Dabhol Power Project: political, technological, and financial risk analysis

Dabhol Power Project

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Dabhol Power Project: Risk Analysis

External risk

For the entities involved with the Dabhol Power Project, the potential political risks posed by the unstable Indian government were very high. Indian politics was in a state of tumult at the time of the project's conception, and although the government was allowing for greater privatization of energy within the nation, there was no guarantee that the current government could remain in power for the duration of the ambitious venture. Not all political parties in India were supportive of foreign investments and joint partnerships. Modern India historically had pursued a policy of being closed to the outside world, in terms of development, in an effort to improve the nation's self-reliance and to break away from colonialism. Although this was changing, there were no guarantees that nationalistic governments could permanently steer their way to greater privatization (Lejot & Pretorius 2007: 1).

Later it was revealed that Enron had spent $20 million on 'educational projects' in India, a figure which the U.S. government suspected to be bribes, rather than a legitimate form of goodwill (Lejot & Pretorius 2007:8). Fears about the negative influence of politics upon national development were later confirmed when the ruling government, because of the high cost of power generated by Dabhol and the prohibitively high price for electricity generated by consumers, elected to end the agreement (Lejot & Pretorius 2007:8). While eventually, the terms were re-negotiated in a satisfactory manner, many suspected that the event was a ploy and part of India's internal politicking between the major parties on the eve of an election campaign. Regardless of the rationale, the fact that internal politics could have such a destabilizing effect upon a foreign corporation attempting to do business with the nation indicates the high degree of internal risk in doing business with a developing world nation.

Financial risk

The balance sheet of Enron was not reviewed, prior to commencing the project and many years later the illegalities inherent in Enron's accounting practices would be revealed. Even at the time, the World Bank noted that specific details about the project costs were absent, even though they were stipulated to be included under Indian law. No specifications were delineated in the project regarding auditing procedures to ensure that the price of electricity was "commensurate" with its cost (Lejot & Pretorius 2007:6). Including appropriate controls regarding auditing procedures is essential with all large-scale projects, particularly those with multiple components or which run the risk of going over-budget.

To mitigate some of its risks, Enron entered into a partnership with several other entities, including GE, although it still owned 80% of Dabhol (Lejot & Pretorius 2007: 4). Ironically, although it seemed as if Enron was taking the major risk for the venture, the real risk was ultimately incurred by the Indian government, when Enron collapsed before the project's full completion.

Reference

Lejot, Paul & Frederick Pretorius. (2007). The Dabhol Power Project. Asia Case Research

Center.