The biggest American company ever to go bankrupt, leaves a trail of questions and lessons.
IF you had to name a single company that could serve as a symbol of international capitalism in the 1990s, this would probably be the one. The giant multinational corporation Enron grew from being essentially a gas pipeline company in the 1980s, into the world's single largest energy trader, accounting for around 25 per cent of energy trade in both United States and European markets. Last year, Enron was ranked 16th on the Global Fortune 500 and eighth on the U.S. Fortune 500.
By then, Enron had grown into a multisector service corporation with five major divisions: Enron 'Transportation Services' specialised in the company's traditional natural gas pipeline operations. Enron 'Energy Services' was the company's retail arm for the sale of natural gas and electricity to both commercial and industrial users. Enron 'Wholesale Services', which is also the main shareholder in the infamous Dabhol Power Company (DPC) in Maharashtra, currently delivers more than two times the natural gas and electrical power volumes as its nearest competitor. Enron 'Online Services' is a commodity trading system. It provides the largest eCommerce site in the world, dwarfing all other energy marketing web sites combined. Enron 'Broadband Services' streamlines media applications and "customises" bandwidth solutions on the Internet.
But of course there was even more in the story of Enron, and that is what makes it so symbolic. It exemplified two important tendencies in contemporary capitalism: the urge - and remarkable ability - to commercialise almost all aspects of human life; and the use of lobbying and access to political power to influence national and international policies to its own advantage.
Surveys conducted by the business magazine Fortune have named Enron the most innovative company in America for six years in a row. One of the reasons was that it was largely responsible for the notion that anything could be commoditised. In fact Enron pioneered the use of the Internet to buy and sell natural gas and electric power supplies for utilities and industrial power users and helping them to hedge against fluctuations in power prices. But in addition, the company has been buying and selling a giddying range of products, from pulp and paper to petrochemicals and plastics to water, and including weird products like clean air credits that power utilities could purchase to "meet" pollution emission limits.
The increasingly popular market perception was that Enron could initiate trade in anything: the weather, bandwidth, even (ironically, now) bankruptcy. This led the eCommerce wing alone to transact tens of billions of dollars of business last year.
The other important characteristic of Enron was its significant political clout, which made it the envy of other large corporations. This clout did not come cheaply: Enron - and its Chairman Kenneth Lay - invested huge amounts in terms of direct donations and other contributions, especially (but not exclusively) to the Republican Party in the U.S. Enron and its executives were the single largest contributors to the presidential ambitions of George W. Bush. Kenneth Lay personally gave at least $1 million in soft money to Bush's political campaigns, and organised a Republican fundraiser that topped all previous records by bringing in $21.3 million in one night.
When Bush was Governor of Texas, Lay served on his Governor's Business Council, and he was a key energy adviser during the presidential campaign. As the Bush Administration formed its controversial energy plan, which favoured the oil and gas industry, Lay was one of the business executives called in to advise. Some benefits have been direct: thus the Enron Methanol plant in Pasadena, Texas, won special concessions from then Governor Bush, which allowed the company to pollute without a permit, as well as giving it immunity from prosecution for violating some environmental standards.
The company also had close ties with U.S. Senator Phil Gramm of Texas, a Republican on the powerful Senate Banking Committee. Gramm's wife, Wendy, joined Enron's board of directors after a five-year term as chairwoman of the U.S. Commodity Futures Trading Commission, which played a role in deregulating energy markets that Enron dominated until its recent financial crisis.
Enron has benefited from these links not only in terms of U.S. domestic energy policy, but also in its international activities. Thus the Overseas Private Investment Corporation (OPIC), which provides political risk coverage and financial support to U.S. companies investing abroad, provided financing or insurance coverage worth almost $300 million for Enron's foreign projects in 2000. Enron received $200 million in political risk insurance for the Dabhol project in 1996, and $200 million in insurance in 1999 for its Bolivian project.
More significantly, the company emerged as a major player in influencing the ongoing GATS (General Agreement on Trade in Services) negotiations at the World Trade Organisation (WTO). The aim has been to expand the scope of the rules to include all public services, ranging from health care and education to energy, water and transportation services. These would push for commercialising and privatising all forms of services and utilities, implying a drastic restructuring of the role of government regarding public access to essential social services across the world. As a leading member of the U.S. Coalition of Service Industries (UCSI), Enron was becoming a prime example of how large multinational corporations can not only influence, but actually determine, global trade rules at the WTO.
The company inevitably created controversy. In India, the Dabhol power project, of which Enron was an 80 per cent shareholder until the Government of India recently purchased 30 per cent shares, was highly controversial from even before its inception. There is sufficient evidence that Enron used its now well-honed skills in terms of lobbying and influencing decision makers to receive terms that proved to be not only excessively generous for itself but actually unsustainable, such that the Maharashtra State Electricity Board (MSEB) had to stop buying power from Dabhol. Amnesty International and Human Rights Watch have both criticised Enron for colluding with the police who brutally suppressed protests at the Dabhol power plant project site.
In Bolivia, the company has been linked to major environmental damage, with its involvement in the Cuiaba Integrated Energy Project. Last year an oil pipeline erupted and dumped an estimated 10,000 barrels of refined crude oil and petrol into the Desaguadero River, which supports several indigenous communities. Local people were deprived of food and means of livelihood, and had to march to the capital to protest before any help was provided.
Enron was even able to reap huge profits from the California energy crisis. When sudden energy shortages translated into massive cost increases, major suppliers of commercial and industrial energy like Enron raked in huge profits, in Enron's case around $377 million. Enron officials have argued that the market should be even more deregulated, to allow 'demand' and 'supply' forces to resolve the ongoing energy crisis in California.
The combination of aggressively innovative trading practices and huge lobbying clout made Enron the darling of Wall Street. It was one of the highest performers on the share market, especially because it supposedly straddled both "old economy" and "new economy" interests. Last year the share price rose to a peak of more than $90 a share.
THE fall of such a huge and powerful company has been relatively swift. The sheer rapidity and scale of its recent growth now appears to have been accompanied by heavy and unsustainable borrowing and willingness to fudge its financial statements. In late October 2001, the company disclosed that it had shifted billions of dollars in debt off its balance sheet and into an array of complex partnerships. When the Securities and Exchange Commission investigated, Enron restated five years of earnings, wiping out nearly $600 million in profit.
As a result, Enron was teetering close to insolvency when Dynegy, a smaller Texan energy company, agreed to acquire it for $9 billion plus the assumption of $13 billion in debt. However, when Enron subsequently disclosed even more debts and dubious financial dealings, Dynegy backed down from its offer. Credit rating agencies downgraded Enron's debt to junk status. Energy trading companies reduced dealings with the firm, and some forced Enron to pay higher prices for natural gas and other products or required it to post large cash deposits to back trades. Enron shares fell by 85 per cent on a single day (November 28) to close at 61 cents a share. It also created a New York Stock Exchange record for large trading volume in a single stock.
At the time of writing, the company is teetering on the brink of bankruptcy. With $62 billion in assets as of September 30, it would be the biggest American company ever to go bankrupt. In consequence, not only are the holdings of investors, including big mutual funds, almost wiped out, but the fate of more than 21,000 employees is in doubt.
This will certainly have repercussions in India as well. The resolution of the DPC dispute would never have been easy and uncomplicated, but now it will be further delayed as the parent company's existence is in doubt. Meanwhile, delays would increase the losses of DPC as interest costs mount since the plant is sitting idle, shut down since June. The Industrial Development Bank of India, State Bank of India, ICICI and other Indian financial institutions have lent directly or guaranteed loans totalling Rs. 6,204 crores ($1.4 billion) to Dabhol. All these loans are now in question, and the profitability of these financial institutions also would be affected.
Enron was more than a large multinational company. It was in fact a symbol of, and for some even a model for, economic activity across the world including in India. It may be too much to hope that its collapse will come to symbolise the disintegration of the type of capitalism Enron came to represent. But it must surely lead to a deeper questioning of the economic system which can generate this scenario.