CASE NUMBER: 364
CASE MNEMONIC: INDPOWER
CASE NAME: India's Enron Power Project Saga
I. IdentificationA. IDENTIFICATION
India is undergoing unprecedented precedent in its power sector which runs the risk of increasing environmental degradation. India is an attractive emerging market for investment in the global economy. The Maharashtra Enron power project--India's largest single plant--is a gas-fired power plant which will add to the country's environmental woes. Much of the problems derives from India's urgent need for investment and complicated governing responsibilities between national and state authorities. This is leading to a lack of accountability for environmental problems and minimal enforcement of existing laws.
2. Description
Liberalization Lures Investment
India has a stable and historic economic, political, and legal framework to offer power infrastructure investors. India, the world's largest democracy (almost a billion people), consists of 26 states and six union territories. Despite a surprise turnabout in national elections early this summer, India has successfully and safely transferred power to an opposition coalition. The leftist United Front (UF) coalition government recently wrested power from both the moderate Congress (I) party--which has traditionally led the Indian government--and the rightist Bharatiya Janata party (BJP) and Shiv Sena. In contrast to the more hard-line BJP, the UF coalition has followed, to a large extent, many of the previous government's reforms. To understand these political transformations, however, one needs to review India's economic policies.
India is a relatively recent big emerging market. Prior to 1991, India was considered a socialist country which isolated itself from the rest of the world and maintained government control over all key industries. Economic reforms, however, were initiated in 1991 when former Finance Minister Singh announced that India barely had enough exchange reserves to cover three weeks worth of imports. The International Monetary Fund bailed out India through a loan contingent upon macro-economic stabilization and pro-market structural adjustment. As a result, the government loosened its substantial hold on the economy and allowed for the gradual public ownership of key industries.
The Indian central government has removed many barriers of entry and has begun decreasing the high level of tariffs and corporate taxation which once deterred foreign investors. Currently tariffs are still above developing world norms, however, the government has made a concerted effort to continue reduction. It has instituted reforms that allow MNCs which enter into joint ventures with Indian corporations to be taxed at the much lower domestic tax rate. The national government has also made significant strides in reducing the import duties on many of its goods, as well as decreasing the custom duties on capital goods. In addition, the government has greatly expanded the convertibility of the rupee; making it easier for multinational corporations to conduct business in the country.
A comprehensive review of the economic reforms indicates that they have accomplished a good degree of success in a relatively brief period. The budget deficit, which had climbed to 8.4% of Gross Domestic Product in 1990-91, fell to 5.7% in 1993-1994.1 Currently, it is projected to remain at 6% for this fiscal year.2 Inflation has remained stable, albeit a little high at 10%, throughout the reform process, in contrast to previous socialist countries of the post-Soviet bloc.3 Imports have continued to fall while the level of exports has risen, in part due to its diversified industrial base. In 1993-1994 exports grew by 20% and in the 1994-1995 fiscal year have already grown 15%. India is also one of the world's largest exporters of software. However, the trade deficit still remains a little high at 2.8 billion dollars. Finally, industrial output has grown between seven and eight percent in the past few years, mainly in coal, steel, cement, textiles, and heavy machinery sectors.4 Many argue that with close to a billion population--which accounts for 21% of the world population--and the second largest middle class in the world, India may be emerging as the newest Asian tiger.5 The potential size of its market, dependent on upon deregulation, is so huge that investors believe they can receive enormous returns. India has also become attractive to foreign investors due to its wealth of natural resources, low labor costs, and its contribution in Research and Development (R&D.) To compliment these R&D investments, India sends more individuals to universities for graduate studies than the United States.6
In addition, India possesses a highly structured and effective legal system, stemming from its days under British rule. Lastly, the middle class market, estimated to be close to 300 million people, cannot be emphasized enough. As India begins to move down the pathway to of the Asian tigers, the country will need private power infrastructure investment to fuel such growth. The relatively rapid growth in India's economy, portrayed in the above statistics, has piqued the interest of foreign investors. Currently seven billion dollars worth of foreign direct investment has been approved by the government since 1991.7 The popular sectors to invest include power projects, oil refineries, food processing, chemical, and electronics. In fact, the southern city of Bangladesh has turned into India's own Silicon valley in respect to electronics and computer software. Texas Instruments, IBM, Hewlett Packard, and Motorola have all established operations in this region. Other US-based MNCs which are investing in India include Kellog, Pepsi, Coca Cola, CHIC, Pizza Hut and McDonalds. These MNCs will need reliable power supplies to run their operations.
In order to support these high growth trends, India is seeking to expand its power production facilities. However, power production responsibilities involve both the state and national governments and sometimes investment can become bogged down in regulations. The next sections expands on the structure and limitations of India's power sector. The Power Sector in India The demand for power in India is far outpacing supply. The government of India has forecast an addition to the existing capacity of about 30,500 MW for the Eighth-Year Plan period of 1991-92 to 1996-97 to the present installed capacity of 70,000 MW--this will require an investment of about $60 billion!8 Electricity supply in India is derived primarily from thermal energy (71%) as well as hydroelectric (26%) and nuclear (3%.)9To date, 96% of power generation is government-controlled, but there over 200 private power proposals pending India.10 During the first two months of 1996-1997, the year-on-year growth in power generation was only 3.9% compared to the 11% experienced in similar months in 1995-96.11
The power sector in India is a joint responsibility between the national government and the states. The central government, through the Ministry of Power, primarily regulates supply and distribution of power at the national level. Specifically, the Central Electricity Authority (CEA) is in charge of developing a national power policy and legislates power sector development. In contrast, the state-run State Electricity Boards (SEBs) and the State Generation Companies (SGCs) generate the majority of the electricity supply for the states and provide most of the distribution functions to the states.
The state responsibilities were clearly laid out in India's Electricity (Supply) Act of 1948, which created the SEBs and their supply function. The Industrial Policy Resolution of 1956 further entrusted the SEBs with the "exclusive responsibilities" in aspects of generation and distribution of power.
In accordance with India's economic liberalization in 1991, the government began to open up the power sector to private investment. In July 1991 the national government modified the Industrial Policy Resolution to remove the power sector from a list of areas limited to the public sector. In September of the same year, the act was again amended to remove many of the regulatory disincentives on the books that were prohibitive to private sector involvement. These reforms raised the rate of return MNCs by allowing:12
--"fast-track approval" of power projects
--100% foreign equity participation with no restriction on dividend repatriation
--machinery imports if they are tied to availability of confessional credit
--a higher depreciation than that allowed for state power utilities
--special appropriations for debt and service obligations
--tax on income to be treated as an expense.
The Indian government has indicated that the critical area of poor performance in the power sector is the SEBs, which generate and distribute the majority of power, set tariffs, and collect revenues. Unfortunately, SEBs tend to bias their electricity tariffs and in terms of their relative shares (many SEBs set at much below cost for the agricultural sector); which means that none of the SEBs cover a reasonable fraction of the unit average cost of operations for the SEB, leading to heavy financial losses.13 The Enron deal is struck... No other private power deal in India has attracted as much attention as Houston-based Enron corporation's power project in Maharashtra state. The Hindu fundamentalist Bharatiya Janata party (BJP), now the ruling state party in Maharashtra, set in motion a series of events that would place Enron in the middle of a controversy over foreign investment in India. The $2 billion, 2,450 MW Dabhol power project will resume construction this month. Enron received approval from the current central government in a July ruling to honor a federal counter-guarantee to Enron for power-purchase payments from the state's utility, Maharashtra State Electricity Board. Enron is 80% owned by Enron Development Corporation, and Bechtel Enterprises and General Electric Company's GE Capital unit each hold 10% shares. This latest approval comes after a review of the counter-guarantee issue by the 13 party United Front (UF) coalition government, which came into power after a 13-day rule by the right wing fundamentalist BJP.14 The BJP was unable to gain a parliamentary majority after narrowly defeating a the moderate Congress(I) Party in the national elections earlier this summer.
In 1992, the negotiated plan between the previous Congress(I) Maharashtra government and Enron was intended to be an example of the success of their New Economic Policies of 1991 and to provide a boost of confidence for foreign investors interested in investing in India. Following the election of the BJP to the state government, however, it became a heated debate about India's commitment to economic reforms.
When the BJP coalition rose to power in the Maharashtra state government in the Spring 1995 state elections, it set up a committee to review the Enron contract. The BJP espouses the policy of swadeshi, or Indian self-sufficiency and limited foreign involvement. This concept stems from the days when India was colonized under Great Britain. When India achieved independence in 1947, many vowed never to allow their state to be dominated by the West again.
The BJP committee reviewed claims that negotiations with Enron took place under the table and were corrupt. The BJP cited this as proof that such methods had led to an inflated cost for the project, as well as lining the pockets of several Congress(I) officials. In addition, the BJP accused Enron of bribing Congress officials in order to set high power rates in Maharashtra to increase profits. The Enron corporation was finally forced to renegotiate with the BJP state government canceled the deal in August. The Maharashtra state government claimed that the deal was too expensive and would damage the environment.15 Enron entered new negotiations with the state government in November 1995. By January 1996, a new contract was finalized between the state government and Enron. Enron agreed to slash the project cost to $2 billion from $2.8 billion and raised the generation capacity to 2,450 megawatts from 2,0150 MW.16 However, because the contract was renegotiated, the federal government was required to approve the new contract.
This process was slowed down by the national elections and changeovers in the national government. Following the current United Front government's ruling in favor of Enron, construction is expected to begin immediately on the first stage for the natural gas plant. The facility will be designed for multiple fuels; it is expected to use naptha in the initial stages and later shift to liquefied natural gas.17 Although Enron officials have refused to comment, power analysts estimate that it will take almost 30 months to complete the first phase of construction.
The federal government has been left struggling to limit the opposition outcry of the Enron deal at the cost of its economic liberalization programs. The result of this conflict fueled an intense debate between the federal government and state administrations, which many claim are willing to sacrifice further foreign direct investment in order to retain the loyalty of its constituents.18 Although the case has been settled in favor of the MNC, this ordeal has created a scar on foreign investors, left to determine whether India has really changed its old socialist ways. Kirit Parekh of the Indira Ghandi Institute of Development points out that, "There can be no doubt that in an investor's mind, the dangers and risks [of doing business in India] have gone up. We are going to bear some costs."19...but is mixed news for the environment.
India's environmental legislation is a myriad of complex paperwork at the national and state level with inadequate enforcement. The Enron gas-fired power project, which has been approved by the national and state governments for construction, has not passed through quite as stringent an environmental process. In fact, if the environmental controls are indeed left at the state level, it is likely that enforcement will be lacking. While India does have to appropriate paperwork for environmental protections, the frequent lack of funding and political will creates a lackluster result.
The Indian Environmental Ministry is responsible for issuing environmental clearances. It is, however, the Maharashtra State Electricity Board (MSEB), that will be largely responsible for policing and enforcement. Due to the rapid increase of investment and construction in all industries, the state environmental agency and is overwhelmed is unlikely to be able to proved even minimal environmental safeguarding. This will lead to unchecked air, water, and ground pollution.
3. Related Cases
Key Words
(1): Environmental Problem: Pollution Air [POLA] Sea [POLS]
(2): Industrial Category: Power [POWER] (3): Nation: India
4. Draft Author: Theresa Augustus, December, 1996
B LEGAL Clusters
5. Discourse and Status
Environmental protection is a national and state mandate. The problem inherent in the system is the lack of a strong central focal point for policy formation and a proper accountability mechanism. Hence, legislation may be on the books, but it is rarely enforced.
6. Forum and Scope: India and UNIlateral
7. Decision Breadth: 1 8. Legal Standing: [Law], [Sublaw] C. GEOGRAPHIC Clusters
9. Geographic Locations a. Continental Domain: Asia b. Geographic Site: South Asia c. Geographic Impact: India 10. Sub-National Factors: NO 11. Type of Habitat: [TEMP]erate D. Trade Filters 12. Type of Measure: Regulatory Standard [REGSTD]
13. Direct v. Indirect Impacts: INDirect
14. Relation of Measure to Impact:
a. Directly Related to Product: YES Power [POWER]
b. Indirectly Related to Product: NO
c. Not Related to Product: NO
d. Related to Process: YES Poll. [POLA] [POLS]
15. Trade Product Identification: Power
16. Economic Data
17. Degree of Competitive Impact: LOW
18. Industry Sector: POWER
19. Exporter and Importer: Domestic
E. ENVIRONMENT Cluster
20. Environment Problem Type: POLA, POLS
21. Species Information: N/A
22. Impact and Effect: [HIGH] and [REGUL]
23. Urgency and Lifetime: N/A
24. Substitutes: CONSV
F. OTHER Factors
25. Culture: NO
26. Human Rights: YES
Air pollution impinges on the health and quality of life of Indians. The increase in air pollution has repercussions to health problems, specifically leading to lung illness. In addition, there is also the risk of soil contaminated by illegal untreated waste disposal. 27 Trans-Boundary Issues: NO
28. Relevant Literature
ENDNOTES
1 "India's Newest Asian Tiger." Business Horizons. May/June 1995. Pg. 47.
2 "Emerging Market Indicators: The Economy" The Economist 20 May 1995. Pg. 108.
3 Emerging Market Indicators: Inflation." The Economist. 8 May 1995. Pg. 100.
4 "India shakes off its shackles." Business Week. 30 January 1995. Pg. 48.
5 "India: Open for Business." Multinational Monitor. July/August 1995. Pg. 9.
6 "Hello World" The Economist. 21 January 1995. Pg. 7.
7 "Don't look back." Far Eastern Economic Review 17 March 1995. Pg. 49.
8 Ranganathan, V. "Electricity Privatization: The case of India" Energy Policy. August 1993. Pg. 875.
9 Khettry, Sanjay. "Financing Power Projects in India" Fourth Annual Conference: Private Power in the Pacific Rim. San Diego, California. 20-21 May 1996.
10 Ibid.
11 Centre for Monitoring Indian Economy. "Infrastructure: Power" Monthly Review. June 1996.
12 Ranganathan, V. "Electricity Privatization: The case of India" Energy Policy. August 1993. Pg. 875.
13 Government of India. Economic Survey: 1995-96.
14 "India's Central Government." Independent Power Report. 12 July 1996. 15 "India OK's Revised guarantee" Dow Jones. 28 May 1996.
16 Ibid.
17 "Enron; busy reviving stalled Indian project." Reuters Trade Report. 19 July 1996.
18 "India nationalists oppose presence of a US chain." Los Angeles Times. 22 September 1995. A5.
19 "Indian roulette" Forbes. 11 September 1995. Pg. 159.