Enron & The Dabhol Power Company
Essay Preview: Enron & The Dabhol Power Company
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Problem: What can Enron do to salvage the Dabhol project and its ties to India?
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 Enrons 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 who owes who.
MSEBs 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 Godbole committee report at the height of the cooling period, is bent on finding a more