Case Scenario:
In 1995, the Maharashtra state government of India abruptly canceled Enron's 2.9 billion projects. This came as a huge blow to Enron's international power unit. Upon the news release, Enron's share price fell immediately about 10% to 33 and half. Rebecca Mark, the CEO sprang to action to resuscitate the deal promising concessions. This effort was met with scorn from BJP politicians. Enron Dabhol debacle cast a serious doubt on the company's aggressive global expansion strategy, involving some $10 billion in projects in power plants and pipelines spanning across Asia, South America and Middle East.
Enron became involved in the project in 1992 when the new government was keen on attracting foreign investment in infrastructure. After meeting with the Indian government officials, Enron dispatched executives to India to hammer out a "memorandum of understanding" in just 10 days to build a massive 2,015-megawatt Dabhol power complex. New Delhi placed the project on a fast track and awarded it to Enron without competitive bidding. The Maharashtra State Electricity Board (MSEB) agreed to buy 90% of the power Dabhol produces. Two US companies, GE and Bechtel Group, agreed to join Enron as partners for the Dabhol project.
In the process of structuring deal, Enron made profound political miscalculations. It did not seriously take into consideration a rising backlash against foreign investments by an opposition coalition led by the BJP. During the state election campaign in early 1995, the BJP called for reevaluation of the Enron project. Jay Dubashi, the BJP's economic advisor, said that the BJP would review all foreign investments already in India, and "If it turns out that we have to ask them to go, then we'll ask them to go". Instead of waiting for the election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way. Enron was not very concerned with local political sentiments. Enron fought to keep the contract details confidential, but a successful lawsuit by a Bombay consumer group forced the company to reveal the details. Enron would receive 7.4 cents per kilowatt-hour from MSEB and Enron's rate of return would be 23%, far higher than 16% over the capital cost that the Indian government guaranteed to others. Critics cited the disclosure as proof that Enron had exaggerated project costs to begin with and that the deal might have involved corruption.
The BJP won the 1995 election in Maharashtra state and unfilled its promise, Manohar Joshi, the newly elected chief minister of Maharashtra, promptly canceled the project, citing inflated project costs and too high electricity rates. This pledge played well with Indian voters with visceral distrust of foreign companies since the British colonial era. By the time the project was canceled. Enron already had invested some $300 million. Officials of the Congress party did not come to the rescue of the project. The BJP criticized the Congress Party for being too corrupt to reform the economy and too cozy with business interests. In an effort to pressure Maharashtra to reverse its decision, Enron pushed like hell the US Energy Department to make a statement in June 1995 to the effect that cancelling the Enron deal could adversely affect other power projects. The statement only compounded the situation. The BJP politicians criticized the statement as an attempt by Washington to bully India.
After months of nasty exchanges and lawsuits, Enron and Maharashtra negotiators agreed to revive the Dabhol project. The new deal requires that Enron cut the project's cost from 2.9 billion to 2.5 billion, lower the proposed electricity rates, and make a state-owned utility a new 30% partner of the project. A satisfied Joshi stated Maharashtra has gained tremendously by this decision. Enron needed to make a major concession to demonstrate that its global power project is still on track. The new deal led Enron to withdraw a lawsuit seeking $500 million in damages from Maharashtra for the cancellation of the Dabhol project.
Q1. Discuss the chief mistakes that Enron made in India.
Q2. Discuss what Enron might have done differently to avoid its predicament in India.