By Manjeet Kripalani
Perched at the edge of the Arabian Sea, in the western Indian village of Dabhol, is a shining new $3 billion power plant built by Houston-based Enron Corp. (ENE) and the Indian government. The 2,184-megawatt plant has stood idle since April--keeping India short of electricity, burning a hole in Enron's tattered balance sheet, and driving the plant's sole customer, the Maharashtra State Electricity Board, into bankruptcy. All this because ever since Enron snared a deal to build the plant in 1994, it's been dogged by controversy over the price of power.
Now, the once haughty Enron, humbled by near-bankruptcy itself, wants to sell its Indian albatross. A deal could make Enron a better acquisition for Houston-based Dynegy Inc. Two Indian conglomerates are seriously interested: the Tata Group and Reliance Industries Ltd. Despite Dabhol's history, "it's too big and too valuable an asset for India to let sit idle," says Padmanabhan Krishnamurthy, vice-chairman of JM Morgan Stanley Ltd., which is advising Tata.
Whoever buys Dabhol, New Delhi ought to use the occasion to speed up much-needed reform of the power sector. That's the only way the plant will pay its own way. As it is, reviving Enron's power plant by the sea will cost plenty. Even if a buyer lands Dabhol for $600 million--half of what Enron invested and the current estimate of what it would fetch--a new owner may have to spend millions more to return the idle plant to operating condition. What's more, the buyer will have to convince Maharashtra to pay at least 6 cents per kilowatt hour--well below the 14 cents Enron got but still twice what some local producers charge. A high price is needed because Dabhol burns pricey, imported naphtha, rather than coal or gas.
New Delhi also has to ditch some of the more ridiculous constraints that ensure Dabhol is a money-loser. Dabhol must sell all of its power to the Maharashtra board, regardless of demand. The plant should be able to sell to other states and into the national grid. More absurdly, some one-third of the 60,000 Mw of electricity generated in India is stolen by businesses, even households, that tap into power lines illegally. Another 15% of power goes to farmers for free. So far, New Delhi has ignored these problems, which have cost India's 19 state power authorities some $5 billion in the past decade. This in a country that somehow must attract enough investment to build 10,000 Mw of new power capacity each year--the equivalent of five Dabhols--if it is to keep up with electricity demand.
The failure of reform has claimed victims besides Enron. Arlington (Va.)-based AES Corp. pulled out of the Indian power-distribution business after losing $46 million due to theft since 1999. CMS Energy Corp., based in Dearborn, Mich., recently quit India after a big plant became mired in politics. While Enron was often criticized for being abrasive, both AES and CMS worked closely with the Indian government, the World Bank, and Indian partners, and still had trouble.
FAST RECOVERY. If the government were to get serious about reform and force customers to pay for the energy they use, India's state electricity boards could all become profitable in three years, figures Mukul S. Kasliwal, chairman of the Federation of Indian Chambers of Commerce energy committee. Then, "investors will be flocking back to India," he predicts.
For now, several Indian companies are willing to give Dabhol a go. Tata Power Co. would double its capacity with the plant, making it the nation's biggest private supplier. "It's an area of growth for us," says Managing Director Adi Engineer. Maybe Tata will succeed where Enron failed. But without proper reform, Dabhol could just as easily remain a money pit. Kripalani is Bombay bureau chief.