The Twisted Tale of Enron’s Equity

ENRON, without any intimation or notice to the government of India or Maharashtra, has obtained an ex parte injunction from the High Court of Justice in London on 10th October 2001. This injunction prohibits the state of Maharashtra, its servants, agents or otherwise, from commencing or participating in proceedings in any Court or Tribunal in India (or in any other jurisdiction) with respect to any disputes involving the Dabhol Power Company. The London High Court must still be believing that the British Raj continues in India, and its writ must run in India. Enron’s attempt is to force the Maharashtra government and MSEB to appear in London in the Arbitration Proceedings as the only platform with respect to the Dabhol dispute, and blackmail the Indian and Maharashtra governments into paying the $1 billion it claims it brought in as equity. While the legal implications of such an injunction will be carefully studied before charting out the response and course of action, we would here like to restrict ourselves to what is the real major issue here – how much actual capital did Enron bring into the Dabhol project.


There are two points involved here. The first is on the question of compensation. Enron’s friends and champions are campaigning on the ground that the $ 1 billion that Enron brought in as its equity, must be returned to it, i.e., Enron should be “adequately” compensated, even if it is recognised that the Enron project is a disaster.

When a contract goes against the interests of the people, then a host of people start discussing the ‘sanctity’ of contracts. When other contracts are found not to be generating the anticipated profits, we are told of the need for bailing out a “vital sector of the economy”. If the Telecom companies had to be saved from their contracts earlier, how come the people of Maharashtra do not need the same attention today?

Even if we assume that Enron needs to be compensated, the question still remains what should be the quantum of this compensation. When a company takes a commercial risk and brings in capital, it is not automatic that the compensation should be equal to what it brought in originally, rather compensation is calculated on the basis of what the capital is currently worth. That is the principle on which all buying and selling of equity operates. And the Godbole committee, going by this principle, has clearly indicated that the net worth of Enron’s equity today is only 25% of its face value.

The second point that the friends of Enron are not willing to discuss is, what happens if a contract is reached through fraud? Again, it is a well-settled principle in law that if a contract has been reached through corrupt practices or through fraud, the contract has no validity.

The Godbole Committee’s report has given computations showing how, (i) in the Power Purchase Agreement, the MSEB agreed to excessive payments to Enron to the tune of Rs.930 crore per year;

(ii) it has given detailed examples, showing how every “error” made in the agreement favoured Enron;

(iii) it has substantiated the point raised by a petition filed in the Courts by the CITU (with Abhay Mehta), that the Central Electricity Authority failed to fulfil its statutory responsibility of carrying out a techno-economic evaluation of the project.

(iv) it has chronicled how the protracted “negotiations” carried out by MSEB from August ’92 to December ’93, led to an increase in the rate of power from 6.91 cents to 7.5 cents, despite the drop in fuel prices in this period.


What are the excess payments that the Godbole Committee has pointed out?

A major portion of them pertains to Enron’s attempt to pass on the entire cost of re-gasification of LNG to the MSEB, although the power plant would use only about 40 per cent of the total re-gasification capacity while Enron was offering the remaining 60 per cent to others.

Double-charging MSEB for facilities such as harbour charges – once as a part of the capital recovery charges of the project, and again as harbour charges.

Built-in inflated operations and maintenance costs, and a higher fuel consumption rate for the plant, leading to a higher charge for fuel than the actual consumption.

All this, in normal legal terms, is fraud.

That the government acquiesced in this fraud in no way exonerates Enron from reaching a contract through illegal means, and thus renders such a contract null and void.

The problem with the Maharashtra government is that it is unwilling to state the obvious – that this contract was reached through corrupt means and in collusion with the leaders of the governments theninvolved. It was a Congress government, led by Sharad Pawar, that signed the initial Enron deal, followed up by an even worse deal perpetrated by its successor BJP-Shiv Sena government. And to seal this whole scandalous process, the counter guarantee vital for the deal was given by the 13-day Vajpayee government a scant two hours before it fell.

It is clear that the reasons for the watering down of the fraud charges against Enron lie in this Congress legacy, the pressure of the Sharad Pawar-led NCP, and the BJP-led central government, to protect the complicity of these earlier governments. But the legal situation today is such that unless the issue of fraud is taken up strongly, the Maharashtra government’s present legal battle against Enron will stand considerably weakened.


How much capital did Enron actually bring in to the Dabhol project? The Godbole Committee did not examine the capital costs of the Dabhol project, but the stark point is that Enron did not in fact bring any equity into the project. It first of all inflated the capital costs of the project, borrowed the funds from financial institutions, including Indian ones, recycled these funds through the EPC contractor and other equipment suppliers into its account, and then showed these funds as its project equity. In other words their equity is nothing but the recycled funds of the project based on fictitious project costs.

Thus, in its first phase, Dabhol was shown as having a capital cost of Rs 5.2 crore/mw. In the same period, NTPC built the Kayamkulam project in Kerala with the same fuel and virtually with the same equipment, at a cost of Rs 3.5 crore/mw. In this period also, a number of projects were undertaken internationally using the same combined cycle plant route. The costs of such projects varied from $600/kw for North America, to 1,000 dollars for India and Africa, i.e., the international costs of similar projects around the globe varied from Rs 2.5 crore to Rs 4.0 crore per mw, depending on the location. Therefore, if we take NTPC’s cost of Rs 3.5 crore/mw, already on the high end of the spectrum, the Enron plant cost at least Rs 1.7 crore per mw more than the prevailing international price.

Totally for the first stage, with a capacity of 695 mw, the Enron plant cost was about Rs 1,300 crore more than what it should have been. For the second stage, of another 1400 mw, the situation is even worse. If we take the re-gas facilities into account, the cost per kw comes to about $1400, Rs 6.6 crore per mw at the current price of the dollar. The overpricing here is of the order of 600 dollars per kw and works out to more than 1.2 billion dollars or more than Rs 5,000 crore.

Without access to its accounts. it is difficult to establish how Enron accomplished all this. However, a recent case, in which two promoters have fallen out, brings out the modus operandi of IPP promoters. In the Godavari Spectrum project, the two promoters Mohan Rao and Krishan Rao, fell out amongst themselves. The documentary evidence filed against each other shows how both of them had stolen project funds and brought them in as equity. The EPC contractor, Rolls Royce, paid 19.3 million dollars and 1.5 million pounds sterling, as commissions, into a Virgin Island account of the promoters. Further, through other methods, another Rs 70 crore were siphoned off into Krishan Rao’s account. Project loans were taken by the two promoters from various Indian financial institutions, and as documented, it now turns out that the entire equity of the promoters was nothing but these loans recycled. Interestingly, after these manipulations, the cost per mw for the Godavari Spectrum is also similar to that of Enron.


This brings us to our last point. How much have the Indian financial institutions paid for Enron? In terms of loans, 1.3 billion dollars; another 600 million dollars have been guaranteed to foreign lenders. Thus their total exposure on Dabhol is to the tune of 1.9 billion dollars. No wonder the finance ministry, after having forced Enron on the country as a “reasonable” project, and having pressurised IDBI and others to extend loans to Enron, is now pushing that Dabhol should somehow be rescued from sinking. If not, all these loans would turn into Non-Performing Assets, sinking some of these financial institutions. Incidentally, with this same 1.9 billion dollars, a 2000 mw plant could have easily been built without any other investment.

What then is a reasonable compensation that should be paid to Enron? Clearly, the Indian people should not be asked to pay for the spurious equity that Enron has brought in. In fact there is a splendid criterion already being enforced in America itself. And that is the logic that Californians are urging on their government.
They have argued that the eminent domain of the state should be used to take over generating companies that have overcharged the California consumers, paying the former a “reasonable cost.” The reasonableness of this cost must be established by opening their books and checking for the fraud they have committed on Californian consumers.

We should demand the same logic be applied here. Enron’s ‘equity’ can be taken over by paying them a “reasonable compensation.” But Enron will have to establish why they paid so much more than the market price for plant and equipment for the Dabhol project. We can check their accounts to trace where this so-called equity came from. In other words, if they want their one billion, it is they who have to show that they have not overcharged the project. The evidence otherwise is overwhelmingly of Enron having cooked their books.

The friends of Enron are of course not interested in any of the above issues. All they want is that Enron be given a golden handshake of $1 billion. It does not matter that Enron brought in very little to the project. The Independent Power Producers Association of India (IPPAI), in its latest issue, has even quoted from Ramayana “jaan jaye par bachan na jaye”. ( The pledge must be honoured even at the cost of life) But the question is whose bachan (pledge), and whose jaan (life)? Or is it that those who gave the bachan to Enron are worried that they may not receive their cut, and for that they are prepared to sacrifice the jaan of the people of Maharashtra?