Stakeholder Analysis: Enron and the Dabhol Power Project in India.
...thout having the proper financial and governmental or non-governmental organizational (NGO) support backing them up for legal matters (Rangan, 2004, 1-3). By December 1993, after two years of mediation, Dabhol and the MSEB signed a Power Purchase Agreement. By 1994, the Indian government also signed a counter-guarantee for financial backing of the Dabhol project. Dabhol finalized their financing by March, 1995 with $643 million and $279 million in equity contributions. The final $2.8 billion required would be obtained later on since Enron wanted to begin construction (which is not the best way to organize such an expensive and complicated foreign project—Enron should have secured more direct financing from its own banks in the US or partnered up with different American corporations to construct the power plant. This would have allowed them more arbitration power while negotiating with the Indian government later). By 1995-1996, problems began when the Indian state government changed to a more populist coalition that wanted to cancel the Dabhol project. As soon as this was evident, Dabhol should have gotten Enron to find their own cancellation terms against the Indian government, rather than trying to resolve the conflict with such a powerful entity. These types of uncertainties would have been unacceptable in an American court, since the contract was legal, already in place, and canceling would cost Enron millions of dollars (Rangan, 2004, 1-3). However, the GoM filed a lawsuit in the Bombay High Court to cancel the purchase agreement due to corruption, fraud and misrepresentation (which were never proven in court, so they had no basis for contract cancellation). Enron should have countersued with their own lawsuit to show they were serious about the contract going through, and immediately begin enlisting the aid of the US government and any global legal authorities (Rangan, 2004, 1-3). SWOT Analysis: Enron Strengths: • Core competencies. • Adequate financial resources. • Name brand recognition. • Many subsidiaries. • Strong vision. Weaknesses: • Poor communication of company objectives. • Poor political negotiation tactics. • Weak long-term strategies. • Poor joint ventures. • Negative public reputation. • Loss of credibility. Opportunities: • Start over fresh and rebuild company reputation and corporate image. • Intensive planning for future development to re-establish themselves in the global community. • Keeping up with the high technology. • Gaining a competitive edge over rivals. • Maintaining the relationship with suppliers. Threats: • New entrants to the market. • Existing potential competitors. • Low customer switching costs. • Inability to repair damage to global reputation. • Incapacity to rebuild corporate clientele globally. Table 1 Enron SWOT Analysis Role of Political Risk The role of political risk in the Dabhol power project involved how there are always chances that a governing body of a nation could somehow intercede into the corporate negotiations of any foreign contract on behalf of the country. Since the contract with Dabhol was actually with the highest political governing body in all of India, the Indian government, Enron should have been more prepared for political uprisings that would interfere with the agreement being enforced. They should had their lawyers draw up a more iron-clad contractual agreement that could not be broken or challenged by any party, not even the Indian government, to protect themselves from the whole 10-year nightmare. Years of experience in corporate business in America should have better prepared them for these types of international uncertainties. However, because America is so well-regulated, government-supported, and able to have business contracts thoroughly enforced through its legal system with the appropriate punishments according to the crimes committed, Enron was unexpectedly surprised at how much control the Indian government had in the renegotiation process (Rangan, 2004, 1-3). Role of Sovereign Risk The role of sovereign risk in this case shows how no one company (no matter how large, profitable or successful), can defeat a sovereign ruling body in any type of legal mediation. Enron should have realized that going up against the Indian government was too difficult for their company to succeed in contract negotiations without conceding to major concessions. The Indian government is an independent, legislative supreme ruler with autonomous, self-governing power over any individual, private corporation operating in their country. The risk of confronting a governmental power for any single company is that not only will they lose any bargaining power they would normally have in their home country, but they also have to consider the ramifications of dealing with the national reputation of that particular nation. If it is a developing nation, the legal entities are not as regulated as in western nations like the USA, so Enron should have realized from the very beginning that there could be contract enforcement problems and took the necessary precautions. For the Indian public, the sovereign risk proved to increase their public electricity bills when the power plant was closed down (Rangan, 2004, 1-3). Role of Business Contracts The role of business contracts in global joint ventures is a very significant aspect of the actual agreement terms to be decided upon and the investments made by both parties. If a business contract is not properly drawn up with several major legal constraints on both sides, then the terms can be easily challenged in court and possibly renegotiated so that one party can take advantage of the other. Enron and Dabhol were not very smart in their establishment of their business contracts with the Indian government. Enron did not have the appropriate measures taken by global authorities to notarize, enforce and stand up for any of the contract terms. Perhaps Enron should have asked the United Nations, WTO, IMF or other non-governmental objective parties to step in and help determine the final negotiations. Without a more powerful strategic alliance on their side, and with the US government unable to intervene, Enron lost major concessions, millions of dollars, 10 years of wasted project time, and any hope of preserving their global reputation as a reliable contracting company for power plants in developing nations (Rangan, 2004, 1-3). Role of Political Lobbying By 1995, Enron had to commence a major lobbying campaign to re-open and renegotiate the Dabhol project with the Maharashtra state government. Several concessions were made by Enron on sensitive pricing issues just to allow the company to continue on with the construction of the power plant. After 1996, the new contract and its amendments were finally completed, however, Dabhol was contractually binded to pay $30 billion just to finish the building of the project. This type of political lobbying should have been conducted by Enron before the first contract negotiations even took place. They could have received much more authoritative and powerful NGO or governmental support through media persuasion or direct contact with other associations that could have been helpful later on in the renegotiation process (Rangan, 2004, 1-3). Recommendations as Enron’s Boss for Contract Renegotiations Since the Dabhol power project would eventually cost Enron and other investors over $3.5 billion in final costs, it seems that not enough research was done to know how much outside investment would be needed. Enron’s boss should have conducted extensive and detailed feasibility research studies to determine the overall expenditures necessary for its completion (and Enron should have taken the majority of the project with 90% ownership in the beginning and 75% in the renegotiation). Any studies done must not have been thorough enough to show that the financial projections over years of construction would be totally over-inflated if there were any political or sovereign uncertainty on the end of the Indian government. They should have conducted studies for every possible miscalculation, governmental hold-up, modification to the original contract terms, and other barriers to success as the prevention methods needed to avoid what eventually did occur. Enron should have gotten about $400 million in equity first, then fought to only have to pay $2 billion in the final costs. Enron’s boss should have allowed for more time to obtain the proper financial and corporate investments needed from banks or other companies, rather than just rush into contract negotiations and expect the Indian government to hold up their end of the bargain. Enron’s boss should also have recruited the best global lawyers, accountants and legal advisors for the contract negotiations and renegotiations in order to save Enron the major concessions they had to accept just to finish the plant. When the troubles initially started, Enron’s boss should have immediately reassessed the situation, then pulled out of India and accepted the challenge of mediating a feasible escape from the agreement with the Indian government (Rangan, 2004, 1-3). Enron’s Contract Compromises (What they gave away) Enron and Dabhol had to make several compromises in their original contract agreement terms, and that led to them having to pay many concessions to keep the power plant project in India from being halted. Due to the January, 2001 involvement of certain NGOs and Indian labor unions opposed to the project, the process became increasingly complex. Also, since the Indian government had guaranteed the project initially, they would be liable for large amounts of capital if it was cancelled, which led to more mediation. By May 30, 2001, the Enron/Dabhol power plant was closed and the MSEB in India refused to purchase any power units, which totally depleted Dabhol’s income. When Enron underwent its accounting malpractice lawsuit in October, 2001, all credibility was lost due to them having to have full public disclosure of all their global business dealings. This gave the Indian government all the power and upper hand they needed to totally take whatever they wanted in the contract renegotiations. By December, 2001, Enron went bankrupt, Dabhol had to fire 200 more employees in India (they originally had 15,000 who all lost their jobs because of the contract problems), and only a few executives were allowed to remain to oversee the final renegotiations and withdrawal from India. The two main contractors for Dabhol, General Electric (GE) and Bechtel (who owned 10% each of the Dabhol plant), were forced to stop working on the $1.8 billion second phase of the project. Both of the American companies left since they were not paid for two months when offshore allocators stopped sending the capital needed after the Enron bankruptcy. By September, 2003, an American arbitration panel ruled in favor of Bechtel and GE to give them $28.5 million each in political-risk insurance from OPIC because the Indian government had illegally seized their investments. Both firms also wanted the Indian government to pay $600 million each for depriving them from revenues. Enron had already lost their investment of $1 billion in the $2.9 billion Dabhol plant, and had to sell its 65% interest in it after the bankruptcy. Dabhol’s investors included 30 banks and financial institutions that lent them $1.9 billion. Debt negotiations in September, 2003 involved GE and Bechtel’s $1.2 billion claim against the Indian government (in accordance with each firm’s initial $120 million). Both foreign and local creditors lost all faith and confidence in the Dabhol plant and Enron after this business failure. Enron’s renegotiated contract terms included having to provide: Rs 2,450 MW capacity and Rs 826 MW for phase I (rather than Rs 2,105 MW and Rs 695 MW); Rs 2.03/KwH and Rs 1.86/KwH (rather than Rs 2.4/KwH without customs and duties for 20 years and 4% annual escalation on fixed charges); Rs 64.2 billion and Rs 15.8 billion for regasification facility fees (rather than Rs 90.6 billion with clearance for $920 million for phase I); 65% Enron ownership (rather than 80%); Enron/Dabhol had to pay for monthly air and water surveys, manag...