A sale on hold

Published : Apr 27, 2002 00:00 IST

The role of the U.S. government in forcing the creditors of former energy giant Enron to stall the sale of the Dabhol plant's assets to recover outstanding loans is undeniable.

EVIDENCE of Enron using its clout with the United States government to try and settle the Dabhol Power Company (DPC) imbroglio has come out in the open. Extensive documentation released by the U.S. government reveals that the White House had made a multi-front effort to help the now-bankrupt Enron Corporation settle the dispute with the Maharashtra State Electricity Board (MSEB). But what is surprising is that Enron, in spite of its collapse in November 2001, believes that it can continue to intimidate countries like India. Until early April, covert attempts were made to persuade the Indian government to resolve the dispute in a manner favourable to the fallen energy giant.

On April 8, the DPC's domestic and offshore lenders met for three days to decide the future course of action to save the 2,184-megawatt plant controlled by Enron. For several days before the meeting, domestic lenders kept up the refrain that they would prefer seizing the assets of the company, and selling them as it would be less complicated than selling Enron's 65 per cent equity stake. However, the meeting had an unexpected outcome. Instead of seizing the assets, the lenders decided to appoint a group of advisers to come up with financial and technical recommendations for the sale and restructuring of the plant.

Coincidentally, Christina Rocca, the U.S. Assistant Secretary of State, arrived in India from Islamabad on April 9. She was in the country to discuss relations between India and the U.S. and the military build-up on the Indo-Pakistan border. On the morning of her arrival, Christina Rocca told the television channel Star News that she would also discuss the expropriation of DPC. The day she left, DPC's lenders made the announcement on the advisory committee. "When there was not even the faintest indication that advisers would be appointed, where did this decision come from?" said a reliable source in a financial institution. Besides, representatives of the lead financiers of the project, such as Overseas Private Investment Corporation (OPIC), a U.S. government agency, are part of the core committee. That OPIC is one of Enron's "special friends" is no secret.

Pradyumna Kaul, an activist with the Enron Virodhi Andolan, observes that Rocca's April 9 visit to India was the third in a year and a half, and during all three visits she had brought up the Dabhol dispute with National Security Adviser Brajesh Mishra even though she said she had come to discuss India-U.S. and India-Pakistan relations. Kaul says: "They are mixing issues of military strategy with commercial issues. She is forcing Brajesh Mishra to discuss Enron. Is it a give-and-take situation? That the lenders decided differently, definitely leads to the suspicion that there is pressure, including from the U.S. government, which continues to bear down on India with regard to Enron." If the lenders had seized DPC's assets, Enron would have lost the ability to influence their price and the decision on how the proceeds should be distributed.

Enron had sought to sell its 65 per cent interest in DPC after years of squabbling with its only customer, the MSEB. Enron chairman Kenneth Lay, in a letter to Prime Minister A.B. Vajpayee in September 2001, asked for $1.2 billion towards the company's investment in DPC and $1.1 billion for the purchase of offshore lenders' debt. He wrote that the amount struck him as being "exceptionally reasonable when compared to the size of the legal claim, which is between $4 billion and $5 billion". Since then Enron has continued to demand the money and used various methods to extract it.

Prior to the April meeting, the financial institutions (FI) had said that asset sale was perhaps the best option for lenders to revive the project and safeguard their investments. The plan to sell Enron's equity to seven bidders was considered too complicated. According to a source in an F.I., the usual business practice in India is that a plant is mortgaged with lenders for loans taken from them. "Lenders can take over assets in case of default or other such extreme cases when their interests are in jeopardy." This, he said, would probably be the most viable and best course to save the plant.

SAVING the plant may not have been on the U.S government's mind, but saving Enron obviously was. The documents that the U.S. government released under the Freedom of Information Act include a letter from OPIC president Peter S. Watson to Brajesh Mishra. The letter, in essence, threatened that unless the Dabhol issue was resolved further foreign direct investment would not come into India. Watson says: "...I express my concern for the lack of significant progress in resolving Dabhol's problems, thereby posing a possible detrimental effect on OPIC's support for other foreign investment ventures of interest and benefit to India's economy." It further says: "...the acute lack of progress in this matter has forced Dabhol to the highest level of the United States government..."

OPIC, together with Exim Bank, has lent Enron more than $600 million towards the project. Both have the complete backing and credit of the U.S. government. Interestingly, the OPIC letter to Brajesh Mishra is dated November 6, 2001 - that is, two days before Enron announced its collapse. This shows that until the very last day, the cash-strapped Enron was trying to intimidate the Indian government in order to salvage funds from the project.

Also available are detailed e-mail correspondence on the Dabhol issue among the Bush administration, the Indian Embassy in Washington, OPIC and Enron. Although the senders' and recipients' addresses have been blacked out, the body of the text makes it clear that the Bush administration was helping both Enron and OPIC resolve the Dabhol dispute. In fact, a clear sign of the U.S. issuing a warning came in February this year when Robert D. Blackwill, the U.S. Ambassador to India, stated that "...the Dabhol dispute can spell death to potential investment in India" (Frontline, March 1, 2002). He told the business community that the Dabhol controversy had created among the overseas community the perception that India was not yet ready for big-time investment.

The Washington Post could be credited with requisitioning many of the Dabhol-related documents under the U.S Freedom of Information Act. The newspaper reported that U.S. financial institutions helped finance projects like DPC because they provided employment and exports. Bush administration officials defended the government's role in the Dabhol affair saying that "their efforts were appropriate and unremarkable, intended primarily to protect the U.S. taxpayers' $640-million interest in the troubled Dabhol power plant. In fact, the Clinton administration, starting in the mid-1990s, had also backed Enron in its dispute with Indian officials."

EVER since Enron entered India it has been associated with dubious deals. Suspicions about its methods of operation were first raised when the first Vajpayee government, which had a 13-day stint in power, provided a counterguarantee. The Dabhol project ran into serious trouble in 1995 when a newly elected Maharashtra government cancelled the power purchase agreement between the plant and the MSEB. Work on the plant resumed only after intense political negotiations. In May 1999, Phase-I of the plant was commissioned. For two years, the MSEB paid DPC a fixed monthly payment. Reduced to a loss-making utility owing to these payments, the MSEB stopped paying DPC. A legal battle ensued. DPC terminated the PPA, claiming political interference in the matter, and the MSEB rescinded the agreement, citing DPC's inability to provide power when required. The plant was shut down in May 2001. As of now, there seems to be few signs of a resolution of the issue.

The responsibility to find a solution eventually lies with DPC's lenders. They cannot afford the squabbling and have realised that a solution is imperative now more than ever. An exposure of over Rs.6,000 crores to the project, coupled with mounting debts, could lead to the collapse of some financial establishments involved.

This looming threat prompted the April 8 meeting of creditors. The core advisory committee that the meeting decided on will comprise of representatives of major lenders (IDBI, ICICI, the State Bank of India, OPIC, Bank of America and Citibank will appoint the financial and technical advisers) who will come up with recommendations on the future of DPC. "Awaiting an opinion from the advisers would be the proper thing to do, given the size and complexity of the project," said A.K. Doda, Executive Director, IDBI. He said there were no differences of opinion among the lenders in this regard and they had unanimously agreed that taking any decision until reports came from the advisers would be premature. Doda told Frontline that the implications of the committee notwithstanding, "the lenders were very much in control of DPC's fate." He did not indicate a time-frame for the advisers' report but said: "We are at least moving forward now." He said the options the advisers would consider were: whether the lenders should sell equity in the project as a whole or seize the assets and sell them individually.

Nearly 30 F.I.s lent $1.9 billion to build the gas-fired Dabhol power plant and the liquefied natural gas (LNG) facility at Guhagar, Maharashtra. Incidentally, Dabhol is Enron's largest single foreign investment and currently its most valuable property. There are two jetties, one of which is exclusively meant for transporting LNG. In addition, there are storage facilities for LNG and naphtha fuel.

Ever since the plant shut down, DPC's assured revenue has come to a halt. As a result maintenance has become a problem, and the state-of-the-art plant is rapidly deteriorating. Obviously, the plant needs to be in a presentable condition if it is to be sold, and therefore the lenders have agreed to bear the cost of maintenance, Doda said. A longstanding demand of the Indian creditors since the plant shut down was the appointment of a Court Receiver to ensure that the plant was being maintained properly. This plea was granted by the Bombay High Court in March. Unfortunately, the Court Receiver sealed the plant and retrenched 135 employees. The employees, who belonged to the local community, were on contract until March 31. All of them had lost their lands to the plant. Such was their frustration that they held three DPC officials hostage for a day. Yeshwant Bait, an activist with a local anti-Enron group, told Frontline that for a few days truckloads of equipment were seen leaving the plant premises. "We heard that the company cannot pay the contractors, so they allowed them to take anything of value," he said.

The high price of DPC's assets was the primary reason why it was expected that the lenders would agree on the seizure of assets through foreclosure. In fact, the lenders had wanted to file a winding-up petition, which would protect them from paying a $200-million political risk guaranteed to DPC by OPIC. They believe they can recover their loan from the sale of assets.

Nevertheless, Pradyumna Kaul says, foreclosure is a trap laid by Enron - if the domestic lenders take over DPC's assets, it would amount to expropriation. This would strengthen Enron's pending applications before OPIC and also the Multilateral Insurance Agency. If foreclosure goes through, OPIC will have to pay $200 million to Enron and the former will recover it by using arm-twisting measures against the government of India.

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