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 1 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