Enron teaches tough lessons for developing world
Enron’s escapades in India have thrown up several important lessons for developing countries. The sordid saga of the politically well-connected power producer which has now filed for bankruptcy in the US has illuminated the perils of energy-sector deregulation and the need to fight off hegemonic pressures exerted on behalf of multinational corporations.
by Praful Bidwai
NEW DELHI: As the Enron scandal sends wave after shockwave through the American political system, the international repercussions of history’s most spectacular case of corporate bankruptcy are just surfacing.
Enron has become an abusive transitive verb in the US, where some 15 committees are investigating the sleazy political connections and the energy deregulation policies that allowed the “New Economy” company to stage a meteoric rise.
Many of the 250-plus senators and congressmen (half the total) who received Enron’s “donations” are returning them to save themselves from further opprobrium.
But in the Third World, Enron faces very little opprobrium, even embarrassment. In India, where it has the largest direct investment in an overseas industrial project, the corporation continues to make bullying and threatening moves.
It is trying to drag the government of India’s Maharashtra state into international arbitration over the termination of a power purchase contract signed with its subsidiary, Dabhol Power Company, rather than submit itself to Indian jurisdiction.
The controversial contract for extremely expensive electricity was suspended six months ago by the Maharashtra power board, which nearly went bankrupt as a result of high power prices. As reported earlier, the deal was reached through shadowy, secret negotiations, and in violation of the Electricity Supply Act.
Enron is also getting Washington to plead its case. Deputy Treasury Secretary Kenneth Dam, who visited India recently, has told New Delhi to resolve the Enron issue speedily and speed up economic reforms.
On 28 January, Ambassador Robert Blackwill made a forceful intervention at an industry meeting, saying that all foreign investment into India hinges upon a favourable resolution of the Dabhol company dispute, which “feeds a chronic perception among the overseas investing community that India may not be ready yet for big-time international investment”.
Blackwill demanded adherence to the “sanctity of contract”, doubts about which can “spell death to potential investors”.
This “arrogant” statement left many industrialists angry and inspired Blackwill’s redescription as the “Viceroy”, the British Crown’s all-powerful representative in India during the colonial period who towered over domestic subjects.
Blackwill may only be voicing the views of the Republican administration: after all, US Energy Secretary Spencer Abraham defends energy deregulation in spite of Enron’s collapse and the bankruptcy of PG&E, the US’ largest power distribution company. In the 14 January issue of the Washington Post, he claimed, “Deregulation is working”.
Blackwill’s remarks were indicative of US support for Enron’s effort to get as much as $2.3 billion for its 65% stake in Dabhol Power Company. Market analysts evaluate it at less than half that figure.
Successive US administrations have heavily lobbied on Enron’s behalf. Vice-President Dick Cheney, himself a former energy company boss, has been in the forefront here.
This policy is rationalized by the White House. Its spokesperson Ari Fleischer recently said: “It’s not uncommon for (companies) to have exposures, which do require contacts between American officials and government officials in other countries.”
In 1995, President Bill Clinton sent an official memorandum to the White House chief of staff, helping Enron clinch the Dabhol deal that was then being resisted by the New Delhi government.
The US energy secretary had publicly warned India: “Failure to honour the agreements between the project partners and the various Indian governments will jeopardize not only the Dabhol project but also most, if not all, of the other private power projects proposed for international financing.”
The threat worked.
More recently, said the Washington Post, the National Security Council reduced itself to a “concierge service” between Enron’s Kenneth Lay and India’s National Security Adviser Brajesh Mishra.
Normally, these disclosures would have sparked a sharp political riposte in India, especially from opposition parties like Sonia Gandhi’s Congress Party. But their response has been supine. This is so in part because Vice-President Cheney had “spoken to” Sonia Gandhi and Manmohan Singh during their US visit in June.
However, pressure to liquidate or nationalize the Dabhol Power Company is likely to build up in India as the Enron investigation proceeds apace in the US.
There are three general, and three specific, lessons in the Enron story for the developing countries.
Firstly, it is absolutely vital to fight off hegemonic pressures exerted on behalf of multinational corporations.
Without such pressure, the highly unequal contract between Dabhol Power and the Maharashtra government would not have been signed in 1995. The central government of India would not have given sovereign guarantees to the project.
The various Indian agencies could have resisted such pressure by developing arguments about competitiveness, efficiency and the logic of the market. They failed to do so.
A second lesson is developing countries should ignore all hype and hoopla about the “New Economy”, which makes it appear as if corporations belonging to that sector follow rationale different from those of the Old Economy, and that they are not motivated by profits.
The third general lesson for the developing countries is that private investment looking for quick returns cannot be the favoured instrument for building core infrastructure such as roads and telecommunications.
In fact, in the developed countries themselves, such activities have typically been financed directly by governments or through state-guaranteed low-interest bonds. This is true not only of Western Europe, but also of the US. Western power utilities were built at low rates of return, such as 2% or 3%.
By contrast, private companies look for quick paybacks and high rates of return such as 16% or more. In the Dabhol Company’s case, the rate was a complete rip-off, varying from 31% to 52%.
Professor AKN Reddy of the International Energy Initiative has drawn many specific lessons for the energy sector. The first, he says, is that it must not be deregulated.
Deregulation has proved disastrous in California, whose biggest power producer and distributor has become unviable. In India too, deregulation of electricity in states like Orissa has led to skyrocketing prices, coupled with low supply reliability.
The second lesson is that the energy industry’s emphasis must shift from supply to demand, with a clear focus on rational use of energy services. This approach privileges users’ groups and ordinary people - not corporations.
The final lesson is that no contract should be signed without full transparency, including open tenders, competitive bidding, and credible evaluation of bids. (IPS)
TWE No.274 (1-15 Feb 2002)