|"Many energy companies have invested in closed or repressive countries -- arguing that their investment would help develop the local economy and thereby improve the human rights situation. But in this case, Enron has invested in a democratic country -- and human rights abuses there have increased. Enron hasn't made things better for human rights; it has made things worse."||
II. Background: New Delhi and Bombay
Table of Contents
II. Background: New Delhi and BombayV. Ratnagiri: Violations of Human Rights 1997
Appendix A: Correspondence Between Human Rights Watch and the Export-Import Bank of the United States
Appendix D: Correspondence Between the Government of India and the World Bank
In 1992, pursuing a policy of economic liberalization, the Congress (I)-led government of India, under then Prime Minister P.V. Narasimha Rao, announced that it would open up the power and electricity sector to foreign investment. On a three-week trip abroad, during May and June 1992, a senior Indian government delegation met with Enron officials and announced that the company was interested in building a power plant in India.1
Thus, in a matter of less than three days after its [the delegations] arrival in Bombay, an MoU was signed between Enron and MSEB in a matter involving a project of the value of over Rs. 10,000 crores [almost $3 billion] at the time, with entirely imported fuel and largely imported equipment, in which, admittedly, no one in the Government had expertise or experience. In fact, the file [on the project] does not even show what Enron waswhat its history is, business or accomplishment. It looked more like an ad hoc decision rather than a considered decision on a durable arrangement with a party after obtaining adequate and reliable information. Neither the balance sheet and annual accounts of Enron, nor any information about its activities, area of operation, its associates, etc. was obtained by the government then, or even later.4
After the agreement was signed, the government of Maharashtra state requested that the World Bank review the project in order to determine what would be required by the companies and the government and to evaluate the MoU.
amending legislation (although we [Linklaters & Paines] understand that this is regarded prima facie as politically impracticable);
In other words, the companys lawyers were requesting that the government modify the law particularly in regard to accounting procedures, purchasing agreements, and judicial and public scrutiny to facilitate the project. Later, the Maharashtra State Electricity Board wrote a letter to the state government noting that private companies, and DPC in particular, would not want to be subject to public or judicial review, in particular, scrutiny flowing from statutory provisions requiring the company to operate efficiently. That letter states:
Thus, DPC even though [it] may be a private sector company under the Companies Act, 1956 will have cast upon it statutory duties and to the extent is likely to be subject in the due performance of such duties to public and judicial scrutiny. This may not be acceptable to foreign promoters. One such area of scrutiny would be the duty cast... to operate and maintain in the most efficient and economical matter the generating stations.9
The MSEB thus proposed that standards under various Indian laws should be modified to attract foreign investors, including provisions designed to make private projects more transparent.
Through the rest of the year, more clarifications and opinions were sought about the project within various government agencies. Then, on December 12, 1992, the Foreign Investment Promotion Board notified Enron that its project would have to be scaled down to 1,920 megawatts (from 2,550) and split into two phases. The price would be $2.65 billion as opposed to the original $3.1 billion. The company agreed to the revised project.10 On February 3, 1993, the government of India notified Enron that its project had been approved and that the government would apply for financing with the World Bank and other institutions.11
[I]t is difficult to appreciate when and why the decision to split the project...was taken. Nor is it clear that this was done after careful consideration of the requirements of the MSEB and the State of Maharashtra. In fact, it seems to address only the concerns of Enron. The conduct of the negotiations shows that the sole objective was to see that Enron was not displeasedit is as if Enron was doing a favour by this deal to India and to Maharashtra. In fact, the entire negotiation with Enron is an illustration of how not to negotiate, how not to take a weak position in negotiations and how not to leave the initiative to the other side.13
The project continued to move forward, nevertheless. Enron, in a letter to the MSEB, said that it would change the World Banks opinion and secure financing from the bank.14 Upon an application by the MSEB to reconsider its decision, the World Bank reaffirmed its refusal to finance the project and criticized the MSEB for claiming that, without the project, MSEBs future ability to efficiently provideelectricity to consumers would be compromised. The banks relevant country director wrote:
Regarding the load forecast for the Maharashtra market, the recent protracted discussions have led us to reconfirm CEAs 14th Electric Power Survey (EPS) as the most realistic forecast on which to base our analysis. As regards the important assumptions about the future performance of MSEBs existing system, we propose to reflect in our analysis the understandings reached during the processing of the Second Maharashtra Power Project in 1992 together with additional information obtained from and reviewed with MSEB subsequently. However, we cannot accept the more pessimistic scenario recently provided by MSEB according to which the existing system is projected to decline in efficiency...
After extensive further review of the above parameters and detailed review of the analytical framework and the existing assumptions, we reconfirm our earlier conclusion that the Dabhol project as presently formulated is not economically justified and thus could not be financed by the Bank.15
At this point, it would have seemed sensible for the Indian government to reevaluate the project, but it forged ahead. Later, after it had examined the structure of the project and the correspondence among Enron, the government and the World Bank, the Munde Committee issued a scathing critique of the governments actions. The committees report concluded:
[T]he Central Government secured the services of the World Bank to assess the Enron Project. In fact, at one stage, Enron itself was seeking to involve the World Bank for finance and participation as, in the view of the then Chief Secretary, Maharashtra, Enron is convinced that the World Bank has full and scientific knowledge of the working of the Power sector in India. This is despite the fact that the then Finance Secretary felt that Enron would pre-empt the other projects of the State from getting World Bank assistance, if Enron were allowed access to theWorld Bank funds. However, later in its Report, the World Bank clearly advised that the Enron Project is (i) unviable, (ii) does not satisfy the test of least cost power and (iii) is too large and (iv) is not justified by the power demands of Maharashtra. Once the World Banks assessment came and it clearly vetoed the Project, the response of all those who persistently asked for the World Bank advice, confessing that in those areas the Government did not have experience or expertise, was to underplay and even suppress it. Almost every official other than the then Secretary of Finance supported the Project ignoring the World Banks advice.16
By August 1993, another problem appeared for the government and the company: the Central Electricity Authority (CEA), which had questioned the project for some time. The CEA is the government body meant to oversee and regulate electricity generation throughout the country, and clearance from the CEA is mandatory for power projects to move forward.
Dear Mr. Pawar:
I understand from our people in Bombay and Delhi that we are making some progress with the Dabhol project approvals. However, it is still not clear when we can expect Cabinet approval and signing the Power Purchase Agreement. A key issue is clearance by CEA. Our people, together with MSEB, have met extensively with CEA this week to answer their questions about the project. The remaining concern seems to reside with Mr. Beg, Member Planning for Thermal Projects. He continues to hold up the project approval based upon the question of demand for power in Maharashtra. No one from the Ministry of Power in Delhi has given direction to Mr. Beg to move forward on this issue. Consequently, we have a project under the governments fast track program, approved by FIPB, but the CEA refuses to grant a clearance...
It is critical that we get the Power Purchase Agreement approved and signed now and that we start Phase I financing immediately. Because of GOM [Government of Maharashtra] delays in approval and the associated negative press of the last few weeks, the project is in danger. We are working on financing arrangements prior to project approval but the banks in India and externally are losing their enthusiasm based on lack of progress... We need to make immediate progress.19
The CEA granted an in principle clearance on September 20, 1993. This was done to allow Enron to finalize financing for the project. The final clearancewas conditional on the companys obtaining other government permits from the Ministry of Environment and Forests and the Port Trust for construction of their harbor and port; and compliance with Section 29 of the Electricity (Supply) Act, 1948 (an issue discussed further below). The CEA also noted that the government of India should make certain policy decisions regarding the cost of importing liquefied natural gas, payments to the company, and the discrepancy between the Maharashtra governments estimate for the price of electricity and the central governments calculations.20
2. Please furnish the main items of equipment/systems/works separately for items furnished at page 8.1.
3. From the cost estimates furnished at table 8.1, it is seen that the cost of balance of plant and equipment [is high]. The reasons for the high cost of balance of plant and housing may be furnished.
In effect, the Dabhol Power Corporation did not want to disclose its capital costs to the statutory body that was charged with reviewing the project for its cost-effectiveness, among other issues. The company argued (above) that it was unnecessary because with a fixed tariff that included the price of construction, the company would bear all the risks. However, as the Munde Committee report would note, capital costs have a direct impact on the tariff itself:
The most intriguing aspect of the Enron project has been the incredibly high capital cost of the Rs. 4.49 crores per megawatt [approximately $1.4 million per megawatt]. The previous Government and Enron have been justifying it on the basis that it compares well with the capital cost of the other Fast Track Projects cleared for the private sector. The comparative table of the capital cost of the seven Fast Track Projects is as under:
It is evident from the above data that the cost of the Enron Project is more comparable to the coal based projects than to gas based projects. Even as compared to the other gas based projects the cost of the DPC Project is clearly higher by at least 25 percent. Considering the fact that the other gas based projects, Jagrupadu and Godavari, are insignificant in capacity as compared to Enron, a comparison with them will be misleading. Being small projects, their capital cost per megawatt is bound to be higher. Even then, the capital cost of the Enron project is higher than the cost per megawatt of these smaller projects...
In fact the high capital cost wiped out the main advantage that the Dabhol power was supposed to bring. Because gas based technology was to be used, the capital cost of the Project should have been much cheaper than a coal based plant, whereas the running cost would have been higher. In the instant case we have lost the advantage of a lower capital cost from a gas based plant while still retaining the disadvantages of a higher running cost.25
Most important, perhaps, was the committees suspicion that a fixed tariff, under which the company paid all of its expenses, could provide an incentive for the company to negotiate a very high fixed tariff. The higher the tariff, the greater theprofit for the company, derived from the margin between project expenses and total revenues. The Munde Committee reported:
[P]rivate investors have a tendency to inflate costs which would finally lead to higher unit tariffs where the tariff structure is based on a cost plus approach. In a project like this where escalations have been built in and a guaranteed 90 percent offtake of power is assured, the incentive to inflate costs could well be imagined.26
Even though the company refused to provide important information to the CEA, the CEA did not hold up the project or contest the lack of cooperation. Instead, at a meeting of the Foreign Investment Promotion Board, the Ministry of Power sent a note informing the CEA that the finance secretary had found the cost of power to be in line with other projects.27 At this juncture, the CEA apparently abdicated its statutory responsibilities to evaluate the project costs and tariffs and decided that, since the Ministry of Finance approved of the tariff, the CEA would not have to, even though the Ministry of Finance had no apparent authority to clear projects on CEAs behalf.28 The matter ceased to be an issue; the CEA looked the other way.
Finance Secretary stated that there had been some criticism regarding the high cost of power from this project. It was necessary that the Government of India and the State Government satisfy themselves that the cost of power is more or less the same as the cost of similar projects which would come up in 1997. An additional concern in this casewould arise because the tariff was denominated in U.S. dollars and therefore apart from the escalation in dollar terms, account would need to be taken of the expected depreciation rate in the Indian rupee.33
Concern over the tariff was also noted in the 1995 Munde Committee report. The Munde Committee was even more critical of the dollar-denominated tariff than the Foreign Investment Promotion Board and noted:
The most amazing aspect of the entire Project is the fact that the tariff for power has been denominated in U.S. dollars. This means that, regardless of the fluctuations in the dollar-rupee exchange rate, the Project will always earn the same amount. In other words, they are permanently insulated from the vagaries of exchange rate fluctuations. The Sub-Committee can see no reason whatsoever for this... In no other case...is the entrepreneur protected against fluctuations in the international currency market.34
While the company insulated itself from currency fluctuations, the state could not. The consumer of the companys electricity was the Maharashtra State Electricity Board (MSEB). The MSEB, as with all the state electricity boards in the country, was in poor financial shape, and its debt load was quickly increasing. For example, as early as 1993, the state governments Department of Industries, Energy, and Labour knew the MSEB might not be able to pay for the Dabhol power:
The other important issue is the financial position of MSEB itself. Even under the existing conditions, MSEB has to borrow from the State Government and other financial institutions at increasing rates of interest to finance all its development plans. As per the current projection MSEBs interest burden is going up at a fast pace. The burden was Rs. 436 crores [about $136 million in 1993] in 1990-91, Rs 552 crores [$172 million at the 1994 conversion rate], Rs 650 crores [$203 million] in 1992-93, and Rs. 788 crores [$246 million] in 1993-94. The interest burden has almost doubled in five years. Even if the generation projects come up in the private sector, MSEB will find itdifficult to generate internal resources for improvement of the transmission system.35
In order for the company to agree to the project it demanded insurance that the debt-ridden MSEB would not default on its payments. Insurance, in this case, took the form of a counter-guarantee by the state of Maharashtra. This agreement would compel the state government to pay the companys fees if the MSEB were unable to meet its financial commitments. The agreement guaranteed the company a steady income for the life of the PPA, regardless of demand. Furthering the surety, the state government waived sovereign immunity in the counter-guarantee. This meant that if the Maharashtra state government were unable to pay the company, the company could potentially seize any state assets in repayment of arrears.36
1 The Munde Committee, Report of the Cabinet Sub-Committee to Review the Dabhol Power Project, Bombay, August 1995, pp. 8-12. Background on the committee and its report is provided below in this section. Report on file at Human Rights Watch. 2 Ibid. 3 Memorandum of Understanding between the Maharashtra State Electricity Board, the Enron Power Corporation, and the General Electric Corporation, June 20, 1992. Memorandum of Understanding on file at Human Rights Watch. The Dabhol Power Corporation is a consortium in which Enron is an 80 percent shareholder and General Electric and Bechtel each hold 10 percent of the shares. On November 3, 1998, the ownership structure changed when the Maharashtra State Electricity Board (MSEB) purchased a 30 percent stake of Enrons 80 percent share of the DPC for approximately $151 million at the November 1998 rupee-dollar exchange rate. 4 Report of the Cabinet Sub-Committee..., p. 12. 5 Letter from Joëile Chassard, World Bank senior financial analyst, Energy Operations Division, India Country Department to U.K. Mukhophadhyay, Maharashtra state secretary for energy and environment, July 8, 1992. Letter on file at Human Rights Watch. 6 CEAs Comments on the Proposed MoU, enclosed with a letter from M.I. Beg, chairman and ex-officio secretary, Central Electricity Authority to R. Vasudevan, secretary, Ministry of Power, August 7, 1992. Letter on file at Human Rights Watch. 7 Letter from Rebecca Mark, president and chief executive officer, Enron Power Development Corporation to A.N. Varma, chairman, Foreign Investment Promotion Board, August 28, 1992. Letter on file at Human Rights Watch. According to the letter, the total cost of the project was estimated at $3.1 billion: $2.1 billion for the power plant, $845 million for related Liquefied Natural Gas (LNG) facilities, and the remaining $155 million in unspecified expenses. 8 Linklaters & Paines, Dabhol Power Project: Problems Concerning the Application of the Indian Electricity Acts, September 4, 1992, p. 6. Memorandum on file at Human Rights Watch. 9 Memorandum from Ajit Nimbalkar, chairman, Maharashtra State Electricity Board, to N. Ramji, joint secretary, Ministry of Power, September 21, 1992. Memorandum on file at Human Rights Watch. 10 Office of the Prime Minister, government of India, Summary Record of the Foreign Investment Promotion Board (FIPB) Meeting Held on 5th December, 1992, December 9, 1992. Record on file at Human Rights Watch. 11 Letter from the government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals, to the Enron Power Development Corporation, February 3, 1993. Letter on file at Human Rights Watch. 12 Letter from Heinz Vergin, India country department director, the World Bank, to Montek Singh Ahluwalia, secretary, Department of Economic Affairs, Ministry of Finance of the government of India, April 30, 1993. Letter on file at Human Rights Watch. 13 Report of the Cabinet Sub-Committee..., p. 18. 14 Letter from Joseph Sutton, chief operating officer of Enron, to Ajit Nimbalkar, chairman, Maharashtra State Electricity Board, June 23, 1993. Letter on file at Human Rights Watch. 15 Letter from Heinz Vergin, World Bank country director for India, to R. Vasudevan, secretary for the Indian Ministry of Power, July 26, 1993. Letter on file at Human Rights Watch. 16 Report of the Cabinet Sub-Committee..., pp. 13-15. 17 Evaluation of the DESU (MCD) Bawana-GTCC Project by the Thermal Design Organization, Central Electricity Authority, August 1993. Letter on file at Human Rights Watch. 18 Letter from N. Raghunathan, chief secretary, Maharashtra Department of Industries Energy and Labour, to R. Vasudevan, secretary, Department of Power, Ministry of Energy of the government of India, August 21, 1993. Letter on file at Human Rights Watch. 19 Letter from Rebecca Mark, chief executive officer, Enron Power Development Corporation, to Sharad Pawar, chief minister of Maharashtra, August 26, 1993. Letter on file at Human Rights Watch. 20 Letter from V.V.R.K. Rao, secretary of the CEA, to the secretary of energy, government of Maharashtra, September 20, 1993. Letter on file at Human Rights Watch. 21 Summary Record of the Foreign Investment Promotion Board meeting held on November 2, 1993. Record on file at Human Rights Watch. 22 Summary Record of the Foreign Investment Promotion Board meeting held on November 5, 1993. Record on file at Human Rights Watch. 23 Letter from Joseph Sutton, director, Dabhol Power Corporation, to Seth Vedantham, chief engineer, Central Electricity Authority, November 10, 1993. Letter on file at Human Rights Watch. 24 Ibid. 25 Report of the Cabinet Sub-Committee..., pp. 25-27. One crore is equal to ten million rupees. 26 Ibid. 27 Letter from R. Vasudevan, secretary, Ministry of Power, to Y.P. Gambhir, chairman, Central Electricity Authority, November 11, 1993. Letter on file at Human Rights Watch. 28 Summary Record of Discussions of the 118th Meeting of the Central Electricity Authority on Techno-Economic Appraisal of Power Development Schemes, First Session, November 12, 1993. Record on file at Human Rights Watch. 29 Letter from V.V.R.K. Rao, secretary Central Electricity Authority, to the Dabhol Power Corporation, November 26, 1993. Letter on file at Human Rights Watch. 30 Note from U.K. Mukhopadhyay, energy secretary, to the secretary of the chief minister and principal secretary of the Finance Department, December 2, 1993. Note on file at Human Rights Watch. 31 Summary Record of Discussions of the 118th Meeting of the Central Electricity Authority. 32 Financial and Economic Appraisal of Dabhol Combined Cycle Power Project by the Central Electricity Authority, November 1993. Report on file at Human Rights Watch. 33 Summary Record of the Foreign Investment Promotion Board (FIPB) Meeting Held on November 2, 1993. Record on file at Human Rights Watch. 34 Report of the Cabinet Sub-Committee..., pp. 29-30. 35 Additional views of the Finance Department of the Maharashtra Department of Industries, Energy and Labour regarding Enron Power Project, August 1993. Memorandum on file at Human Rights Watch. The dollar amounts are based on the 1993 conversion rate of thirty-two rupees to on U.S. dollar. 36 Guarantee of the State of Maharashtra to the Dabhol Power Corporation, signed by U.K. Mukhopadhyay, secretary of energy, and Joseph Sutton, director the Dabhol Power Corporation, February 10, 1994. Guarantee on file at Human Rights Watch. The relevant clause of the counter-guarantee states: (E) Sovereign Immunity: The Guarantor unconditionally and irrevocably: (1) agrees that the execution, delivery and performance by it of this Guarantee constitute private and commercial acts rather than public or governmental acts; (2) agrees that, should any proceedings be brought against it or its assets in any jurisdiction in relation to this Guarantee or any transaction contemplated by this Guarantee, no immunity from such proceedings shall, to the extent that it would otherwise be entitled to do so under the laws of India, be claimed by or on behalf of itself or with respect to its assets; (3) waives any right of immunity which it or any of its assets now has or may acquire in the future in any jurisdiction; and (4) consents generally in respect of the enforcement of any judgement against it in any such proceedings in any jurisdiction to the giving of any relief or the issue of any process in connection with such proceedings (including, without limitation, the making, enforcement or execution against or in respect of any property whatsoever of its use or intended use). 37 Guarantee of the government of India to the Dabhol Power Corporation, September 4, 1994. Guarantee on file at Human Rights Watch. 38 Secretary O'Leary Hosts First Reunion with India, press release by the United States Department of Energy, September 28, 1994.