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Eron Case Study

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Enron Development Corporation: The Dabhol Power Project in Maharashtra, India if you are Rebecca Mark in 1995, what will you do?
After nine years of an obvious debacle, it seems that Enron and the Indian government have reached a state of impasse, where a sustainable long term relationship cannot be achieved. Enron has chosen to terminate the agreement by offering to the Indian Prime Minister Enron's 65% equity in DPC for US$1.2 billion and offshore debt for US$1.1 billion. Various political parties have consistently used Enron as an issue to gain the masses' approval and thus political power. Given the size and the "foreign" nature of the investment, Enron will constantly stir political unrest unless it gives in to the terms of the party in power. Difficulty in predicting and understanding local political conditions and coping with the constant threat of forced re-negotiation The agreement (PPA) was flawed from the beginning and unless the company sees the error of its ways, reviews from the World Bank and other committees would always reflect that there was a one-sided deal and would lead to a protracted debate of legitimacy. MSEB's capacity to pay DPC in the next few months is seriously doubtful. Though the Indian government has a guarantee, paying DPC will likely bankrupt MSEB and will lead to a threatening major dispute between MSEB and DPC. If Enron had wanted to cut its losses, it should have let the project end in Phase 1. It need not have negotiated for Phase 2 financing after barely getting Phase 1 operational.

Recommendations: To be able to salvage its stake in DPC, it must re-negotiate the PPA with a reasonable tariff and terms that would pass the scrutiny of a neutral third party, e.g., the World Bank. Given the fact that MSEB could not absorb all the electricity generated by DPC, Enron should find a secondary market where the excess power can be sold to, or scale down its projected operation. Without these concessions, the benefits of an increased and continuous electricity supply cannot be realized in India, and the re-negotiation will still not be successful as DPC is trying to sell MSEB what it does not need. At this point, while Enron is still in a strong legal position to demand payment from the Indian government, it should be the one to spearhead the re-negotiation. It seems that the Indian government, with the Global committee report at the height of the cooling period, is bent on finding a more favorable position by re-evaluating the flaws in the PPA. In the end, Enron may well be the losing party if the Dabhol plant remains non-operational. With the Indian government knee high in debt, it will be a great challenge to get payments even if these were contractually committed.
To improve its chances of staying in DPC and in India as well, Enron should get a local partner who could help re-negotiate with the government by selling a part of its stake in the Dabhol project. From the beginning, while Enron refused a local partner and chose to directly deal with each level of government, it tried to maintain a neutral and distant position. However, with the deeply political agenda of parties criticizing the project, Dabhol may have been spared by not being viewed as a "purely foreign investment". A reputable local partner (e.g., Tata group) appeals to the Indian people's principle of swadeshi, of being able to patronize in part, an Indian-generated electricity supply. The local partner, upon negotiation, may take care of local factors like asking the government to try to remember its objectives in entering into foreign fast-track projects (Dabhol), and to re-evaluate them critically. This is also a good time to raise the appropriate rate of return given that Enron has a large capital intensive project coupled with an uncertain political environment. Although the DPC project is becoming less and less profitable, saving it will allow Enron to pursue more smoothly its other interests in India, including its pipeline project with the Gas Authority of India. It is not only money at stake but Enron's reputation for its capability and character to do business globally.…...

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