The Dabhol Power Plant Debacle

Corruption never has been compulsory

Continuing one week more on the Enron theme, Honestly Lay Bare has always considered Enron's investment in India in the 1990s as one of the classic case studies of poorly thought out - and even more poorly executed - management of foreign investment risk.

Welcome to the financial and political disaster that was Enron's investment in the Dabhol Power Plant - more than 300 kilometres south of Mumbai.

Once the seventh-largest company in the US, Enron in 1992 was contracted to build a US$2 billion power project on India's western coast, in what was then the largest foreign investment ever made in India.

Today, the Dabhol plant, 320 kilometers south of Mumbai, is nearly 700 hectares of rusting equipment, empty buildings and huge storage tanks bisected and surrounded by deserted roads. It had been projected as the world's largest natural gas-burning energy facility.

At Dabhol, almost everything went wrong. Dabhol Power Company (DPC), as it was named, was supposed to generate 2,100 megawatts of power, not only to meet the shortage around Mumbai and Maharashtra state, but to partially meet the demand for an increasingly power-starved country.

Even before it was built, opposition figures were charging that Enron had got the contract with the aid of bribes, which the company repeatedly denied.

The opposition campaigned in 1994 and 1995 against the then-ruling Congress Party on an anti-Enron platform, charging that the contract was unduly enriching the Texas company. The Maharashtra state government fell in 1995, with the new government appointing a team of ministers to review the project and ultimately recommending the contract be scrapped. Enron entered arbitration and demanded $300 million in compensation. The state government countered with a suit alleging fraud and misrepresentation.

In 1996, when the currently ruling Bharatiya Janata Party had only been in power for 13 days, Dabhol received the green light for construction from Finance Minister Jaswant Singh. He not only cleared the project, but also provided the government's first-ever counter-guarantee to a power project, assuring full payment to the creditors in case of project failure under the Indo-US Bilateral Investment Protection Treaty.

At its height, the power plant employed 15,000 people. Its most immediate problem was that the power Enron’s Dabhol plant was selling was twice as expensive as that of its next nearest competitor.

None of this should have however come as a surprise.

Back in 1993, when the project was just a twinkle in an executive's eye, the World Bank concluded that it was "not economically viable." The bank said that the type of plant proposed would produce too much power at too costly a price for the state.

"We knew what would happen, and they did it anyway for reasons they thought best," it was said. "You're bankrupting yourself knowingly, willingly, deliberately."

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Enron's problems extended from fraudulent accounting to an inability to execute its largest project.

Clearly they were not always the smartest guys in the room.