100486618 enron-case-study-1

ENRON CASE STUDY
INTERNATIONAL BUSINESS Page 1
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Date: February 17th
, 2012
SUBJECT
INTERNATIONAL BUSINESS
TOPIC
ENRON CASE STUDY
T.Y.B.COM – B.B.I

ENRON CASE STUDY
SEMESTER VI
ST. ANDREWS COLLEGE OF ARTS,
SCIENCE & COMMERCE (B.B.I)
GROUP NO: 6
PROF: FALGUNI MATTHEWS
ACKNOWLEDGEMENT
It gives us immense joy and pleasure to acknowledgethe help of all the
people who have helped us complete this project.
Our group owes more than it can say to the experience and the guidance
of our College Principle Dr. Marie Fernandes and the excellent faculty
and staff of St. Andrew’s College, Bandra.

ENRON CASE STUDY
We are greatly indebted to our BBI Prof. Shirley Pillai for her
enthusiastic supportand co-operation as also for her constant
encouragement throughoutthe making of this project.
A special thanksto our friends and above all to our families for their
unceasing love, support and encouragement. Their wisdom has helped us
through the highs and lowsof completingthis project.
DECLARATION
We the students of St. Andrew’s College of T.Y.B.COM (B.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.Information submitted is true and original to
the best of our knowledge.
Group Members

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

ENRON CASE STUDY
Name Roll. No Sign
1] MILTON GRACIAS 8225
2] ALSTON PEREIRA 8248
3] JEYSON BARBOZA 8249
4] VICKY RAMESH 8250
5] CLIFFTON KINNY 8251
6] HEINRICH KINNY 8252
7] KEVIN DSOUZA 8253
INDEX
TOPIC PAGE NO.
BACKGROUND 6
ABSTRACT 7
INTRODUCTION 9
IN QUEST OF POWER 10
THE POWER FACTOR 13
ENRON AND CORRUPTION 16
CONCLUSION 18
BIBLIOGRAPHY 19

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. In December 1993 Maharashtra State
Electricity Board(MSEB) signed a power purchase agreement with
Dabhol power corporation(DPC). The power plant
was planned to be completed in two stages. In 1995 after the state
elections, the new government scrapped the project,

ENRON CASE STUDY
alleging corruption and high costs. Later, in the same year the project
was renegotiated and MSEB’s stake was much
higher than it had been in the initial contract. In May 1999 the first phase
of the power plant was ready and begun
operating. Maharashtra government allies wanted to stop the project
because in their opinion the power produced was
much too expensive, and shortly thereafter they default on their
payments to DPC. In 2001 the problems continued and
in April the board of DPC authorized the management to terminate the
contract any time it chooses. Today the first
phase of the plant is idle and the second is still not completed, Enron’s
part of DPC is for sale and a deadline for bids is
on April 15.
Abstract

ENRON CASE STUDY
The case 'The Enron Saga' outlines
the problems faced by Enron in
starting its operations in India-the
legal, political and economic forces
at play during the early 1990s. 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 outlines the
various events from the time the
MoU was signed till the final
clearance. The case is a good
example of the strategy adopted by
Enron to make the project a success.
It also draws a comparison with
Cogentrix, which failed to take off
under similar conditions as faced by
Enron. 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.
The case helps them to understand how an effective strategy can
overcome the various political, 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. From the
case, the students are expected to understand the various factors (mainly
the external environment) that should be taken care of before entering an
international market.
The case is a good example of the role of ethics in business. One of the

ENRON CASE STUDY
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. To avoid
this, it is important to regulate the entry of companies to negotiate a fair
deal.
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. 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.
Introduction

ENRON CASE STUDY
In 1996, Rebecca Mark, CEO, Enron Corporation, managed to wrest the
controversial Dabhol Power Company (DPC) from the jaws of death.
Five years later (2001), the survival of DPC was at stake. Both DPC and
the Government of Maharashtra (GoM) have been accused of corruption
and economic insanity. With the controversy regarding the price of
power still raging and the latest payments crisis that the Maharashtra
State Electricity Board (MSEB) faced, both Enron and GoM were
desperately looking for a solution.
The MSEB was not able to lift even the first phase supply fully. It was
caught in a vicious circle with high fuel prices leading to low off take of
Dabhol power into the grid. This in turn caused the unit capacity cost to
rise. In October 2000, the price of Dabhol power touched Rs. 7.09 per
kWh, due to the high price of fuel and the worsening exchange rate. In
January 2001, responding to Business World's query on the state
government's stand, Padmasinh Patil, energy minister, GoM, said, "We
will set up a review committee shortly. There are complex issues to
work out".
Analysts felt that the possibility of Enron selling out or invoking penal
clauses in its contractual agreement with MSEB, to exit could not be
ruled out.
In Quest of Power

ENRON CASE STUDY
In June 1992, 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.1 Prior to this, the government drew up a list of projects in
which the private sector could participate.
In addition to the coal based projects, (Refer Exhibit II) there were two
or three gas-based projects in the list. The Enron Corporation showed
interest in setting up a power station in India based on the import of
Liquefied Natural Gas (LNG).
On 15 June 1992, a team of officials from Enron Corporation arrived in
New Delhi. On 18 and 19 June, 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 MoU specified
that the MSEB would buy electricity and/or capacity from Enron which
would build, own and operate (but not transfer) a plant of about 2000-
2400 MW capacity.
The power station would be built near Dabhol in the Ratnagiri district,
about 300 km south of Mumbai. 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. The "electrical power purchase contract” would be a contract for
20 years and would be structured to achieve a price of US $ 0.073/kWh
(Rs. 2.34 per unit at the then prevailing exchange rates)."
At the price quoted by Enron for a unit, MSEB would be paying a sum
of US $ 1300 million (Rs. 400 crores) every year for the total capacity of
2000 MW. The total payments for 20 years would be around 35 billion
US dollars.
In India the power sector was dominated by Central and State
government owned organizations. In most of the cases, any State

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

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

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

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

ENRON CASE STUDY
"This case has highlighted to the people how even after 50 years of
independence, 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."
- Bombay High Court's passing remark after dismissing a bunch of
petitions that had challenged the legality of the Enron power
project.
"Enron's India odyssey which started with the largest American FDI in
India is ending in a whimper."
- Business Today, February 21, 2001.

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

ENRON CASE STUDY

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

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