The Multinational Monitor

JULY/AUGUST 1995 · VOLUME 16 · NUMBERS 7 & 8


I N D I A :     O P E N     F O R   B U S I N E S S



Enron Deal
Blows A Fuse

by Pratap Chatterjee



DHABOL, INDIA - Until recently, 600 hectares of porous red rock and shrub covered the hills that make up the volcanic outcrop overlooking the Arabian sea in the state of Maharashtra on the southwest coast of India.

No more. Houston, Texas-based Enron, the world's largest natural gas company, has bulldozed the area and replaced the rock and shrub with a construction site, heavy machinery, limousines and makeshift plastic offices, complete with air conditioning. This is the site of what Enron promises will be India's single largest power plant - a gas-fired, combined-cycle facility designed to generate 2,015 megawatts.

The price tag on the project, which Enron negotiated with the Indian government for almost four years, is $2.8 billion. This will be financed by international loans that the Maharashtra state electricity board is to pay back through a system of guaranteed electricity tariffs that will begin at 8 cents a kilowatt hour and rise to 33 cents a kilowatt hour by the project's slated termination date in 2017. Consumers now pay 4.3 cents a kilowatt hour. This extra cost of the Enron electricity could be shifted to residential or industrial consumers or subsidized by the government. In a cross-guarantee opposed by the World Bank, the national government is guaranteeing the state government's loan.

The Dabhol Power Company (DPC) a newly-formed joint venture of Enron and two U.S. partners, Bechtel and General Electric, will run the project - if it is ever completed.

In May, hundreds of villagers stormed the project site and injured many of the 1,500 construction workers, including three of the 60 foreign advisers on the project. The villagers say that effluent from the power plant will destroy their fisheries and kill the coconut and mango trees that they have traditionally grown here.

"They destroyed the petrol pumps, they destroyed furniture, they destroyed office records. I ran away," says Nitin Shitole, who runs the state-run Hindustan Petroleum pumps.

"There were election promises that the project would be stopped," says Mahmood Ibrahim Mastan, the headman of Anjanvel, a nearby village. "The papers started talking about pollution in the area. And people heard they would have to leave their homes. They said, 'why not remove them before they remove us?' "

The villagers are not the only threat to the Enron project. The newly elected local state government, which is a right-wing coalition comprised of the Shiva Sena and Bharatiya Janata Party (BJP), has threatened to cancel the deal because of its high price tag and the alleged corruption by the previous government that negotiated the project.

During election rallies, Gopinath Munde, now the state's deputy chief minister, said that the Enron project could easily be built by Indian companies. But the Enron deal, he said, would turn over huge profits made off "the backs of India's poor." The political campaigners promised to "bundle Enron into the sea."

"Enron, in collusion with certain business interests, tried to pull off quite an unfair business deal, if not outright plunder," write Subodh Wagle, Shantanu Dixit and Girish Sant, economists with Prayas, a non-governmental organization based in Pune, Maharashtra.

Prayas economists say World Bank economists rejected requests to fund the Enron project because it was too expensive. Prayas has calculated that Enron will get an after-tax rate of return on the project of as much as 32 percent, roughly three times the average rate in the United States. Prayas also points out that Enron completed a similar-sized plant in Teeside in northern England for less than half the price.

Prompted by these allegations, the state government has commissioned an inquiry into the project. In late July 1995, the final review of the project had just been handed over to Manohar Joshi, the state chief minister, who was preparing to make a final decision.

"We are for foreign investment in the infrastructure sectors, but we want everything to be transparent and above board. We feel that the way that the project was negotiated was not in the interest of the state," says Jay Dubashi, a BJP spokesperson.


Elites are aghast

If nothing else, the state government review has shaken up powerful people in Houston, New Delhi and Washington.

"I'm in grief," said Rebecca Mark, the chief executive of Enron Development Corporation, one of Enron's five subsidiaries that is building the plant, when the state ordered the review. In the wake of the announcement of the review, Mark quickly flew to India to try to persuade officials not to cancel the deal.

The Indian central government is alarmed by the turmoil in Maharashtra because the Enron gas plant is the single largest foreign project in the country. It also is the first private contract for such a project and, perhaps most importantly, is seen as a litmus test of India's four-year-old economic liberalization process.

"More than anything else, I suspect that the kind of [political] reasons responsible for throwing out of Coca-Cola two decades ago are behind the review ordered by the newly elected government of the State," says Commerce Minister P. Chidambaram.

The review sparked an angry rebuke from the U.S. government, which helped Enron negotiate the deal. "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 being proposed for international financing," said a June statement from the Office of the Secretary of the U.S. Department of Energy.

Other foreign governments that have been negotiating deals with the Indian government, such as Britain and France, have backed the United States. Kenneth Clarke, the British chancellor of the exchequer, warned India that pulling out of the Enron deal could have repercussions for British investment.

These foreign statements infuriated some fence-sitters, who regarded them as an expression of imperialist arm-twisting. "It is time the West realized that India is not a banana republic which has to dance to the tune of multinationals," thundered The Hindustan Times of New Delhi in a June 6 editorial. "A necessary condition for newlyweds to work out a long term modus viviendi is that the bride's father stays out of the relationship," wrote Calcutta's Business Standard.

Even the central government felt compelled to object to the U.S. statement. Describing the statement as an unwarranted "threat," N.K.P. Salve, the central government power minister, said, "The Indian government is not going to act under any pressure from the U.S. government."

Since then, U.S. officials have been conciliatory, as the diplomatic corps has regained the upper hand from the more outspoken Department of Energy. "I can see no reason ... why this review cannot reach a conclusion that will satisfy the needs of all parties, the state, its citizens, its need for power and Enron's desire to create a long-term and productive relationship with India," says Frank Wisner, the U.S. ambassador to India, who helped arrange the deal.


Show must go on

Mark has promised that Enron will not stop its work. "We don't have anything to do with politics," she told a local business magazine. "We came here to get our work done. [The project] will continue to be built regardless, until the day the Maharashtra state electricity board serves us a termination notice revoking the contract and says we no longer want you in the country."

Enron Development Corporation's vice president of global finance, Linda Powers, testified before the U.S. Congress in January 1995 that, "Our company has spent an enormous amount of its own money - $20 million - on this education process [of legal and policy changes and sound project lending practices] , not including any project costs." In addition, company officials say they have spent $75 million on new port facilities and almost $25 million on new roads, sewage systems and hospitals. Critics say that the new infrastructure will only serve Enron and its highly-paid executives but not the local villagers. They also charge that the "education" fee probably includes discreet bribes to the former administration, which was led by Sharad Pawar, the chief minister who clinched the Enron deal.

Pawar recently warned his successors that Maharashtra state would have to pay severe penalties of up to $286 million if it violates its contractual guarantees by scrapping the deal. He also warned that canceling the project would curtail the flow of foreign investment into India. Enron has indicated that the state's kill cost would be closer to $100 million.

"Without participation of foreign capital and technology, growth in this most crucial sector of the economy will slow down and the ill-effects will spill over to all other sectors of the economy," warned Pawar in a document defending funding for the Enron project.

Other defenders point out that any failure to complete the project will hamper plans for India to add 150,000 megawatts of electricity-generating capacity over the next 15 years. This ambitious plan would almost triple the country's current 80,000 megawatt capacity.

But industry sources say the brouhaha has led other investors, such as Hong Kong-based Consolidated Electric Power, to propose a multi-stage, 10,000-megawatt, multibillion-dollar project, which would deliver electricity at lower rates than Enron proposed.

Prayas economists contend that the entire output of the Dhabol plant can be met at less cost if the state adopts conservationist measures such as using compact fluorescent light bulbs (saving 680 megawatts), solar water heaters (saving 250 megawatts), refrigerator efficiency improvements (saving 35 megawatts), irrigation pump sets (saving 390 megawatts), transmission and distribution loss reductions (saving 175 megawatts) and industrial power load shifting (saving 250 megawatts).

Prayas also says that co-generation plants (which generate electricity from the excess heat given off in other industrial processes) can generate another 500 megawatts, while small hydro-power plants could add another 700 megawatts. The group argues that all this can be built and the fines for expelling Enron paid at a significant saving over the current price tag for the project.

At this stage, the ball is in the state government's court. But even if the Maharashtra government comes to an agreement with Enron, there is no guarantee that the project will be completed. Villagers vow to continue to struggle against the U.S. company, irrespective of the state government's decision.

The resolve of the villagers cannot be taken lightly. Chemical giant DuPont had to abandon a plant in the southern state of Goa after public protests in early 1995 made construction work impossible (see "DuPont Spinning its Wheels in India," Multinational Monitor, March 1995). The Maharashtra villagers have expressed a similar militant determination.

"Out of fear, the next day [after the attack by villagers in May], the construction site attendance was practically zero," says S.M. Pimpley, a senior executive in the Enron consortium.


Politically Plugged In

Enron's projects around the world from Argentina to the Philippines have been dogged by controversy. Such allegations of overpricing and rumors of behind-the-scene political deal making would come as no surprise to opponents of the Dhabol plant in India.

Enron, for example, is currently bidding for a contract to rebuild Shuaiba North, a 400-megawatt power plant that supplied 5 percent of Kuwait's electricity before it was bombed during the 1991 Gulf war, according to journalist Seymour Hersh.

Hersh wrote in a 1993 New Yorker magazine article that Enron's price for supplying the power is 11 cents a kilowatt hour. The rival bid put forward by the German company Deutsche Babcock was six cents, while the state-subsidized rate is half-a-cent a kilowatt hour.

Despite the large price difference, Hersh notes that Enron's bid received favorable consideration after former U.S. Secretary of State James Baker visited Kuwait in 1993. Baker was working as a consultant for Enron at the time.

Questioned about the contract, Kuwait's press attache in Washington, Raed al Rifai, declined to discuss the subject: "We expect that the contract will be awarded very soon, but until it is awarded, we cannot comment on the matter."


Utility board resigns

Enron won a contract to build a 105-megawatt, diesel-fired power plant in the Philippines that critics said would cost the Philippine National Power Corporation (NPC) eight cents a kilowatt hour - 20 percent more than NPC charged consumers.

The controversy led to resignations in 1993 of all seven members of the NPC board. Philippine President Fidel Ramos and Delfin Lazaro, the energy secretary at the time, ordered investigations into the matter.

A probe by a three-member team led by energy under-secretary Rufino Bomasang cleared Enron of improprieties. The team said the up-front cost of the contract was high but concluded that, worked out over 25 years, it would be close to the current price of electricity.

"Power is now being supplied by private contractors to the NPC after selection through open bidding," says Victor Gosiengfiao, the Philippine economic counselor in Washington. "It's not always the lowest bidder that wins the deal. There are other factors involved."

Diane Bezalides, Enron's vice-president for public relations, also defends the bidding process. "There were questions asked in open legislative process. We did provide information to the Department of Energy, and they were satisfied with our replies. In fact, President Ramos even attended our inauguration ceremonies," she says.

Enron has similar access to powerful political figures in its home country. The company has close connections in both main political parties in the United States.


Revolving doors

Kenneth Lay, Enron's founder and chief executive, is known to be a friend of former U.S. President George Bush, and raised funds for Bush's 1992 re-election bid. Lay also hosted the reception committee for the Republican National Convention that year.

Following Bush's loss at the polls, Lay hired as his consultants two key Bush cabinet officials: Baker and former Commerce Secretary Robert Mosbacher. Thomas Kelly, the director of operations for Bush's Joint Chiefs of Staff during the Gulf war, was already working for Lay.

Baker and Kelly accompanied Bush on a private visit to Kuwait in April 1993 after Bush left the White House. Hersh says in his New Yorker article that Baker, along with the former president's two youngest sons, Neil and Marvin, remained in Kuwait after Bush left to promote the Enron bid to rebuild Shuaiba with the Kuwaiti utility ministry.

Their efforts apparently paid off. Hersh's sources told him that Enron's Kuwaiti business partners in the bid to rebuild Shuaiba had "obviously been hand picked" by the Kuwaiti prime minister.

Enron called the New Yorker article "completely incorrect." The company now says it has abandoned the project in Kuwait.

"Bush's sons were not working for us and never have. I cannot comment on whether or not we have a bid in that country," says Bezalides. "James Baker did have one or two meetings on our behalf in Kuwait but that was after George Bush left."


Pipeline in the Argentine bush

The Bush children have also come in for criticism in Argentina for their role in an Enron bid to construct a pipeline from Argentina to Chile. George W. Bush, the governor of Texas and a son of the former president, called Rodolfo Terragno, the Argentine cabinet minister in charge of public works under then-President Raśl Alfons’n, to ask him to give Enron the contract. Terragno reported this pressure tactic to the press. But the contract ended up being awarded under the current President, Carlos Menem. Menem, who is reportedly a good friend of the Bush family, awarded the contract to Enron.

Enron's political luck did not run out after Bush's departure. Lloyd Bentsen, another Texan, and Clinton's first treasury secretary, was already a recipient of Enron's largesse. In one Senate election campaign, the Democrat received more than $14,000 from Enron. According to data provided to Multinational Monitor by the Washington, D.C.-based Center for Responsive Politics, the amount is the second highest paid out by Enron to a political campaign.

Bentsen quit his job as Treasury Secretary at the end of 1994 and was succeeded by Robert Rubin, who worked closely with Enron when he was co-chair of Goldman Sachs investment bank. Clinton first hired Rubin to head his National Economic Council. Soon afterwards, Rubin wrote on Goldman Sachs stationery to former clients, including Enron, saying he "looked forward to continuing to work with you in my new capacity."

After this ethical lapse, Rubin filed a White House financial disclosure form that listed Enron among the names of 42 former clients with whom he had had "significant contact." Rubin pledged to recuse himself from any government dealings affecting these former clients for one year, a period that has since lapsed.

Clinton officials publicly helped Enron win the contract in India as well as in Indonesia. In the last two years, Enron has received U.S. government funds to build power plants in China, the Philippines and Turkey. Enron also won contracts in Pakistan and Russia while accompanying senior U.S. government officials on state trips.


Rosy futures

Enron's lobbying clout was demonstrated in its attempts to deregulate the energy futures markets that enhance its profits. Enron was one of nine energy companies that asked the U.S. Commodity Futures Trading Commission (CFTC) in November 1992 to exempt energy derivative contracts from federal government oversight as well as from fraud laws. The request was made right after Bill Clinton won the U.S. presidential election at a time when the political composition of the board was likely to change soon. The five-member commission is made up of three members from the ruling party and two from the majority party.

The deregulatory push was advanced by Wendy Gramm, the CFTC chair, who authorized the commission staff to begin the lengthy rule-making process required when a federal agency makes a major policy decision. Gramm, a former senior staff member of the Reagan White House, resigned as chair of the commission on January 21, 1993, as Clinton took office. Wendy Gramm is the wife of Phil Gramm, the ultra-conservative Republican Senator from Texas, who is now a presidential candidate.

The energy companies strongly objected to the threat of federal oversight, saying it would add costly and cumbersome regulation to their business. This was a position to which they knew Gramm adhered. As CFTC chair, she had already helped deregulate "interest-rate swaps," which are used by corporations to hedge against unfavorable changes in interest rates and foreign currency values.

Five weeks after Gramm resigned, she was appointed to Enron's board of directors, just as the commission voted two to one to deregulate the energy derivative contracts business. President Clinton had yet to appoint anyone to the two vacant seats on the CFTC board; the commissioners who embraced deregulation were Gramm allies appointed during the Bush administration.

The regulatory exemption for energy futures was made retroactive to 1974 - when the CFTC was created - to remove any potential legal challenges to past energy contracts. The exemption from fraud legislation that the industry wanted was dropped in response to objections in Congress. Gramm and Lay say there is no connection between the CFTC decision and Gramm's appointment to Enron's board.

"Enron understands the role of government in winning business," says Houston Chronicle journalist Bill Mintz. "Lay, the chairman, used to work for the federal government and the Pentagon and he knows who and what it is all about."

- P.C.

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