Enron corporation's power project in India - Essay Example

Enron Corporation’s power projects in India Abstract Historical case research has been attempted on the functioning of Enron Corporation’s power project in India. Critical collaborations of Enron and stakeholder interests of the Indian government have been elaborated to research the deficiencies of the power project and the Enron Corporation on global platform. Various cultural and political causes of the project failure in India have been analyzed, giving sufficient space to other critical factors for the downfall of the Enron Corporation, including the theoretical basis for the fall of capitalistic structure of big corporations. Senior management played a negative role by not taking right decisions because of their over-confidence created from consecutive successes. By linking the energy market with futures trading, the company over-played its cards, resulting in its bankruptcy. Enron Corporation’s Power Project in India Enron, a US energy company, entered into a contract with the Indian government in 1992 for producing electricity by building a 2,015 megawatt power plant through market debts of $1.75 billion. The project was Enron’s first global expansion project to be started in emerging markets like India, in its third largest state, Maharashtra’s commercial capital, Mumbai. The project failed because of Maharashtra State Electricity Board (MSEB) debt and renegotiations (Negotiation-project-India, 2010). The time of building the power plant was particularly crucial as after the economic downtime of 1991 no other energy company was interested to take the risk of investing in India. It was claimed to be just “…inspired lunacy” of Enron (Choukroun, 2002). Enron entered into a contract with the Maharashtra Sate Electricity Board (MSEB) by risking its and its allied companies’ stakes in Dabhol Power Project (DPP). The discussions for the project started with the two principal stakeholders from the Indian side, the Indian state of Maharashtra and the other was Maharashtra State Electricity Board (MSEB). The project proposal of building a 2015 megawatt power plant with the investment of US$3 billion was given a green signal initially (Negotiation-project-India, 2010). Enron was not the only principal stakeholder; it was a sort of joint collaboration with the investment of 10% each by General Electric and Bechtel. Sustenance of the project was detriment to the availability of Liquefied Natural Gas to power the plant, which Enron planned to secure from one of its joint venture in Qatar, 1200 miles away from the power plant situated in Dabhol. The project was the largest ever project taken by Enron in India, supposed to produce electricity in two phases. In the first phase it was planned to produce 695 megawatts from the locally available LNG, while the second phase target was to produce 1320 megawatts through natural gas channeled from Qatar (Negotiation-project-India, 2010). Enron was expecting huge profits from this project for the company investors from the MSEB of Maharashtra. It took just five days to materialize the contract by signing a memorandum of agreement between the MSEB and DPP, representing Enron of purchasing electricity at the rate of 7.3 US cents per kilowatt hour (Negotiation-project-India, 2010). What went wrong that the project failed? From the very start, it was a mistake made by the management at Enron to invest in a technology-efficient project in India without attempting an analysis of Indian socio-political environment. One thing became clear that the project was cleared without adhering to set legal and corporate procedures, essential for such a huge global venture. It also became evident that Enron adopted the unethical path in securing the contract. It was totally in the darkness over the political unsettling environment in India. All its negotiating and renegotiating expertise failed as the MSEB could not pay the bill against the used electricity. Enron had to confront opposition from many fronts; it had to initiate counter-campaigns to create positive conditions in its favor; legal battles also ensued. DPC found the possibility of an out-of-court arrangement very low, expecting a decision by the Maharashtra Electricity Regulatory Commission (MERC) and application of arbitration clause in Power Purchase Agreement (Parasuram, 2001). The DPP project heated the political debate over Enron’s under the table tactics. Even after settling its stakes on minimized tariff rates, permitting a 30 percent stakes to MSEB, cutting the interest of the MSEB from 80 percent to 50 percent, and increased production, bankruptcy was declared by Enron. While discussing the failure of Enron Corporation, Ahmed (2010) quotes Schumpeter, forecasting the “inevitable decomposition of capitalism society,” considering that capitalism could not survive as “Its very success undermines the social institutions which protect it, and inevitably creates conditions in which it will not be able to live” (p. 625). The failure with large corporations is sure to happen not only for lack of competition but due to the exit way shown to small players resulting in their “dependents, henchmen, and connections” greatly weakening the political system and cutting down political support for capitalism (p. 625). The same happened with Enron, a multibillion-dollar international corporation, desiring a big chunk in India’s economic arena, leveraging the conditions to the limit of risking its own existence. In the process Enron’s attempts to use the social institutions of India such as the leading political party, the Congress Party, new laws, regulations, and institutions to such an extent that they become easy target of criticism and irrelevant, or both (Ahmed, 2010). Large corporations like Enron Corporation exemplify the neo-liberalization process variously. A shift occurs through complicated working of traditional social relations to devise a type of capitalism leveraging from public assets meant to serve social goals. Enron Corporation did the same in India to restructure space for its interests through organizations meant to provide balanced development, equality, and socialism from public sector undertakings (Ahmed, 2010). One of the corporate managers of a global corporation found fault with the Indian policy of subsidizing power to the consumers. He viewed it as a hurdle in the path of competition, as it created inefficiencies in the market and business. When Ahmed (2010) inquired from him over availing of tax holidays and provision of land at reduced rates as conditions for investment in the global South and asked his opinion on the sort of inefficiencies these would create, the reply was: “Do you want the investment or not—you need the investment? Why would investors want to come here if you do not provide incentives? (p. 631)” This outlook speaks volumes for the spatial transformations happening in India at that time. Enron Corporation did the same thing in the United States; it impacted public policy through its lobbyists in the US states and through the federal government. It entered into trading on energy futures because of having inclination on the futures market as it could turn the futures market in its favor. The attitude of Enron Corporation gets reflected to change the policies in its favor, as remarked by Linda Powers (Vice President, Global Finance, Enron Development Corporation) that projects like DPC were “action-forcing events that are getting the host countries to finally implement the legal and policy changes” (Ahmed, 2010, p. 632). In opposition to the claims of neo-liberalism and privatization, policies in India were molded for the benefit of multi- and transnational corporations by sacrificing the Indian national interests. Powers claimed that Enron Corporation spent US$20 million as “expenditure on education and project development process alone, not including any project costs,” which indicated the presence of a scam created through “influence peddling” for Enron to make a smooth entry into the Indian power sector (Ahmed, 2010). Actually, the Dabhol Power Project (DPP) was an outcome of an exploitative nexus between Enron, GE, and Bechtel. These three companies were not only the promoters of the DPP, but GE was also the supplier of material and Bechtel was a consultant of DPP. All the expenses incurred on promotion were realized as sources of income, as the selection of GE as the supplier of material and Bechtel as a consultancy was made without adhering to open bidding procedure (Ahmed, 2010). Powers’s boasting on the role played by MNCs in the growth of developing countries like India can put to risk the removal of entry hurdles and even endanger the expansion programs of MNCs. This attitude of Enron caused dearly to the Corporation, making it complacent, inelastic, and led to its Indian debacle. Overdependence on rules turned them into ends in themselves rather than means to ends. Employees could not feel free to create new ideas due to binding to follow rules, which caused incapacities. The technical traits of the industry, a set of basic economic and technical features that led to the creation of distinct forces in the environment, helping in the building of a strategic action plan to impact the environment in the company's favor, was missing in Enron (McLarney and Dastrala, 2001). The burden of the failure of the DPP rests totally with the CEO and the senior managers of Enron Corporation. They could have availed many possibilities of cracking their prevailing systemic flaws and attain a transaction through clean working but it could not happen due to clash of ego, beliefs, and not identifying the visible facts. Had the clash of ego among the senior managers not become a hurdle in the smooth path of the project, the Indian side could also have benefitted after the renegotiation, resulting in confidence building for global investment by MNCs (McLarney and Dastrala, 2001). The political gaming over the DPP caused loss to both the major stakeholder parties, the DPP and Enron. Playing with environmental imbalances added to the complexity of the issue, making the case of Enron DPP a role model reminder for the central government, the state governments in India as well as for MNCs keen to be the leading stakeholders in Indian concerns (McLarney and Dastrala, 2001). Drawbacks of the Enron model The model brings into focus the different limitations that organizations face when they work on the global platform. Although the model is recent, in the way that it grows on the basis of the experiences of the MNCs that had internationalized, the Enron model fails to look at some problems that are detrimental to the success of any global project (McLarney and Dastrala, 2001). . The first drawback is related to the timeframe the model perceives. It considers the long-term outlook of the companies as their connection with the environment is very unstable (McLarney and Dastrala, 2001). The issues analyzed attend more on the entry level and there is not enough focus on companies that are performing already on the international horizon. This is looked into by the fact that the model is a shifting one which focuses on the concurrent transaction between the organization and its environment (McLarney and Dastrala, 2001). Second, the culture, ordinarily, and politics, specifically, are the significant environmental variables that decide the success of a company. Other variables that include economic, legal, technological, and educational variables are of lesser significance. These variables are related to a country and, therefore, need to be recognized through detailed study. Each variable should be researched in the context of the country where a corporation is keen to expand business. Credit to a particular variable needs to be awarded on the basis of comparative significance of that variable to the MNC (McLarney and Dastrala, 2001). Lastly, although the model increases the intangible values awarded to these cultural variables, it offers a standard parameter to control the issues. Profit and therefore long term competitiveness needs to be the long-term aim of MNCs. Such MNCs keen to enter the global arena should organize ethnographic research, lengthy interviews, a number of visits to the host country, as well as find out resembling case studies to enrich the model (McLarney and Dastrala, 2001). Julia K. Brazelton and Janice M. Ammons (2002)) have evaluated the Enron phenomenon from various angles. They have found deficiencies in the Corporation’s business culture, auditing transparency, accounting processes, checks and residue in the functioning of corporate systems, internal auditing, and the government role in the power supply business of Enron (Fink, 2003). Regarding tax evasion by corporations like Enron, there were clear indications that it was practicing tax sheltering, which needs to be taken due note by the FASB or SEC. The accounting statements of big corporations do not state the story behind the cloudy statements, providing a view of the under-cover activities. This “inscrutable” area of financial statements requires some improvisations (McGill and Outslay, 2004). Enron representatives could also provide no clarification on how the company spent the US$20 million in the name of education expenditure, which points towards the loose threads in the company’s accounting system, used to evade taxes. Enron’s bankruptcy has lot to do with the commodity market and derivatives trading, the risks of which need to be covered through cleared exchanges for better transparency to help in spreading the risk of default over market stakeholders. Cleared exchanges should deter the energy companies to get any credit threshold due to their unsecured credit exposures. Clearing houses need to include the initial margins and the variation margins both to overshadow any risk to guarantees in the OTC transactions. Such precautions by the exchanges can provoke the energy companies to change their strategies to meet the clearing needs (McGill and Outslay, 2004). Energy companies choose their futures commission merchant (FCM) having their own “cleared swaps documentations,” which are different from the International Swaps and Derivatives Association’s (ISDA) “master agreement.” Other than the traditional defaults of the documentation, a discretionary default can be used by the FCM to announce it anytime to secure the FCM. Energy companies would be forced to settle these risks by adopting risk management strategies (Turner and Sherrill, 2011). Actual Enron risk occurred from its energy trading. The demon of the Enron fallout was all the time present and was bound to happen. Energy traders secure trading risks very quickly because of their robust and dynamic personas; they secure attractive transactions even in the complicated hedge market (Parsons, 2002). Analysis by the CDR Assessment Group in Tulsa, Okhlahama on energy traders, specifically on ex-employees of Enron revealed that they were performing the same tasks as done by criminals. Top-rated energy traders because of getting the competitive edge break rules and make fun of procedures. Research revealed the truth that many trading employees of Enron changed jobs and established connections with other ex-employees of Enron to work on the course material for a trader’s training academy. A deal was settled between the senior Vice President who was an ex-employee, an Enron trader, with another ex-employee of Enron for a reward of $30,000 a month without any job role assigned or clause attached on payment although no such job profile was required. It was a bullying by the in-house trading functionary. In the absence of total control over such functionaries who are traders and at the same time hold important positions, risks to bankruptcy abound. Role of government regulations cannot compensate the loss to the system if insiders change party. Energy corporations depend too much on these traders to get customers. The profile of an energy trader is such that it can lead the company to new heights as well as bring a downfall of the company (Parsons, 2002). The Enron experience offers three lessons to the managers. Other than being honest, frugal, and be always ready, managers should be prepared to taste failure if the innovation does not deliver. The fault with Enron was that it had become accustomed to success in multiples. Too much success corrupted its capacity to further entrap it in deceit. Strategy and planning can not ensure the success of innovation. Organizations need to form new strategies to deliver and perform as planned. Another recommendation related to innovation is that it should be about the people, not the organization. There was no dearth of ideas in Enron but the self-deceiving attitude of the management engulfed the innovative instinct or the blame lies with corporate corruption (Hyde, 2002). References Ahmed, W. (2010). Neoliberalism, corporations, and power: Enron in India. Annals of the Association of American Geographers, vol. 100, no. 3, pp. 621-639. 19p. 2. doi: 10.1080/00045601003794965. Choukroun, S. (2002). Enron in Maharashtra: power sector development and national identity in modern India. Thesis. Retrieved from http://lauder.wharton.upenn.edu/pdf/SylvieChoukroun_Thesis.pdf Fink, R.P. (2003). Enron and beyond: technical analysis of accounting, corporate governance, and securities issues. (Book Review) The Tax Adviser, vol. 34, no. 12, p. 760. Retrieved from http://galenet.galegroup.com Hyde, A.C. (2002). Enron: 'lessons' for public managers? (Views You Can Use: New Ideas for Management). The Public Manager, vol. 31, no. 1, p. 57. Retrieved from http://galenet.galegroup.com Kundra, P. (2008). Looking beyond the Dabhol debacle: examining its causes and understanding its lessons’, Vanderbilt Journal of Transnational Law. Retrieved from http://www.britannica.com/bps/additionalcontent/18/34271242/Looking-Beyond-the-Dabhol-Debacle-Examining-its-Causes-and-Understanding-its-Lessons McGill, G. A. and Outslay, E. (2004). Lost in translation: detecting tax shelter activity in financial statements. National Tax Journal, vol. 57, no. 3, p. 739. Retrieved from http://galenet.galegroup.com McLarney, C. and Dastrala, R. (2001). Socio-political structures as determinants of global success: The case of Enron Corporation. International Journal of Social Economics, vol. 28, no. 4, pp. 349 – 367. Retrieved from http://dx.doi.org/10.1108/EUM0000000005402 Parsons, N. E. (2002). The real Enron risk: energy traders. (Risk Reporter). Risk Management, vol. 49, no. 8, p. 8. Retrieved from http://galenet.galegroup.com The Negotiation Case Studies. (2010). Enron’s Indian negotiation debacle. Retrieved from http://www.negotiations.com/case/negotiation-project-india/ Turner, P.B. and Sherrill, M. (2011). 4 risks facing energy companies today. Risk Management, vol. 58, no. 7, p. 20. Retrieved from http://galenet.galegroup.com Read More