ENRON CASE STUDY

Date: February 17th, 2012

SUBJECT INTERNATIONAL BUSINESS

TOPIC ENRON CASE STUDY

T.Y.B.COM – B.B.I

SEMESTER VI

ST. ANDREWS COLLEGE OF ARTS, SCIENCE & COMMERCE (B.B.I)

GROUP NO: 6 PROF: FALGUNI MATTHEWS
INTERNATIONAL BUSINESS Page 1

support and encouragement. INTERNATIONAL BUSINESS Page 2 . Andrew’s College. Shirley Pillai for her enthusiastic support and co-operation as also for her constant encouragement throughout the making of this project. Bandra. Our group owes more than it can say to the experience and the guidance of our College Principle Dr. A special thanks to our friends and above all to our families for their unceasing love. Their wisdom has helped us through the highs and lows of completing this project. Marie Fernandes and the excellent faculty and staff of St.ENRON CASE STUDY ACKNOWLEDGEMENT It gives us immense joy and pleasure to acknowledge the help of all the people who have helped us complete this project. We are greatly indebted to our BBI Prof.

B.ENRON CASE STUDY DECLARATION We the students of St. Group Members Name 1] MILTON GRACIAS 2] ALSTON PEREIRA 3] JEYSON BARBOZA 4] VICKY RAMESH 5] CLIFFTON KINNY 6] HEINRICH KINNY 7] KEVIN DSOUZA Roll. No 8225 8248 8249 8250 8251 8252 8253 Sign INTERNATIONAL BUSINESS Page 3 .B.I) – 6th Semester hereby declare that we have completed the project on “ENRON CASE STUDY” for the subject International Business in the academic year 2011-2012.Y. Andrew’s College of T. Information submitted is true and original to the best of our knowledge.COM (B.

Y. No 8225 8248 8249 8250 8251 8252 8253 Sign INTERNATIONAL BUSINESS Page 4 .I) – 6th Semester have completed the project on “ENRON CASE STUDY” for the subject International Business in the academic year 2011-2012. Group Members Name 1] MILTON GRACIAS 2] ALSTON PEREIRA 3] JEYSON BARBOZA 4] VICKY RAMESH 5] CLIFFTON KINNY 6] HEINRICH KINNY 7] KEVIN DSOUZA Roll. Andrew’s College of T. The information is true and original for the best of my knowledge.ENRON CASE STUDY CERTIFICATE I __________________________ hereby certify that the following students of St.B.B.Com (B.

ENRON CASE STUDY INDEX TOPIC BACKGROUND ABSTRACT INTRODUCTION IN QUEST OF POWER THE POWER FACTOR ENRON AND CORRUPTION CONCLUSION BIBLIOGRAPHY PAGE NO. 6 7 9 10 13 16 18 19 INTERNATIONAL BUSINESS Page 5 .

Enron’s part of DPC is for sale and a deadline for bids is on April 15. Today the first phase of the plant is idle and the second is still not completed. The power plant was planned to be completed in two stages. and shortly thereafter they default on their payments to DPC. In 1995 after the state elections. the new government scrapped the project.ENRON CASE STUDY BACKGROUND Overview In May 1992 India invited Enron Corp to explore the possibilities of building a large power plant in Maharashtra and already the following month a memorandum of understanding was signed. INTERNATIONAL BUSINESS Page 6 . alleging corruption and high costs. In December 1993 Maharashtra State Electricity Board(MSEB) signed a power purchase agreement with Dabhol power corporation(DPC). Later. Maharashtra government allies wanted to stop the project because in their opinion the power produced was much too expensive. In May 1999 the first phase of the power plant was ready and begun operating. in the same year the project was renegotiated and MSEB’s stake was much higher than it had been in the initial contract. In 2001 the problems continued and in April the board of DPC authorized the management to terminate the contract any time it chooses.

It also draws a comparison with Cogentrix. The case helps them to understand how an effective strategy can overcome the various political. political and economic forces at play during the early 1990s. which failed to take off under similar conditions as faced by Enron. The case outlines the various events from the time the MoU was signed till the final clearance. From the case. The case is a good example of the strategy adopted by Enron to make the project a success. legal and economic hurdles. The case also shows how the political and legal environment influenced the approval of the project thus proving advantageous to Enron. The case is an example of how Enron surmounted the different hurdles and made the project viable under the then prevailing business environment in India. The case also touches the various options available to Enron and the MSEB to sustain the project under the prevailing circumstance of MSEB defaulting on payments.ENRON CASE STUDY Abstract The case 'The Enron Saga' outlines the problems faced by Enron in starting its operations in India-the legal. INTERNATIONAL BUSINESS Page 7 . the students are expected to understand the various factors (mainly the external environment) that should be taken care of before entering an international market.

One of the teaching objectives is that a foreign (not local) company can drain away large amounts of profits if the contract that is signed is not fair. This can be lowered if there is competitive and transparent bidding. It is also important that the state boards are run on a competitive basis. The rate of return is not important in the power sector. the single most important factor is the price at which one gets the power. To avoid this.ENRON CASE STUDY The case is a good example of the role of ethics in business. INTERNATIONAL BUSINESS Page 8 . it is important to regulate the entry of companies to negotiate a fair deal.

both Enron and GoM were desperately looking for a solution. GoM. Enron Corporation. The MSEB was not able to lift even the first phase supply fully.09 per kWh. CEO.ENRON CASE STUDY Introduction In 1996. Analysts felt that the possibility of Enron selling out or invoking penal clauses in its contractual agreement with MSEB. the survival of DPC was at stake. "We will set up a review committee shortly. Padmasinh Patil. Five years later (2001). This in turn caused the unit capacity cost to rise. energy minister. Rebecca Mark. INTERNATIONAL BUSINESS Page 9 . due to the high price of fuel and the worsening exchange rate. In October 2000. managed to wrest the controversial Dabhol Power Company (DPC) from the jaws of death. It was caught in a vicious circle with high fuel prices leading to low off take of Dabhol power into the grid. Both DPC and the Government of Maharashtra (GoM) have been accused of corruption and economic insanity. responding to Business World's query on the state government's stand. In January 2001. to exit could not be ruled out. the price of Dabhol power touched Rs. 7. There are complex issues to work out". said. With the controversy regarding the price of power still raging and the latest payments crisis that the Maharashtra State Electricity Board (MSEB) faced.

MSEB would be paying a sum of US $ 1300 million (Rs. (Refer Exhibit II) there were two or three gas-based projects in the list.ENRON CASE STUDY In Quest of Power In June 1992.1 Prior to this.34 per unit at the then prevailing exchange rates). INTERNATIONAL BUSINESS Page 10 . a team of officials from Enron Corporation arrived in New Delhi. The Enron Corporation showed interest in setting up a power station in India based on the import of Liquefied Natural Gas (LNG). 2.073/kWh (Rs." At the price quoted by Enron for a unit. In addition to the coal based projects. a team of officials of the Government of India (GoI) toured the USA with the aim of inviting power producers in the USA to invest in India. the government drew up a list of projects in which the private sector could participate. The power station would be built near Dabhol in the Ratnagiri district. the team visited over half a dozen potential sites in Maharashtra and on 20 June 1992. the MSEB signed a Memorandum of Understanding (MoU) with Enron. The total payments for 20 years would be around 35 billion US dollars. The MoU also specified that the MSEB agreed that there was a need to set up a 2000 MW plant to be run on LNG. On 18 and 19 June. The MoU specified that the MSEB would buy electricity and/or capacity from Enron which would build. about 300 km south of Mumbai. The "electrical power purchase contract” would be a contract for 20 years and would be structured to achieve a price of US $ 0. 400 crores) every year for the total capacity of 2000 MW. On 15 June 1992. own and operate (but not transfer) a plant of about 20002400 MW capacity.

INTERNATIONAL BUSINESS Page 11 . did not diminish significantly. IPPs started contributing to installed capacity only as recently as 1996. In 2000. NHPC.3 The major portion of the capacity was set up by SEBs (58%). their share in power generated. Nuclear Power Corporation. In most of the cases.ENRON CASE STUDY In India the power sector was dominated by Central and State government owned organizations. This was followed by centrally controlled plants which contributed 34%. transmittor and distributor of power. Central Utilities dominated the Indian power generation sector. Damodar Valley Corporation and NEEPCO. India's power generation capacity stood at around 96600MW (Approx. Power was generated by Central Utilities such as NTPC. as well as new capacity added. Even after the new power policy of 1991came into effect. 478 billion units). State Electricity Boards which were stateowned utilities. any State Electricity Board (SEB) was the sole generator. Transmission and distribution was mostly in the hand of SEBs with the sole exception of Orissa where power distribution was in the hands of the private sector. licensees such as BSES and CESC and Independent Power Projects (IPPs).

To meet the growing shortage of power. The new power policy permitted 100 per cent foreign owned companies to set up power projects of any capacity and type (coal. could generate power and sell it to the respective SEBs under a Power Purchase Agreement (PPA). INTERNATIONAL BUSINESS Page 12 . hydel.. An Independent Power Producer (IPP). the government encouraged private (including foreign) participation in the power sector. Central Utilities included Powergrid Corporation of India. Rural Electrification Corporation and Power Trading Corporation of India. after getting government approvals for its specified plant size.. wind or solar). Licensees were predominantly private companies that generated and distributed electricity to urban areas. Power Finance Corporation of India.ENRON CASE STUDY This was largely due to the failure of IPPs to take off. gas.

. the Government of India asked Enron to submit a break-up of the project costs and the return on equity that was assumed. Among the parameters that should have been examined were the capital cost of the plant (on which the price of electricity depends)." In July 1992.. “…We advice you against auditing project costs and predetermining return on equity. the CEA examined the MoU and pointed out that the price agreed on was a "departure from the existing norms and parameters notified by the Government. the location of the plant etc." According to the CEA.”. In July 1992. the price that had been agreed upon was "considered high. INTERNATIONAL BUSINESS Page 13 . An autonomous organization. Enron wrote back stating. the type of fuel to be used." It also pointed out that “denominating the price in US dollars was also a departure from the existing norms. the Central Electricity Authority (CEA) was supposed to examine these aspects.ENRON CASE STUDY The Power Factor The MoU between Enron and MSEB was signed prior to the examination of the terms and conditions and implication of the project.

The DPC and the MSEB would have to work out alternative options as the project was unviable in its present form. Gopinath Munde. 400 MW and an LNG terminal of 5 million tons. the power from Enron is currently expensive.ENRON CASE STUDY The Peak Load The project generated much controversy in Maharashtra. leader of the BJP. former director. "Yes.". INTERNATIONAL BUSINESS Page 14 .. visited the Enron site and promised to throw "the project in the Arabian Sea". Said Kirith Parikh. Throwing the Enron project into the sea is not an option.. if MSEB failed to pay up and the state government refused to bail out the ailing MSEB. Business Line and Frontline carried long and detailed articles on the PPA.. which had been kept secret up till then. Enron was made a key issue in the elections. In January 1995. The PPA had provisions for arbitration in case a dispute could not be resolved through negotiations. but a solution needs to be worked. the BJP was in the forefront of the opposition to the project on a number of grounds. elections to the Maharashtra state assembly were announced. Indira Gandhi Institute of Development Research (IGIDR).. There was an increasing possibility that the dispute over phase I might end up in international arbitration. Of the two main opposition parties (the BJP and Shiv Sena) . A Tripp The MSEB's inability to pay DPC was rapidly emerging as a threat to the viability of phase II of the project which involved a generating capacity of 1. Their primary contention was that the deal indicated corruption at the highest level.

"Enron's India odyssey which started with the largest American FDI in India is ending in a whimper.ENRON CASE STUDY "This case has highlighted to the people how even after 50 years of independence." . INTERNATIONAL BUSINESS Page 15 .Bombay High Court's passing remark after dismissing a bunch of petitions that had challenged the legality of the Enron power project. political considerations outweigh the public interest and the interest of the state and to what extent the government can go to justify its actions and not only before the public but even before the courts of law." . 2001. February 21.Business Today.

Enron and DPC have also been criticised about its accounting and auditing procedures.g. Despite of this. The US Government carried out an investigation about the questionable USD 6 million education expenses used by DPC. Arthur Andersen is accused of allowing Enron to hide huge losses off the balance sheet. Dabhol has been accused of corruption in the setting up of the project and in the procedure regarding granting official clearance for the project. The auditors allegedly conspired in the manipulation of accounts. However. the project contract was questionable. the results showed that there was no bribery involved in the amount. the employees have told later that communicating the corruption to managers would possibly have caused reprisal INTERNATIONAL BUSINESS Page 16 . According to a senator there is an “almost a culture of corporate corruption” in Enron. The World Bank has called this type of corruption “state capture”. e.ENRON CASE STUDY Enron and Corruption Right from the beginning. no cases of prosecution have been made. The initial contract of the project was considered to be suspiciously generous to DPC. Generally Enron has a bad reputation in its corporate culture.

ENRON CASE STUDY INTERNATIONAL BUSINESS Page 17 .

Also Daewoo. India had been carefully building the confidence and trust of the foreign financiers and companies. The points of failure were that the high costs and that MSEB ran out of money. e. since its financial situation was not evaluated critically enough in the beginning of the project. PowerGen and National Power have previously experienced problems in India. One other important factor that proved to be dreadful is that although DPC got decisions in court in favour of them.ENRON CASE STUDY CONCLUSIONS The project was the focus of attention nationally and internationally because of the controversies surrounding the project’s suspension. Internationally. The Dabhol power project’s collapse came at an acutely embarrassing time for the Indian government. The law enforcement did not work as it should have which in turn was a result of many different causes. The DPC debacle follows with a number of foreign investors pulling out of India. There are numerous reasons that made the project fail discussed in this paper.g. so they could not get their money. there was no way they could enforce the decisions. as it needed to secure long-term economic growth. INTERNATIONAL BUSINESS Page 18 . Electricite de France and Cogentrix.

http://altindia. http://www.uk/news/labour_and_enron.html Altindia http://www.ENRON CASE STUDY BIBLIOGRAPHY References: The enron saga.com/general18/enrons.consortiumnews. http://www.net/enron/Home_files/Gom_gua.net/enron/Home_files/goi_gua. http://www.org.altindia.com/human_rights/doc299.htm Democratic underground http://democraticunderground.html Jeff Rense Program http://www.htm Corporate watch http://www.net/enron/Home_files/doc/munde/intro.org/reports/1999/enron/index.htm http://www.guerrillanews.altindia.rediff.htm Independent Power Producers: A review of the issues.html Guerillanews http://www.corporatewatch.html Consortiumnews http://www.com/2001/123001a.icmrindia.hrw.htm INTERNATIONAL BUSINESS Page 19 . http://www.indiainfoline.htm Government of India guarantee.org/casestudies/catalogue/Business%20Ethi cs/The%20Enron%20Saga.altindia.com/infr/spfe/inpp/ Power purchase agreement scans.htm Government of Maharasthra guarantee.com/money/enron1. rediff.rense.com/articles/02/01/26_india_2.net/enronPPA/ Human rights watch. http://www.

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