Dabhol Darkness

ENRON’S spectacular rise, and its even more dizzying collapse, is being felt far and wide. In a matter of six weeks — mid-October to end-November — Enron’s market capitalisation dissolved from $62 billion to zip, making it the most spectacular bankruptcy in US history. Its auditors, Arthur Andersen, are in deep trouble, and so are a host of banks and financial institutions on Wall Street. Indian FIs are not far behind. Meanwhile, disturbing reports have surfaced — that Enron has removed critical plant components to a secure location outside India, forestalling Indian lenders from selling the plant.

With the Afghan war winding down, Enron and its political connections have come under increasing scrutiny in the US. Half the senate and three-fourths of the Congress received funding from Enron. The Bush administration is particularly vulnerable, as Enron’s ties with the Bushes, both senior and junior, are well known. There is now talk of an Enron gate hamstringing the Bush presidency.

While the Republicans received three times as much as the Democrats from Enron, it is clear that Enron had friends in both the major parties. In 1993, Wendy Gramm, Bush senior’s top commodity regulator and the wife of senator Phil Gramm, was appointed to the Enron board — just five weeks after she helped push through a ruling favourable to Enron. Enron officials met Dick Cheney and his energy task force six times last year. Not surprisingly, the task force produced a report largely in tune with Enron’s recommendations.

That Enron was cooking its accounts over a long period of time is now public knowledge. What is now coming to light is that a number of its key executives and directors sold millions of shares from 1999 through mid-2001, raking in more than a billion dollars; while advising others, including their employees, to hold on to theirs. Prominent among the winners were Kenneth Lay, founder chairman, with more than a $100 million; Jeff Skilling, the past CEO, and Rebecca Mark of Dabhol fame, both of whom made about $60-80 million each. These and other insiders bailed out well before the stock nose-dived; small investors and Enron employees, who had most of their pension funds in company stocks, were left holding worthless paper.

The Enron collapse has revived the debate about the inherent conflict of interest in auditors doubling as consultants. In 1999, Arthur Andersen and other leading audit companies successfully spiked regulatory attempts of the Securities and Exchanges Commission (SEC) and its chairman Arthur Levitt to ban firms from offering consulting services to companies that they audit.

How did a nondescript Texas company, owner of a few pipelines, rise to become an economic powerhouse? And how did it fall from the dizzying heights of a Fortune 10 company to nothing in just one year? To unravel this mystery, we must look at the kind of business Enron built up. Under Kenneth Lay and Jeff Skilling, Enron built itself up as an energy trader. With a worldwide, computerised energy trading system, EnronOnline, it became a new economy energy company. In this system, the bulk energy consumers and suppliers bought and sold electricity for the future, both as contracts with Enron. In order to protect itself from adverse movement of prices, Enron also created certain derivatives and hedges; if the prices fell lower than what Enron had anticipated, it had bought itself some insurance.

Playing the future markets is risky business — as a number of mutual funds and banks have discovered. Enron, in contrast, seemed to have mastered the energy future markets successfully, making hefty profits year after year. It is now clear that this was achieved by some very innovative book-keeping. Enron’s key officers set up private companies that took loans guaranteed by Enron and then ploughed this money back. The loans did not appear on the balance sheet, as Enron was technically only the guarantor of the loans. This made its books look much prettier than they really were.

Enron booked not only its commissions but also its entire energy trade figures as turn-over, unlike other traders and stockbrokers who only book their commissions. This inflated its business, making it look much bigger than it really was. This, coupled with its phoney profits, took its stock to dizzying heights before the intricate financial structure of private companies and loans unravelled.

At present, not only are the SEC and the US justice department investigating Enron, but also dozens of cases, including some by its former employees, have been filed against its officers. Arthur Andersen is also in a similar situation and faces a very tenuous future.

Indian financial institutions will now have to address the problem caused by their lending Enron huge amounts of money. Not only did IDBI, IFCI and others lend Dabhol some $1.2 billion; they have also given guarantees to US Exim and other lenders for another $700 million. Indian FIs are now paying the foreign lenders so that they do not encash these guarantees. With Enron’s bankruptcy, its shares in Dabhol cannot be acquired without getting enmeshed in the tortuous bankruptcy proceedings in the US courts and the plant turning into junk. The FIs, as a result, are in imminent danger of losing the entire $1.2 billion, triggering their own collapse, unless immediate measures are taken.

Despite this grim scenario, there is no indication that the Indian government even understands the enormity of what is happening. Subsequent to reports that Enron was removing critical components of the plant, the power ministry spokesperson claimed that the government is not concerned with what private companies do with their equipment. He needs to be informed that Dabhol is a project built largely with Indian money. It is mortgaged to Indian lenders, and its assets cannot be removed without notifying these lenders. Removing vital equipment, microchips and coded CDs vital to the control system and transporting them outside India without authorisation and proper procedure, also means violating the law.

The government must take the sole remaining option; take over Enron by an Act of Parliament or an ordinance and pay the existing shareholders, including Enron, GE, Bechtel and MSEB, a fair compensation to be decided after examining the actual equity brought in by each of the parties. Enrongate makes it imperative for us to check what Enron really brought in, and not blindly accept what it claims. Only this step will save Maharashtra and the FIs.
Courtesy: Times Of India

[ FRIDAY, JANUARY 18, 2002  12:48:37 AM ]