WASHINGTON – The Kennedy School of Government at Harvard University is holding up a failed Enron Corp. power project in India – which former President Clinton helped broker and fund with government loans – as a lesson in bad public policy and business.
The case study, a copy of which was obtained by WorldNetDaily, is used in a class taught by Kennedy School professor Henry Lee.
The study pans the Enron-led deal, a $3 billion power-plant project in India, as risky and
financially unfeasible from the start.
Yet the Clinton administration backed the project with more than $642 million in loans and insurance from the government’s two primary development banks – the Export-Import Bank and the Overseas Private Investment Corp., as WorldNetDaily first reported Jan.
The high-risk Indian project would not have gotten off the ground without the federal funding. Commercial banks rarely make big loans for long-term projects in unproven, unstable markets like India.
Indeed, the gas-fired Dabhol plant marked the single-largest foreign investment ever made in India, which was just opening up its economy to outsiders.
Top Clinton officials lobbied Indian officials to help Enron CEO Kenneth Lay, a frequent visitor to the Clinton White House, obtain Indian state guarantees for the project after it hit snags in 1995.
On Clinton’s orders, his then-chief of staff Thomas “Mack” McLarty made closing the deal a top priority.
Also helping speed the project along were Clinton Energy Secretary Hazel O’Leary and Commerce Secretary Ron Brown, who invited Lay and other Enron officials on a succession of trade missions to India, as WorldNetDaily first reported Jan.
11. OPIC officials joined them on the junkets. Clinton’s ambassador to India Frank Wisner, who along with McLarty performed work for Enron after leaving the administration, also rode herd on the Dabhol project.
“We had a lot of access in the Clinton administration,” Lay told PBS’ “Frontline” in a May 22, 2001, interview.
On July 5, 1996 – just four days before India gave final OK to Phase II of the project, and three weeks after Wisner traveled to Bombay to pressure Indian officials to clear the project, and five months after an Enron senior vice president attended a White House coffee hosted by Clinton – the Enron Corp. PAC donated $100,000 to the Democratic National Committee and Clinton’s reelection effort, federal records show. It was Enron’s largest single contribution to Democrats, and the biggest gift to either party during the 1996 election cycle.
Also, Lay in 1995 personally gave $1,000 to the Clinton-Gore campaign, records show.
But the sweetheart India deal quickly soured into a costly boondoggle that acted as a drag on Enron’s stock, and even sped the company’s collapse last year, when Indian officials stopped paying their power bills.
The Indian electricity board reneged on payments, claiming the power bills were too high.
But that should have been obvious to anyone – particularly Clinton appointees who signed off on the huge, taxpayer-supported loans – from the unrealistic terms of the deal.
The Kennedy School case study, written in 1998 by PhD analyst Shashi Verma, concludes there was no way the Indian government could honor the contract as written.
The price Enron was proposing to charge for electricity was far beyond what the government could afford to pay – and higher than the competitive price in the market at the time the contract was signed.
The tariff rate for electricity was about 7 cents per kilowatt-hour, while the average power price to Indian consumers at the time was 3.44 cents. Though the 3.44 cents was not sustainable given that the local Indian government power sector was operating at a loss, it was unrealistic to expect Indian consumers to pay double the rate.
Enron needed the high charges to meet the high return on investment it demanded from the project, the study says.
Indian officials “objected to the 26.52-percent rate of return, stating that 20 percent was more reasonable,” the study said.
But “Enron Development Corp. chief Rebecca Mark made repeated threats to leave the negotiation table, stating that equity investors would expect a return of more than 30 percent,” the study said.
Enron eventually offered a slightly reduced 25.22 percent offer, and Indian officials reluctantly accepted.
In the end, Enron got an anemic 7-percent return from Phase I of the project, says Carl Krist, an analyst with Merrill Lynch Global Securities in Houston, who adds that Dabhol was always Enron’s “trouble child.” And the Houston-based energy giant “never got anything” from Phase II, despite a net investment of well over $1 billion. (Enron held a 65 percent equity stake in the total project.)
Last year the failed project began hemorrhaging losses. In December, Enron declared bankruptcy, and filed a $200 million claim on its OPIC insurance policy on Dabhol. The amount is the maximum claim under its coverage, meaning its losses are likely much higher.
The Kennedy School case study, which called the government-backed deal “an important indicator of the fragility of international infrastructure investments,” noted that the World Bank gave the Dabhol project the thumbs-down way back in 1993.
It declared the Enron project “not economically viable,” rightly warning that the plants would produce power too costly for the state. World Bank refused to fund the project.
“A World Bank report submitted to the government of India concluded that the Dabhol plant would create years of excess baseload capacity and prove an expensive alternative to coal or other fuels,” the Kennedy School study said.
Such cold-eyed analysis escaped OPIC and Ex-Im Bank under Clinton, which committed massive funding and backing for the Enron deal in 1994 and again in 1999.
Even Democrats are baffled by their lack of due diligence.
“I cannot fathom frankly how both Ex-Im and OPIC could have been so misled over such an extended period with respect to Enron,” said Rep. Nita Lowey, D-NY, ranking member of the House Appropriations Committee.
But the official trip report of O’Leary’s July 1994 junket to India shows the Clinton administration was well aware of the project’s risks, and pushed ahead with the deal anyway.
Page 5 of the report, a copy of which was obtained by WorldNetDaily, acknowledges that Indian local electricity boards “are not financially stable.”
It also notes that there is a “disincentive for using natural gas, especially for power production,” in India because of the abundance of coal. The Dabhol gas-fired plant replaced a coal-fired operation.
Yet the mission “significantly advanced approval for Enron’s gas power project valued (at the time) at $2 billion,” the report said, citing memoranda of understanding with the Indian government.
Under a section called “White House support,” the report says the Energy Department’s first follow-up action would be to draft a “Presidential directive” to OPIC and Ex-Im Bank for project backing.
Under Clinton, Enron became one of OPIC’s and Ex-Im Bank’s biggest customers.
From 1992 to 2001, OPIC and Ex-Im, along with the Maritime Administration and Trade and Development Agency, backed 25 Enron projects with $3.68 billion in approved guarantees, according to the Institute for Policy Studies.
OPIC this year has had to cancel supports for at least two of the projects it underwrote – one in Brazil and the other in Bolivia – because Enron missed deadlines for financing the projects.
Democratic strategists say Clinton was just trying to bring jobs back to America.
But given Enron’s rare 1996 DNC donation, at a time when Clinton was courting even foreign donors for cash, the corporate welfare looks suspicious, critics say.
Enron seemed to steer Clinton foreign policy, too.
For years, Vietnam projects were off-limits for OPIC and Ex-Im Bank financing and underwriting because of the country’s communist government.
But that changed in 1997 after Linda F. Powers, senior vice president for global finance at Enron International, told a House subcommittee: “If we have no Ex-Im Bank, it would literally force us to open up a foreign location and move our manufacturing jobs overseas in sufficient size and scope so that we have the interest of the export credit agency of that
Powers said Enron was trying to obtain French financing for an unnamed project in Vietnam, absent OPIC backing.
Clinton within months of Powers’ statement revoked a provision barring U.S. financial aid to projects in Vietnam, points out a recent report by the Institute for Policy Studies.
Interestingly, the Bush administration last year cut funding for the Ex-Im Bank by 25 percent, a move that was denounced by corporate America and the U.S. Chamber of Commerce.
According to conventional wisdom, Bush showered Enron with favors.
Lay in 1997 was even rebuffed by then-Texas Gov. George Bush when he tried to get him to lobby U.S. legislators from the state to urge additional federal funding for OPIC and Ex-Im bank, according to a memo obtained by the Houston Chronicle.
“The Gov is no fan of Ex-Im,” a Bush aide wrote back to an Enron official representing Lay’s wishes.
The Kennedy School critique stands out against Harvard’s other glowing case studies on Enron. Harvard Business School has touted the Enron model as innovative and worthy of duplication.
And what’s more striking, two Enron board members are closely tied to Harvard.
Herbert “Pug” Winokur is a member of the Harvard Corporation, the university’s seven-member governing body. And Robert Belfer is a major Harvard donor who re-endowed the Kennedy School’s Belfer Center, previously called the Center for Science and