press. One journalist claimed that “Enron had negotiated a sweetheart

deal for itself, the state has to fork out [to Enron]…five percent of its expenditure per

month,” but this accusation was based on problems in the deal structure itself rather than

on blatant corruption by Enron officials.65 He argued that Enron was not bringing to

India any technical or managerial skills that were not already present in the country, that

India’s electrical power should be generated from indigenous coal and hydro rather than

from petroleum products, and that “the deep-rooted structural problems of our power

industry would not get addressed if we had quick-fix solutions in the form of Enron.”66

Without addressing the problems of below-cost tariffs to agricultural customers and the

insolvent, poorly run SEBs, India would not be able to benefit from projects like Dabhol.

Although the MSEB officials acknowledged the need to increase tariffs and reduce theft

and transmission losses, the decisions were fraught with political implications. “If a

company like Enron has got away with overcharging the government for the electricity

from its Dabhol venture, this is essentially the price the country is paying for years of

political mismanagement and bungling in the power sector as a whole.”67

Reports that the MSEB had been forced to turn down cheaper sources of

electricity to accommodate the power generated by Dabhol provoked a similar

dichotomous response. Though some accused Enron of bankrupting the state by lying

about the true cost of electricity, other focused on the structural problems in the system

due to the inability of the SEBs to easily sell power from areas of the country with a

surplus to those with a deficit. “The problem is not with the [Dabhol] project per se, but

with the lack of a national power policy...The need for a nationwide market has never
65
Jairam Ramesh, “So Enroff is On, After Years of Heat,” India Today 7 June 1999.
66
Jairam Ramesh. India Today 7 June 1999.
67
“Blown Fuse” The Times of India, 23 December 1999.
 35

been greater.”68 Although the 1991 reforms had a provision for the creation of a national

grid company, most states continued to plan their capacity growth based only on the

demand projections of each state. In an editorial in Business India, the author proposed,

“the real reasons why investment – domestic and foreign – have dried up in the power

sector is not because of Enron but because the mess that government regulations have

created. The key issue is the right to distribute power…It is now well accepted that all

SEBs are mismanaged, corrupt, and rotten to the core.”69 The SEBs monopoly over

transmission and distribution in the states had prevented the full benefit of private

investment in the power sector to be realized.

In spite of the accusations and misinformation, the fact remained that the

electricity bills from Dabhol to the MSEB were extremely high, on the order of $20

million per month. Enron conceded that the MSEB’s bill would be close to $100 million

per month when Phase II was scheduled to come online in June 2001. That the

electricity from Dabhol would be slightly more expensive than the existing coal plants

was not a surprise; however, the strong impact on the actual tariff of the changing price

of oil and the fluctuating exchange rate between the rupee and the US dollar was

unexpected. The reality of high electricity bills set off a new wave of protests in India,

both against Enron and against the government that had agreed to the provisions. Deputy

Chief Minister Munde in charge of the energy portfolio of the state – the same man who

headed the Shiv Sena-BJP review that ruled to cancel the Dabhol project in 1995 –

argued that the cost of power needed to be evaluated as an average over the course of the

year. When the charge for June 1999 came as 4.95 rupees per kilowatt-hour, higher not

68
“Market Power” The Economic Times of India. 16 July 1999.
69
“Letter from the Publisher,” Business India, 2001.
 36

only than the 3 rupees from May, but also the 1.80 rupees promised in 1996 with the

renegotiated deal, Munde defended himself saying that it was due to the weakening of the

rupee against the dollar, and that the average over the course of the year would be lower.

The fact of currency risk, together with the exposure to changes in world petroleum

prices for the fuel cost, meant that the MSEB had to absorb risks in price fluctuation that

it was unable to manage effectively without hedge mechanisms or other mitigation

measures.

Yet inasmuch as some in the press were willing to forgive Enron and shift some

of the blame to the politicians who engaged with the deal, the radical opponents of the

project only intensified their campaign as the multi-million dollar electricity bills arrived

at the MSEB. They were also able to identify the deep-rooted structural problems, but

held Enron fundamentally accountable for the MSEB’s financial failure. Arundhati Roy

charged, “Of course it’s in Enron’s interests to bugger a country if you’re going to get a

profit out of it, if you don’t think that’s wrong, which you don’t, because you say: I’m a

businessman and my job is to make money.”70 For Roy, the Enron solution to India’s

electricity would never have been successful because Enron was focused on its own

interests. Abhay Metha, another vocal anti-Enron campaigner, gave the following

analogy about the high cost of power from Dabhol: “If it costs you 20 rupees to take a

three-wheeler to office and return home, should you hire an imported limousine run on

foreign fuel which will wait outside your office all day and which costs you 2000

rupees?”71 While Mehta acknowledged in other instances that India’s problems with

electricity went beyond Enron, his analysis of the Enron debacle in India traced back to

70
Jonathan Rugman, Power Failure. Channel 4 News, Special Reports. 21 June 2000.
71
Paranjoy Guha Thakurta, “Short Circuits” The Hindustan Times, 9 February 2001.
 37

the damage done by the first MOU which, in his view, was never reversed with the

renegotiated deal.72 These more radical views showed that the mere fact of foreign

investment was still fraught with memory of a colonial past. Although Enron and the

MSEB tried to negotiate a contract that satisfied the needs of both parties, Enron was still

viewed as the aggressor.

After the MSEB failed to remit payment in January and February 2001, the

Dabhol Power Corporation invoked the federal guarantee of the state’s payments to make

up the $47 million owed by the MSEB. The government paid the MSEB’s arrears in this

instance, but could not continue to do so indefinitely. The MSEB argued that the central

government should not pay the latest arrears because the bills needed correction, and

Enron claimed that the MSEB was trying to renege on its contractual obligations.73

Enron, having learnt the lesson of Indian politics in 1995, was willing to work with the

MSEB to make the project’s electricity less expensive and suggested that the MSEB

attempt to sell the surplus power to neighboring states. However, because Dabhol was

designed to run all the time, not only at peak periods, the MSEB would essentially be

asking other states to substitute their own cheaper, base-load power for electricity from

Dabhol. Although Enron was protected from the commercial risk of market demand and

the non-payment risk from the MSEB, this airtight deal structure was not sufficient to

make the project succeed. The plant was generating electricity and Enron was getting

what it required, but it was not a tenable situation. Protestors gathered in the streets of

72
“Power to the People, but at what Price?” An interview with Abhay Metha. India Together (October-
November 2000). Available at <http://www.indiatogether.org/interviews/abhay-enron.htm>. Mehta’s
website detailing his data sources is available at <http://www.altindia.net/enron/>.
73
Daniel Pearl, “Indian Paradox: States Starved for Electricity Spook the Big Producers.” The Wall Street
Journal, 14 March 2001.
 38

Mumbai with signs reading, “Enron Go Back.”74 In a speech in Bombay, the US

Ambassador to India said that the Enron project was “tottering on the edge of

disappointment” and efforts to renegotiate the contracts “add fuel to those who argue that

their dollars are safer in China or Malaysia than they are in India.”75

With Enron in a strong legal position to demand payment, the problems with the

Dabhol project became even moreso part of the Indian establishment. The government

set up a committee headed by home secretary Madhav Godbole to reconsider the

provisions of the PPA with a view toward further renegotiation. Enron was prepared to

discuss renegotiation when the Godbole report was released in April 2001, but argued

that proper talks could not begin until the state of Maharashtra restructured its electricity

board’s finances such that it could make payments for the duration of the 20-year life of

the project. The report cited arguments similar to those raised by the World Bank in

1993, determining again that the project was too big and too expensive for the state of

Maharashtra to manage. Enron invoked the political force majeure clause for non-

fulfillment of the MSEB’s contractual obligations and issued arbitration notice to the

central government to collect the December bill. In May, the MSEB announced that it

would stop payment on electricity from Dabhol, and issued notice to scrap the PPA.

Enron responded with a preliminary six-month notice to terminate its contract with the

MSEB. Phase I of the plant was shut down, the loans for Phase II were blocked, and

construction on it, although 95% complete, was stopped.

By mid-2001, Enron began to look for a buyer for its 65% stake in the Dabhol

Power Company (DPC). Enron’s business model had changed in the late 1990’s from an

74
“Enron, and on, and on.” The Economist. 21 April 2001, 56.
75
Pearl, The Wall Street Journal, 14 March 2001.
 39

asset-heavy strategy of major investment in power plant development, into a global

trading business with few large infrastructure investments. Enron was no longer prepared

to fight the necessary battles with the Indian government to make the project a success.

The DPC served an asset transfer notice to the MSEB and thus moved closer to

terminating their agreement.

After nine long years of discussion and controversy, it appeared that Enron and

India had reached an impasse. However, it was still not evident to the Indian industry

experts that the project was necessarily a failure. R. K. Pachauri, head of a high-profile

energy consultancy in India and a member of the Godbole Committee, argued extensively

in the press about the need to salvage the benefits from the Dabhol project. However, he

was firm in his opinion that “the agreement, as it stands, is NOT a good deal for India.”76

India had learned from Enron through its mistakes, as Pachauri admitted that the “process

of evaluation of projects and invitation of bids was wrong. We also did not set up

appropriate capabilities for analysis of projects in a professional manner.”77 By

renegotiating the PPA with a reasonable tariff that the MSEB and Enron could agree

upon, Pachauri believed that the benefits of reliable electricity supply could be realized in

the Indian economy. Given that the MSEB could not absorb all the electricity generated

by the Dabhol plant, it was clear that, without a secondary market to sell the excess

power, a renegotiated deal would be unsuccessful. For Pachauri and many other

intellectuals, Dabhol was a paradox, a modern plant placed in a disorganized system:

“From all accounts that I have heard even from those who regard the whole project as a

big mistake, this is a very well engineered plant. To harp on the termination of the

76
R. Pachauri, “The Power of None,” The Times of India, 29 May 2001.
77
Pachauri, The Times of India, 29 May 2001.
 40

contract would be like cutting your nose to spite your face.”78 Pachauri was not simply

trying to salvage something good from a bad situation, but instead asking India to

remember its goals in entering into contracts with Enron and to reevaluate them critically.

Conclusion
When Enron proposed the Dabhol project, few could have predicted the

complicated story that would emerge from the original MOU signed with the

Maharashtra government. Although the problems in the electricity sector due to shortage

in supply and inefficient SEBs had been widely discussed prior to 1991, the experience of

Enron fundamentally changed India’s understanding about how it could develop a

modern, efficient power sector. Consensus grew that India needed to open its economy

to private, foreign investment in order to spark economic growth faster than the

bureaucratic structure within the country could accommodate the change.

By refusing a local partner and negotiating directly with each government, Enron

attempted to maintain a neutral, distant position. However, while Enron remained on the

outside, its project became part of India, built on its soil, changing the landscape of power

generation for the country. Politicians appropriated the project to advance their own

political goals, as they attempted to find the solution to real shortages and infrastructure

weaknesses in the power sector. The politicians were soon criticized for the project’s

failures as much as they criticized Enron itself. The Dabhol plant took on a new meaning

within India, symbolizing the contradiction between the technological efficiency of a

modern plant and the nonfunctioning power sector that Dabhol did not improve simply

by being part of it.

78
R. Pachauri, “Scrap the PPA with Dabhol?” The Economic Times, 5 June 2001.
 41

India as a nation was formed on the premise of rationality and science as it

distanced itself from British interests by expanding its technical expertise for a new

nation. What resulted was a “technicist nation-state [as] the modern repetition of India’s

ancient national institutions and social needs; it was the nation’s coming into being in

modernity.”79 By applying this model to the experience of power sector privatization,

India was forced to reevaluate the meaning of this relationship. While it first seemed to

many in India that foreign, private investment was the means to modernize India through

technological development, it soon became clear that India’s politicians had an

ambivalent attitude toward the plan. Although Enron brought advanced technology and

sophisticated financial instruments, it was unable to fit those systems into the traditional

structure of India’s bureaucracy or political establishment. India was continuing its

constant struggle to balance the traditional past and a modern future that was present in

Indian political discourse since Nehru’s time. The relationship between India and Enron

was troubled from the start due to the ambivalence on the part of the Indian political

leadership to allow a foreign company to be the benefactor of modernization.

Following on Hecht’s analysis of the “technopolitics” of the French nuclear

program, the Dabhol plant became for India its own symbol of the politicization of

technology. Complicated by the fact of the importation of a foreign technology, Dabhol

became a symbol fraught with complexity, at once the emblem of India’s modernity and

also a monument to the dependence on outsiders to achieve modernization. As the

politicians of India transformed the Dabhol project to satisfy their own agendas, Dabhol

became a part of Indian technological history. In Hecht’s formulation, although the

79
Prakash, 199.
 42

technology was not “both French and indispensable to Frenchness” at its origin, the

Dabhol plant was symbolically wrested from Enron to become part of India and integral

to its understanding of power sector development. Although the technical expertise for

Dabhol was not a product of an Indian system, it was appropriated by Indian politicians

and transformed into their own technological achievement.

The story of Enron in India has taken on new meaning in the aftermath of the

Enron controversy in the US. In November 2001, Enron Corporation’s stock and credit

ratings plummeted in the US after the Securities and Exchange Commission began a

comprehensive evaluation of Enron’s accounting practices. In the midst of merger talks

in a last attempt to rescue the company from bankruptcy, Enron announced that it was

leaving India: “It is now completely clear that no part of Enron will stay on in India.”80

The irony of the Enron scandal in the US was not lost on the Indian press: “Now we find

that Enron’s top officials were busy mostly in ripping off their fellow Americans.”81 In

April 2002, the lenders to the Dabhol project were evaluating offers from both Indian

companies and international investors for Enron’s equity stake and the assets of the DPC.

Ironically, in the wake of Enron’s collapse, India has the last word on Dabhol. If

the Indian press blames Rebecca Mark for charming the Indian politicians into signing

her deal, today they have perhaps forgiven them. As Enron’s creditors sort through the

bankruptcy, the assets will be sold at their current value:

Despite being plied with money and women, Indian

politicians have always skinned businessmen alive. Enron
too. Even if Enron paid bribes (there is evidence of this),
just look at the matter in perspective. First, crooked India

80
“Enron Prepares its Exit from India” CNN.com. 9 November 2001.
81
“Enron Educates India” The Indian Express, 11 December 2001.
 43

took Enron's money. Then it reneged on the favour it was

supposed to grant. Then it drove Dabhol to closure. And
now it will acquire the foreign holdings at a tiny fraction of
the original price. While complaining all the time that
Enron is the profiteer. What a performance! Mark you did
not take India for a ride. India took you for a ride.82
Enron was forced to leave India, but it had to leave Dabhol behind. Dabhol became part

of the long history of India’s technological modernization, as it appropriated an outside

technology and made it its own. The scope of the emotional response that Enron

provoked in India, by turns contentious and spiteful, goes to the root of India’s own

understanding of the relationship between technical modernization and national identity.

82
A. Anklesaria Aiyar. “You Could Not Take India for a Ride, Rebecca Mark.” The Times of India, 17
February 2002.
 44

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