Appendix B: Report of the Cabinet Sub-Committee to Review the Dabhol Power Project

Appendix C: Selected Recommendations and Conclusions from the Parliamentary Standing Committee on Energy, May 29, 1995

Appendix D: Correspondence Between the Government of India and the World Bank

Upon their election in March 1995, the new government under Chief Minister Manohar Joshi announced that it would review the Dabhol Power project.40 A committee chaired by Deputy Chief Minister Gopinath Munde—the “Sub-Committee to Review the Dabhol Power Project”—was constituted on May 3, 1995.41 The committee undertook a comprehensive study of the project, reviewing thousands of pages of documents and interviewing representatives of numerous organizations concerned with the issue, including the company itself.

We have cited this report and many of the same sources extensively, in describing the background of the project. We have detailed the committee’s findings regarding the price of the tariff, the financial impact of the project, and the manner in which the former government negotiated the deal. The committee had other findings as well. It examined issues related to corruption, namely the lack of competitive bidding, lack of transparency, secrecy of negotiations, and whether the company received any “undue concessions.” The committee’s conclusions follow:

1. On the question of competitive bids:

The previous Government has committed a grave impropriety by resorting to private negotiations on a one on one basis with Enron and under circumstances which made the Enron/MSEB arrangement on Dabhol to lack transparency. Although there was no policy formulated for competitive bidding in power projects this has been accepted practice, in the larger public interest, to involve more than one contender. There was no compelling reason not to involve a second contender for Dabhol. Actually, such a thought does not seem to have occurred to anyone at all. Therefore the Sub-Committee strongly disapproves of the one to one negotiations with Enron and is clearly of the view that it violates standard and well-tested norms of propriety for public organisations.

2. On whether there was any secret or off the record negotiations:

Considering the records available with the State Government and the MSEB, we are led to the irresistible conclusion that they are not the only guide to what actually happened. It is reasonably clear that several unseen factors and forces seem to have worked to get Enron what it wanted.

3. On whether the capital cost of the Project is reasonable:

On the basis of the material accessed by the Sub-Committee, it concludes that the capital cost of the DPC project was inflated.

4. On whether undue favours and concessions have been given for the Project:

Several unusual features of the negotiations and final agreement have been pointed out by the Sub-Committee in the report which makes it clear that whatever Enron wanted was granted without demur.

5. Whether the rate for power from the Dabhol plant is reasonable:

The Sub-Committee is of the view that because of the denomination of tariff for power in U.S. dollars and other reasons, the consumer will have to pay a much higher price for power than is justified. This is clearly not reasonable.

6. On the environmental aspects of the Project:

The Sub-Committee is of the view that the real environmental issue is whether such a huge power project should be located in such an unpolluted part of Maharashtra and whether there is any other part of the State where it could have been located. Also whether a project of lesser size could help the preservation of the environment better was not gone into. It is evident from the environmental assessment that marine life and plants may have to face problems if adequate care is not taken.

7. On whether the Project is useful to the State:

The Sub-Committee is of the view that such high cost power as Enron envisages will, in the immediate future, and in the long run, adversely affect Maharashtra and the rapid industrialization of the State and its competitiveness.42

Based on these findings, the committee concluded:

[T]he arrangement in force is not tenable because of the infirmities pointed out above in the terms and conditions of the contract. It,therefore, recommends that Phase II of the Project should be canceled and Phase I should be repudiated. [sic]43

This outcome was stunning: the committee recommended cancellation of the largest single foreign investment in India. Its grounds were corruption, lack of transparency, the high costs associated with the project, and the lack of benefit to the state.

Chief Minister Manohar Joshi announced that Phase I would be stopped and Phase II would be canceled on August 3, 1995.44 In a speech to the Maharashtra legislature, Joshi said:

This agreement is an anti-Maharashtra agreement. This agreement is mindless and devoid of self-respect and to accept this agreement as it is shall amount to cheating the public. This agreement can never be called an agreement and therefore, it is important to uphold the self-respect and interest of Maharashtra by canceling this agreement even if that results in some financial burden.45

Following the announcement to cease construction, Enron initiated arbitration proceedings against the Maharashtra government in the United Kingdom during August 1995. The company stated that it wanted to recoup up to $600 million in costs because the contract was suspended but also stated that it was willing to renegotiate the PPA.46

Countering the company’s actions, the Maharashtra government filed a court case in the Bombay High Court against the MSEB and DPC in September 1995. Both the lawsuit and the government’s stance in arbitration proceedings contended that the contract with Enron was contrary to the public interest and conceived through corruption. The government argued that, in these circumstances, the PPA should be declared void and related contracts such as the counter-guarantees shouldbe void as well.47 Arguing as to why the contract should be voided, the state government’s lawyers stated:

In the proceedings in the High Court of Bombay, it is alleged that payments were made by the claimant in these arbitrations by way of illegal bribes. A contract which involves the bribery of a public official or officer is a contract procured by commission of a criminal offence. Not only is the making of a bribe a criminal offence, it also means that the officers and agents of the Maharashtra State Electricity Board (“MSEB”) who purported to contract on behalf of the board were exceeding their authority. An employee or agent has no authority to bind his principal to a fraudulent transaction. The consequence of this is that the MSEB were not contractually bound by the actions of their employees or agents purportedly on their behalf. This means that the MSEB never entered into the PPA. It was an agreement made by officers without authority to act. It therefore, does not bind the MSEB.48

On November 1, Enron officials apologized to the Maharashtra state government and offered a “renegotiated” project.49 The government, specifically the unelected leader of the Shiv Sena, Bal Thackeray, announced that the “Enron people have accepted nearly all our conditions.”50 However, the arbitration proceedings were not resolved, so the project remained in limbo.

41 Report of the Cabinet Sub-Committee..., pp. 1-3.

42 Ibid., pp. 37-40.

43 Ibid., p. 40.

44 Mark Nicholson, “ Indian State Scraps U.S. Group's Power Project,” Financial Times, August 4, 1995.

45 The government of Maharashtra’s translation of the chief minister’s statement in the Maharashtra Assembly, August 7, 1995. Statement on file at Human Rights Watch.

46 Jeremy Clift, “Enron Seeks Arbitration in $2.8 Billion India Deal,” Reuters, August 7, 1995; Feizal Samath, “U.S. Enron Corp Offers Fresh India Power Deal,” Reuters, August 31, 1995.

47 State of Maharashtra vs. Dabhol Power Company and others, Civil Writ Petition Number 3392 of 1995 in the Bombay High Court.

48 Notes of arbitration proceedings between the government of Maharashtra and the Dabhol Power Corporation written by Christopher Carr and R.J. McGrane, lawyers for the government of Maharashtra, November 2, 1995, p. 7. Notes on file at Human Rights Watch.

49 “Enron Bosses Apologise to India State Chief,” Reuters, November 1, 1995.

50 Clarence Fernandez, “Indian Leader Seems to Give Axed Enron Thumbs Up,” Reuters, November 1, 1995. Bal Thackeray, founder and current leader of the Shiv Sena party is widely acknowledged as the final arbiter in Maharashtra government decisions despite the fact that he is not an elected government official and has never held public office.