Business Negotiation Skills - Research Paper Example

Case Analysis – Enron Executive Summary The project was to generate electri in two phases by importing liquefied natural gas from Qatar for thesecond phase at Dabhol, a town situated on the Indian Ocean. Central to the Dabhol project was Enron’s business interest in getting a buyer for the produced electricity at a fixed rate for the long term debt financing it had undergone to leverage its investors. Three major problems surfaced regarding the Dabhol Power plant. The World Bank, consultant to the Indian government, found the project costly in comparison to traditional sources of energy. Secondly, there was no unanimity over return to the stakeholders of the project between the Indian central government, state government and Enron. The last major tussle was over the rate of tariff, red tape in giving the green signal to the project without ay transparency in the bidding of the project. The opposition to the project had begun with the filing of suit against Enron in the Indian High Court. Opposition political powers at the state made this a huge issue in the approaching Maharashtra assembly elections and with the change of government; the contract was annulled by the MSEB causing daily loss of US$250,000 to Enron and its partners. The contract was further renegotiated at the behest of Enron with the new state government. After agreeing to new terms and conditions stipulated by the MSEB, and the 1st phase was completed and second phase of producing electricity started but the MSEB failed in paying back the agreed tariff rate. By the same time, Enron also filed for bankruptcy. Basic Analysis of the Case Enron, a US energy giant, signed a contract with the Indian government for the production of electricity by building a 2,015 megawatt power station through market debts of $1.75 billion (Choukroun 2002). The project was Enron’s first diversification initiative in one of the emerging countries, India, at its thirds largest state, Maharashtra’s commercial capital, Mumbai. The project collapsed due to Maharashtra State Electricity Board (MSEB) debt and renegotiations (Negotiation-project-India 2010). The timing of setting the power plant coincided at a critical time after the economic slow down of 1991 as no other company was willing to take such a huge risk of investing in India. It was called nothing but “…inspired lunacy” on the part of Enron (Choukroun 2002). Enron signed a contract with the Maharashtra Sate Electricity Board (MSEB) by putting its and its partner companies’ stakes in Dabhol Power Project. The negotiations for the project began primarily with the two stakeholders from the Indian government, one was the Indian state of Maharashtra and the other was MSEB. The project proposal of making a 2015 megawatt power plant with the proposed investment of US$3 billion was cleared initially. On its side, Enron was not the sole company; it had made and entered into joint initiative with the investment of 10% each by General Electric and Bechtel. It required Liquefied Natural Gas to power the plant, which it arranged from another of its joint venture in Qatar, 1200 miles away from the plant location in Dabhol. As it was the biggest ever project taken by Enron in India, it offered to produce electricity in two phases. In the 1st phase it was to produce 695 megawatts from the locally arranged LNG. In the second phase the project was to produce 1320 megawatts through gas imported from Qatar (Negotiation-project-India 2010). Business interests of Enron from this project were to gain long term profits for the company investors from a buyer that would purchase electricity, which was the MSEB of Maharashtra. To finalize the contract, a memorandum of agreement was signed in less than five days between the MSEB and Dabhol Power Plant representing Enron of purchasing electricity at the rate of 2.40 rupees (7.3 cents US) per kilowatt hour (Negotiation-project-India 2010). The Indian media had already been debating the pros and cons of the project, finding a number of loopholes. Arundhati Roy, an Indian novelist and anti-globalization Activist, expressed her opinion on the project saying, “It was the biggest contract ever signed… and probably, no obviously, the biggest con job on an entire nation” (Choukroun 2002). So, at political and social level, the project had become a hotly debated issue of interest for the Indian masses. An anti environment had been created pointing fingers towards the people at the political helm of affairs in India being blamed for taking bribes in clearing such a huge contract without undergoing proper procedure of calling bids globally. An Indian public interest group filed charges that Enron along with an Indian company, Reliance bribed the Petroleum Minister in 1992-93 to get the contract (Roy 2002). The opinion of the World Bank was also against the project, which helped in inflaming the feelings of the common public against the power project, thus, creating an uncongenial environment. The World Bank argued that the project would supply electricity beyond the demand for many years and would cost high in comparison to traditional sources like energy produced with coal. Enron also initiated a response campaign highlighting the positive environmental impacts of the project. Another issues related to shareholders’ return on investment arose between Enron and the Indian central and State government. Enron wanted to pay back to investors at the rate of 26.52 percent, which the Indian state and central government wanted to be no more than 20 percent. Finally the agreement was reached on 25.22 percent. Negotiations among different opposing stakeholders also faced public wrath over high tariff rate, bribe taking by the ruling party and lack of transparency over the whole contract (Negotiation-project-India 2010). The debate over the power plant project never subdued although the project was finally signed in December 1993. At political and judiciary level, tactics spurred the environment against the project. A case was fled in the Indian High Court. The main opposition parties at the state level, the Shiv Sena Party and the Bharatiya Janata Party made this an issue in the approaching state assembly elections in 1995. The ruling Congress Party got defeated because of supporting the contract with Enron. The new government conducted an inquiry into the project that resulted in the cancellation of the agreement to purchase electricity by MSEB from the Dabhol Power Company. The Enron and its associate investment companies at the time of break up of the agreement had already invested US$300 million and delays were causing huge losses to the Enron and its partner companies of US$250,000 daily. This initiated a legal battle between both the parties but it did not stop Enron from making new initiatives for convincing the new government at the state of Maharashtra to review the case and start the renegotiation process. The government also agreed to renegotiate with the Enron executives and at the same time held discussions with those elements that were against the power project over high tariff rate, huge capital involved, payment procedure, and the environment (Negotiation-project-India 2010). Renegotiation succeeded with new entries of 30 percent partnership of MSEB with Enron, with Enron charging reduced interest rate from 80 percent to 50 percent from MSEB. The total outages after the completion of the 2nd phase also increased to 2,410 megawatts. Capital cost was also reduced besides new reduced tariff rates of 6.03 US cents were applied conditionally, depending on the hike in fuel and inflation (Negotiation-project-India 2010). By January 1996, environment became quite conducive for a renewed agreement between the concerned stakeholders, Enron and MSEB. The Indian government Okayed the project once again but still the production could not start as 24 court cases were pending decision over the power project. Finally, this took one full year till December 1996. By the time the second phase of the project began for which Enron had arranged the finance of US$1.87 billion, the MSEB was unable to pay its debt of US$45 million to the Dobhal Power Company. As a result the plant was closed and a case was filed against MSEB by the Dobhal Power Company. Incidentally, Enron also declared bankruptcy (Negotiation-project-India 2010). Conclusion Taking from the start, it was wrong on the part of Enron to invest in a technology-efficient project in India without undergoing an analysis of Indian socio-political set up. It became very much clear that the project got materialized without fulfilling of routine legal and corporate formalities attached to such a global venture. It also became clear that Enron took the unethical route in capturing the contract. It was unaware of the political debating environment at the emerging country, India. All its negotiating and renegotiating skills got defeated because the MSEB could not pay the bill against the used tariff. Enron had to fight a battle on many fronts at the same time; it ran counter-campaigns to create environment in its favor; it fought legal battles. DPC found the chances of an out-of-court settlement quite dim, therefore, wanted a decision by the Maharashtra Electricity Regulatory Commission (MERC) and maintenance of arbitration clause in Power Purchase Agreement (Parasuram 2001). It had to face the harsh political repercussions over under the table tactics. Even after compromising its interests on reduced tariff rates, allowing a 30 percent partnership to MSEB, reducing the interest of the MSEB from 80 percent to 50 percent, increased production, reduced tariff and capital cost, it came crumbling down by going bankrupt. Finally, OPIC, a US government undertaking paid more than $110 million on political-risk insurance policies covering Enron, Bechtel, and GE among others for the risk against expropriation. Since the Enron debacle, India has made moves to create a positive environment for the foreign investors to invest in joint ventures. Changes have been made in the related laws to confirm with the international standards on appropriation. At that time, the action of the Indian government, particularly the Indian law violated the international law, and it was nearer to “total expropriation” (Kundra 2008). References Choukroun, Sylvie., 2002. Enron in Maharashtra: power sector development and national identity in modern India. Thesis. Available from http://lauder.wharton.upenn.edu/pdf/SylvieChoukroun_Thesis.pdf [Accessed 10 December 2010]. Kundra, Preeti 2008. ‘Looking beyond the Dabhol debacle: examining its causes and understanding its lessons’, Vanderbilt Journal of Transnational Law, http://www.britannica.com/bps/additionalcontent/18/34271242/Looking-Beyond-the-Dabhol-Debacle-Examining-its-Causes-and-Understanding-its-Lessons [Accessed 10 December 2010]. Parasuram, T.V. 2001. Enron debacle would dampen Flow of foreign funds, Legal Battle On, As High Court Adjourns. Available from http://www.outlookindia.com/article.aspx?212190 [Accessed 10 December 2010]. Roy, Sandeep 2002. ‘India: Enrons Debacle at Dabhol’, Pacific News Service, 8 Feb. 2002 Available from http://www.corpwatch.org/article.php?id=1773 [Accessed 10 December 2010]. The Negotiation Case Studies, 2010. Enron’s Indian Negotiation Debacle. Available from http://www.negotiations.com/case/negotiation-project-india/ [Accessed 10 December 2010]. Read More