WASHINGTON – A so-called “sweetheart” deal between Enron Corp. and India – brokered with the help of Clinton administration officials during controversial trade junkets in the mid-’90s – ultimately soured and sped the energy giant’s collapse, analysts say.
After investing more than $1 billion to help build a huge power plant near Bombay, Enron had problems last year getting paid for power generated by the plant – even after sources say former President Clinton lobbied Indian officials on Enron’s behalf during his April visit to India.
Desperate, Enron chairman Kenneth L. Lay on Sept. 14 fired off a letter to Indian Prime Minister Atal Bihari Vajpayee threatening legal action to recover claims of up to $5 billion related to the Dabhol Power Co.
A month later, on Oct. 15, Lay called Commerce Secretary Don Evans, pleading for help with the nightmarish project.
The next day, Enron stunned Wall Street by announcing its first loss in more than four years. In the third quarter, the Houston-based company
hemorrhaged $618 million.
Enron’s once-high-flying stock nose-dived, robbing many of its workers of their retirement nest eggs, and the company filed the biggest bankruptcy in U.S. history.
The gas-fired Dabhol project, which stopped production and construction in May, had been a black mark on Enron’s books from the start, analysts say.
“No doubt about it, it was always the trouble child,” said Carl Kirst, an analyst with Merrill Lynch Global Securities in Houston.
He says the Indian deal was “one of many factors” that hurt Enron.
“But clearly it was one of the better-known pressure points on the stock,” Kirst said in an interview with
WorldNetDaily.
Costly boondoggle
Wall Street didn’t think much of the deal when it was announced in 1995 by the late Commerce Secretary Ron Brown and Lay during a trade mission to India. The more than $3 billion power-plant project was the single-largest foreign investment ever made in India, which was just opening up its economy to outsiders.
“In the mid-’90s, not many people were venturing into the international-development market like this, certainly not in India,” Kirst said. “So there was a good deal of risk built in.”
Of the four investors in the project, which is the largest gas-fired plant in the world, Enron put up the biggest stake –”north of $1 billion,” Kirst said.
Phase 1 of the project yielded an anemic 7-percent return on investment, he says, contributing roughly under a nickel a year to Enron’s earnings per share.
That was bad enough.
But by the time Phase 2, twice as big as Phase 1, was nearly completed, the local Indian electricity board reneged on payments, claiming the power bills were too high. If Phase 2 had come on line, the board would have owed a projected $1 billion-plus a year starting this year. Enron inked a 20-year contract with the state board.
“So here at a net investment of well over $1 billion, Enron almost had Phase 2 completed, but they never got anything for it,” Kirst said.
And the poor returns from Phase 1 weren’t covering the cost of developing Phase 2, he adds.
In short, Enron had a costly boondoggle on its hands, one that was starting to punish its financial statement.
“You can’t have over $1 billion of investment on your books and continue to earn only 7 percent, at best, and not open yourself up to write-downs,” Kirst said.
The best thing Enron could have done is unload the project, he says.
But Lay couldn’t find suitors.
“Enron hoped, ideally, that someone would buy them out at their book value – roughly $1 billion,” Kirst said. “That is, shall we say, optimistic at this point.”
There have been rumors of buyout offers of between $600 million and $800 million circulating since September, he says. Possible buyers mentioned in the past include Reliance, one of India’s largest industrial concerns, and China Light and Power Co.
But nothing has panned out.
It shouldn’t come as much of a surprise. The huge project was never popular.
Even back in 1993 – when Indian officials first proposed the idea of converting to gas as a main power source for Maharashtra, one of India’s most industrialized states and home to Bombay, the country’s financial center – economists were skeptical.
The World Bank, for example, concluded such a project was “not economically viable,” warning that the plants would produce power too costly for the state.
The New York Times, moreover, quoted a senior Indian official who said anyone who invested in such a project was “bankrupting yourself knowingly, willingly, deliberately.”
So why did Lay press ahead? Political opportunism.
‘Sweetheart deal’
On May 19, 1994, Clinton met here with former Indian Prime Minister P.V. Rao. Rao told Clinton that India was interested in opening its centrally controlled economy up to American corporate investors.
Clinton, in turn, instructed then-Energy Secretary Hazel O’Leary to lead a delegation of corporate executives to India on a trade mission.
“The mission marked the first official visit to India by a U.S. cabinet secretary in many years,” Energy’s internal trip report states.
Enron executives joined O’Leary on the July 1994 junket, whereupon they planted the seeds of the ill-fated Dabhol deal.
Then in January 1995, Lay accompanied Brown on the Commerce trade mission that helped seal the deal.
The Clinton administration got two federal export-finance agencies – the Export-Import Bank and the Overseas Private Investment Corp. – to help underwrite the project by kicking in nearly $400 million in loans.
During the final negotiations, Clinton aide Thomas “Mack” McLarty rode herd on the project in Washington for Lay, his old energy-industry buddy.
He tracked the progress of Clinton’s ambassador to India, Frank Wisner, who was helping speed the deal along.
Even Clinton pitched in to help his golfing partner, Lay, by sending McLarty memos and articles on the project.
(The ex-president’s lobbying for the Enron deal even continued into the Bush administration, sources close to the Dabhol project say, when he visited Indian officials in Mumbai, India, in April. At the time, Enron was fighting the state electricity board for back payments.)
In June 1996, India gave final OK to Lay’s project. Four days before the approval, Enron gave $100,000 to Clinton’s party.
McLarty and Wisner were not forgotten. Lay snatched up McLarty for Enron when he left the White House. And
Wisner got a seat on the board of an Enron subsidiary when he stepped down as ambassador in 1997.
Lay and McLarty have denied the Democratic Party gifts were tied to the Indian deal. And Wisner called “foolishness” any suggestion his board seat was payback for helping Enron close the deal in India.
But in India, local foes of the Dabhol project regarded it as a “sweetheart deal” from the start, and even charged that Enron bribed Indian officials. The charge, which Enron has denied, was never proved.
For his part, Lay blames the recession, not any bad deals he made, for his company’s collapse.
Ironically, for all the talk of Lay’s cronyism with President Bush, this administration has been relatively hands-off, at least when it comes to aiding Enron in its overseas deals.
No Enron executives got seats on last year’s sole Bush administration trade mission, which was to Russia.
And in March, Bush, who held no Enron stock directly in his 1999 financial disclosure, proposed slashing the next fiscal year’s budget of the Ex-Im Bank by 25 percent. What’s more, he proposed cutting the subsidies of the Overseas Private Investment Corp.
Under the Clinton administration, Enron had benefited famously from both agencies, which support corporate investments abroad.
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WND Staff