Enron International Case Study

SYNOPSIS

In the early 1990s, Enron International entered into an agreement to build two gas fired power plants in India. The plants would help supply electricity in a country whose rapidly growing power needs were far exceeding existing generating capacity. The plants were to be gas fired, receiving a portion of the gas from Indian fields and a portion from a facility Enron was building in Qatar.

While the general idea behind the projects had been approved at the highest levels of the federal government, final approval on many aspects needed to be approved by local bureaucrats. One of the plants, Dabhol, was located on India's fast growing western seaboard near Bombay. Receiving approval was a slow process that was helped by the fact that the state government was run by the same Congress Party as controlled the federal government.

During early stages of the project, state elections took place. The opposition party took the position that this was a corrupt project, with bribes and favors going to Congress party officials. When the Congress Party lost the state elections, the new administration decided to pull the plug on the project. Although investigations showed no bribes had taken place, the new government needed to assert its authority.

Enron responded on multiple fronts. It filed a lawsuit for breach of contract, which required that the state reimburse Enron $300-800 million. On legal grounds its position seemed very strong. It also appealed directly to the people, taking out advertisements extolling the benefits of the project for India. Political pressure was also placed on the federal government, suggesting that such a decision would be injurious to India's goals of attracting additional foreign investment.

After careful negotiations, the project was restarted and expanded. Given the larger scale of the plant, Enron was able to lower the projected electricity cost, giving the government something to show the voters. For India's part, there is little doubt that Enron's experience with the Dabhol project was a public relations setback. Although ultimately the outcome reaffirmed the country's commitment to encouraging foreign direct investment, the perception was created that the shifting political landscape, bureaucratic rules, and the cross currents between national and state governments, make India a difficult place in which to invest.