India's Worsening Power Vacuum
It was only a month ago that Kenneth Lay, the tough-talking chairman of Enron, was in India, laying down sales terms for its $2.5 billion, 2,100-megawatt, power-generation plant at Dabhol, near Bombay. Pay up, Lay warned, or he might enlist the help of the U.S. government in helping to rid Enron (ENE) of this white elephant once and for all.
The project remains the largest foreign investment in India by far, but it has been the source of endless controversy. First, the Indian government balked at the prices Enron wanted to charge for energy produced at the plant. Then the Indian government reneged on its contract with Enron, which was terminated in April. Now, Enron wants to sell Dabhol and get all its money back -- but the Indian government isn't cooperating. Now, with Enron's stunning buyout by Dynegy (DYN) and Lay out of the chairman's seat in the wake of a scandal involving questionable company transactions, the company has little room for international maneuvering. Small wonder local buyers have descended upon Dabhol: The Tata group, Reliance Industries, ex-Dabhol employees, and even the Indian banks that lent Dabhol money all want those shining steel power towers by the Arabian Sea -- but at a discount: 60 cents on the dollar of Enron's asking price of $1.2 billion.
For now, the Indian government has some respite from the pressure of paying for a project on terms many critics say it never should have accepted in the first place. But India's primary problem remains the same: The country doesn't have enough power generation to serve its population. Dabhol was supposed to alleviate that. So was AES's model-power project in the poor, eastern state of Orissa. But the Orissa project is also having trouble. AES is now winding up its operations in India, citing delinquent payments by the government.
NO EASY OPTIONS. With private investment on the wane, and India's bedraggled state power boards unable to cope, the talk in New Delhi is once again focused on efforts to strike energy deals with neighbors, from Iran to Myanmar. Given the region's volatile geopolitics, this is no less a minefield for India than negotiating joint ventures with multinational corporations.
Take the ambitious multibillion-dollar gas-pipeline project that was supposed to link Iran with India through Pakistan. Backed by all three governments, Unocal and India's Reliance Industries also have shown interest. A grand signing ceremony was set for last August, but then put on hold when India-Pakistan peace talks in Agra collapsed. Now, the war in Afghanistan has shelved the project indefinitely. A pipeline that could have generated $600 million in annual transit fees for India is "virtually dead," according to Indian foreign ministry sources.
A proposed gas pipeline from Bangladesh to India looks like it might meet a similar fate. Since 1996, Unocal has invested $350 million to explore the estimated 60 trillion cubic feet of gas discovered in Bangladesh, which would be sold domestically and to nearby India, the only practical export market for Bangladeshi gas. Development could have major economic implications: In addition to satiating the needs of Bangladesh and power-starved northern India, the project could produce at least $200 million a year for impoverished Bangladesh and reverse that country's trade deficit with India.
GOOD NEIGHBORS? Still, the Islamic backlash spawned by the Afghan War hasn't bypassed Bangladesh, a predominantly Muslim country. The new government of Prime Minister Khalida Zia, elected in September, has a 15% representation of fundamentalist Islamic parties which will not tolerate any detente with India, a predominantly Hindu nation. "Bangladesh saw commercial sense, but did not know politically what to do," says former Indian Prime Minister Inder Kumar Gujral, who worked hard at making peace with the country's immediate neighbors.
Not all of the neighbor nations are ambivalent about selling their resources to India. Every year, the tiny Himalayan kingdom of Bhutan exports $800 million worth of hydroelectric power to India, providing a lift to the local economy. Two more export-based hydro power plants that are under way will ensure that, in five years, Bhutan's per-capita income will be the highest in South Asia.
And Bangladesh's backstepping has brought an unlikely ally to India's doorstep: the military dictatorship of Myanmar, which has plenty natural gas to sell and is keen to seal a deal with India. "Myanmar gas prospects are excellent," says P. Rath, additional secretary in charge of Bangladesh, Myanmar, and Sri Lanka in India's foreign ministry. Indeed, Indo-Myanmar ties are strengthening of late: trade has increased over the past five years, and New Delhi is building a road from India's north-eastern state of Mizoram to Myanmar. A water-transport system across the Bay of Bengal could set the precedent for an undersea gas pipeline between Mynamar and India, bypassing Bangladesh.
CREDIBILITY GAP. All of these prospects are viable. There's just one problem: The Indian government is short on cash. And given the bickering that shadowed the Dabhol debacle from the beginning, New Delhi is unlikely to find any large international investors to fund construction of such projects. "Even if the Indian government agrees to pay, who will believe them now?" asks Sanjay Bhatnagar, former chief executive of Enron India, who now runs an investment firm in New York and is himself making a bid for the Dabhol project.
In the view of some experts, the lesson from Dabhol is clear: Overseas investors won't come back to India until New Delhi's politicians quit trying to micromanage the power sector. The government must let the marketplace set the price of energy in India, says Subir Gokarn, chief economist of the National Center of Applied Economic Research. As it stands now, almost 25% of the power produced in India is stolen, and 40% is a free subsidy to rural areas. Privatizing India's vast energy market may well ensure the best commercial and diplomatic deals for India in the subcontinent
The project remains the largest foreign investment in India by far, but it has been the source of endless controversy. First, the Indian government balked at the prices Enron wanted to charge for energy produced at the plant. Then the Indian government reneged on its contract with Enron, which was terminated in April. Now, Enron wants to sell Dabhol and get all its money back -- but the Indian government isn't cooperating. Now, with Enron's stunning buyout by Dynegy (DYN) and Lay out of the chairman's seat in the wake of a scandal involving questionable company transactions, the company has little room for international maneuvering. Small wonder local buyers have descended upon Dabhol: The Tata group, Reliance Industries, ex-Dabhol employees, and even the Indian banks that lent Dabhol money all want those shining steel power towers by the Arabian Sea -- but at a discount: 60 cents on the dollar of Enron's asking price of $1.2 billion.
For now, the Indian government has some respite from the pressure of paying for a project on terms many critics say it never should have accepted in the first place. But India's primary problem remains the same: The country doesn't have enough power generation to serve its population. Dabhol was supposed to alleviate that. So was AES's model-power project in the poor, eastern state of Orissa. But the Orissa project is also having trouble. AES is now winding up its operations in India, citing delinquent payments by the government.
NO EASY OPTIONS. With private investment on the wane, and India's bedraggled state power boards unable to cope, the talk in New Delhi is once again focused on efforts to strike energy deals with neighbors, from Iran to Myanmar. Given the region's volatile geopolitics, this is no less a minefield for India than negotiating joint ventures with multinational corporations.
Take the ambitious multibillion-dollar gas-pipeline project that was supposed to link Iran with India through Pakistan. Backed by all three governments, Unocal and India's Reliance Industries also have shown interest. A grand signing ceremony was set for last August, but then put on hold when India-Pakistan peace talks in Agra collapsed. Now, the war in Afghanistan has shelved the project indefinitely. A pipeline that could have generated $600 million in annual transit fees for India is "virtually dead," according to Indian foreign ministry sources.
A proposed gas pipeline from Bangladesh to India looks like it might meet a similar fate. Since 1996, Unocal has invested $350 million to explore the estimated 60 trillion cubic feet of gas discovered in Bangladesh, which would be sold domestically and to nearby India, the only practical export market for Bangladeshi gas. Development could have major economic implications: In addition to satiating the needs of Bangladesh and power-starved northern India, the project could produce at least $200 million a year for impoverished Bangladesh and reverse that country's trade deficit with India.
GOOD NEIGHBORS? Still, the Islamic backlash spawned by the Afghan War hasn't bypassed Bangladesh, a predominantly Muslim country. The new government of Prime Minister Khalida Zia, elected in September, has a 15% representation of fundamentalist Islamic parties which will not tolerate any detente with India, a predominantly Hindu nation. "Bangladesh saw commercial sense, but did not know politically what to do," says former Indian Prime Minister Inder Kumar Gujral, who worked hard at making peace with the country's immediate neighbors.
Not all of the neighbor nations are ambivalent about selling their resources to India. Every year, the tiny Himalayan kingdom of Bhutan exports $800 million worth of hydroelectric power to India, providing a lift to the local economy. Two more export-based hydro power plants that are under way will ensure that, in five years, Bhutan's per-capita income will be the highest in South Asia.
And Bangladesh's backstepping has brought an unlikely ally to India's doorstep: the military dictatorship of Myanmar, which has plenty natural gas to sell and is keen to seal a deal with India. "Myanmar gas prospects are excellent," says P. Rath, additional secretary in charge of Bangladesh, Myanmar, and Sri Lanka in India's foreign ministry. Indeed, Indo-Myanmar ties are strengthening of late: trade has increased over the past five years, and New Delhi is building a road from India's north-eastern state of Mizoram to Myanmar. A water-transport system across the Bay of Bengal could set the precedent for an undersea gas pipeline between Mynamar and India, bypassing Bangladesh.
CREDIBILITY GAP. All of these prospects are viable. There's just one problem: The Indian government is short on cash. And given the bickering that shadowed the Dabhol debacle from the beginning, New Delhi is unlikely to find any large international investors to fund construction of such projects. "Even if the Indian government agrees to pay, who will believe them now?" asks Sanjay Bhatnagar, former chief executive of Enron India, who now runs an investment firm in New York and is himself making a bid for the Dabhol project.
In the view of some experts, the lesson from Dabhol is clear: Overseas investors won't come back to India until New Delhi's politicians quit trying to micromanage the power sector. The government must let the marketplace set the price of energy in India, says Subir Gokarn, chief economist of the National Center of Applied Economic Research. As it stands now, almost 25% of the power produced in India is stolen, and 40% is a free subsidy to rural areas. Privatizing India's vast energy market may well ensure the best commercial and diplomatic deals for India in the subcontinent
