THE FLETCHER SCHOOL OF LAW AND DIPLOMACY
When “Power Failures” Undermine International Business Negotiations: A Negotiation Analysis of the Dabhol Power Project
A MALD Thesis
Presented to Jeswald Salacuse
By PRIYA GHANDIKOTA April/2002
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Abstract: The purpose of this paper is to investigate the institutional factors that lead to the collapse of international business deals. To develop a working framework from which to discuss this problem, the Enron- promoted Dabhol Power project in Maharashtra, India will be discussed as a case study. Traditional business strategy fails to internalize the social, cultural, political and ideological dimensions of complex business transactions. A preliminary examination of the Dabhol case reveals that many of the problems that led to the inability and unwillingness of the parties involved to implement a business agreement can be explained by negotiation theory. Negotiation theory accounts for the personality of the players, asymmetrical power relations, the lack of cultural know-how, and other complex issues in the pre-negotiation, negotiation and post-negotiation phases that lend insight into why international business agreements may fail. This paper begins with a translation of the history of the Dabhol project, continues with the application of negotiation theory to analyze the problems that arose and concludes with a model that attempts to correlate factors explained by negotiation theory that collectively produce a successful international business negotiation strategy.
2 When “Power Failures” Undermine International Business Negotiations: A Negotiation Analysis of the Dabhol Power Project
TABLE OF CONTENTS
PART I. INTRODUCTION...... 6
PART II. THE HISTORY OF THE DABHOL POWER PROJECT ...... 9 A. INDIA’S ENERGY SECTOR...... 9 An Energy Sector in Need of Investment...... 9 The Move Towards Reform...... 11 B. THE SIGNED MOU WITH ENRON...... 12 C. EVENTS LEADING UP TO THE SIGNED PPA ...... 13 Public Protest...... 13 The World Bank’s Initial Conclusions...... 13 The Initial Findings of the CEA ...... 14 The World Bank Report...... 16 C. NEGOTIATION OF THE PPA...... 19 Sovereign Guarantees...... 20 D. CANCELLATION OF THE PPA ...... 20 The Results of the 1995 Maharashtra State Elections...... 20 The Report of the Cabinet Sub-Committee to Review the Dabhol Power Project...... 21 Termination of the PPA ...... 22 Arbitration...... 22 A Review Panel is Struck ...... 24 D. RE-NEGOTIATION OF THE PPA ...... 24 E. NON-PAYMENTS AND ESCALATING HOSTILITIES ...... 25 Invoking the Sovereign Guarantee...... 26 The Godbole Review Panel...... 27 Pre-Termination Notice...... 30 Subsequent Rounds of Arbitration ...... 31 Enron’s Exit Strategy...... 32 Final Termination Notice...... 33 The Singapore Meeting...... 34 The Downfall of Enron...... 35 PART III. APPLYING NEGOTIATION THEORY TO EXPLAIN THE FAILURE OF THE DABHOL DEAL...... A. UNDERSTANDING BATNA AND BATRNA...... 38 The Indian Team’s BATNA ...... 38 Enron’s BATNA...... 40 The Indian Team’s BATrNA...... 40 Enron’s BATrNA ...... 42 B. TIME DEFICIENCIES ...... 44 Speed...... 44 When the Time is `Ripe’...... 48 C. RESOURCING THE NEGOTIATIONS...... 48 Institutional Endowments...... 49
3 Corruption...... 49 Technical Endowments...... 51 Inflationary and Deflationary Expectations...... 52 D. ASYMMETERICAL POWER RELATIONS...... 54 Terms of the agreement...... 54 E. TRUST AS A STABILIZING FORCE IN NEGOTIATIONS ...... 56 F. INCORPORATING STAKEHOLDERS...... 58 Local Community...... 59 The World Bank...... 62 The Bureaucracy...... 62 Indian Financial Institutions...... 63 The Non-Resident Indian Community...... 64 When Stakeholder Interests Hold the Negotiation Process Hostage...... 65 G. MORAL BASED POSITIONING VS. INTEREST-BASED POSITIONING...... 67 The GOM’s Changing Interests ...... 67 Enron’s Interests...... 68 Surmounting hostilities - Blaming the “other” Leads to Moral Positioning...... 70 When Inflexibility of the Agreement Contributes to Inflexible Positioning ...... 73 Personality of the Players...... 75 The Hand of the White House...... 79 H. NEGOTIATING WITH CULTURAL BLINDERS...... 81 Theory...... 82 Cultural Limitations in the Indian Team’s Negotiating Strategy...... 82 Cultural Limitations in Enron’s Negotiating Strategy ...... 84 I. ORGANIZATIONAL CONSTRAINTS AND INSTITUTIONAL MEMORY AS DEBILITATING FACTORS ...... 85 Organizational Precedents...... 86 Institutional Memory As a Constraint in the Decision-making Process...... 86 J. THE IMPORTANCE OF EFFECTIVE AND BROAD-BASED COMMUNICATION...... 87 Theory...... 87 The Breakdown of Effective Communication between the Negotiating Parties...... 87 The Breakdown of Effective Communication with Stakeholders...... 88 K. SUMMARY...... 90 PART IV - CONCLUSION ...... 92 A. VERNON’S OBSOLESCING BARGAINING FRAMEWORK...... 92 B. AN INTEGRATIVE APPROACH TO ANALYZING BUSINESS TRANSACTIONS...... 93 C. CONCLUDING REMARKS...... 96
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TABLE OF FIGURES
FIGURE 1 - REGIONAL POWER CAPACITY...... 10 FIGURE 2 - BREAKDOWN OF RESPONSIBILITIES OF JV PARTNERS (1993) ...... 20 FIGURE 3 - CAPITAL COST, ENERGY COST AND SIZE OF "FAST TRACK" PROJECTS IN INDIA ...... 22 FIGURE 4 - INDIA'S BATNAS ...... 38 FIGURE 5 - RAYMOND VERNON'S OBSOLESCING BARGAIN MODEL...... 93 FIGURE 6 - BALANCING CONSTRAINTS TO NEGOTIATE A SUCCESSFUL BUSINESS DEAL ...... 96
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When “Power Failures” Undermine International Business Negotiations: A Negotiation Analysis of the Dabhol Power Project
PART I. INTRODUCTION
"The end crowns all, and that old common arbitrator, time, will one day end”- William Shakespeare, Troilus & C, Act IV, Sc.V
The purpose of this paper is to investigate the institutional factors that lead to the collapse of international business deals. To develop a working framework from which to discuss this problem, the Dabhol Power project will be discussed as a case study. The Dabhol Power
Company (DPC) was established as a joint venture between the Enron Corporation, General
Electric and the Bechtel Corporation. A Power Purchasing Agreement (PPA) was signed between the DPC and the state Government of Maharashtra in India to generate a 2,015 MW base load power project at Dabhol in the Ratnagiri district, approximately 300 km south of
India’s commercial and financial center of Mumbai. Divided into two phases, the project succeeded a re-negotiation of its terms, two changes in government, and twenty-four lawsuits.
Nevertheless, the DPC ultimately collapsed, with the future of its assets still uncertain.
The Dabhol Power project was chosen as a case study because of its significance to the development of India’s foreign investment policy and the unprecedented size and scope of the project. Indeed, this project is the largest single foreign investment project in India’s history.
Furthermore, it is a significant case study because the project was first regarded as a boon to an ailing energy sector faced with a myriad of demand-driven and supply –driven problems. The company was created to serve a sector in India that is highly politicized, fraught with corruption and a sector that was expected to provide maximum linkages to other sectors of an economy that was poised for growth. The state electricity boards have suffered from consistent losses and
6 approximately a quarter of the power stations in India are over twenty-five years old and the inefficient maintenance of these stations has led to the breakdown of equipment and the shutting down of plants.1 Power shortages have had serious repercussions for India’s program of development since industry and transport account for seventy per cent of India’s power consumption.2 Finally, not only was the Dabhol deal expected to heal an ailing energy sector, but it was also touted as a symbol of economic reform, as it rode on the coattails of the aggressive liberalization reforms pursued by the Government of India (GOI) after 1991.
From an international business perspective, the Dabhol Power project is an exemplary case of how and why international business transactions fail in large part due to a lack of strategic negotiation acumen. While the Enron-promoted project in Maharashtra is unique with respect to the size and scope of the project, it is not unique with respect to the institutional factors that led to its demise. Many of the problems that explain why the agreement was never fully implemented are problems that have surfaced in numerous other cases where international business deals have been negotiated, both in India and in other countries. For example, the problems inherent in the Dabhol deal have manifested themselves in other deals such as the
Government of India’s failed negotiations with Bechtel Enterprises from 1963-1965 and the controversial energy agreement now the subject of dispute between US-based AES and the state government of Orissa in India.3
Traditional business strategy, which is dominated by an applied microeconomic or macroeconomic approach that originates at the firm level or at the country level, provides only a
1 Abhay Mehta, Power Play: A Study of the Enron Project (Abhay Mehta. Power Play: A study of the Enron Project (Hyderbad: Orient Longman Ltd, 1999), p.12. 2 Harvard Business School, Enron Development Corporation: The Dhabol Power Project in Maharashtra, India (A), Case No. 9-797-086 (Cambridge, Massachusetts: Harvard Business School Publications, 1997), pg. 6 3 Ashok Kapoor provides an excellent analysis of the events leading to the failed mfp signed between the GOI and Bechtel Corporation. See Ashok Kapoor, International Business Negotiations: A study in India (New York: New York University Press, 1970).
7 limited explanation of the structures and events that lead to the failures of international business deals. Specifically, this discipline fails to internalize the social, cultural, political and ideological dimensions of complex business transactions. A preliminary examination of the Dabhol case reveals that many of the problems that led to the inability and unwillingness of the parties involved to implement a business agreement can be explained by negotiation theory. Negotiation theory accounts for the personality of the players, asymmetrical power relations, the lack of cultural know-how, and other complex issues in the pre-negotiation, negotiation and post- negotiation phases that lend insight into why international business agreements may fail.
This paper begins with the history of the Dabhol project, continues with the application of negotiation theory to analyze the problems that arose and concludes with a model that attempts to correlate the factors that collectively produce a successful international business negotiation strategy. This model attempts to bridge the gap between negotiation analysis and traditional business strategy, where the latter is defined by a distributive bargaining framework, which features the competitive behavior and interests of the firm and the industry or country as key players.
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PART II. THE HISTORY OF THE DABHOL POWER PROJECT `Enron came, they saw, and they conquered’ – Maharashtra Chief Minister Manohar Joshi, Speech to the Maharashtra State Assembly
A. INDIA’S ENERGY SECTOR
The Dabhol Power Company (DPC)4 is a fascinating case study primarily because the project was created to serve a sector in India that is highly politicized, fraught with corruption and a sector that was expected to provide maximum linkages to other sectors of an economy that was poised for growth.
An Energy Sector in Need of Investment The DPC was first regarded as a boon to an ailing energy sector faced with a myriad of demand-driven and supply –driven problems. At the time that an investigation was underway to study the viability of the project, per capita consumption of power in India was only 190KwH compared with 600 KwH for Malaysia, 3,000 KwH for Taiwan, and 10,000 KwH for the United
States. India’s relative low consumption rate can be explained not by the fact that demand for power was low but by the fact that there was an insufficient supply of power generated. In 1991-
1992, demand for power throughout the country exceeded supply by 22.5 billion KwHs and grew to 23.8 billion KwHs the year after.5 Power demand in India today outpaces supply by 11.1 per cent during peak periods.6 These shortages have had serious repercussions for India’s program of development since industry and transport account for 70% of India’s power consumption.7
4 In popular press, the “Dabhol” debacle is also referred to as the “Enron” debacle; therefore, throughout this paper, references will sometimes interchangeably be made to the “Dabhol Power Company” and “Enron”. 5 Harvard Business School, Case (A), 6.
6 P.N.V Nair. Power Sector Needs Urgent Reforms, November 26, 2001 (accessed December 5, 2001); available from www.projectsmonitor.com. 7 Harvard Business School, Case (A), 6.
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Figure 1 - REGIONAL POWER CAPACITY Region Central Total Regional Government Capacity Capacity Northern States 9287 MW 23820 mw Western States 5512 MW 24301 MW Southern States 4640 MW 19459 MW Eastern States 2730 MW 12302 MW N. Eastern States 356 mw 1282 MW (Source: Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India (A), Exhibit 2)
The problem of energy shortfalls in India can be explained not only by the phenomenon of demand outpacing supply but also by the inefficient management of existing power plants.
Specifically, India suffers from one of the highest transmission losses in the world and has one of the world’s lowest utilization of installed capacity.8 According to one estimate, by 2007, the additional installed generating capacity required will be 85,000 MW accounting for a GDP growth rate of six per cent per year and 100,000 MW if the growth rate is eight per cent per year.
At a relatively low fixed capital charge of US$1 million per MW, this additional capacity would require an investment of $85 to $100 billion US.9 Peaked demand is not met primarily because power stations in India run on coal and coal is often not delivered on time because of a failure to pay or due to the unavailability of transport. The State Electricity Boards (SEBs) themselves lack the ability to pay their principal supplier, the National Thermal Power Corporation (NTPC), which prevents the NTPC from paying Coal India (CIL) and other suppliers of fuel. In 1987-
1988, the State Electricity Boards had operated consistently at a loss except for the State of
Andhra Pradesh and Orissa in 1990-91, Maharashtra in 1986-87 and 1987 –88 and Kerala in
1985-6. The total outstanding debt of all the SEBs to various suppliers equaled Rs18, 500 crore
8 Mehta,, p. 9. 9Kirit Parikh, “The Enron Story and its Lessons”, The Journal of International Trade & Economic Development 6, no. 2 (1997): 210.
10 at the end of October 1998.10 The problem of unprofitable SEBs is compounded by the fact that approximately a quarter of the power stations in India are over twenty-five years old and the inefficient maintenance of these stations has led to the breakdown of equipment and the shutting down of plants.11
Official sources estimate that SEBs currently experience an average transmission and distribution (T &D) loss of 22 per cent. Unofficial reports estimate this figure to be 48 per cent.12
The primary reason for these losses can be explained by politically driven subsidies offered to wealthy farmers and domestic consumers.13 Concessional power amounts to as much as 46 per cent in some states.14 According to The Economist, the SEBs have also become “job creation centers for friends and relatives of politicians”.15 As one author states, the Delhi Electricity
Supply Undertaking is “one of the most corrupt and bankrupt organizations in the country”.16 In addition to politically driven subsidies, T & D losses can also be explained by transmission theft.
In New Delhi, transmission theft accounts for nearly fifty-four per cent of all T & D losses.17
The Move Towards Reform During the Fifth Plan of the National Planning Commission, “electricity” was included in the “minimum needs” program.18 In the hopes of addressing the major structural deficiencies confronting the energy sector in India, the Electricity Supply Act (ESA) of 1948 was amended in
1991. The revised Act adopted a “cost-plus” approach and assured a return of equity of 16 per
10 Mehta, 12. 11 Ibid. 12Yamini Narayanan. Privatization of the Electric Utility Industry in India: A Case Study (Ph.D diss, University Of Oklahoma, 1998), p. 35. 13 Ibid., p. 21. 14Ibid., p. 35. 15Ibid., p. 36. 16 Mehta, 9. 17 Ibid., 8-9 18Narayanan, 19.
11 cent on investment in this sector.19 In May and June 1992, the Government of India established a team to visit the United States in pursuit of attracting foreign direct investment for India’s energy sector. The Houston-based energy company, Enron Corporation, responded favorably to the
Government of India’s proposed reforms and expressed an interest in setting up a power station in India based on the import of liquefied natural gas (LNG).
B. THE SIGNED MoU WITH ENRON
Almost immediately after the Indian delegation’s promotional trip, representatives from
Enron and General Electric arrived in India to survey sites for a potential project. Three days following their survey, on June 20, 1992, they signed a Memorandum of Understanding (MoU) with the Maharashtra State Electricity Board (MSEB) to build the Dabhol Power Project. The operating entity of the project would be the Dabhol Power Company (DPC), a joint venture between the Enron Corporation, General Electric and the Bechtel Corporation. The MoU, although not a legal document, stipulated that the company would establish a 2,015 MW base load power project at Dabhol in the Ratnagiri district, approximately 300 km south of India’s commercial and financial center of Mumbai. DPC would lease the project site from the
Maharashtra Industrial Development Corporation.20. The project was initially established to generate 2,550 megawatts (MW) at a cost of $3.1 billion. Acting upon the recommendations of the Foreign Investment Promotion Board, the proposed project was later scaled down to 1,920
MW, at a capital expenditure priced at $2.65 billion dollars and most importantly, the project was split into two phases. Phase I would run on imported distillate oil until LNG supply
19 Mehta, 24. 20 Siva Y Sankar. Dabhol Power Co to export fruits, flowers; available from www.rediff.com/money/2000oct/06dabhol.htm).
12 contracts were secured and a LNG re-gassification plant and storage and harbor facilities were developed as part of Phase II.21
C. EVENTS LEADING UP TO THE SIGNED PPA
Public Protest The statement by Maharashtra Chief Minister Joshi that “Enron came, they saw, and they conquered”,22 while extreme and lined with political pretension, reflected the attitude of many opposed to the Enron deal. In light of this fact, it is remarkable that the Dabhol Power project steam-rolled ahead, at the pace that it did, in an environment where public and political opposition were fierce and where there was a low estimation of the benefits of the project and its viability amongst various local stakeholders. On July 7, 1994, Ramdas Nayak, a member of the
BJP, a Hindu nationalist party, filed a High Court case against the Indian Government and the
DPC on the grounds that the project was tainted by a lack of transparency and competitive bidding. Similarly, local residents and activists launched appeals to the Government of
Maharashtra (GOM) to halt the project on the shared belief that environmental standards had been violated. Between 1992-1993, through the forum of public hearings and written correspondence, many local residents expressed the fear that the construction of a mega-power project in Dabhol would threaten their economic livelihood.
The World Bank’s Initial Conclusions After the Memorandum of Agreement (MoU) was signed amidst public protest, the GOM requested the World Bank to review the project. On July 8, 1992, the World Bank concluded,
“this large project which is nearly 20 per cent of its (MSEB’s) installed capacity is likely to have
21Harvard Business School, Case (A), p. 3 22 The GOM’s translation of Chief Minister’s Statement in the Maharashtra State Assembly”; available from http://altindia.net/enron/Home_files/doc/gomSuit/Cmstate.html
13 an adverse financial impact”.23 The World Bank cautioned the Maharashtra State Secretary for
Energy and Environment that the MoU was “one-sided” in favor of Enron and encouraged the government to “verify Enron’s experience” as an electricity generating company before proceeding with the project.24
The Initial Findings of the CEA The amended Electricity Supply Act of 1948 specified that companies submitting proposals of projects exceeding a capital expenditure of twenty five crores were obligated to submit a scheme to the Central Electricity Authority (CEA) which included revenue details, financing agreements, costs, and supply and generation estimates. The CEA was therefore approached in early August 1992 by the Indian Secretary of Power to examine the technical and economic viability of the tariff, the cost considerations, and the welfare impact of the Dabhol project on Maharashtra. Similar to the World Bank’s analysis, the CEA concluded that the
Dabhol project was not economically or technically viable. Specifically, the CEA estimated the cost of the plant to be Rs.1.81 crore per MW and Rs. 1.91 crore per MW, according to an estimation of December 1996 and December 1997 completed costs, and not Rs. 4.49 crore per
MW as approximated by Enron.25 This significantly lower deduction in costs led the CEA to conclude that the DPC tariff structure needed to be significantly reduced to a more realistic estimate of total real costs. The CEA further argued that that the MoU did not produce pertinent details of the project including the total costs of the project, when the contract would begin, or when the electricity would be made available. There was a minimum level of cooperation exercised between Enron and the CEA as Enron insisted on providing “lump sum” estimates of
23 Mehta, 28. 24 Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations, 1999 (accessed December 5, 2001); available from http://www.hrw.org/reports/19999/enron/enron2-1.htm. 25 Mehta, 52.
14 its costs. On November 10, 1993 in a letter addressed to respond to the CEA’s request for a segmented breakdown of project costs, DPC officials replied, “It is important to note…that capital costs are irrelevant to CEA”26. DPC further claimed, “(y)our request for more detailed project costs of equipment/system/works other than those provided in the capital cost summary cannot be supported and is not deemed necessary”.27
Concerns Raised by Enron’s Legal Team As the CEA continued to express its reservations about the project and as the agency began to re-consider the total foreign exchange outgo upon request by the Indian High Powered
Board, Enron’s London-based legal team at Linklaters and Paines submitted a report to the
Government of India outlining what it deemed to be legal and regulatory impediments to foreign investment in India. The report, entitled, “Problems Concerning the Application of the Indian
Electricity Acts”, was submitted on September 4, 1992. One of the main concerns of the report was that the tariff regulations raised by the Government of India were found to be “incompatible with the financial structure of a power station project” in light of the assumed load factors, the admissibility of foreign exchange variations, the permitted return on equity, and the five year term of the tariff as stipulated in the pricing provisions of the PPA.28 The legal team raised the additional point that the indiscrete power afforded to the MSEB and the CEA to regulate DPC activities constituted a conflict of interest, as the CEA was the administrative agency selected to exercise juridical functions over any disputes arising between the DPC and the MSEB. In addition, Enron expressed concern about the remedies available for breach of a statutory duty.29
Finally, the Enron legal team raised objection to the fact that under the Electricity Acts, the DPC
26 Mehta, 61. 27 Ibid. 28 Ibid., 32. 29 Ibid.
15 would be obligated to “furnish to the CEA…accounts, statistics, returns of other information relating to the generation, supply and use of electricity…”, adding to the DPC’s existing obligations under the Companies Act.30
The World Bank Report On March 12, 1993 the Finance Ministry formally approached the World Bank to finance the project. When submitting his report on April 30, 1993, World Bank India Country Director,
Heinz Vergin, wrote to M.S. Ahluwalia, Secretary to the Department of Economic Affairs in the
Indian Ministry of Finance, “Our analysis based on the parameters provided to us indicated that the LNG-based project as presently formulated is not economically viable, and thus could not be financed by the Bank”.31 The World Bank submitted its full report on April 30, 1993 to the
Finance Ministry, which then forwarded the report to the Secretary of Power. In the report, the
World Bank expressed concerns about the fact that a LNG plant was being promoted instead of a combined cycle production plant with coal, since LNG generation at a variable cost of about 150 k/WH is much higher than coal-based production of 30 k/WH.32 Coal production would also allow the electricity boards to achieve significant cost advantages by relying on domestic equipment and domestic suppliers, thereby decreasing foreign exchange outgo.33
The World Bank further argued that the willingness of industrial consumers to pay for electricity had been estimated at Rs. 2.2 kWH in the western region of Maharashtra, and 2.4 kWH in Bombay, which were amounts substantially lower than the Rs. 4.6 kWH stipulated in the
DPC proposal. According to the Bank, consumers had expressed a willingness to pay higher
30 Ibid., 32-33. 31 Letter of April 30, 1993 signed by Heinz Vergin, India Country Director at the World Bank, addressed to Secretary of the Department of Economic Affairs, Indian Ministry of Finance; available from http://www.altindia.net/enron/Home_files/Wbnote.htm. 32 The World Bank, “India: Dabhol Power Project”, April 30, 1993; available from http://www.altindia.net/enron/Home_files/Wbnote.htm, line item 5. 33 Mehta, 40.
16 tariffs only for guaranteed and/or additional supply during peak periods.34 The World Bank further critiqued the viability of the project on the grounds that “the implementation of the project would place a significant long-term claim on India’s foreign exchange resources” with the “capacity payments (starting) at about US $175 million in 1996 and escalating at 5% per annum, reaching $US 400 million in 2015”.35
Responding to allegations that the MSEB overestimated growth of demand for energy, the MSEB maintained that there existed pending applications from certain industries for additional supply amounting to 4,100 MW, thereby increasing the peak load by 2100 MW by
1997.36 Addressing this point, the World Bank argued that there was no substantive evidence determining that there were pending applications and even if the peak load was expected to increase, the LNG-based power plant was not the least cost option to meet surplus demand.37
The World Bank concluded its report by advocating that investment needed to be targeted towards alternative energy projects (e.g. coal production).38 Enron management did not perceive the report to be entirely damning or immovable. In a letter addressed to the head of the MSEB,
Joseph Sutton, Vice-chairman and head of the Enron Development Corporation’s Asia
Operations, confidently wrote, “I recently met with the World Bank and have been following the articles in the India papers. I feel that the World Bank opinion can be changed. We will engage a
PR firm during the next trip and hopefully manage the media from here on….We need now to put the PPA behind us”.39
34 The World Bank, “India: Dabhol Power Project”, line item 13. 35 The World Bank, “India: Dabhol Power Project”, line item 7. 36 Mehta, 40-1. 37 Ibid., 41. 38 The World Bank, “India: Dabhol Power Project”, line item 11. 39 Mehta, 199.
17 Taking the lead on this confident note and in the first of many strategic miscalculations to follow, the Chief Minister of Maharashtra Sharad Pawar decided to overlook the recommendations of the World Bank and the CEA and in an August 1993 meeting with the High
Powered Board, announced that the issues raised by the CEA were all issues that could be examined in a final review and “were minor issues to be clarified”.40 The project was subsequently approved by the various departments of the state government, the State Cabinet
Ministry of Power and Finance, the Central Government and the Foreign Investment Promotion
Board which was comprised of a high level committee of secretaries of the Central
Government.41
On November 26, 1993, the CEA in principle granted provisional clearance. This clearance, however, was not a final determination and was made with significant reservations. A study of the correspondence between the GOM and the CEA, and Enron executives and the
GOM during this period suggest that the clearance was executed under pressure by Enron and the GOM so that Enron could finalize its financing for the project. In a letter to Chief Minister
Pawar, Rebecca Mark wrote:
The remaining concern seems to reside with Mr. Beg, Member Planning for Thermal Projects. He continues to hold up the project approval based upon the question of demand for power in Maharashtra ….we have a project under the government’s “fast track” program, approved by FIPB, but the CEA refuses to grant a clearance….It is critical that we get the Power Purchase Agreement approved and signed now and that we start Phase I financing immediately. Because of GOM delays in approval and the associated negative press of the last few weeks, the project is in danger. We are working on financing arrangements prior to project approval but the banks in India and externally are losing their enthusiasm based on lack of progress….We need to make immediate progress.42
The CEA clearance was conditional on a readjustment of the price of electricity, the policy of importing liquefied natural gas and on DPC’s ability to obtain other government permits from
40 Ibid., 53. 41 Ibid., 142.
18 the Ministry of Environment and Forests and the Port Trust for construction of their harbor and port facilities.43
C. NEGOTIATION OF THE PPA On December 8, 1993, a week after the CEA’s preliminary clearance was issued, the
Purchasing Power Agreement (PPA) of the first phase of the project was signed. DPC would build, own and operate a plant of approximately 2,000-2,400 MW capacity, which would be run on liquefied natural gas (LNG). The LNG plant would maintain an average plant load factor of ninety per cent.44 The Dabhol project would cost Rs. 4.36 crores/megawatt (MW) and the DPC would sell to the MSEB at a rate of Rs. 2.65/kWh in 1997 and the rate would increase after that date. The MSEB and GOM were responsible for building the transmission lines from the power station to its power grid. By the time DPC was ready for commercial production, the MSEB would still be obligated to make the capacity payments irrespective of whether the State followed through with its infrastructure commitments. The MSEB was required to purchase power from the DPC under a two-part tariff. The first part of the tariff was determined by established base load and peaking capacities. The second part of the tariff was determined by the actual output of power. The PPA further stipulated that after twenty years from the commencement of commercial production, the MSEB would have the option to extend the contract for five or ten years.45
Loan commitments amounted to $643 million and equity contributions amounted to $279 million for Phase I of the project. The major foreign lenders included the Bank of America, the
42 Ibid., 204.
43 Human Rights Watch, The Enron Corporation. 44 Average plant load factor is an indicator of operational efficiency as it measures the actual energy produced by the power plant as a percentage of the maximum capacity of the plant. Break down of Average Plant Load Factor (PLF): 92 per cent during the eight peak non-monsoon months and 86 per cent during the off-peak months.
19 Overseas Private Investment Corporation, the Export-Import Bank of the United States (EXIM
Bank) and various Eurobank guarantors. The Indian creditors included the Industrial
Development Bank of India (IDBI), the State Bank of India, the ICIC, the Industrial Finance
Corporation of India and Canara Bank, with the IDBI assuming maximum exposure of risk.
Figure 2 - BREAKDOWN OF RESPONSIBILITIES OF JV PARTNERS (1993)
Company Enron Power Bechtel Enterprises General Electric Corporation Incorporated Company Equity $223 million $28 million $28 million Responsibilities Construction management, Construction and Construction operations and Contractor maintenance, fuel management (Source: HBS Case A, Exhibit 1)
Sovereign Guarantees On February 10, 1994 the State of Maharashtra issued a sovereign guarantee, assuming
liability for all of MSEB’s dues to the DPC under the PPA. On June 24, 1994, the State Support
Agreement was signed between the GOM and the DPC. On September 16, 1994, the Union
Ministry of Finance, on behalf of the Government of India, signed a counter guarantee.
D. CANCELLATION OF THE PPA
The Results of the 1995 Maharashtra State Elections In an interesting sequence of events, the February 1995 State elections in Maharashtra
brought the project to an abrupt halt. The Hindu nationalist party, the Bharatiya Janata Party
(BJP), won the Maharashtra elections to form a coalition government with the more conservative
and fundamentalist religious party, the Shiv Sena (SS). The BJP-SS alliance officially took over
the political reigns of power in April 1995. The new nationalist, “swadeshi-oriented”46
government produced a different trajectory in the state’s vision of development and foreign
45 Harvard Business School, Enron Development Corporation: The Dabhol Power Project in Maharashtra, India – (B) Case No. 9-797-085 (Cambridge, Massachusetts, Harvard Business School, 1997), page 11.
20 investment. Bal Thackeray, leader of the Shiv Sena party, often preached on the evils of foreign investment and rendered popular the slogan, “Justice to All, Appeasement to None”. With respect to the Dabhol project, the two most immediate mandates of this government were to replace the chairman of the MSEB and to establish a cabinet sub-committee to review the project. This committee was established on May 3, 1995 and was headed by Deputy Chief
Minister, Gopinath Munde.
The Report of the Cabinet Sub-Committee to Review the Dabhol Power Project The Report of the Maharashtra Cabinet Sub-Committee to Review the Dabhol Power
Project recommended the termination of the project based on the conclusion that the cost of the project was inflated at least by twenty-five per cent47 and that there was a lack of competitive bidding and transparency that resulted in a “one-sided” agreement which favored Enron and its partners. The committee’s report specifically cited regulations that had been relaxed to expedite the project. The Cabinet Sub-Committee, also known as the Munde Committee, further argued that a proper environmental impact assessment of the project was not executed. Finally, the
Committee determined that the Dabhol project was more expensive than other “fast-track projects” (see Figure 3 below).
46 “Swadeshi” translates to home rule and was one of the nationalist slogans employed during India’s Independence movement. 47 This estimate is based on a study of the US based Advanced Light Water Rector Program (ALWR) which cites other projects such as the Jerapadu and Godavari gas-based projects in the range of 3.52-3.60 crore per MW.
21
Figure 3 - CAPITAL COST, ENERGY COST AND SIZE OF "FAST TRACK" PROJECTS IN INDIA48 Project Size (MW) Capital Cost (Rs.Crore Cost of Energy (Rs. per MW) Per KW) NTPC-Gandhar 648 3.53 ------GVK-Jegurupadu 216 3.52 2.21 Spectrum-Godavari 208 3.60 1.87 Torrent-Gandhar 654 4.27 2.17 Enron-Dabhol 695 4.49 2.40 Congentrix-Mangalore* 1,000 5.08 2.59 AES-Ib Valley* 420 4.82 2.39 Ashok Leyland-Vizag* 1,000 5.81 ---- CMS-Neyveli 250 4.50 3.10 NTPC-Kayamkulam* ----- 3.20 2.61 NTPC-Faridabad ----- 3.00 2.12 (Source: HBS Case Study-B; referencing the Ministry of Power, Dabhol Power Company) *Coal Powered Projects
Termination of the PPA The report of the Munde Committee symbolized the first of many events that effectively rendered the agreement void. Based on the Committee’s findings, on July 8, 1995, the new Chief
Minster, Manohar Joshi, announced to the Maharashtra State Assembly that the Government of
Maharashtra had decided to cancel the second phase of the project and halt directives associated with the first phase of the project. Chief Minister Joshi in his admonishment of the project made what is now an often-cited declaration “(from) the speed with which this process was completed, one can say that `Enron came, they saw, and they conquered’.49 Joshi continued to state that the decision to cancel the agreement was, “not against the United States; but against the Dabhol project…. The deal is against the interest of Maharashtra. Accepting this deal would indicate an absolute lack of self respect and would amount to betraying the trust of the people”50
Arbitration The PPA included an arbitration clause that committed the MSEB and DPC to dispute resolution should the two parties not be able to resolve the conflict through non-legal means.
48 These projects were under negotiation at the time that the case study was written (December 1996). 49 The GOM’s translation of Chief Minister’s Statement in the Maharashtra State Assembly”
22 Arbitration would be conducted in London and would be presided over by a panel of independent experts in accordance with the United Nations Commission on International Trade
Law (UNCITRAL) rules of arbitration and the 1958 New York Convention. The DPC chose to invoke this clause by initiating arbitration in London against the MSEB and the GOM to claim damages well over $300 million (Rs. 1,000 crore).51 Throughout the arbitration proceedings, however, Enron repeatedly and publicly expressed its willingness to renegotiate the terms of the agreement.52
In response to the DPC initiating arbitration, on August 3, 1995, the Government of
Maharashtra filed suit against the DPC in the Bombay High Court seeking cancellation of the
PPA on grounds of fraud, corruption and a lack of competitive bidding. The Government of
Maharashtra argued in court that the PPA was “null and void” on the basis that it violated several statutory provisions, including sections 18, 29, 30, and 43A of the Electricity Supply Act, and that the PPA suffered “from the vice of misrepresentation” by Enron and was “conceived in fraud”.53 On August 19, 1994, the Bombay High Court ruled that an open invitation for competitive tenders should have occurred to ensure “the transparency of the deal”.54
Enron’s commitment to the project was demonstrated by its efforts to resuscitate negotiations by engaging in significant diplomatic maneuvering after the cancellation of the project. Joseph Sutton, Scott Bayman from General Electric, Ashok Mehta , Vice-President of
DPC, and Sanjay Bhatnagar from the Enron Development Corporation made a trip to New Delhi during the second week of April 1995 to meet with the Union Minister for Power, N.K.P Salve,
50 Harvard Business School, Case B¸ 4. 51 Jeswald W. Salacuse, “Renegotiating International Project Agreements”, Fordham International Law Journal 24, no. 4. (April 2001): 1352. 52 Chris Ayres. “Enron to pull out of Indian project”, The Times (London), November 6, 2001 (accessed December, 2001); available from Lexis -Nexis Academic Universe. 53 Mehta, 147. 54 Ibid., 141.
23 Finance Minister, Manmohan Singh, and the General Secretary of the BJP, Pramod Mahajan.55.
The DPC team received the assurances it needed from the Center to forge ahead. Specifically,
Salve was forthright in his declaration that the Center was committed to continuing the project and that the State of Maharashtra should honor the pact because a renouncement of its contractual obligations would have adverse ramifications for the entire nation.56 On November 7,
1995, Rebecca Mark met with Bal Thackeray, founder and leader of the Shiv Sena party in
Maharashtra. Thackeray was an important political figure with whom to reconcile differences, as he remains an influential nationalist, with little sympathy for foreign investors and he has immense political connections throughout Maharashtra. Despite having missed a scheduled meeting with Manohar Joshi, Mark was later able to secure a commitment from the Chief
Minster that the GOM would explore the possibility of recommencing negotiations.
A Review Panel is Struck On November 8, 1995, the GOM commissioned a Review Panel, comprising of government officials, academics and industry experts.57 Based on its negotiations with the Enron team and principal critics of the project, the panel submitted a proposal to the GOM on how to restructure the Dabhol deal with recommendations to restructure the electricity tariff, capital costs, terms of payment and delineation of environmental responsibilities.58
D. RE-NEGOTIATION OF THE PPA
The renegotiated agreement transformed the Dabhol deal into the single largest foreign direct investment project in India’s history. The recommendations put forward by the Review
55 Mehta, 143-144. 56 Ibid., 144. 57 Salacuse, “Renegotiating International Project Agreements”, 1353. 58 Ibid., 1353.
24 Panel lay the foundation for the amendments made to the PPA. Specifically, the total capital cost of the plant was reduced by $330 million to US$2.51 billion.59 The plant was reconfigured to be a multi-fuel generating plant, which would run on naphtha during Phase I. This adjustment had the benefit of reducing India’s dependence on imported fuel and lowering the capital costs of the project. Additional capacity was negotiated from 695 MW in Phase I to 740 MW and in Phase II, from 2,015 MW to 2,184 MW. The committee also fixed a price of 5.9375 cents/kWhr for Phase
I and 5.906 cents/kWhr for both phases.60 The load factor remained set at eight-six per cent.61
Responding to criticism about the environmental impact of the project on local horticulture and fishing, the renegotiating committee arrived at an agreement whereby there would be regular monitoring of marine life and whereby the DPC would plant one hundred and fifty hectares of mango and cashew trees in the area.62 One of the most important features of the newly structured deal was the allocation of thirty per cent equity in the project to the MSEB, and a reallocation of
Enron’s equity holding from eighty to fifty per cent.
On May 27, 1996, the Union Cabinet issued an extended counter guarantee. In August
1996, each party withdrew their respective suits in their courts to sign the renegotiated PPA. By
May 1999, final construction of the project had completed and the project received financing for its second phase. By March 1999, Phase I was well underway while Phase II was expected to commence in 2001.
E. NON-PAYMENTS AND ESCALATING HOSTILITIES
In October 1999, a new government came into power in the State of Maharashtra. This government, led by the Democratic Front (DF), was fragile and politically dwarfed by its many
59 Parikh, 216. 60 This amount translates to Rs. 1.90k/Whr for Phase I and Rs.1.89/kWhr for both phases. See Parikh, 217. 61 Ibid., 217.
25 alliances and coalitions. Inheriting an incredible deficit of 9,848 crores from Chief Minister
Joshi’s government, the newly elected Democratic Front government in Maharashtra, led by
Vilasrao Deshmukh, discovered that it could no longer sustain payments to the DPC. In February
2001, Chief Minister Deshmukh remarked “(l)et us face it. We cannot afford the power given to us by the DPC. The MSEB is in no position to pay the monthly power bills Dabhol sends to us.
We have asked the Centre to buy all the power generated by Enron, from both phases of the project and distribute it through the NTPC (the National Thermal Power Corporation) grid. If we want power for the state, we will buy it from NTPC”.63 Deshmukh also declared, “we have given all the necessary powers to the MSEB Chairman to take any action, including disconnection of power supply lines, against defaulters. We need full police force for this. We are prepared to do this”.64 Even the Indian Finance minister admitted that the “cost of power supplied by the DPC was too high” and the government would have to see “if the state can use all the power generated and that if the excess power can be wheeled out to needy states”.65
Invoking the Sovereign Guarantee During the first week of February 2001, under pressure from its lenders, the DPC responded to the MSEB’s refusal to pay its dues by invoking the GOI’s counter-guarantee.66 The
GOI argued that it would not pay the estimated amount of Rs. 1.02 crore (15 million pounds) on the grounds that Enron engaged in “certain technical violations”.67 Specifically, the GOI
62 Ibid., 220. 63 Raghunatha, TN. “Empowered to overpower problems”, The Pioneer, Feb. 18, 2001 (accessed December 5, 2001); available from www.dailypioneer.com. 64 Siva Y. Sankar. Maharashtra move may help solve Enron tangle, February 7, 2001 (accessed December 5, 2001); available from www.rediff.com/money/2001/feb/07enron.htm. 65 Binoy Sharma. Centre to send sole representative, April 25, 2001 (accessed December 5, 2001), available from www.dailypioneer.com. 66 Sujata Anandan, “Enron willing to amend Power Purchase Agreement”, The Hindustan Times, February 9, 2001 (accessed December 5, 2001); available from www.hindustantimes.com. 67 Khozem Merchant, “Enron Dispute heading for Court”, April 9, 2001 (accessed December 5, 2001; available from http://globalarchive.ft.com.
26 concurred with the MSEB’s allegation that the DPC had fallen short in its guaranteed supply of power and therefore was subject to the RS. 401 crore non-performance penalty as stipulated by the PPA.68 On September 11, 2001, the DPC invoked a letter of credit (LoC) from the Canara
Bank accusing MSEB for non-payment of dues. The MSEB countered this action by restraining the DPC from encashing the LoC by obtaining an injunction from the Mumbai High Court, which was later upheld by the Supreme Court on September 21.69 That same week, the DPC invoked its second federal counter-guarantee.70
The Godbole Review Panel To respond to tensions mounting between the DPC and the MSEB, a review panel was established by the GOM. The panel was headed by Dr. Madhav Godbole, former finance secretary, and was comprised of energy experts.71 In April 2001, the Godbole Panel submitted its review report of the Dabhol project. In this report, the panel recommended de-linking the LNG terminal from the project, restructuring the loan repayment clause in the PPA, and removing the dollar-rupee denomination of payments. Probably one of the most significant statements made by the Godbole Review Panel Report was its resignation of the fact that “though development of
DPC has been fraught with infirmities, its existence cannot be wished away and it now stands as a near completed project on Indian soil”.72 The Panel, therefore, arrived at the conclusion that a restructuring of the Dabhol project was needed.
68 “Centre’s firm no to DPC”, The Pioneer, August 18, 2001 (accessed December 5, 2001); available from www.dailypioneer.com. 69 “SC decides to continue interim order”, The Statesman (India), November 3, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 70 Khozem Merchant, “India to hold inquiry into Enron Affair”. 71 Energy experts on the committee included N. N. Lele and R N Pachouri, long associated with Tata Electricity and Kirit Parikh, of the Indira Gandhi Institute of Development Research. 72 “Godbole Panel Stresses on negotiation with DPC”, The Pioneer, April 13 2001 (accessed December 5, 2001); available from www.dailypioneer.com
27 The Godbole Re-Negotiating Committee
Chief Minister Deshmukh ultimately resigned himself the fact “we can not bring down the cost of power (sold by the DPC) unless the PPA is re-opened. The issues like the rupee-dollar parity which has contributed to the hike in the power rates will have to be considered while undertaking re-negotiations”.73 At the end of April 2001, his government, acting on the recommendation of the Mumbai High Court to arrive at an amicable settlement, commissioned the Godbole panel to form a committee to renegotiate terms of the PPA with Enron. Pressured from the leftist groups in Deshmukh’s coalition government, the committee was commissioned to ultimately bring down the cost of power by restructuring the tariff rate, to explore the options of attracting third party purchasers of the energy, and to ultimately soften what had become to be perceived as a hardliner stance developed by Enron.
Recognizing that other state electricity boards could share in absorbing excess capacity generated by the Dabhol plant during off-peak periods, the Godbole committee immediately began to organize simultaneous meetings with the SEBs. Representatives of the state electricity boards from Madhya Pradesh, Karnataka, Delhi and Punjab met the Madhav Godbole Committee on July 26, 2001 to negotiate buying power from the DPC but their expectation of price and supply was too low to ease the financial pressure of the Maharashtra government. With the exception of the SEBs of Madhya Pradesh and Punjab, which were willing to pick up approximately 200 MW as base load power, the other states were seeking a power arrangement that would meet seasonal shortfalls of power.74
The efforts of the Godbole committee to arrive at a renegotiated settlement was severely hampered by the various legal acrobating that was simultaneously taking place in London and ni
73 “Maharashtra softens stand ahead of London meet”, The Pioneer, April 26, 2001.
28 Mumbai by the GOM, DPC and Indian creditors. Furthermore, three of the committee members resigned from the committee in an act of protest directed towards the leadership of Dr. Madhav
Godbole and the political interference exercised by the Center. One of the members of the committee who resigned, R.K. Pachauri, argued that Dr. Godbole’s suggestion of a judicial enquiry into the DPC’s activities, would have the unintended consequences of driving the Enron team farther away from the negotiating table. In one interview, he stated “(h)ow long do such judicial enquiries in India normally take and how many have achieved anything tangible? Can the government of Maharashtra renegotiate a deal with Enron if a judicial enquiry is in progress, and would the public accept any such deal till the enquiry is over? And till it is over, the
Government of Maharashtra would continue to run up huge bills even as the State is unable to absorb the power generated by Dabhol”.75
On May 3, 2001, the efforts of the Godbole committee became further impeded when the
Enron team backed out of a meeting scheduled for May 5 with officials of the state government, the MSEB and members of the Godbole committee to re-chart the renegotiation process.76 Even when the energy company initially agreed to meet, it cautioned, “the published terms of reference of the Godbole report do not represent an acceptable basis for further discussions…This meeting should in no manner be construed as an open offer from DPC to renegotiate the terms of the contract”.77 The Dabhol team made clear that any specific proposals brought forward for renegotiation should be premised on the principle of lifting the entire base
74 Julie Earle. “Enron wants out of Indian Power Project” in The Financial Times (London), July 27, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 75 “R K Pachauri rejects Godbole’s suggestion to institute `Judicial Enquiry’”, available from http://www.teriin.org/news/may012.htm 76 “Agenda for fresh talks with Enron chalked out”, Business Line, May 5, 2001 (accessed March 31, 2002); available http://www.blonnet.com/businessline/2001/05/06/stories/14065607. 77 “DPC agrees to meet gov’t panel as a `courtesy’: Godbole terms of reference not acceptable”, rediff.com, May 4, 2001 (accessed December 5, 2001); available from http://www.rediff.com/money/2001/may/04enron.htm
29 load power produced at the plant.78 They further reasoned that no exercise of re-negotiation would be fruitful for them without a basic assurance of payment for the second phase of the project, which was due to go online on June 7, 2001. Since the MSEB could not provide for these assurances, the Enron team decided to issue its pre-termination notice.79
Before the pre-termination notice was actually issued, several attempts were made by the
Center to engage officials from the DPC, the MSEB and the GOM in a dialogue to resolve their differences. On May 11, 2001, officials of Enron India and the Godbole committee met to discuss the future of the Dabhol project with no headway, as the MSEB continued to reiterate its stance that the DPC should adjust its dues owed by the MSEB for not achieving peak supply levels.80
Pre-Termination Notice On April 26, in a decision of six to one, the Board of Directors of DPC had authorized
Neil McGregor, Managing Director, to issue a notice of intent to terminate the PPA at a future date to be determined by the DPC management. The MSEB was not allowed to vote on the issue because of its status as “an interested party”.81 On May 19, the DPC issued its pre-termination notice. The pre-termination notice attributed the decision to terminate the project to the failure of the MSEB to pay its dues amounting to two months of electricity payments, and to the MSEB’s unwillingness to increase the size of the letter of credit and provide escrow cover as provided for in the PPA. According to clause 17.8 of the termination procedure outlined in the PPA,
following the giving of a preliminary termination notice, the parties shall consult for a period of six months (or such longer period as they may agree) as to what step shall be taken with a view to mitigating the consequences of the relevant event
78 “Dabhol issues termination notice – still open to `solutions’ minus Godbole report”, Business Line, May 20, 2001 (accessed March 31, 2002); available from http://www.blonnet.com/businessline/2001/05/20/stories/14205601.htm 79 “Dabhol issues termination notice”. 80 “Talks begin on Dabhol Issue”, Business Line, May 12, 2001, (accessed March 31, 2001); available from http://www.blonnet.com/businessline/2001/05/12/stories/14125602.htm 81 “DPC board authorises MD to issue PPA termination notice”, Business Line, April 27, 2001, (accessed March 31, 2001); available from http://www.blonnet.com/businessline/2001/04/27/stories/142756dh.htm
30 having regard to all the circumstances….”.82
The DPC’s pre-termination notice, therefore, would expire on Nov.19, 2001, after which the
DPC board would have to approach its lenders for approval to issue a final termination notice.
As the MSEB continued to rescind on its contractual payments and its unpaid bills escalated to approximately $185 million, DPC officials decided to shut down the first phase of the project
(740 MW) in May 2001.
At the end of July, Enron CEO, Kenneth Lay, formally announced Enron’s intention to sell its equity stake, signifying a formal departure from the project. Lay reported “We have made it pretty clear to the government leadership we are now at a point where we would like to be taken out and we think most of our partners do”.83 Wade Cline further explained “we are not in the business of litigation but of selling energy worldwide. November 19 is our exit path and no way are we going to take a merchant risk in the power purchase agreement. I surely have a distressed asset but not a distressed PPA”.84
Subsequent Rounds of Arbitration The DPC resorted to arbitration against the State Government, again on the basis of a breach of contract. The company had accused the Government of not honoring its guarantees and supplemental support guarantees by refusing to pay the amount due for MSEB’s December and
January bills. The GOM responded to the arbitration proceedings again by filing its own suit in the Bombay High Court alleging that the DPC had misrepresented terms of the agreement by inflating the operating characteristics and scope of the project.85 The GOM further supported the
82 Ibid. 83 Earle, “Enron wants out of Indian Power Project”. 84 “Enron’s exit countdown begins from November 19”, The Pioneer, August 13, 2001 (accessed December 5, 2001); available from www.dailypioneer.com 85 “MSEB forced to rescind PPA?”, The Pioneer, August 6, 2001 (accessed December 5, 2001); available from www.dailypioneer.com.
31 MSEB’s argument that the DPC was required to adjust payments due by the MSEB according to a Rs.401 crore penalty for performance default, as stipulated in the PPA. Furthermore, on
September 19, 2001, Indian authorities announced that they were to launch a judicial investigation into the origins and legality of the $2.8 billion company. Fearful that this initiative was an attempt to stall arbitration proceedings in London, by declaring DPC activities illegal, the commercial court in London passed an ex parte order in October 2001 “against the State government restraining it from taking any legal action against international arbitration initiated by DPC”.86
Enron’s Exit Strategy
Wade Cline, of the DPC, articulated the desire that apart from deflating the sale price of its assets from $3 billion to $1 billion, at the end of the day, they wanted to complete the project before leaving Dabhol. “Though we are looking at exit routes, DPC is ready to get the original contractors and ensure completion of the project as the original designs and drawings of the plant are not with the company, but with them”.87
Once it was clear that the GOI would not purchase Enron’s equity stake in the company, on January 30 2002, the IDBI invited “Expressions of Interest” (EOI) for acquisition of eight- five percent stake in DPC from domestic and international companies with a minimum net worth of $200 million or its equivalent in Indian currency or from a consortium with a net worth of
$400 million having requisite experience in managing and operating power and LNG plants.88
Three bidders, Tata Power Company, BSES Ltd. and the Gas Authority of India submitted their
EOIs. For practical reasons, Enron preferred selling its assets to a local Indian buyer. Wade Cline
86 “India: Arbitrators meet in Singapore on Dabhol”, Business Line, November 23, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 87 “Enron’s exit countdown begins from November 19”.
32 argued that if a local buyer bought the project, the rupee-dollar parity, that became an issue of contention in negotiations between the GOM and the DPC, would disappear if an Indian company bought the project. Cline further maintained that “the project then also could be run on a 30 per cent plant load factor…believe me no foreign guys are going to do that”.89
Final Termination Notice On November 6, 2001 Enron officially announced that it would serve its final termination notice to close the power project after November 19, when a six-month deadline for resolving the payment dispute would end.90 Enron served a notice to transfer the 2,184MW asset to MSEB and was willing to demand compensation based on independent valuation.91 Domestic lenders, including the State Bank of India, ICIC Ltd., the Industrial Development Bank of India and IFCI
Ltd., filed a lawsuit in the Mumbai High Court. The creditors demanded the immediate re- commencement of the plant to protect their investments.92 On November 9, 2001, the Mumbai
High Court ruled in favor of the Indian creditors and issued and issued a stay order against the
DPC’s final notice of termination. This action prevented the DPC from issuing its final termination notice until a hearing was called, which would not take place until December 3,
2001. The Court further ruled that the fourteen-day period beginning November 19, during which the DPC could file the final termination notice as per the PPA, would not expire.93
88 “Expression of Interest Invited for DPC Sale”, IndiaInfo.com, January 30, 2002 (accessed March 31, 2002); available from http://finance.indiainfo.com/news/2002/01/30/30enron.html 89 “Enron’s exit countdown begins from November 19”. 90 Enron India Unit’s lenders issue court challenge to prevent project pullout, AFX EUROPE, November 8, 2001 (accessed December 5, 2001); available from http://globalarchive.ft.com 91 Sanjeev Srivastava, “Enron set to leave India”, BBC News.com, November 6, 2001 (accessed December 5, 2001); available from http://news.bbc.co/uk/hi/english/business/newsid_1641000/164100.stm 92 “Enron delays closure notice for Indian plant after legal action”, Agence France Presse, November 19, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 93 Indian Court Bars Enron From Serving Financial Termination Notice”, Asia Pulse, Nov. 12, 2001 (source: http://globalarchive.ft.com)
33
The Singapore Meeting Following the action of the Indian financial institutions of filing a suit against the DPC, the DPC decided to `boycott` the November 10-12 meeting held in Singapore where the DPC’s institutional lenders, including Citibank, ABN Amro and Bank of America and the IBDI and the
State Bank of India, met in a final attempt to discuss the financial restructuring of the DPC. After the DPC received personal assurances from the Center and the financial institutions that they intended to present new proposals at this meeting with respect to a negotiated settlement to the dispute, the DPC agreed to attend the meeting.94 At the meeting, the lenders were concerned about facilitating the sale of the Dabhol assets with prospective buyers, including Tata Power and BSES. The financial institutions also devised a proposal that was ultimately rejected by the
MSEB. The proposal called for the MSEB to off-take power from Phase I and relinquish to the potential new buyer its exclusive distribution area where there are key industrial centers. The
MSEB rejected this proposal with the argument that if it forfeited these prized areas, then it would not be able to absorb the power from DPC’s first phase of 740 MW. The MSEB further protested the fact that FIs did “not call us to the Singapore meet and had no right to make such an offer without consulting and taking MSEB into confidence”.95 An official at the MSEB went on to declare that “(f)inally, if things get sorted out and DPC is taken over by another company, it is
MSEB which is going to be the largest consumer of the plant, and strangely despite having a 15 per cent stake in the company, it is not even involved in DPC’s sale process”.96
94 “Singapore meet spills over; no proposals given, says DPC”, in rediff.com, November 9, 2001 (accessed December 5, 2001); available from http://www.rediff.com/money/2001/nov/09enron1.htm 95 “`FIs completely ignored us in DPC’s proposed sale’ says MSEB”, The Press Trust of India, November 23, 2001, available from Lexis -Nexis Academic Universe. 96 Ibid.
34 The Downfall of Enron One of the most interesting developments that emerged in this case, is the downfall of the energy giant Enron. Enron’s declaration of bankruptcy on December 2, 2001 signified the largest filing of bankruptcy in US history. The question of finding a local buyer through the Singapore negotiations assumed less importance with respect to time and investment as Enron became embroiled in a series of US federal investigations on the transparency of its accounting practices and dealings. It was revealed that Enron had been omitting from its balance sheet financial losses incurred in relationships with private partnerships run by some of its own corporate officers. As
Enron shares plummeted from $82 in January 2001 to $11.82 on November 5, 200197, Kenneth
Lay announced to Enron shareholders that Enron would regain “billions” from, among its many assets, sale of its broadband telecommunications and its assets in Dabhol.98
One analyst states “…the Dabhol investment played an insignificant or no role in the collapse of Enron. Several analysts concur with this argument maintaining that the company went down under the collective weight of its extraordinary corporate ambitions and the cumulative effect of sharp practices”. 99 On the other hand, some Wall Street analysts had been complaining that Enron’s complex web of businesses had contributed to lack of clarity in its financial reporting. An analyst at Salomon Smith Barney argued that the lack of strategic focus in acquisitions and operations contributed to Enron’s undisclosed financial losses. Raymond
Niles specifically argues that among other unrelated projects, “power plants in India” are
“unrelated, or only tangentially related, to their core merchant energy business”.100 The Enron
97 Ayres, “Enron to pull out of Indian project” 98 Stacie Babula, “Enron falls amid concern debt threatens Dynergy bid”, Bloomberg News, November 20, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 99 “The Enron Collapse and India”, The Free Press Journal, January 23, 2002 (accessed March 12, 2002); available from www.samachar.com) 100 Simon London and Sheila McNulty. “Enron flickers: Once a paragon of the new economy, the US energy group is under scrutiny for its opaque accounting and free-wheeling management”, The Financial Times (London) October 29, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
35 collapse, however, did play a significant role in the fate of the Dabhol project. Specifically, under pressure to sell its assets quickly to raise much-needed cash, Enron’s bargaining position was significantly depressed vis-à-vis DPC’s potential local Indian buyers and the GOM. Amidst allegations that Enron was over-leveraged and under pressure to cut costs in various business segments, Enron highlighted the Dabhol project as one of its most notably poor investments and noted that it would accelerate the process of trying to dispose of these failed assets to raise cash to pay its $12 billion debt. As Ronald Barone of UBS Warburg states “Tata would be a faster exit and resolve it once and for all. It is better to take a small loss and move along. Dabhol periodically becomes a problem and an issue, and it depresses the stock”.101 As a result of this decline in Enron’s bargaining position, subsequent negotiations of the sale of the Dabhol assets involved a sale price that was substantially discounted.
101 “TATA in talks to buy Enron power plant”, The Financial Times (London), October 15, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
36 PART III. APPLYING NEGOTIATION THEORY TO EXPLAIN THE FAILURE OF THE DABHOL DEAL
“In fact, the entire negotiation with Enron is an illustration of how not to negotiate, how not to take a weak position in negotiations and how not to leave the initiative to the other side”– Report of the Munde Committee (August 1995)
When discussing the importance of the pre-negotiation phase, Harold Saunders outlines four steps necessary to produce a commitment to a negotiated settlement: that it no longer serves either party’s interest to pursue the present situation (i.e. conflict situation); that the alternatives to a negotiated settlement (BATNA) are not better than a foreseeable settlement; that each side makes its own estimates of whether the other side would accept a negotiated solution and is willing to reach a compromise; and finally, that an equal power balance exists to permit a fair settlement.102 This framework of analysis captures several of the reasons why the Dabhol deal failed, for even though a settlement was ultimately reached in the form of a negotiated PPA and a renegotiated PPA, the agreement was undermined in various stages because it served the interests of the ruling government to contest the PPA, because `compromise’ became an ugly word when the Dabhol project became politicized and when mistrust escalated on each side and furthermore when compromises were made, the right kind of compromises were not made and finally, because the PPA reflected an asymmetrical power balance as it was negotiated with a supply-side bias.
Elements of Saunders’ framework and other frameworks that draw from negotiation theory and the field of conflict resolution will be explored in this section, as they lend insight into the failures of the Dabhol project in India, and ultimately why international business transactions can fail.
102Harold H. Saunders, “We Need a Larger Theory of Negotiation: The importance of Pre-negotiating Phases” in Negotiation Theory and Practice, eds. William J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at Harvard Law School, 1999), 65-68.
37 A. UNDERSTANDING BATNA and BATrNA
In Getting to Yes: Negotiating Agreement Without Giving In, Roger Fisher and William
Ury, argue that the best way to estimate a negotiated agreement is to measure it against what would be considered to be the parties’ best alternative to a negotiated agreement (BATNA).103 In the Dabhol case, the concepts of BATNA and what I refer to as BATrNA (Best Alternative to a
Renegotiated Agreement) help explain how and why both parties were willing to enter into negotiations to construct the power project in Dabhol and ultimately why the parties agreed to renegotiate the PPA in an environment of escalating hostilities.
The Indian Team’s BATNA The table below is a summary of India’s alternatives to a negotiated PPA with Enron and its partners.
Figure 4 - India's BATNAs
Ranking Alternatives Best Contract a domestic private investor to build, own and Alternative operate the energy plant 2nd Best Domestic company becomes majority partner in power Alternative project 3rd Best Tap into alternative forms of energy sourced domestically Alternative (e.g. coal production) 4th Best Have another foreign investor build, own and operate the Alternative energy plant
The “Best Alternative” and “2nd Best Alternative” in this case were untenable in the Indian context as Supriya Roychowdhury states, the “...private corporate sector in India has in general failed to demonstrate the characteristics of a vigorous entrepreneurial class”, has grown based on state support and “speculative behavior in a range of activities relating to underutilization of capacities making quick profits in a protected market, using its monolithic structure to preempt
103 Roger Fisher and William Ury. Getting to Yes: Negotiating Agreement Without Giving In, 2nd ed, ed. Bruce Patton (New York: Penguin Books, 1991), 97.
38 competition and to perpetuate a market of shortages”.104 A study done by Yamini Narayanan reveals that on a cost basis alone, there were incentives to pursue Enron as the lead supplier instead one of India’s leading national suppliers of energy, the National Thermal Power
Corporation (NTPC)105, as Enron had the capacity and resources to supply power at a cost 8.45 million dollars less than that of the NTPC.106 The reconstruction and revitalization of SEBs have been ear-tagged as investment risks by the World Bank, which made it difficult for the state governments to borrow for electricity generation and therefore placed a premium on the need for foreign investment.107 The GOM and the MSEB quickly disqualified the third best alternative noted above, as demonstrated by their disregard of recommendations to explore domestic sources of energy production such as coal production. Consequently, the merits and downfalls of this third best alternative did not influence or inform their decision to enter into negotiations with
Enron. Finally, Enron, when compared to other foreign energy companies, was poised to be the lead contractor, as it possessed a portfolio of international projects similar in size and scope to
Dabhol in developing countries and had a sizeable cost advantage as a large multinational in an industry that is highly capital intensive. Moreover, the GOI’s search for a foreign investor was limited by the fact that only six companies in the world produce power generation equipment.108
Considering the varying degrees of viability of implementing these four options, it is easy to see why the GOI and the GOM aggressively pursued an agreement with Enron and its partners for the establishment of the Dabhol power plant.
104Supriya Roychowdhury, “State and Business in India: The Political Economy of Liberalization, 1984-89”. (Ph.D. diss., Princeton University, 1992), 126-7. 105In 1995, the Central Government owned and operated approximately 31% of the national capacity under the National Thermal Power Corporation (NTPC) while the states operated the other 65%. See HBS, Case A, 4. 106 Narayanan, 19. 107 Ibid., 2. 108 Mehta, 13.
39 Enron’s BATNA At the time of negotiations, Enron was negotiating a deal in Qatar with the state-owned
Qatar Gas & Pipeline Company to create a LNG facility. To avoid suffering from major financial setbacks, Enron needed to find a large supply of consumers for the LNG produced at its Qatar facility. Rebecca Mark, President and CEO of Enron Development Corporation109, had looked for countries where there was a huge amount of LNG consumers. The three candidates were
Israel, India and Pakistan. Israel, however, had retracted its commitment to lift three million tones of LNG every year and of Pakistan, Rebecca Mark disclosed “since the situation in
Pakistan has become unstable after the killing of two Americans there, we aren’t thinking of any project in that country for at least two years”.110 Consequently, India became the prime candidate for investment and, at that time, it was estimated that by 2002, India was expected to consume nearly ninety-six billion cubic meters of natural gas every year.111
The Indian Team’s BATrNA When attempting to understand each party’s BATrNA in the Dabhol case, D.
Sampathkumar comments “each of the parties with a stake in the project has its own compulsions in seeking a resolution of the dispute and thereby put an end to the uncertainties facing them vis-à-vis their financial exposure to the project. For all the bravado, the basic fact remains that none of the parties involved in the deal can afford to dig in its heels and refuse to go along”.112
At the height of uncertainty and hostility, the GOM’s best alternatives to a renegotiated agreement included soliciting another investor to take over a project which had become highly
109 Enron Development Corporation is the worldwide arm of Houston-based Enron Corporation. 110 Alam Srinivas. “Will Enron’s New India Strategy Work?”, Business Today, December 7-21, 1997 (accessed December 5, 2001); available from www.india-today.com/btoday/07121997/enron.html. 111Srinivas, “Will Enron’s New India Strategy Work?”. 112 Sampathkumar, D. “India: It is deal-making time in Dabhol” in Business Line (November 18, 2001)
40 scandalized and plagued with financial uncertainties and extracting domestic sources of energy to meet growing demand. Jeswald Salacuse points out how the practicality of implementing these agreements was almost negligible. He points out “once it (the GOM) fully understood the costs that it might entail in an international commercial arbitration and the difficulty it would encounter in attracting other investors, it became considerably more open to agreeing to renegotiation and to arriving at a satisfactory conclusion to the conflict”.113
Similarly, throwing away the deal entirely was never a best alternative. When the GOM was contemplating terminating the PPA, former Maharashtra Chief Minister Sharad Pawar argued, “not a single foreign company showed any interest in setting up a power project in India except Enron. In fact, it was my predecessor who signed the memo of understanding…. (the cancellation) is clearly a political stunt, totally selfish and shortsighted in its aims. By scrapping
Enron’s project the national economy will definitely suffer, as will the international image of the state and the country. I strongly believe the government should not have taken this step”.114
Carolan McLarney and Ramakrishna Dastrala concur with this reasoning. In their article, “Socio- political structures as determinants of global success”, the authors point out that, confronted with a bill of nearly $300 million and bound by its guarantee for liability of non-payments, the
Maharashtra government had no choice but to renegotiate the deal.115 Terminating the project would give the impression of instability in the country thereby substantiating the notion of high risks for potential investors. Furthermore, in a climate of immense competition in the political arena, instead of discarding the deal, the BJP-Shiv Sena government saw a golden political opportunity to negotiate a better contract than its predecessor, which made the opportunity for a
113 Salacuse, “Renegotiating International Project Agreements”, 1367-8. 114 Harvard Business School, Case A, p. 4. 115 Carolan McLarney and Ramakrishna Dastrala. “Socio-political structures as determinants of global success: The case of Enron Corporation”, International Journal of Social Economics 28, no. 4, (2001): 364.
41 renegotiated agreement more attractive than any best alternative did. It is therefore not surprising that on April 6, 2001, the Chairman of the MSEB, declared: “The Indian government’s stand is that Enron should negotiate this issue. We have already formed a committee to discuss this problem and we would like Enron to discuss this issue with us”.116
Enron’s BATrNA When analyzing the matrices of choices facing each player, it is often argued India had more to lose than Enron by not renegotiating and terminating the project completely. In fact,
Enron had a great deal at stake and was motivated to renegotiate the agreement as its own matrix of choices and best alternatives resembled that of the Government of Maharashtra with respect to its financial, reputational, and political constraints.
The transition in Enron’s strategy from enthusiastically reiterating its interest to renegotiate the PPA in the beginning to subsequently revoking its commitment to a negotiated settlement by developing an exit strategy from India can be explained by a shift in Enron’s
BATrNA. Enron originally had indicated that it would be willing to renegotiate even when it filed for arbitration in London because it was aware that the costs of arbitration were greater than the procedure of renegotiating the agreement. By December 2001, however, the DPC was confronted with serious cash flow problems. Dabhol was left with less than $8-$10 million, with legal fees amounting to $2-2.5 million, and liabilities amounting to $25 million-$30 million mostly in payments due to vendors, and it therefore no longer became financially sustainable to maintain operations in India.117 Furthermore, if the project was terminated, Enron’s goal of sourcing a large supply of consumers for its LNG facilities over a long period of time would never materialize. As Uttam Gupta, a Chief Economist for the Fertiliser Association of India,
116 “Enron issues notices to MSEB for settlement of dues”, April 6, 2001 (accessed December 5, 2001); available from www.dailypioneer.com.
42 points out, the unavailability of LNG would curtail the revenues of industries such as fertilizers and power.118
An interesting position raised by Supriya Roychowdhury is that Enron had little choice but to negotiate with the Governments of India and Maharashtra instead of lobbying for policy, judicial and economic reform since there is no unified consortium of private investors or businesses in India with which a multinational could join forces and lobby. Roychowdhury specifically notes that “business influence upon government remained locked in the structural heterogeneity of the private sector and their competing, often conflicting interests”.119
The DPC’s BATNrA of taking advantage of back channel diplomacy to influence reform as an alternative best strategy to renegotiation became unsustainable. Specifically, Enron’s efforts to lobby the GOI to exert pressure on the GOM and the MSEB on the issue of default payments, quickly deteriorated vis-à-vis external events influencing American foreign policy. In the aftermath of December 13, 2001 when the Islamic militant group, Lashkar-e-Toyeba, bombed the Indian Parliament, the Indian government received unprecedented support from US
Secretary of State Colin Powell and US President George Bush, as part of their own efforts to build a world-wide coalition against terrorism. Indeed, Colin Powell’s statement that the US government “knows of India’s intent” and “certainly understands their intent” to take action against the terrorists, reveals the interdependent relationship that the Bush administration is determined to forge with India and has been perceived, as one Indian journalist explains, as if the
US has given “carte blanche to the India to go after the terrorists responsible”.120 In efforts to solidify relations with the Vajpayee government, the US government invited Home Minister L K
117 “Dabhol Power Co. in grave cash crisis”, India Abroad, December 21, 2001, 32. 118 Uttam Gupta, “DPC-MSEB slugfest – Needed a conciliatory approach”, Business Line, May 11, 2001, (accessed March 31, 2001); available from http://www.blonnet.com/businessline/2001/05/11/stories/041156ju.htm 119 Roychowdhury, 265.
43 Advani to the US to discuss various steps to strengthen cooperation in countering “various steps of terrorism” including cyberterrorism and mechanisms to strengthen border security. The United
States has also offered to sell India sensors and unmanned aerial vehicles for better border management, especially for the Line of Control between India and Pakistan.121
B. TIME DEFICIENCIES
The two time deficiencies to be discussed in this case are the deficiencies of “speed” and a disregard for “timing or ripeness” when negotiating an international business deal.
Speed Jeswald Salacuse makes two important observations when discussing the burden of time deficiencies in the negotiation process. He discusses `speed’ “as a defect in the negotiation process”, and further notes that this defect can be explained by cultural factors.122 Specifically he argues that Asians value relationship-building which takes time during the negotiation process while North Americans “generally want to `dispense with the preliminaries’ and to `get down to cases’”123 Two examples from the Dabhol case illustrate this culturally-reasoned predicament.
When Indian Power Secretary S. Rajgopal made that initial trip to Washington, D.C. to encourage foreign investment in the power sector, Rebecca Mark made the pitch that “we are prepared to be the first if you could work on an expedited basis”. Almost every newspaper in
India covering Enron’s visit to India, however, remarked with dismay that a MoU was secured in just five days after the Enron team’s first visit.124 Indeed, the 1995 Report of the Cabinet Sub-
Committee to Review the Dabhol Power Project noted that,
120 Aziz Haniffa and Suman Guha Mozumider, title not retrievable, India Abroad, December 21, 2001, p. 1. 121 Josy Joseph, “US invites Advani to Discuss Terrorism” in India Abroad, Friday December 21, 2001, p. 14. 122 Salacuse, “Renegotiating International Project Agreements”, 1360. 123 Salacuse, “Renegotiating International Project Agreements”, 1361. 124 Narayanan, 8.
44
….in a matter of less than three days after its arrival in Bombay, an MOU was signed between Enron and MSEB in a matter involving a project of the value of over Rs. 10,000 crores at the time, with entirely imported fuel and largely imported equipment, in which, admittedly, no one in the Government had expertise or experience. In fact, the file (on the project) does not even show what Enron was – what its history is, business or accomplishment. It looked more like an ad hoc decision rather than a considered decision on a durable arrangement with party after obtaining adequate and reliable information. Neither the balance sheet and annual accounts of Enron, nor any information about its activities, area of operation, its associates, etc. was obtained by the government then, or even later”.125
Similarly, observing the fact that the renegotiating committee was set up on November 8, 1995 and was asked to submit its report four weeks later, the Bombay High Court noted “(b)ut once it
(GOM) decided to revive the project, it acted in the very same manner in which its predecessors in office had done. It forgot all about competitive bidding and transparency. The only transparency it claims is the constitution of the negotiating group. The speed with which the negotiating group studied the project made a proposal for renegotiation which was accepted by
DPC, and submitted its report is unprecedented”.126 In contrast, when asked what went wrong in
India, Rebecca Mark responded in an interview, “We were extremely concerned with time, because time is money for us. People thought we were pushy and aggressive. But think of the massive bureaucracy we had to move. How do you move a bureaucracy that has done things one way its entire collective life? You have to be pushy and aggressive”.127
A secondary point is that each party upheld different values of time, which influenced the positions and vision they developed for the project. While Enron and its partners were accountable to their shareholders, who were looking for long-term value, the BJP-Shiv Sena coalition, in a politically competitive environment, was seeking immediate and short-term political victories to appease its constituents.
125 Human Rights Watch, “The Enron Corporation”. 126 Mehta, 152. 127 Manjeet Kripalan, “Enron’s Rebecca Mark: `You have to be pushy and aggressive’”, BusinessWeek, February 24, 1997.
45 In response to the assertion that the negotiation process suffered from hasty deliberation,
Enron officials cited the fact that twenty-seven different government agencies had looked at the contract before approving it.128 Regardless of how many agencies deliberated about the merits of the project, however, it is evident that a business relationship was not cultivated between Enron and the GOM, MSEB and GOI. As Salacuse explains, parties take for granted that because an agreement is signed, a business relationship is ultimately forged and that only during times of conflict, when misunderstandings surface, it becomes apparent that no business relationship was ever cultivated.129 As Salacuse states “….after nearly eighteen months of negotiation, Enron emerged with a contract but no real business relationship. It had no real connection to any Indian party and had established no basis for cooperation and trust with either (the) Maharashtra State
Electricity Board, the Maharashtra State Government, or the Indian public”.130 There were opportunities to build a relationship through equity-sharing arrangements. Enron, however, refused a suggestion submitted by Bechtel, its minority partner, to sign on a ocall Indian partner as a minority equity holder in the project.131 Indeed the deal that was void of a long-term business relationship, in the Dabhol case, led to serious underlying problems of mistrust between all parties involved.
To a large extent, all parties to the negotiation were new to the scale, scope and nature of this deal and could have benefited from an extension of time to extract valuable information about each other’s interests, level of commitment and capabilities. As Sucheta Dal points out,
“few in India understood the complexities of working out the tariffs and guarantees of an
Independent Power Project. Until Enron came along, most power projects were set up by public
128 Narayanan, 61. 129 Salacuse. “Renegotiating International Project Agreements”, 1357-1360. 130 Salacuse, “Renegotiating International Project Agreements”, 1360. 131 Jeswald W. Salacuse. “More on Dabhol”, Thursday April 4, 2001. Private e-mail communication.
46 sector companies and private ones such as BSES and TEC and could either accept the returns paid by government or lump it”132 The GOI, according to Kirit Parikh, did not take the time to consider whether a nuclear plant rather than a coal-based plant required the lowest combination of capital and operating costs. The GOI further failed to take into account the fluctuations in demand for power during the day. Accounting for these factors, Parikh calculates that the GOI could have extracted a more favorable deal with Enron with respect to costs.133 Some analysts argue that Enron’s pre-negotiation preparation was fraught with miscalculations and information gaps. For instance, Enron’s risk assessment was not properly calculated. The factors that led to its decision to enter India included the size of Indian market, its western-style legal code and contracts, the widespread use of English and its democratic polity.134 When put to the test, however, these broad guidelines and directives failed to account for the particularities of the project. Abhay Mehta argues that in its rush to get an agreement concluded, several factors including the FOREX component, the need for a base-load capacity, and least-cost considerations were omitted in the preliminary examination of the project.135 Sanjay Gupta, former President of Mahindra & Mahindra USA, unequivocally asserts that the primary reason international business agreements fail is that “parties do not do their homework”.136 Inadequate preparation, as a function of the rapid speed at which agreements are concluded, is a serious impediment to international business transactions.
132 Sucheta Dalal, “The Enron Fiasco”, December 20, 2000, (accessed December 5, 2001), available from www.rediff.com/money/2000/dec/20dalal.htm. 133 Parikh, 227. 134 Harvard Business School, Case A, 7. 135 Mehta, 28-9 136 Sanjay Gupta, Lecture at the Fletcher School of Law and Diplomacy, March 20, 2002.
47 When the Time is `Ripe’ Jeffrey Rubin discusses the “role of ripeness’ in negotiations. He notes that “there is a right time to negotiate, and the wise negotiator will attempt to seek out this point”. 137 In the international business scenario, this might translate to the time that there is possibility for joint gain by both parties.138 This opportune time may also be defined by the ability of the actors involved to follow-through with their contractual obligations. Merchant Khozem, an Indian journalist who has extensively followed the Dabhol negotiations, remarks that “a decade ago,
DPC was given fast-track clearance and was advertised as a symbol of India’s economic awakening. It’s withdrawal is now seen as an indictment of the attempts to jump-start economic growth” (emphasis added).139 Merchant’s observation raises the question of whether the time was ripe to negotiate this deal. The poor conditions of the MSEB, the uneasiness of the government to manage foreign investment of a large scale and the inability of all actors involved to resource the negotiations are all evidence of the fact that the timing was not ripe for negotiation of the PPA.
C. RESOURCING THE NEGOTIATIONS
Even if both sides understand their own BATNA and each other’s BATNA, it is impossible to negotiate successfully, where success is measured in part by the implementation phase of the agreement, without understanding each parties’ resource endowments and their willingness and ability to contribute to the implementation phase of the contract. In other words,
137 Rubin, Jeffrey Z. “Some Wise and Mistaken Assumptions about Conflict and Negotiation” in Negotiation Theory and Practice, ed. William Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at Harvard Law School, 1999), 10. 138Rubin, “Some Wise and Mistaken Assumptions about Conflict and Negotiation”, 10. 139 Khozem Merchant. “Utilities in bid for project stake: Tata Power and BSES have offered about half the sum demanded for a majority shareholding in a controversial Indian power project beset by political problems”, Financial Times, November 12, 2001 (accessed December 5, 2001); available from http://globalarchive.ft.com/ globalarchive.articles.html
48 all parties to an agreement must have the institutional and technical endowments to actually provide resources to implement the agreement to provide legitimacy to the deal-making process.
Institutional Endowments When assessing the Government of India’s and the Government of Maharashtra’s institutional endowments, it is clear that there was a significant deviation between what was agreed to on paper and which terms of the agreement could actually be serviced. Anupama
Dokeniya, who has studied India’s liberalization policy in the telecommunications sector, has observed that the bureaucracy in India has been progressively weakened in the post-
Independence years with the absence of a checks and balance system between the executive branch and the legislative branch, which makes it difficult to implement regulatory agreements.140
Corruption
No discussion of India’s institutional endowments, or lack thereof, can take place without mention of the issues of transparency and corruption. Transparency International’s 2001
Corruption Perceptions Index (CPI) ranks India 71 out of 91 countries with a very low CPI score of 2.7.141 Indeed, a top executive at industrial giant Larsen & Toubro notes despairingly that
“countrywide corruption is increasing at all levels”.142 A Vice-President of a leading rice exporting firm notes that businessmen have to deal with sales tax, income tax, excise, customs, land and quality control, of which “not even the slightest progress is possible without greasing
140Anupama Dokeniya. “Re-forming the State: An institutional analysis of telecommunications liberalization in India” (Ph.D. diss., Cornell University, 1999). 53-4. 141 The CPI score measures the degree of corruption as perceived by business, academics and risk analysts and ranges between 10 (very clean) to 0 (highly corrupt). India’s CPI score resulted in standard deviation of 0.5. See Transparency International 2001 CPI Index; available from http://www.transparency.org/cpi/2001/cpi2001.htm) 142Sanjay Kumar, “India -Corruption Slows Growth”; available from http://mahendra- agarwalonline.20m.com/PR_CorruptionSlowsGrowth.htm.
49 officials’ palms”.143 As Sanjay Kumar reports, “many Indian businessmen feel that liberalization of the economy will have no impact on reducing the corruption that has become so well entrenched”.144
It is important to understand the cultural and political context in India that explains corruption as a hindrance to growth and investment. Businessmen in India argue that during
Indira Gandhi’s leadership in the 1970s, politicians and government officials gained almost unlimited powers to issue licenses, driving the India economy to license-dependency for everyday market interactions, which today has produced endemic corruption.145 Jairam Ramesh,
Secretary of the Economic Cell of the All India Congress Committee (AICC) explains corruption in India differently. He makes the distinction between “needs-based” corruption and “greed- based” corruption where the emergence of needs-based corruption is largely explained by the fact that there is no transparent way to finance the Indian electoral system. He further comments that Indians are comfortable with the “bazaar economy” mindset and not a market economy where there are rules and regulations and standards.146
Corruption serves as a severe institutional constraint when it impairs the state’s ability to negotiate and legitimize international business deals. The resignation of three members147 of the
Godbole Renegotiation Committee was in part an act of protest against the political interference of the central government in what was supposed to be the unbiased processes and findings of the committee.148 The patron-client relationship nurtured in the State Electricity Boards (SEBs) constitutes an additional institutional factor that impairs the tenability of investment deals
143 Ibid. 144 Ibid. 145 Ibid. 146 Interview with Jairam Ramesh, Thursday Nov. 29, 2001, Harvard University 147 These three members were Mr. Parikh, head of the Indira Gandhi Institute for Research and Development, Mr. Pachauri of Tata Energy Insittiute, and Mr. Sharma, former Union Energy Secretary and member of the Andhra Pradesh State Electricity Board.
50 concluded in this sector. As V. Rahuraman, senior advisor of the Confederation of Indian
Industry, comments “state governments have to discipline themselves, and they should know how to pay for power purchased from private companies instead of blackmailing the Center to pay for their dues”.149 Amid charges of corruption, the state of Maharashtra lost two lucrative foreign investment contracts to the state of Tamil Nadu and to the state of Andhra Pradesh. “Its volatile politics have undermined the rule of law and foreign investors are alarmed by official abuse of the sanctity of contract”, reports journalist Khozem Merchant. 150 International business deals cannot be negotiated in full faith and in full sincerity when the agreement is not resourced with tools to guarantee implementation. Indeed, Enron’s response to allegations of corruption in
India is “that’s not the way we do business here or anywhere in the world. Out policy is to walk away rather than pay a bribe”.151
Technical Endowments G.V. Ramakrishna, Member of the Planning Commission of the GOI, declared in a 1994 public address that “the commercial losses of the SEBs are mounting every year”.152 Indeed, many of India’s SEBs are close to insolvency. Almost all the SEBs, including the MSEB, are as
Kirit Parikh notes, “over-staffed and plagued with political waywardness as they pander to the agricultural lobbyists who were able to extract significant subsidies from 1950 and onwards”153
148 “Three Quit Panel on Enron Deal”, The Asian Age, May 15, 2001. 149 “Exit of Enron to tarnish India’s image for foreign investment”, Netpilgrim, May 22, 2001; (accessed December 5, 2001); available from www.netpilgrim.com/articles/2001522/NetArticle5244.asp) 150 Khozem Merchant. “Maharashtra pays the price for bad governance: Dispute with Enron has called into question its status as India’s preferred home for investment”, Financial Times (London), May, 22, 2001, Asia-Pacific Section, p. 11; available from Lexis -Nexis Academic Universe. 151 Harvard Business School, Case B, 1. 152 Naryanan, 36. 153 Parikh, 223.
51 The MSEB is currently undertaking reforms to improve its billing and collection systems, in an effort to capture lost revenues.154
With respect to technical considerations, it is questionable whether some of the terms of the PPA could realistically be serviced. Operating on a base load capacity meant that Dabhol power would be running for most of the day. The GOM justified this on the grounds that neighboring states could absorb surplus power. The problem with this suggestion was that
Dabhol did not have dedicated lines to other states and surplus power during non-peak periods in
Maharashtra would have to be transferred to a common pool. During peak periods, these states might have only required a small quantum of power that could be obtained for a lower cost than what Dabhol was offering or which could be countered through load management or shedding.
The bottom line issued by energy analysts was that power rates must be in accordance with the payment capacity of the SEBs, which the Dabhol agreement was not.155
Inflationary and Deflationary Expectations
When attempting to understand the factors that led to the failure of international business deals similar to the Dabhol deal, a mere assessment of interests and positions is insufficient. Any study of a negotiated agreement needs to take into account the perceptions and expectations of the signatory parties. Inflationary and deflationary expectations, in particular, often lead to unrealistic agreements that cannot be serviced and explain why international business transactions ultimately collapse.
154 Billing is now being decentralized so that where one regional center used to issue 300,000 bills, each sub- divisional office will now issue bills to the tune of 30,000 to improve collections and to empower officials to monitor the situation from the ground. See Sankar, “Maharashtra mo ve may help solve Enron tangle”. 155 “Message from Dabhol”, Financial Express, July 28, 2001 (accessed December 5, 2001); available from www.financialexpress.com)
52 During the pre-negotiation phase, Enron expressed its intention to develop long-term business partnerships in India. Enron’s blueprint for India envisioned laying a pipeline from
Bangladesh to India for tapping the fifteen million cubic meters of gas available in Bangladesh, setting up power plants in Nepal to export power to India and constructing a national gas grid connecting all sources of power to consumers.156 This ambitious blueprint explains why Enron was aggressive in its lobbying tactics. Even though the 1991 reforms were harked as a positive step conducive to FDI, Kirit Parikh notes significant problems with the 1991 reforms that he suggests must have had an impact on FDI projects as large as Enron. Specifically, he states that
“the reforms initiated in June 1991 have unwittingly created an infrastructure bottleneck in
India”.157 Parikh goes on to say that “the control of inflation and price stabilization hamper investment as they lead to decreased spending in infrastructure. The government initiates these reforms with the expectation that private sector investment will supplant public investment in infrastructure development, which is not the case in India today”.158 Such kinds of inflationary expectations may result in the belief of either party or both parties that the agreement failed them because the deal was unable to achieve their unrealistic goals and visions. This belief can lead to a premature termination of the agreement.
Negotiation strategists intellectualize less about the importance of resourcing negotiations than traditional business strategists. Nonetheless, there are important lessons to be learned from the Dabhol case of why business transactions can fail, due to the inability of the parties involved to service the agreement. The lack of institutional and technical endowments and the phenomenon of inflationary or deflationary expectations are factors that explain why some international business agreements never reach fruition.
156 Srinivas, “Will Enron’s New India Strategy Work?”. 157Parikh, 209.
53 D. ASYMMETERICAL POWER RELATIONS
When tracking the shift in power relations between multinational corporations and host governments in developing countries, Raymond Vernon argues that over time host governments have increased their efforts to gain control over raw material projects to reduce their passive dependence on these foreign invested projects.159 According to Vernon, governments have achieved this goal by increasing their voice in the management decisions of foreign companies and by monitoring prices set by foreign companies. Vernon remarks that “pressures from host governments to share somehow in the downstream profits related to processing, distribution, and marketing are bound to grow”.160 The tension that exists between the foreign multinational and the developing country host government is still palpable and has much to do with overcoming a historically perceived imbalance in power relations.
Terms of the agreement
The PPA was fraught with inequities and a supply-side bias that compelled the government in power to renegotiate the agreement. The project operated on base load capacity, which did not take into account actual demand. While capacity charges had to be paid 86% of the time, the MSEB’s real load factor (ratio of average demand over the day to peak demand over the day) was only 60%. The tariff structure reflected the fixed costs associated with the project
(e.g. operating and management costs, and capital recovery costs). Most variable costs were passed on to the MSEB making the project virtually risk free for Enron while the MSEB was required to bear the exchange rate risk to cover all the dollar payments for capacity payments at
158 Ibid., 210. 159 Raymond Vernon, Sovereignty At Bay: The Multinational Spread of US enterprises (New York: Basic Books, 1971), 54. 160 Ibid., 57
54 the prevailing exchange rate.161 Furthermore, the PPA exempted the DPC from sales tax and duty provisions on the electricity generated and sold162 and from tax provisions on the interest payable on off-shore debt.163 The GOM in 1993 raised the additional concern that its projected capital cost comparisons were much lower than Enron’s estimates.164 On the issue of the capital cost structure, Kirit Parikh makes the fascinating observation that the nature of the fallout originated from the time that the PPA was first hashed out. The opening bid was structured around the
Chandrapur power plant, which what was thought to be a comparable project. While at face value, the two projects were projected to be equal in cost, Parikh points out that, in fact, the
Chandrapur plant was a coal-generated plant. This detail proved to be problematic as gas or oil- based plants are usually twenty per cent cheaper than coal-based plants and therefore, according to Parikh, the estimated cost of $1300/kW for the Dabhol plant was inappropriately inflated,
`providing a cushion to insure the promoters against uncertainties’.165
Adarsh Kishore, Additional Secretary, Department of Economic Affairs declared “when we read the fine prints of the Power Purchase Agreement, we realize that perhaps the mistake was on our side as to why did we agree to such exorbitant tariff rates”.166 Kirit Parikh’s own analysis is consistent with this observation as he argues that the GOM and GOI gave “unintended signals” to foreign investors that `it was willing to be taken for a ride’. According to Parikh, the
GOI was so eager to appear open to foreign investment that it overlooked the fact that it could not find a cheaper bid simply because all other investors were benchmarking their bids on the
161Naryanan, 56 and Harvard Business School, Case A, 12. 162 Section 3 of the Bombay Electricity Duty Act of 1958. See Mehta, 101. 163 Section 10(15) of the Income Tax Act. See Mehta, 101. 164 Harvard Business School, Case A, 10. 165 Parikh, 213. 166 “Agreeing to Enron’s tariff was a mistake: Govt”, The Times of India, January 25, 2002 (accessed January 26, 2002); available from www.timesofindia.com.
55 Enron deal.167 Parikh studies how the renegotiation committee tried to rectify this by “setting up an international benchmark” by comparing the DPC project to an Enron plant in Teesside in the
UK.168 DPC was not amenable to such comparisons because it argued that there were differences in site condition, country risks, financing costs, time of construction and inflation while the renegotiation committee argued that it could adjust for these differences.169
During the renegotiation process several attempts were made to resolve the power asymmetry embedded in the original PPA. Salacuse points out that an integrative bargaining framework was applied to the renegotiated settlement. Not only did the amended agreement reduce the power tariff and capital costs of the project to meet the demands of the Indian negotiating team, but it also enlarged the project capacity, a term favorable to Enron. According to Salacuse, “a significant portion of the capital cost reduction (was a) result of favorable market developments with respect to generating equipment, not a transfer of value from Enron to the state of Maharashtra”.170 Furthermore, an allocation of thirty per cent equity to the MSEB was a positive measure to rectify the asymmetrical power dynamics imbedded in the original agreement.
E. TRUST AS A STABILIZING FORCE IN NEGOTIATIONS
When characterizing the multinational corporation, Raymond Vernon, in Sovereignty at
Bay writes: “they sprawl across national boundaries, linking the assets and activities of different national jurisdictions with an intimacy that seem to threaten the concept of the nation as an integral unit”.171 When making reference to the fact that sixty to seventy per cent of Venezuela’s
167 Parikh, 211. 168 Ibid., 221. 169 Ibid., 221-2. 170 Salacuse, “Renegotiating International Project Agreements”, 1356. 171 Vernon, 5.
56 revenues in 1964 derived from taxes paid through foreign petroleum and iron-ore operations,
Vernon argues that “(g)overnments feel constantly threatened by the fact that the flow of money seems to depend on the sustained willingness of foreign investors to continue their operation.
The size of this putative threat ought not to be overstated”.172 Raymond Vernon notes that the unease of host governments regarding the multinational enterprise “comes close to being pathological when the suspicion exists that the multinational group is acting in partnership with some foreign sovereign. In the less developed word, for instance, there are lawyers that fear that the subsidiaries of US parents…may be able to sue the US foreign aid program to influence the outcome of the dispute”.173 The apprehensive and at times belligerent attitudes of the host government directed towards Enron confirm Vernon’s theory. Indeed, Bal Thackeray, head of the regional SS party in Maharashtra cautioned foreign investors,” don’t come to kill our products, but if you have anything new, then we welcome it”.174 Returning to Salacuse’s point about the importance of cultivating a business relationship, it is evident that a solid business relationship would have mitigated some of these historical misgivings and underlying emotions of distrust that characterize many multinational agreements in developing countries and specifically the nationalist policies of the “saffron regime” in India.
In the Dabhol case, a positive measure employed to build trust was dividing the project into two phases so that the GOM would be able to test Enron’s ability to service the agreement.
In turn, the two-phase agreement, according to Rebecca Mark, would allow Enron “to get us started, test India’s credit, and convince suppliers of the project”.175 Enron, however, generated distrust in their negotiating counterparts, who publicly characterized Enron’s proposal as
172 Vernon, 52-3 173 Kapoor on Vernon, 286. 174 Harvard Business School, Case B, 1. 175 Harvard Business School, Case A, 9.
57 “greedy”, by touting the line that excess costs could be explained by its construction of a port facility, which in reality only represented a fraction of the real costs projected by Enron.176
Furthermore, Enron, in its initial proposal, had agreed to construct schools, hospitals, community centers, a polytechnic college, and roads for the benefit of the locals in Ratnagiri district. Asoke
Basak, chairman of the MSEB, later claimed that Enron had not set up the social infrastructure that it had promised.177 Also, Enron’s earlier promise of employing two hundred local people was not fulfilled. Instead, Enron hired only one hundred local people due to the problem of a lack of skilled labor in the area.178 Preparatory research on the technical expertise and educational levels of the workers in the area would have prevented Enron from making a promise that it would later not be able to uphold thereby avoiding greater mistrust of its activities. Similarly, MSEB’s act of reneging on its contractual obligations generated mistrust within the DPC team during the renegotiation period. Kenneth Lay in a letter to Vajpayee wrote
“our experience would indicate that contracts with governmental authorities in India really do not seem to represent anything more than a starting point for renegotiations, and are broken by
Indian governmental authorities whenever and as often they prove inconvenient or burdensome”.179
F. INCORPORATING STAKEHOLDERS
Ashok Kapoor in International Business Negotiations: A Study in India , states that “the negotiation process is influenced by a range of divergent interest groups who express their views in a variety of ways. An understanding of the nature, composition, and orientation of such groups
176 Parikh, 228. 177 “Enron’s Dabhol Power Plant to light up Maharastra by March end”, February 10, 1999 (accessed December 5, 2001); available from www.rediff.com/business/1999/feb/10enron.htm. 178 “Enron’s Dabhol Power Plant to light up Maharastra by March end”. 179 “Enron criticizes India’s efforts in Dabhol dispute”, Financial Times, September 20, 2001 (accessed December 5, 2001); available from http://global archive.ft.com/globalarchive/articles.html
58 is essential for an understanding of a decision unit’s approach to negotiations”.180 Kapoor defines
India’s interest groups as the World Bank and other multilateral agencies in addition to internal interest groups such as Indian political parties, Parliament, the press, and business groups.181 Any renegotiated deal must be sold by each party to its constituents and must be perceived as fair while recognizing as Sampathkumar states, “the harsh commercial realities that characterize the present situation”.182 If one adopts Kapoor’s definition of interest groups, then it is clear that
Enron and its partners and the GOM, in a series of strategic miscalculations, failed to understand the nature and the composition of interests of several of their important stakeholders. If any one measure is demonstrative of this fact it is the fact that approximately twenty-four lawsuits were filed in the Indian courts by public interest groups opposing the project.183
Local Community In India, there is a historical distrust of efforts to privatize and attract foreign investment in the energy sector, as ascertained by public demonstrations of protest. For example, attempts to raise the electricity rates in the state of Haryana led to riots and several deaths.184 Abhay Mehta provides a host of examples of concerns raised by local residents in the Dabhol district. One illustration is a memorandum signed by V.S. Vaidya and sixty-four other residents in the village of Anjanvel, which notes “we fear that after this project is established, the air in our village will be polluted and our life would be ruined. We feel that the project will affect horticulture and ruin our main source of livelihood”.185 In addition to several memorandums and public petitions, the
Maharashtra government was flooded with complaints vocalized at public hearings held at
180 Kapoor, 291. 181 Ibid., 289. 182 D. Sampathkumar, “India: It is deal-making time in Dabhol”, Business Line, November 18, 2001. 183 Salacuse, “Renegotiating International Project Agreements”, 1354. 184 Ibid., 1345. 185 Mehta, 93.
59 Sachivalaya in Bombay on November 8 and 9, 1994.186 At the time that the GOM established the
Godbole Committee to renegotiate the PPA with the DPC, trade unions organized a “bandh”
(strike) in Maharashtra protesting the overall economic policies of the government in power.187
When characterizing India’s fragmented society and competing public interests, Supriya
Roychoudhury remarks that “within India’s noisy political democracy, featuring powerful trade unions, competing sections of capital, a wide array of leftists, feminists and environmentalists, liberalization became a matter of public debate and an object of varying, competing interpretations”.188
Enron developed a confusing and inconsistent approach to communicating with these competing interest groups. For example, in a January 2001 interview, when asked whether DPC was in a “mood for international arbitration” and whether DPC was willing to enter into another round of talks with the state government, Neil McGregor, President of DPC, responded with the statement “although we are comfortable with the contractual safeguards in our existing PPA, we also want to maintain positive relationships with the Government of Maharashtra and the
Government of India. Consequently, we are not always willing to discuss issues with our various stakeholders” (emphasis added).189 In the same interview, however, McGregor flagged the participation and inclusion of stakeholders in the negotiation process as a necessary feature of a winning strategy. McGregor offered his reasoning of why there was an impasse and eventual default on the part of the MSEB. He revealed that, “MSEB’s financial predicament is fundamentally attributable to a multitude of factors relating to transmission, distribution, arrears,
186 Mehta, 90. 187 “MSEB, State Gov’t officials in London to `soften’ Enron stand”, The Pioneer, April 26, 2001 (accessed December 5, 2001), available from www.dailypioneer.com. 188Roychowdhury, 17. 189 Siva Y. Sankar “`The Dabhol tariff is not the highest in the country”, January, 15, 2001, (accessed December 5, 2001); available from www.rediff.com/money/2001/jan/15inter.htm.
60 etc. We believe a lasting solution to MSEB’s financial predicament is required and needs to involve all stakeholders concerned such as state and central governments, political parties, labor unions, NGOs and others”.190
Immediately after the MoU was signed and after public protest of Enron’s presence in
Dabhol had captured media attention and the government’s attention, Enron took several positive steps to address local concerns. For example, to address concerns about water shortage, Enron agreed to provide clear drinking water through a newly constructed pipeline to all the villages of the vicinity.191 It further promised to open schools, an industrial training institute and a hospital in that area.192 The DPC also toyed with the idea of producing fruits and flowers in this resource- rich area for exports as part of its “good neighbor” policy and in an attempt to upgrade the region’s development as a tool to change people’s perceptions of the company.193
For every positive step taken, however, Enron made serious blunders that adversely affected its relations with the local community. For example, Enron executives decided that money should be invested in activities dedicated to “educating Indians” on the merits of the project. The Rs. 4 crore “education campaign” was widely criticized by the Indian press as an arrogant effort to bypass legitimate concerns raised and arm-twist local residents into complicity.194 Furthermore, the multinational became quickly associated with police brutality exercised during protests in the Ratnagiri district. In response to allegations of bribery, corruption and the suppression of civil rights, Enron declared in a letter issued November 17,
190 Sankar, “`The Dabhol tariff is not the highest in the country”. 191 Narayanan, 63. 192 Narayanan, 63. 193Sankar, “Dabhol Power Co to export fruits, flowers”. 194 Binoy Sharma. “Centre to send sole representative”, The Pioneer, April 25, 2001, (accessed December 5, 2001); available from www.dailypioneer.com.
61 1997, “(b)y law, we are required to offset the cost of police officers placed near our site if police officials deem it necessary to preserve law and order when protests occur”.195
The World Bank
Successful negotiators, representing parties to an agreement, are not only able to recognize who their local stakeholders are but they are also well-adept at knowing when and how to act responsive to their needs in a timely manner so as to produce an agreement that is perceived to be fair and that has little probability of being contested in the future. When signals of disapproval emanated from the domestic and multilateral lending communities, such as the disapproval expressed by the World Bank, there was plenty of time for Enron to act and assess the benefits of incorporating the recommendations made. Instead Enron quickly dismissed the merits of the World Bank report as revealed in a letter written by Joseph Sutton to the Chairman of the MSEB on June 28, 1993. Sutton writes, “I feel that the World Bank opinion can be changed. We will engage a PR firm during the next trip and hopefully manage the media from here on”.196
The Bureaucracy
Throughout the negotiation process, the Government of India’s policy in informing and involving the relevant agencies of its bureaucracy lacked coordination and coherency. For example, the GOI had decided to send only one representative to the high-level Godbole renegotiating committee that was mandated to rework the PPA with the DPC. This one representative was unrealistically expected to represent the divergent interests of the Ministries
195“Enron in India: The Dabhol disaster”, Corpwatch, July 20, 2000, (accessed January 21, 2002); available from www.corpwatch.org/issues/politics/featured/2000/enronindia.html 196Mehta, 47
62 of Banking, Law, Finance, Petroleum and Power.197 Sources reported that even the Power
Ministry had been kept in the dark on who would be this “sole conscience keeper” of the government.198
Indian Financial Institutions
The most interesting transformation of roles of any of the stakeholders in the negotiation process is that of the Indian lending institutions. Through their several incarnations as financiers, mediators and finally third party auctioneers, they significantly impacted the course of negotiations between the DPC and the Government of Maharashtra.
Approximately seventy per cent of DPC was funded by debt with Indian financial institutions paying 1.4 billion dollars and foreign lenders the remaining balance.199 Concerns raised by an advisory committee, which was compromised of experts from the Industrial
Development Bank of India (IDBI), were nevertheless ignored by the GOI after the committee protested concessions given to foreign investors. Yamini Narayanan offers the explanation that the concerns and recommendations of the committee were probably ignored due to pressure from high-ranking government officials in New Delhi and Bombay. 200Concerned about protecting its financial investments in the project, the major lending institutions in India submitted a plea requesting the MSEB to start buying power and for the power plant to resume operations, ensuring all the while that they did not press for relief against the MSEB.201 The Indian financial institutions once again actively intervened when, at the climax of heightened hostilities between
DPC and the MSEB, the DPC filed its first termination notice. Later on, the consortium of Indian
197 Sharma, “Centre to send sole representative”. 198Ibid. 199 “TATA in talks to buy Enron power plant”, The Financial Times (London), October 15, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe. 200 Narayanan, 47.
63 lenders comprising of the IDBI, ICICI, and SBI, filed a motion in the Bombay High Court to prevent Enron from pulling out. This action had the effect of stalling the transfer of Dabhol’s assets.
In April 30, 2001, the fate of DPC’s project hung in greater limbo when the Indian financial institutions decided to stop funding the debt portion of the project, with approximately seventy per cent of the $1.8 billion total disbursement already absorbed in the project. “Naturally we have stopped disbursement as we think that it is indeed a loss-making proposition, as of now.
If MSEB begins paying, we would go ahead with our funding as well” an IDBI official said.202
This action further aggravated relations between DPC and its Indian partners, as DPC responded to this decision by canceling a meeting with the Indian lenders scheduled for later that week.203
In an interesting turn of events, the Indian lending institutions became important secondary players in the negotiation process when they effectively mediated the Singapore meetings. When negotiations failed, it is the lending institutions, which were concerned about protecting their investments, that stepped in to mediate the sale of the Dabhol assets and to act as a “match maker” between potential investors, such as Tata Power, and the DPC.
The Non-Resident Indian Community While not one of the obvious or foremost stakeholder groups in the Dabhol affair, the
Non-Resident Indian (NRI) community has played a significant role in publicizing the downfalls of the Dabhol agreement to local communities in India, as well as internationally.204 On February
201 “HC restrains DPC from issuing final termination notice”, The Times of India, Nov. 11, 2001 (accessed December 5, 2001); available from http://globalarchive.ft.com/articles.html 202 “Enron may switch off Dabhol project” in The Pioneer, April 30, 2001 (accessed December 5, 2001), available from www.dailypionner.com. 203 Enron India Unit’s lenders issue court challenge to prevent project pullout”, AFX EUROPE, November 8, 2001 (accessed December 5, 2001); available from http://globalarchive.ft.com 204The website maintained by this group is an excellent source of primary materials relating to the Dabhol project. See http://altindia.net/enron.
64 10, 2001, a group of activists from the NRI community placed a notice in Bombay’s Mid-Day newspaper on the Dabhol controversy. The advertisement read:
If you are asking why it should concern you, just remember that without the share of central revenues, Maharashtra will not have any funds left to carry out any development programmes in the state….Act now and find out why we have signed off all our assets.205
Om Damani, an NRI, publicly justified the advertisement by declaring, “we feel outraged at the
Enron deal. We felt that an advertisement was needed because the press has not sufficiently highlighted the scale of the contractual obligations”.206 The NRIs, belonging to this group, expressed their belief that the Dabhol deal should have been scrapped early on. Their arguments were in conformity with the GOM claim raised in an affidavit filed in the Bombay High Court that the PPA was “null and void ab-initio, inter-alia, on account of its being violative of several statutory provisions, public policy, consumer interest, public interest and interest of the state”.207
The members of this group further argued that the PPA suffered “from the vice of misrepresentation” by Enron and was “conceived in fraud”.208
When Stakeholder Interests Hold the Negotiation Process Hostage
The omission of stakeholders in a genuine consultative process generated fierce and extreme political opposition to the project, which later narrowed the range of choices that the
Indian negotiators could leverage. At one point in time, it became political suicide to befriend
Enron and its partners, which explains the basis of the immoderate and now infamous promises
205 “India has staked all its assets as surety to Enron”, February 15, 2001 (accessed December 5, 2001); available from www.rediff.com/money/2001/feb/15enron.htm 206 Ibid. 207 Ibid. 208 Ibid.
65 by the BJP-led government in Maharashtra to throw “the project in the Arabian Sea”.209 In some places, MSEB officials were threatened, and even harmed by irate consumers.210
In the world’s largest democratic polity, party politics and the public, drive economic and social choices in India. Anupama Dokeniya explains that “on the one hand, the responsiveness of political actors to electoral and populist concerns has dictated the choice of liberalization rather than privatization as the preferred policy instrument for attracting private investment….”.211 An example of this is the movement that developed within a consortium of nine leftist and secular parties in Maharashtra.212 This alliance, which vocalized its concerns under the banner of the
“Anti-Liberalisation Action Committee” and which supported the Democratic Front party in
Maharashtra, pressured Chief Minister Deshmukh to order the establishment of a Commission of
Inquiry under a sitting retired High Court judge. The Committee would be commissioned to probe the excesses in granting waivers and clearances to the DPC by the previous Congress and
Saffron alliance governments. These nine parties also argued for the immediate termination of the PPA.
Raymond Vernon notes a universal trend in developing countries whereby demands on local bureaucrats have tended to increase while the protection afforded to the foreign investor has tended to decline.213 Maharashtra Chief Minister Deshmukh, in particular, has had difficulties consolidating power in the wake of the Enron crisis. The concessions he could grant to the DPC team during the renegotiation of the PPA was constrained by his fixation on warding off within his own party a group of detractors, led by the ambitious Maharashtra Pradesh Congress
209 Mehta, 137. 210 Sankar, “Maharashtra move may help solve Enron tangle”. 211 Dokeniya, 254-5. 212 These parties include: Peasants’ and Workers’ Party, CPM, CPI, Janata Dal, Samajwadi Party, Republican Party of India, Kamghar Agadhi, Samajwadi Jan Parishad and Lal Nishan Party. 213 Vernon, 197.
66 Committee (MPCC) President, Govindrao Adik. Deshmukh once remarked “you’ll realize that running a coalition government is not an easy task. Another factor has to be kept in mind, that ours is a post-poll alliance and not a pre-poll pact. This puts me under additional pressure while dealing with crucial issues like Enron.”.214 The relegation of the Government of Maharashtra to the extreme of the negotiating spectrum was in part due to party politics. More importantly, the extreme position established can also be explained by the fact that no consultative mainframe was developed to genuinely incorporate the interests and recommendations of key stakeholders in the agreement. The constituents who were plagued by their own frustrations of being neither informed nor consulted on a consistent and coherent basis helped drive the negotiators to a deadlocked stance of moral-based positioning.
G. MORAL BASED POSITIONING VS. INTEREST-BASED POSITIONING
Roger Fisher and William Ury in Getting to Yes explain the importance of focusing on interests versus positions in the exercise of negotiations.215 When the negotiating parties focus on interests versus positions, there is greater opportunity to identify and invent mutual gains. In the
Dabhol case, the factors the led to moral-based positioning versus interest-based negotiating were the role of stakeholders in holding the negotiations hostage through a set of extreme demands, as described above, the surmounting hostilities which led to `blaming the other party’, the inherent inflexibility of the agreement, the personality of the players, and the actions of the
US government.
The GOM’s Changing Interests
214 Raghunatha, TN. “Empowered to overpower problems”. 215 Fisher and Ury, 40.
67 At the time the PPA was being negotiated, India was trying to carefully build alliances abroad for foreign investment in other sectors, such as the telecommunications sector.216 The
GOM was not considering the pure economics of the deal, as measured by their acceptance of an absorbent high tariff rate. Instead, the GOM and the GOI to a larger extent were motivated by larger ambitions to demonstrate to the rest of the world that India was a hotspot for investment.217 The succession of state power from the Congress party to the Hindu-nationalist party, the BJP, quickly transformed the state’s official policy towards foreign investment and the
Dabhol project. The issue at hand no longer concerned the economic viability and commercial merits of the project; rather, the issues at stake concerned safeguarding Maharashtra’s cultural and economic interests against the threat of foreign capital. With respect to negotiating the PPA, the main interest of the GOM was to bring down the tariff structure in addition to the high preliminary and pre-operation expenses, and to renegotiate the high foreign exchange outgo. The tariff issue was perhaps the greatest issue of concern to the GOM. At one point, the MSEB argued that Enron’s tariff was three or four times higher than that levied by other power producers in India.218
Enron’s Interests As mentioned earlier, Enron’s interests at the time of negotiation was to capture a large market that could consume excess supply generated at plants like the Qatar facility. When one delves deeper into an analysis of the interests on the table at the time of negotiation and renegotiation of the PPA, one discovers a `frontier culture’ that largely informed Enron’s overall business strategy and interests at stake. As one analyst reports, “Enron inspired enthusiasm in
216 McLarney and Dastrala, 361. 217 Parikh, 214. 218 Khozem Merchant, “Enron Dispute heading for Court”, Financial Times, April 9, 2001 (accessed December 5, 2001); available from http://globalarchive.ft.com
68 investors and analysts”.219 The multinational possessed strong core businesses. It was the number one marketer of natural gas and power in North America and delivered commodities and financial and risk management services worldwide. Enron was the `frontiersman’ of the industry, taking risks with aggressive expansion into new sectors and emerging markets. For instance, in late 1999, the company re-invented itself as a dot.com with the launch of EnronOnline, the world’s biggest web based transaction system, trading everything from weather derivates to coal.
As CEO Kenneth Lay once reported,” we’re an energy and broadband company that also does a lot of other stuff”.220 As they continued their strategy in what one reporter cites as “conquering so many new and unsupervised areas”.221, they continued to promise their shareholders more and more. It is evident that from a strategic perspective, one of Enron’s motivations to pursue the
Dabhol deal was to confirm its reputation as a first-mover in un-chartered territory.
In Richard II, William Shakespeare writes, “(t)he purest treasure mortal times afford is spotless reputation”.222 William Shakespeare and negotiation strategist Jeffrey Rubin have much in common when discussing the importance of reputation as a strategic factor influencing behaviors that govern relationships. Jeffrey Rubin argues that `negotiation is not a one-time-only exchange’ and that “rarely does one negotiate in the absence of future consequences…our reputations have a way of surviving the exchange, coloring the expectations that others will have of us in the future”.223 Both sides in the Dabhol debacle were aware that the world was watching the events unfolding and both sides were soliciting other investment projects and contracts with
219 Sheila McNulty, “Inside Track: A victim of its opacity: ENRON”, Financial Times, November 12, 2001, available from http://globalarchive.ft.com. 220 Ibid. 221 Ibid. 222 William Shakespeare, Richard II (Washington: Washington Square Press, 1996), Act I, Scene i 223 Rubin, “Some Wise and Mistaken Assumptions about Conflict and Negotiation”, 7.
69 their international partners.224 The positions they developed, therefore, were very much informed by their concern for their international reputation. It remains to be determined how successful each side was in advancing their international reputation. For instance, Enron Corporation was included on Multinational Monitor’s “10 Worst Corporations of 1995 list” for its role in the
Dabhol Project.225
Surmounting hostilities - Blaming the “other” Leads to Moral Positioning The events leading up to the renegotiated settlement and the final exit of Enron are tarnished with several acts of “blaming the other” which in effect led to moral-based positioning versus interests-based negotiations. These events ranged from very sublime and subtle comments to harsh retaliatory measures.
The Bharatiya Janata Party and the Shiv Sena colored the Dabhol project as a symbol of cultural and economic imperialism and came to power in the 1995 elections on a platform of economic and cultural nationalism in the state of Maharashtra.226 In his speech to the State
Assembly announcing the cancellation of the project, Chief Minister Joshi stated
From the speed with which the memorandum of understanding was signed it seemed as if Enron came, it saw, and it conquered….Enron has hypnotised in such a way that the state government has not seen the shortcomings of this agreement….This contract is anti-Maharashtra. It smacks of lack of self-respect and is irrational. Accepting it in present form is like betraying the people of Maharashtra. This agreement is no agreement at all. Therefore, refusing the agreement even with economic burden is acceptable as it is important to maintain the self-respect and interests of Maharashtra. Also, it is important to expose the people who have entered into such agreement….” 227.
This exaggeration of the costs of the deal is an example of what Twight explains as
`manipulated political transaction costs’. Twight specifically states “politically-relevant transaction costs are also in substantial part endogenously determined through self-interested use
224 At the time, Enron was bidding for a contract in Indonesia and the Indian government had commenced the bidding process for projects in its telecommunications sector. 225McLarney and Dastrala, 361. 226 Salacuse, “Renegotiating International Project Agreements”, 1351.
70 of the mechanisms of government. Accordingly, political transaction costs sometimes are increased intentionally. Political actors manipulate them strategically to achieve personal political objectives…. Since information costs and organization costs shape the viability of their political opposition, political actors often have incentives to try to increase key transaction costs facing their adversaries, even if the collective outcome is thereby worsened”.228 As expected, the drawbacks of exaggerated political transaction costs are innumerable. For instance, at the time that the Munde committee convened the political environment was such that it was politically necessary to distance oneself from the Enron fiasco. Supporters of the project were now disclaiming their involvement, such as Sharad Pawar, the Chief Minister of Maharashtra under the Congress administration. 229 This environment prejudicially set the parameters for the mandate of the Committee and the scope of what the Committee could ultimately recommend.
The positional-based approach versus the interest-based approach lends itself to the `hard stick’ versus `soft carrots’ stance in negotiations. Jeffery Rubin’s critique of the `hard stick’ approach is that “it is far easier to move from cooperation to competition than the other way around” and that the relationship is jeopardized in the long-term.230 An example of this is how the hardliner stance adopted by the GOM on the issue of renegotiating the IRR of the deal nearly drove Enron away from the negotiating table altogether. The Indian Finance secretary had emphasized the centrality of this issue to the approval of the project. Rebecca Mark was exasperated by the GOI’s hardliner stance on this issue and made repeated claims that Enron would leave the negotiating table.231 At one point Mark, referring to the 20 % IRR calculated by
Ranjit Mathrani, the MSEB’s financial advisor from Chartered West, London, retorted “Ranjit’s
227 Translation of the Chief Minister’s Speech to the Maharashtra State Assembly”. 228 Dokeniya, 60. 229 Harvard Business School, Case B, 4. 230 Rubin, “Some Wise and Mistaken Assumptions about Conflict and Negotiation”, 10-11.
71 numbers are totally off…the worldwide expectation is 30%, plus, particularly in India…you are taking away any incentive to do business here. It’s entirely too difficult and just too aggravating.
We might as well pack and go home. We don’t have any more room to give. We can only bring you a deal. We can’t get it done for you. Construction costs always go up. Our return of 26.5% is far from guaranteed. We eat the excess costs of any kind”.232
As misunderstanding and distrust escalated on both sides, each side participated in what
Roger Fisher and William Ury coin as “lock-in tactics”, making it impossible for either side to yield to a common denomination of interests and thereby weakening each party’s control of the situation.233 The post-re-negotiation phase experienced a sharp transition from a willingness to service the re-negotiated deal to one of hostile positioning, based on a game of retaliation. As mentioned earlier, the MSEB attempted to restrain the DPC from encashing a Letter of Credit from Canara Bank by obtaining an injunction from the Bombay High Court. Similarly, in anticipation of the GOM’s move to file a civil suit against the DPC for “misrepresentation”, the
DPC obtained an injunction to restrain the GOM from filing suits in India to challenge international arbitration proceedings on the basis that the GOM had no jurisdiction to interfere in the judicial proceedings taking place in the court of another sovereign.234 Furthermore, the
MSEB attempted to hijack the final termination process by arguing that any decision to issue a final termination notice must be done through a unanimous decision by the DPC board, of which it is a member, and not through the DPC’s Managing Director.235 In addition to directly challenging Enron’s notices of termination, the Government of India chose to adopt defensive
231 Harvard Business School, Case A, 10 232 Harvard Business School , Case A, 10. 233 Fisher and Ury, 140. 234 “Bid to gather political support – Centre initiative on Dabhol crisis”, Business Line, October 14, 2001 (accessed December 5, 2001); available from www.hinduonnet.com/bline/2001/10/14/stores/1414565db.htm) 235 “`FIs completely ignored us in DPC’s proposed sale’ says MSEB”, The Press Trust of India, November 23, 2001, (accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
72 measures in subversive ways. In August, 2001, the Customs Department accused the DPC of
“large-scale duty evasion, misdeclaration of value and suppression of vital facts from the
Government” and imposed a sixty five per cent duty instead of the twenty per cent previously afforded to DPC.236 The Government of Maharashtra also decided to initiate penal action against it for falsification of statements. Enron responded to the government’s claim by stating that the
MSEB “is raising frivolous claims in an attempt to avoid payments”.237 Tensions further mounted when in November 2001, the MSEB chose to abstain from future board meetings of the
DPC. MSEB’s reasoning for not attending the meetings was that the “DPC has consistently ignored our rebate claim for their material misrepresentation in the operating capabilities of the plant. Since there is nothing that we can discuss we see no point in attending such meetings”.238
In short, the relationship between the DPC and the GOM and the GOI quickly deteriorated as a result of a series of unproductive and retaliatory tactics.
When Inflexibility of the Agreement Contributes to Inflexible Positioning
Traditional business strategists often advocate for fixed, detailed and specific contracts in the absence of what Dokeniya describes as institutionalized or “informal norms or bodies of administrative law that restrain the arbitrary use of government power even in the absence of explicit legal restraints”.239 The disciples of this school of thought argue that fixed contracts are fundamental for contractual stability. On the other hand, strategists concerned with various phases of negotiation, including re-negotiation, place primacy on the flexible contract to account for the inevitability of changing circumstances. In his study of the nature and causes of intra-deal
236 “Customs Dept slaps DPC with Rs 283 cr fine”, The Pioneer, August 9, 2001; (accessed December 5, 2001); available from www.dailypioneer.com.com 237 Khozem Merchant, “Enron Dispute heading for Court”. 238 “MSEB not to attend DPC meeting”, The Economic Times, November 26, 2001 (accessed December 5, 2001); available from http://economictimes.com 239 Dokeniya, 51.
73 and extra-deal negotiations, Jeswald Salacuse states, “today, most contracts explicitly or implicitly deny the possibility of change and therefore make no provision whatsoever for adjustments to meet changing circumstances”.240 The PPA, while including a provision on dispute settlement, did not include opportunity for renegotiation. As Salacuse notes, “…another approach to contractual instability is to provide in the contract that at specified times or on the happening of specified events, the parties may renegotiate or at least review certain of the contract’s provisions. In this approach, the parties deal with the problem of renegotiation before, rather than after, they sign the contract”.241 The Godbole renegotiating committee criticized the agreement for being a fixed agreement with fixed terms. The Godbole committee further urged the signatory parties to proceed on broad guidelines to avoid the costs of another renegotiation.
The transition of leadership from the Congress-led party to the BJP-led coalition in
Maharashtra increased the political transaction costs of the deal for the Indian negotiating team.
The subsequent moral postulations and rhetoric espoused by the GOM reveal how changing circumstances can lead to inflexible positioning. On this point, Raymond Vernon writes
“(n)ational ideologies are ephemeral commodities; as governments come and go, one set of national tenets displaces another…. Accordingly, foreign investors must resign themselves to the fact that the national goals and preferences to which they were responsive at the time they entered any country are likely to undergo periodic metamorphoses”.242 While foreign investors should resign themselves to this fact, Salacuse suggests that incorporating flexibility in the deal may mitigate some of the risks associated with changed circumstances. Foreign investors may engineer a flexible arrangement, for example, by advocating feedback loops in the contract and
240Salacuse, Jeswald W. “Renegotiations in International Business” in Negotiation Theory and Practice, William J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts, 1999), 346. 241 Salacuse, “Renegotiating International Project Agreements”, 1362. 242 Vernon, 52.
74 opportunities for renegotiation in addition to negotiating a series of short-term contracts instead of one long-term contract.243
Personality of the Players
In their analysis of why negotiations fail or succeed, most negotiation strategists account for the unique personality traits of the negotiators. As Ashok Kapoor aptly states, “the negotiation process is strongly affected by the respective expectation frameworks of the participating groups which can be understood through insight into the organizational, environmental, and personality factors which influence the framework” (emphasis added).244 An analysis of the personality of the players involved reveal that the senior members of Enron’s negotiating team were aggressive in originally pushing the PPA forward and emphatic in their criticisms of their Indian counterparts with respect to upholding the terms of the contract.
Similarly, the high-profile players on the Indian side were militant in their disapproval of the originally signed agreement and employed flamboyant language to convey their disapproval. The personalities of the key players of both sides explain how the post-negotiation phase degenerated to inflexible moral positioning instead of interest-based negotiating.
One Indian press reporter described Rebecca Mark, President and CEO of Enron
Development Corporation (EDC), as single-handedly responsible for pushing through the Enron project by arguing that Enron was investing in India at a time when nobody was willing to look at investment in India. Mark was known for her abilities to build friendly relations with politicians and bureaucrats.245 A local Texas paper remarked that “when Rebecca Mark has a
243 Salacuse, “Renegotiating International Project Agreements”, 1362. 244 Kapoor, 271. 245 Srinivas, “Will Enron’s New India Strategy Work?”.
75 power meeting, she's discussing power”. 246 Mark fought hard to keep project alive during its review process by the GOM after the BJP-led government came to power, but when hostilities began to mount, it was Mark that swiftly initiated arbitration. When an interview asked Mark what her thoughts were on what went wrong in India, Mark responded, “I think most people thought [our project] was too grandiose. They said no, you can't do that for India. Another thing people thought we did wrong was not taking a local partner. But all the local partners with multinationals in power projects in India have gone nowhere. People also thought we didn't do it
''the Indian way,'' whatever that means….You have to be pushy and aggressive” (emphasis added). 247
Joseph Sutton, who headed EDC’s Asia Operations, resigned from his post on November 1,
2000. His pre-Enron career included military service. During his career at Enron, he was charged with developing Enron’s power plant at Dabhol and similar plants throughout Asia. During his career at the Enron Development Corporation, he adopted a kind of missionary zealousness about EDC’s operations. When commenting on the setbacks experienced at Dabhol, he remarked, “judging from our Philippines experience, the first project through certainly paves the way. The first one is like a `baptism’ for the country – after that you can use boilerplate documents; people are educated about the process…”.248 He further argued “if you can’t make
Enron, GE, Bechtel bring in foreign investment, can you be serious about economic reform?”.249
The vision of Enron’s CEO, Kenneth Lay, was that Enron would be the first energy company to supply energy to sectors worldwide that were transitioning to deregulation. He further envisioned a large role for Enron in a world where natural gas would be “the choice energy in the
246 Madeline Baro. “CEO Rebecca Mark heads Enron's ventures into foreign markets”, November 23, 1997 (accessed December 5, 2001); available from http://www.texnews.com/biz97/mark112397.html. 247 Kripalani, “Enron’s Rebecca Mark: `You have to be pushy and aggressive’”. 248 Harvard Business School, Case A, 2.
76 developing world because of its reasonable cost, its ability to power combined cycle plants, and its environmental safety compared to either coal or nuclear power”.250 Lay, with his important contacts in the White House, was keen on back channel diplomacy and used aggressive lobbying techniques to pressure the GOI to abandon litigation and to pressure the MSEB to make payments. In a major setback to the negotiation process, Lay made the controversial statement
“there are US laws that could prevent the US Government from providing any aid or assistance or other things to India if they expropriate property of US companies”.251 After being accused of issuing veiled threats to the Government of India, Lay responded that he had merely answered a question about what might motivate the Indian government to help break the deadlock.252 While
Lay did not explicitly ask the US government to consider imposing sanctions against India, the effect of his statement was to further alienate the Indian public, provide anti-American fodder for the Indian press and it affirmed the GOI’s suspicion of Enron’s intention to use its political and financial muscle to bulldoze reform through.253
When presiding as governor of Ohio, Richard Celeste adopted the belief that honoring foreign investment agreements was of the utmost importance. When his predecessor had negotiated a thirty million dollar incentive package to attract a multinational car manufacturer to build a plant in Ohio, Celeste made the politically unpopular decision to honor the agreement even though his state was saddled with a one-half billion dollar deficit.254 Informed by this experience, as US Ambassador to India, he was determined to protect US interests in the Dabhol
249 Ibid., 9. 250 Ibid., 2. 251 “Enron Chief `threatens’ sanctions’” , August 25, 2001 (accessed December 5, 2001); available from www.dailypioneer.com 252 Ibid. 253 “Enron Chief backs down”, August 27, 2001 (accessed December 5, 2001); available from www.dailypioneer.com 254 Siva Y. Sankar, “US Envoy warns against scrapping of Dabhol phase-II”, January 22, 2001 (accessed December 5, 2001); available from www.rediff.com/money/2001/jan/22siva.htm.
77 investment deal. In one interview, he declared, “when you consider the gap between letters of intent or MoUs, and actual investment, there seem to be as many disappointments as successes…
I would like to do what I can to ensure that Enron’s Dabhol power plant remains a symbol of successful American investment in India and not a symbol of the impediments that still hinder even greater foreign direct investment”.255 In the same interview, Celeste noted, “India needs
Dabhol power” and declared with confidence that the Dabhol Power Company was “a world class capacity represent(ing) an invaluable foundation stone of India’s 21st century infrastructure”.256 The Indian press reacted unfavorably to the crusade initiated by Celeste, Lay, and Sutton and interpreted their remarks to be one-sided and arrogant in nature. The controversial statements made by these individuals had the effect of pushing the Indian negotiating team further into a defensive mindset.
Gopinath Munde, who was the most vociferous campaigner against Enron became
Maharashtra’s deputy CM under the BJP-Shiv Sena coalition, after serving as leader of the BJP party in Maharashtra. It was Munde who made the infamous threat, to `throw the Dabhol project into the Arabian Sea, instead of negotiating tariffs’. The BJP-Shiv Sena’s choice of Munde to head the Sub-Committee to Review the Dabhol Power Project in May 1995, was contentious since Munde had been one of the most vocal components of the project under the leadership of
Chief Minister Sharad Pawar. While he was supposed to serve as an impartial investigator, in a taped speech, Munde is heard to have declared “I have come here to promise you that I am not going to remain in the background of this fight against Enron but would be fighting along with you till the time Enron is removed from this land”.257
255 Sankar, “US Envoy warns against scrapping of Dabhol phase-II”. 256 Ibid. 257 Mehta, 137.
78 All of the key negotiators were aggressive in defending their respective positions, as demonstrated by their efforts to either push the agreement through or stall the negotiation process. An understanding of the personality of the high-profile players in this case draws a more defined picture of why this particular deal suffered from position-based negotiating instead of interest-based negotiating.
The Hand of the White House
Keeping in mind the Indian government’s historical distrust of foreign involvement in the domestic affairs of the state, the involvement of the White House in the Dabhol debacle worked to the detriment of the negotiation and post-negotiation processes. The strategy employed by
Enron to pressure the Government of India through diplomatic channels made available by the
US government, further politicized the project and resulted in defensive argumentation and moral posturing by both parties.
With the election of the Bush administration, it appeared as if Enron would experience greater leverage in its negotiations with the Government of India. Indeed, Enron provided
$114,000 in political action committee money for Bush’s presidential campaign, making the company one of Bush’s biggest financial supporters. Enron began to reap the rewards of its financial contributions during the early years of Bush’s administration, beginning with the passage of the 1992 Energy Policy Act, which forced the established utility companies to carry
Enron's electricity sales on their wires.258 US Commerce Secretary Donald L. Evans publicly acknowledged that Lay had called him several times to get the US administration to intervene in the Dabhol matter. Lay’s appeals for assistance were not left unattended. When a review of the project was being deliberated by the BJP government in Maharashtra, the US Energy secretary
258 Robert Scheer, “Enron Is a Cancer on the Presidency”, LA Times, January 2, 2002.
79 warned the GOM that, “failure to honor the agreements between the project partners and the various Indian governments will jeopardize not only the Dabhol project but also most, if not all, of the other private power projects proposed for international financing”.259 Similarly, hours before the GOM was to meet on Jan. 23, 2001 to discuss the future of the DPC, Richard F.
Celeste again issued a stern warning that reneging on sovereign commitments would have an adverse impact on foreign investments in India.260 On July 30, a government memo, labeled as a
“Confidential Business Communication” was distributed to members of the Dabhol Working
Group. The memo disclosed that State Department Official Christina Rocca had met with a senior aide to Vajpayee. The memo also noted plans to “broaden the advocacy” related to the power plant and called for resolving the dispute “in a diplomatically correct manner”. 261 The memo suggested enlisting the aid of ambassador-designate Robert Blackwill, the World Bank, the US embassy in New Delhi and the State Department and the Indian embassy in
Washington.262 Peter Watson, the President of the Overseas Private Investment Corporation, the overseas investment agency of the US government, wrote a letter to top Vajpayee aide, Brajesh
Mishra, “I ask that you give this matter serious and immediate attention”.263 In addition Vice-
President Dick Cheney was reported to have met with the leader of the Congress Party, Sonia
Gandhi, in order to influence the opposition’s position on the project.264 Even the British
Chancellor of the Exchequer, Kenneth Clarke, expressed his solidarity with Enron. Ari Fleischer,
White House press secretary, reported “It’s not uncommon for leaders of the United States, no
259 Mehta, 145. 260 Sankar, “US Envoy warns against scrapping of Dabhol phase-II”. 261 Dana Milbank and Paul Blustein, “White House admits that it helped Enron lobby with PM and Sonia for Dabhol”, January 20, 2002 (accessed January 21, 2002); available from www.indian-express.com. 262 Ibid. 263 “US Gov’t, India’s Enron liaison”, January 21, 2002 (accessed January 21, 2002); available from www.dawn.com/2002/01/21/int13.htm 264 “The Enron Collapse and India”, January 23, 2002 (accessed January 23, 2002); available from www.samachar.com
80 matter what party they are, to help make certain that if contracts are to be awarded overseas, they’re given to Americans. There’s a lot of competition”.265 The White House further maintained that it was appropriate for the US government to intervene to protect the interests of
American taxpayers.266 While Fleischer’s justifications may have made sense from a business and political standpoint, Yamini Narayanan points out that from the perspective of negotiation strategy, “all this only worsened the situation with the (Indian) politicians vowing not to succumb to foreign pressure”.267 This conclusion certainly holds true for Union Home Minister
L.K. Advani, who warned “we will not be dictated (to) by giant powers or power giants”. 268
Indeed, the `hand of the White House’ ended up further driving the Indian re-negotiating team into a dead-locked stance conditioned by moral defensiveness. This moral defensiveness can also be explained by cultural factors.
H. NEGOTIATING WITH CULTURAL BLINDERS
Raymond Vernon notes that “..the existing level of tension generated by US-controlled subsidiaries in host countries cannot be explained merely in terms of conflicts of economic interest. Cases of such conflict exist; but they are too tangled and the results too obscure to explain the universality and depth of the reaction. In search for prime causes, one is pushed off economics to the political, social, and cultural variables. Variables of this sort, of-course, are difficult to distinguish and difficult to measure”(emphasis added).269 When one disentangles these variables, however, one finds that cultural and ideological tensions constitute two important determinants of why the Dabhol deal ultimately collapsed.
265 “US Gov’t, India’s Enron liaison”. 266 Ibid. 267 Narayanan, 65. 268 Harvard Business School, Case B, 2. 269 Ve rnon, 230.
81 Theory Any assessment of the other party’s BATNA or BATrNA is complicated by what
Schelling describes as the self-reference criterion. Specifically, negotiators unconsciously reference their own cultural habits and norms even when attempting to gauge or anticipate the actions, interests and positions of their negotiating counterpart. Schelling argues, “the larger the discrepancy in habits, culture, and business conduct between a foreign country and the United
States, the stronger the subjective uncertainty”.270 Similarly, Robert Janosik argues that one’s thinking pattern derives from one’s cultural context and international business conflict can often be explained by the approach of “culture as dialectic”, as applied by Erik H. Erikson in
Childhood and Society. This approach attempts to define culture by the various competing tensions that exist amongst subset values or norms and when applied to the discipline of international business strategy, explains why international business conflict can exist.271
Cultural Limitations in the Indian Team’s Negotiating Strategy Indian society has suffered from a historical distrust of foreign multinationals. As
McLarney and Dastrala point out, “popular belief in India is that any dealings with foreigners are bound to be either unfair or disadvantageous to India”.272 Indeed, the Indian public had relatively little experience with large foreign multinationals, as the characterizing feature of India’s private sector pre-liberalization was the domination of family management and family ownership, as in the case of the Birla, the Ambani and the Tata families. Public distrust of foreign companies can also be explained by the fact that India assumed a protectionist ideology post-Independence like many post-colonial regimes, in an effort to direct its economy towards self-reliance. The cadre of
270 Kapoor on Shcelling, International Business Negotiations: A study in India, 263. 271 Robert J. Janosik. “Rethinking the Culture-Negotiation Link”, in Negotiation Theory and Practice, eds. William J. Breslin and Jeffrey Z. Rubin (Cambridge, Massachusetts: The Program on Negotiation at Harvard Law School, 1999), 239. 272 McLarney and Dastrala. 360.
82 technocrats and professional civil servants educated during this period shared a ‘statist’ view that the state would regulate economic and social activity in India. The evolution of this socialist ideology has had a profound impact on India’s program of liberalization in the 1990s. The enthusiasm, expressed in the private sector and in some bureaucratic agencies, to foster export- oriented growth and cultivate large-scale private enterprise, has not been echoed by all government agencies or even society-at-large which remain firmly entrenched in their socialist values. This ideological tension has produced an incoherent program of change and consequently, economic liberalization has never really been understood or promoted as a national or public project. As Supriya Roychowdhury notes, “while the political impact of liberalization varied, both contraction of the state and greater reliance on private profitability were interpreted as pro-capital and anti-poor in the language of politics. Thus, for example, the democratic imperative and the socialist rhetoric of the Congress Party in India imposed very definite limits on how far privatization of state enterprises could proceed on the adoption of advanced technologies that threatened to displace labor”.273 Roychowdhury further states that,
“populist statism has remained the dominant political catchword” not the language of market economics despite a move towards liberalization. 274
Efforts have not been made by the political leadership in India to move towards constructing an alternative ideology that could function in India’s new economy. These cultural and ideological underpinnings in India explain popular backlash against the Dabhol project, why the Indian government could not sell the merits of the Dabhol project to the Indian public, and ultimately why Indian negotiators assumed a hardliner stance in their negotiations.
273 Roychowdhury, 2. 274 Roychowdhury, 111.
83 Cultural Limitations in Enron’s Negotiating Strategy
Theoretical frameworks that explain organizational culture are useful frameworks to integrate into negotiation analysis. In their paper, “Socio-political structures as determinants of global success”, Carolan McLarney and Ramakrishna Dastrala examine the strategic issues regarding cross-cultural management to understand their implications on business organizations.
With respect to the inflexibility of the large MNC, the authors cite Pfefer and Salanik who argue that “organizations that are large have more power and leverage over their environments. They are more able to resist immediate pressures for change, and moreover, have more time to recognize external threats and adapt to them. Growth enhances the organization’s survival value, then, by providing a cushion, or slack, against organizational failures”.275 McLarney and Dastrala concur with this analysis as they argue that, “..large multinational companies sometimes become complacent, and tend to overlook the critical cultural barriers in global strategy”.276 In the
Dabhol case, the authors argue that Enron gave primacy to the political and economic variables to direct its strategy in India, ignoring the core cultural values as part of its organizational strategy.277
While broad organizational culture lends insight into Enron’s strategy an examination of the cultural features specific to Enron need to be explored as well. As one reporter states, “Enron is a bull-market machine. Its investor relations and culture – even its business model – were ideally suited to the confidence and ready money that pervaded Wall Street in the 1990s.”278 One analyst at PriceWaterhouseCoopers described Enron as” aggressive in the way it did financing but it was very much in character because Enron was very aggressive in the way it did
275 McLarney and Dastrala, 357. 276 Ibid. 277 Ibid, 362. 278 McNulty. 2.
84 everything”.279 Enron’s own description of its objectives and mission confirms this characterization. “We are a very eclectic bunch with some ex-military people and some ex- entrepreneurs. We are brought together with a certain amount of missionary zeal which I think you have to have in this business”…I think for us that missionary zeal has three parts – first, that these projects are good for the country. Second, these plants are environmentally safe and without equal when you consider the options of coal or nuclear power. Third, we are bringing a market mentality and spreading the privatization gospel in countries that desperately need this kind of thinking. We are in the business of doing deals. This deal mentality is central to what we do. It’s never a question of finding deals, but of finding the kind of deals we like to do. We like to be pioneers”.280 An example of the over-exuberant and borderline aggressive tactics employed by Enron during its deal-making with the GOM is the report authored by its legal team, contemptuously titled ““Problems Concerning the Application of the Indian Electricity
Acts” (1992). This report was neither solicited nor well-received by a community that has had a historical distrust of foreign interference in domestic regulations. Enron’s Rs. 4 crore campaign, inappropriately coded as an “education campaign”, to win over local residents by preaching the merits of the project and by providing development incentives is a further illustration of the company’s missionary zealousness that did not harmonize well with the Indian cultural landscape.
I. ORGANIZATIONAL CONSTRAINTS AND INSTITUTIONAL MEMORY AS DEBILITATING FACTORS
Aharoni observes that the negotiation process is complicated by the fact that “it contains various elements of individual and organizational behavior, influenced by the past and the
279Ibid., 3. 280 Harvard Business School, Case A, 1.
85 perception of the future as well as the present. It is composed of a large number of decisions, made by different people at different points in time”.281 Organizational precedents and the predisposition of organizations to “accept precedents as binding and look at standard operating procedures (serve) as constraints in any problem-solving situation”.282
Organizational Precedents Enron relied greatly on its management success in other emerging markets as a predictor of how to guide negotiations with India. Enron’s success in China in operating a $135 million
150MW power plant on Hainan Island, an economic free trade zone of the southern coast of
China was an example of its success with “fast-track projects”.283 Similarly, Enron had successfully negotiated PPAs for several fast-track projects with the Government of the
Dominican Republic, Turkey and Indonesia. The commitment that Enron had to accelerating negotiations with the GOM was most likely influenced by its past successes in negotiating fast- track projects, as it paid minimal attention to studying the particularities of doing business in
India.
Institutional Memory As a Constraint in the Decision-making Process The legacy of those killed and injured in the Bhopal disaster of December 1984 that involved the US chemical company, Union Carbide, continues to be a source of anguish for
Union Carbide employees and the residents of Bhopal in Madhya Pradesh, India. This event had the lasting effects of increasing public concern nationally about issues concerning due diligence and increasing the number of public advocacy organizations throughout India. The memory that lingered from this widely publicized event institutionalized fears about the unrestrained
281 Kapoor on Aharoni, International Business Negotiations: A study in India, 261. 282 Kapoor on Cyert and March, International Business Negotiations, 267. 283 “Fast-track projects” are projects that generate less than 200 MW and can be completed within twelve to eighteen months. See Harvard Business School, Case A, 3.
86 sovereignty of MNCs in India. Similarly, the memory that lingered from the termination of the original PPA, colored Enron’s attitudes towards renegotiating with the Government of
Maharashtra. Kenneth Lay reported “(w)e have fought this once before, put it back together, fixed the contracts, but we don’t want to do that again and have the same problems in a few years”.284 The variables of organizational precedents and institutional memory perpetuated distrust on both sides and therefore need to be taken into account when discussing failures to international business transactions.
J. THE IMPORTANCE OF EFFECTIVE AND BROAD-BASED COMMUNICATION
Theory While the intuition of most negotiators would provide that effective communication is an important feature of any negotiation, the reality is that most international negotiations suffer from a lack of communication between the signatory parties. Once again, negotiation theory helps explain why this paradox exists. Fisher and Ury in Getting to Yes explain that communication breaks down when each side has given up on each other and talks merely to impress their constituents or third parties. They further note that even if one party engages in dialogue, the other side might not be listening because it is preoccupied with the concerns of its own constituents. In both cases, problems of misunderstanding arise.285
The Breakdown of Effective Communication between the Negotiating Parties Fisher and Ury’s explanation is applicable to the Dabhol case. The Government of India’s affront to what it perceived to be a veiled threat issued by Kenneth Lay that the US government may resort to imposing sanctions on India is an excellent example of how misunderstandings arise between parties to an agreement. Furthermore, the flamboyant language and anti-Enron
284 Julie Earle. “Enron wants out of Indian Power Project”, The Financial Times (London), July 27, 2001 (accessed December 5, 2001); available from Lexis -Nexis Academic Universe.
87 rhetoric employed by the Maharashtran government is an example of how parties to an agreement, during moments of extreme hostilities, speak to their political constituents without regard to the fact that their hostile declamations are simultaneously affecting the strategy and positioning of their negotiating counterparts.
Effective communication was broken down when the MSEB effectively stopped communicating with other members of the DPC board by refusing to attend their board meetings as an act of protest. In situations like this, Ashok Kapoor argues for dialogue to take place through informal communication networks in order to help relieve tension.286
The Breakdown of Effective Communication with Stakeholders As alluded to earlier in this section, the interests of stakeholders were not actively incorporated in an equitable manner in the decision making process, which caused significant distrust of the deal within local communities. Neither the merits of the deal nor the conditions and terms of agreement were communicated to the local communities, which contributed to the overall untenability of the agreement. The Indian public had learned about the project for the first time on September 22, 1993 when a notification was published, as required under section 29 of the CEA.287 The notification stated that “any licensee or any another person interested in taking objection, if any, in respect of the above scheme may please make representation to that effect within a period of two months from the date of publication of this notification. Any representation received after 2 months shall not be entertained”.288 Very little information about the project was provided in this initial communication. Mehta estimates that approximately eighty per cent of the letters in response to the public notification were from people seeking
285 Fisher and Ury, 32-3. 286 Kapoor, 281. 287 Mehta, 73. 288 Mehta, 73.
88 information about the overall impact of the project and included requests for “technical literature” on the project.289
In response to the notification, one hundred and thirteen residents in the village of Veldur signed a petition that stated,
We the residents of the village Veldur, hereby represent to you that we have strong objection to the Dabhol Power Project that is being set up in the villages of Veldur, Anjanwel and Ranvi in Guhagar Taluka in Ratnagiri district…. While various actions to set up this project were in progress, we the local people were kept in the dark by the Government….290
In their “Report on Field Visit to Dabhol” on February 19, 1994, three members of the
Environmental Assessment Committee (EAC) stated that,
We discovered that local communities were unaware of the DPC plans till very recently. It was, for instance, only three days before we arrived that the first notices for land acquisition were received by villagers. This has caused considerable discontent among the villagers and though our itinerary was not public knowledge we were stopped at least eight times along the route by people protesting the siting of large-scale projects in and around their lands.291
One reason why domestic stakeholders were kept in the dark about the agreement is that both parties were bound by the confidentially clause registered in the PPA to keep the terms of the PPA classified. Clause 21, the confidentiality clause, of the PPA read
…both parties shall at all times during the continuance of this agreement and for a period of three years following the termination: use their reasonable endeavors to keep all information regarding the terms and conditions hereof and any data and information acquired under and pursuant to this agreement confidential and accordingly neither part shall disclose the same to any other person.292
Enron further claimed that the confidentiality clause was instituted not for secrecy but meant to protect the DPC and MSEB during the negotiation period. 293 Instead of learning about the details of the project directly from their own government, the Indian people learned about the
289 Mehta, 75 and 78. 290 Mehta, 92. 291 Mehta, 86-7. 292 Narayanan, 59. 293 Ibid., 61.
89 project through a leaked report in the press.294 This development was further complicated by the fact that the method by which Enron often accomplished its goals was through powerful lobby techniques, almost bypassing the constituents to whom it was serving. As one journalist states,
“so far Enron has maintained a studied silence in public while it continues to lobby hard in private”.295 Jairam Ramesh explains that the government of India has been accustomed to brokering deals in confidentiality. It is this “public silence” that Ramesh cites as necessary to execute deals in India to cope with India’s diverse political spectrum of voters and its large bureaucracy.296 On the other hand, Kirit Parikh, a member of the Indian renegotiating team, argues “…the credibility of politicians and bureaucrats in India is such that the public could trust only competitive bidding with open public procedures. The fact that Enron’s PPA was kept a secret until the new government made it public created much suspicion. There was nothing new in the PPA that needed to be kept secret, and in my opinion, keeping it so ill-served the interests of (the) MSEB and even Enron”.297 Both Ramesh and Parikh are correct in their observations.
While elements of the PPA should not have been disclosed, at an earlier stage, greater information should have been communicated to the local residents of the community to prevent suspicion and subsequent backlash against the project.
K. SUMMARY While an agreement and a renegotiated agreement was reached between Enron and its partners, and the Government of Maharasthra, concerning the establishment of the Dabhol Power
294 The terms of the agreement had leaked to the public on March 21 1995 in Business Line and then in the April 7, 1995 issue of Frontline. See Mehta, 137. 295Sucheta Dalal. The Enron Fiasco (December 20, 2000); available from www.rediff.com/money/2000/dec/20dalal.htm 296 Jairam Ramesh. Personal Communication. Thursday November 29, 2002. 297 Parikh, 226.
90 Project in Maharashtra, India, the negotiation process when studied in its totality was tarnished by an inability and unwillingness to actually implement terms of the agreements.
The story of how and why there was an inability to implement terms of the original and renegotiated agreement can be explained from the strategic lens of negotiation theory. Firstly, the agreements suffered from “time deficiencies” which can be explained by the hastiness and the lack of timeliness at which the agreements were concluded. Secondly, there was little initiative taken to “resource the negotiations”. Thirdly, the process became diluted through an erosion of trust between the parties in large part due to the fact that no business relationship was developed as part of the pre-negotiation strategy. This is a significant development as trust is a stabilizing and powerful factor in negotiations. Fourthly, the terms of the agreement reflected and cultivated asymmetrical power relations between the actors. Fifthly, the mistake of not incorporating stakeholders by building a consulting mainframe from the onset came back to “bite” the concerned parties and the wound never healed as domestic constraints limited the range of choices facing negotiators. Additionally, both sides participated in moral-based positioning and lock-in tactics versus interest-based positioning which contributed to the escalation of hostilities.
Furthermore, the act of negotiating with cultural blinders undermined the negotiation process.
Ineffective communication also became a debilitating factor in the negotiation process both with stakeholders and between the negotiating parties. Finally, organizational constraints and institutional memory weakened the tenability of the agreements concluded. The following section will synthesize the findings outlined in this section to derive a sustainable model that will address where traditional business theory and negotiation theory intersect to explain factors that lead to failed business transactions.
91 PART IV - CONCLUSION
In discussing the Dabhol project as a case study, the above analysis attempts to explain the idiosyncratic and intangible factors that lead to failed business transactions, which for the most part are accounted for in negotiation literature but not in theories concerning business strategy. A useful method to make this distinction is to explore theories and frameworks that illustrate this point. Raymond Vernon’s theory of “obsolescing bargaining” is an excellent example of a theory to study, as it addresses the business risks and uncertainties that inform differentials in bargaining power between host governments and multinational companies, which lead to failed business transactions.
A. Vernon’s Obsolescing Bargaining Framework
Vernon’s theory was originally conceived to explain foreign investments in the natural resource sector in developing countries. Over time, however, Vernon’s model has been applied to explain other forms of investment including the privatization of infrastructure projects in developing countries. Vernon explains that when the initial agreement is made between a host government and multinational corporation, the MNC negotiates with tremendous bargaining power, as it is furnishes the host country with superior technology, management expertise and access to capital. As risk and uncertainty are high, the investor is often able to extract favorable terms from the host government. As the host government gradually acquires its requisite technology, management skills and capital, and additional investors enter the market to take advantage of increasing returns of scale from newly-created infrastructure, the quasi-monopoly of the first investor is gradually eroded. During this period, the bargaining power eventually shifts from the MNC to the host government, at which point the host government has a greater propensity to re-negotiate the premium concessions afforded to the investor. In a more extreme
92 example, at the point where the foreign invested project is extremely asset-specific, it is vulnerable to confiscation and expropriation by the host government.298 At this point, the MNC runs down the operations of its project and exits the country to salvage its fixed investments and sunk costs.
Figure 5 - Raymond Vernon's Obsolescing Bargain Model
(source: Paul Vaaler, EIB231, Session 11, www.murrow.org)
B. An Integrative Approach to Analyzing Business Transactions
While Vernon’s theory concerns the entire lifecycle of an investment, there are useful points of comparison that can be made to explain distinctions between traditional business strategy and negotiation theory.
Firstly, Vernon’s explanation of the host government’s propensity to renegotiate the deal is built on a distributive bargaining model instead of an integrative bargaining model.
Negotiation strategists often subscribe to the second model, which is premised on the assumption that transactions can and should occur beyond the zero-sum game reasoning.
298 Vernon, Sovereignty At Bay.
93 Secondly, Vernon’s theory assumes that the host government and the foreign investor, in protecting their self-interests, are rational. His theory does not take into account the fact that players are irrational because they are constrained by nationalist ideologies or domestic constraints. Actors may also be irrational if there exits an asymmetry of information, which can occur with new government actors which do not have the same access to information as their
MNC negotiating counterparts.
Thirdly, with its emphasis on asset specificity and sunk costs, Vernon’s theory describes the classic MNC concern as centered on its fixed investments. According to Vernon, the transfer of fixed assets and know-how ultimately alter the bargaining relationship between the MNC and host government. This analysis ignores other issues that alter the bargaining power of each party, and which ultimately influences the party’s willingness to execute a negotiated deal, salvage a deal through renegotiations, or exit. These issues include timing constraints, political constraints, cultural and ideological constraints, communication constraints (e.g. asymmetry of information because of revolving door governments), organizational constraints, personal constraints (e.g. managerial action as informed by personal preferences and motivations), constraints that emerge through vested interests, knowledge, skills, commitment, intentions, and capacity support, and constraints that are generated by local stakeholders. It is this last deficiency that this paper has attempted to address.
Figure 6 attempts to explain these constraints in an integrative bargaining framework.
Vernon’s explicit assumption that there is a trade-off in bargaining power between both actors during the life of the project is readjusted to account for an integrative bargaining framework wherein there is a mutually beneficial time to negotiate and execute a deal. This optimal period is represented by the point (Point C) at which both parties’ costs or constraints to bargain intersect,
94 which is located at the minimum point in the total bargaining cost curve. Secondly, Vernon’s assumptions are readjusted to account for the various bargaining constraints noted above that inform each party’s willingness to enter in a deal and renegotiate the deal, above and beyond the risks associated with fixed investments and sunk costs.
The beginning point, Point A, on the horizontal axis (time) represents when the host government first comes into power and/or when the multinational first enters the country in the pre-negotiation phase. Failed business transactions occur at Point B when negotiations are rushed in the beginning of the relationship between host government and the MNC, and when the host country’s bargaining constraints are significantly higher than the multinational due to, for example, greater vulnerability to extreme demands of its constituents and party coalition members, as was the case with the BJP-Shiv Sena alliance when it was newly formed. In this scenario the host country has less bargaining power to negotiate a viable `win-win’ deal. Indeed, only after significant time elapsed in office was the BJP-led government willing to renegotiate the PPA. Similarly, point D represents the point where the MNC’s costs to negotiate or renegotiate a deal increases, when organizational constraints and distrust become further entrenched, as was the case with the DPC’s initial refusal to attend the Singapore negotiations.
Negotiating at any point other than at point C, increases the overall costs and risks of negotiating a business deal (see `Total Bargaining Cost Curve’). At these points, the negotiators, when failing to integrate successful business strategy with negotiation strategy and when failing to internalize factors such as building trust, choosing leaders that will not engage in moral-based positioning, adequately researching the culture of one’s negotiating counterpart, will most likely produce an unsustainable business transaction that may ultimately fail.
95
Figure 6 - Balancing Constraints to Negotiate a Successful Business Deal
Total Bargaining Costs Total Bargaining Costs
Bargaining Costs/Constraints Bargaining for the Host Government are Costs/Constraints High in the Beginning Examples: for the MNC Examples: •Asymmetry of Information in •Sunk Costs increase the beginning for `revolving door’ governments bargaining constraints over time(Vernon) •Vulnerable to Political •Acclimatizing to local stakeholders holding negotiations hostage when first cultural preferences and ideologies consolidating authority
A B D C (Optimal Time)
Time
C. Concluding Remarks An increasing number of governments in developing countries have committed
themselves to programs of privatization, particularly in infrastructure projects. As the transfer of
ownership and management of these assets from the public to the private sector occurs,
multinational companies that have the capital and expertise to service these agreements are
adjusting to the fact that they are operating in highly regulated industries and most often
negotiating directly with the host government.299 On another note, Jeswald Salacuse notes that
international business deals can be understood as more unstable than domestic business
299 Mirjam Schiffer and Beatrice Weder, “Catastrophic Political Risk versus Creeping Expropriation: What determines Private Infrastructure Investment in Less Developed Countries?”, working paper for the World Bank, December 1999; available from http://www.unibas.ch/wwz/wifor/staff/ms/infra-jan10.pdf.
96 transactions due to issues of currency devaluation, radical shifts in governments and government policies, divergent legal systems and different culturally-reasoned negotiating practices.300
Understanding these two related points crystallizes an emerging trend in this field: negotiations that occur directly between host governments and MNCs will increase over time while risk and uncertainty, when compared to risk incurred in domestic business transactions, will not decrease in the immediate future. There is every reason to believe, therefore, that an alignment of interests and positions, as defined by both traditional business strategists who study institutional factors and negotiation strategists who focus on idiosyncratic variables, is essential to produce viable international business deals. Without such alignment the consequences can be damaging and lasting. Indeed, while an eerie calm hangs over the Ratnagiri district that was once hailed the symbol of development and promise in India, one wonders if and how time, as the
`final arbitrator’, ultimately ended and `crowned’ all the players involved.
300 Salacuse, “Renegotiating International Project Agreements”, 1341. 97 BIBLIOGRAPHY
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Mc.Larney, Carolan and Ramakrishna Dastrala. “Socio-political structures as determinants of global success: The case of Enron Corporation”, International Journal of Social Economics 28, no. 4, (2001): 349-67
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