Slowdown On India's `Fast Track'

As laborers do preliminary work at Enron Development Corp.'s power-plant site in Dabhol, 280 kilometers south of Bombay, 400 armed guards stand by. They want to prevent a repeat of a mid-May demonstration. Villagers, opposed to the forced acquisition of their land for the project, overran the site, overturned trucks, and chased off more than 2,000 workers.

Hiring a few guards won't quiet the furor over Enron's $2.9 billion liquefied-natural-gas project. Dabhol was one of eight "fast-track" power projects that Prime Minister P.V. Narasimha Rao exempted from competitive bidding to expedite privatization of the power sector. After opposition politicians gained control of the local government last winter, the project presented a chance to embarrass Rao. So in May, the local government began probing charges of kickbacks and environmental hazards connected to the project.

A TEST. More than just Dabhol's fate is at stake. The Enron deal is being viewed by the international business community as a test of Rao's reforms. In contrast to China, where power deals have been stalled by the bureaucracy, India has presented itself as a place where investors can get speedy results. A reversal in a case such as Enron's may lead investors to doubt other Indian deals as well. U.S. Energy Secretary Hazel O'Leary and British Chancellor of the Exchequer Kenneth Clarke have said that financing for other projects might be affected by the


Fallout from Dabhol is being felt across India. Rao's government is delaying decisions on foreign power deals until the investigation's findings are made public. That has put in limbo 14 foreign-funded power projects worth a combined $10 billion. In addition, more than a dozen banks, including Chase Manhattan, Banc One, and Chemical Bank, have frozen funding plans for

Indian power projects.

Bureaucrats in New Delhi are jittery. The Finance Ministry projects net foreign investment inflow of $4 billion this fiscal year, a figure that is sure to be optimistic if investors turn wary over Dabhol. Harry Dhaul, director-general of the Independent Power Producers' Association of India, says reneging on a contract would confirm suspicions among foreigners that investments in India become unsafe when governments change.

Before the March elections, Enron's plans seemed to be on track. In late 1993, the Houston-based company signed a crucial power-purchase agreement with the Maharashtra state electricity board. But the new Maharashtra state government, led by right-wing Hindu nationalists, appointed a committee to review the Enron deal. The committee is headed by Gopinath Munde, who promised during the campaign to "drive Enron into the Arabian Sea."

Even before the committee announces its decision, Enron's woes are deepening. A parliamentary group on energy last month singled the company out in a critique of Rao's policies on privatization of the country's power sector. A group of 44 prominent economists, social scientists, and retired judges have sent an open letter to the state administration criticizing several aspects of the Enron deal.

High on the list of protesters' complaints is the secrecy that surrounded the two-year negotiations between Enron and Maharashtra's electricity board. The power-purchase agreement was only disclosed after a Bombay consumer group went to court last year to get the information. The agreement guarantees a high price for Enron's power--about 8 cents per kwh--based on a fixed-rate tariff, rather than the more complicated two-part formula the Indian government had used in the past.

DAMAGE CONTROL. The fixed rates led to allegations of corruption by Hindu opposition groups. Enron officials deny allegations of kickbacks. "Nobody asked us for a single rupee," says Rebecca P. Mark, CEO of Enron Development, a division of Enron Corp. In an effort to control the damage, she flew to Bombay on May 24 to make Enron's case before the review committee. At the same time, Enron officials agreed that the company would increase compensation paid to villagers, relocate the liquefied-natural-gas storage tanks away from population centers, and provide up to 200 lifetime jobs to people affected by the project.

Few critics have been pacified. Instead, anti-Enron groups have intensifed their protests. For a project that was supposed to be on the fast track, Dabhol may be bogged down for a long time.


-- Demonstrators have overrun the site of its $2.9 billion liquefied-natural-gas power plant in western India

-- The new opposition-led state government has launched an investigation of alleged corruption involving Enron

-- A multiparty parliamentary group in New Delhi has singled out Enron in criticism of the government's privatization program

Before it's here, it's on the Bloomberg Terminal.