[SOLVED] On August 3, 1995, the Maharashtra state

On August 3, 1995, the Maharashtra state government of India, dominated bythe nationalist, right-wing Bharatiya Janata Party (BJP), abruptly canceled Enronâ€™s$2.9 billion power project in Dabhol, located south of Bombay, the industrialheartland of India. This came as a huge blow to Rebecca P. Mark, the chairman andchief executive of Enronâ€™s international power unit, who spearheaded the Houstonbasedenergy giantâ€™s international investment drive. Upon the news release, Enronâ€™sshare price fell immediately by about 10 percent to $33.50. Mark sprang to actionto resuscitate the deal with the Maharashtra state, promising concessions. This effort,however, was met with scorn from BJP politicians. Enronâ€™s Dabhol debacle cast aserious doubt on the companyâ€™s aggressive global expansion strategy, involving some$10 billion in projects in power plants and pipelines spanning across Asia, SouthAmerica, and the Middle East.

Enron became involved in the project in 1992 when the new reformist governmentof the Congress Party (I), led by Prime Minister Narasimha Rao, was keen on attractingforeign investment in infrastructure. After meeting with the Indian governmentofficials visiting Houston in May, Enron dispatched executives to India to hammer outa â€œmemorandum of understandingâ€ in just 10 days to build a massive 2,015-megawattDabhol power complex. New Delhi placed the project on a fast track and awarded itto Enron without competitive bidding. Subsequently, the Maharashtra State ElectricityBoard (MSEB) agreed to buy 90 percent of the power Dabhol produces. Two otherU.S. companies, General Electric (GE) and Bechtel Group, agreed to join Enron aspartners for the Dabhol project. In the process of structuring the deal, Enron made a profound political miscalculation:It did not seriously take into consideration a rising backlash against foreigninvestments by an opposition coalition led by the BJP. During the state electioncampaign in early 1995, the BJP called for a reevaluation of the Enron project. JayDubashi, the BJPâ€™s economic advisor, said that the BJP would review all foreign investmentsalready in India, and â€œIf it turns out that we have to ask them to go, then weâ€™llask them to go.â€ Instead of waiting for the election results, Enron rushed to close thedeal and began construction, apparently believing that a new government would findit difficult to unwind the deal when construction was already under way. Enron wasnot very concerned with local political sentiments. Enron fought to keep the contractdetails confidential, but a successful lawsuit by a Bombay consumer group forced thecompany to reveal the details: Enron would receive 7.4 cents per kilowatt-hour fromMSEB and Enronâ€™s rate of return would be 23 percent, far higher than 16 percentover the capital cost that the Indian government guaranteed to others. Critics citedthe disclosure as proof that Enron had exaggerated project costs to begin with andthat the deal might have involved corruption. The BJP won the 1995 election in Maharashtra state and fulfilled its promise.Manohar Joshi, the newly elected chief minister of Maharashtra, who campaigned ona pledge to â€œdrive Enron into the sea,â€ promptly canceled the project, citing inflatedproject costs and too-high electricity rates. This pledge played well with Indian voters,many of whom had a visceral distrust of foreign companies since the British colonialera. (It helps to recall that India was first colonized by a foreign company, the BritishEast India Company.) By the time the project was canceled, Enron already hadinvested some $300 million. Officials of the Congress Party who championed theDabhol project in the first place did not come to the rescue of the project. The BJPcriticized the Congress Party, rightly or wrongly, for being too corrupt to reform theeconomy and too cozy with business interests. In an effort to pressure Maharashtrato reverse its decision, Enron â€œpushed like hellâ€ the U.S. Energy Department to makea statement in June 1995 to the effect that canceling the Enron deal could adverselyaffect other power projects. The statement only compounded the situation. The BJPpoliticians immediately criticized the statement as an attempt by Washington to bullyIndia.After months of nasty exchanges and lawsuits, Enron and Maharashtra negotiatorsagreed to revive the Dabhol project. The new deal required that Enron cut the projectâ€™scost from $2.9 billion to $2.5 billion, lower the proposed electricity rates, andmake a state-owned utility a 30 percent partner in the project. A satisfied Joshi, thechief minister, stated: â€œMaharashtra has gained tremendously by this decision.â€ Enronneeded to make a major concession to demonstrate that its global power projectswere still on track. The new deal led Enron to withdraw a lawsuit seeking $500 millionin damages from Maharashtra for the cancellation of the Dabhol project. Discussion Points 1. Discuss the chief mistakes that Enron made in India. 2. Discuss what Enron might have done differently to avoid its predicament inIndia.

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Question: On August 3, 1995, the Maharashtra state

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