RELATED STORY A Chronology of Enron's Empire
Showcasing Enron's ability to leverage $7.2 billion dollars in public financing. |
(Excerpted from the full report, available at www.seen.org)
The US public is only just beginning to comprehend the devastating domestic impact of Enron's financial machinations and dirty deals. However, the part of the story that has been eclipsed until now, is that Enron's international empire, which was fraught with charges of human rights and environmental abuses, was built on a foundation of about $7 billion in taxpayer money. This $7 billion came from institutions whose mandates range from poverty alleviation to promoting the US Merchant Marines or German exports, yet Enron convinced each that it was in their interest to promote the capitalization of Enron.
Since Enron's inception in 1992, at least 20 agencies, representing the U.S. Government (leading the way with over $3 billion), the British, Italian, French, German, and Japanese governments, as well as the Inter-American Development Bank, the European Union and the World Bank, approved $7 billion in financing toward overseas projects in which Enron had substantial involvement. Enron leveraged this public finance into a worldwide web of power and energy projects with an array of political interventions from local politicians to the Vice President of the United States. Enron's overseas operations rewarded shareholders temporarily but often punished the people and governments of foreign countries it targeted with price hikes and blackouts worse than those suffered by Californians in 2001.
In desperately poor countries where Enron operated, these hardships sparked protests or riots. Local government leaders were, in many cases, implicated in the scandals or in the violent suppression of dissent.
For example:
In the Dominican Republic, nine people were killed when police were brought in to quell riots after blackouts lasting up to 20 hours followed an Enron-initiated power price hike. Among the complaints of protesters was the allegation that Enron had purchased the local power plant at a vastly undervalued price. The auditor: a local subsidiary of Arthur Andersen.
In India, police hired by Enron beat non-violent protesters who challenged the $30 billion power purchasing agreement -- the largest deal in Indian history -- struck between local politicians and Enron.
The president of Guatemala tried to dissolve the Congress and declare martial law after rioting followed an Enron-maneuvered price hike.
In Panama, the man who negotiated the asking price for Enron's stake in power production was the brother-in-law of the head of the country's state-owned power company. Rioting followed suspicions of corruption and Enron's price hikes and power outages there, too.
In Colombia, two politicians resigned amid accusations that one was trying to push a cut-rate deal for Enron on the state-owned power company.
While all this was occurring, the US Government and other public agencies continued to advocate for Enron, threatening poor countries like Mozambique with an end to aid if they did not accept Enron's bid on a natural gas field. Enron was so intertwined with the US Government in many people's minds that they assumed, as the late Croatian strongman Franjo Tjudman did, that pleasing Enron meant pleasing the White House. For Tjudman, he hoped that compliance with an overpriced Enron contract might parlay into an array of political favors, from softer treatment at The Hague's War Crimes Tribunal to the entry of his country into the World Trade Organization.
Only when Enron's scandals began to affect Americans did these same government officials and institutions hold the corporation at arm's length. And only when Enron leadership revealed their greed on home turf did it became the biggest corporate scandal in recent US history.
The World Bank and Enron: A Converging Agenda
The history of Enron's rise and fall would be incomplete without some background on the public agencies that assisted the corporation in its global expansion. It is important to begin with the World Bank, this institution more than any other often creates an agenda that other bilateral and multilateral development banks follow.
The World Bank began investing in oil and gas following on the heels of the Organization of Petroleum Exporting Countries (OPEC) oil embargo and oil price shocks of the 1970s. The rationale for this investment was clear: The US, an oil- and gas-dependent nation with limited indigenous sources of oil, needed to diversify its sources of non-OPEC oil and gas. Administration officials were concerned that OPEC had a virtual monopoly on the fuels, and could raise prices at whim, sending shockwaves throughout the global economy. The secondary concern, particularly for Northern investors, was the fact that, as oil prices rose, so, too, did developing countries' inability to service their debt. The U.S. worried that these countries, already strapped for cash, would default on their loans.
And so it was just days after former President Ronald Reagan assumed office in January 1981 that their administration began dismantling World Bank conventions and initiatives. One of the first areas to which the Reagan administration turned its attention was the World Bank's investment in the energy sector. The Bank had revealed its intention to increase investments in energy, but the US Treasury wrote that, without deregulation and privatization of the oil and gas industry abroad, such investment would support regimes that were not friendly to private investors and multinational oil companies.
In a report entitled, An Examination of The World Bank Energy Lending Program, the office of the US Treasury's Assistant Secretary prescribed measures the World Bank should take to encourage private investment in oil and gas development. The report's authors noted that the World Bank, perceived as a neutral third party, would be more successful in advancing this agenda than the US, at little or no cost.
Here is how it worked: The World Bank would issue loans for privatization of the energy or the power sector in a developing country or make this a condition of further loans, and Enron would be amongst the first, and often the most successful, bidders to enter the country's newly privatized or deregulated energy markets. The US Commerce Department, State Department, or Energy Department would then send officials to meet with politicians in the targeted country. After meeting with these officials, deals would mysteriously turn in Enron's favor. Sometimes suspicions would be raised by the amazing deals Enron would strike -- purchasing power plants or buying shares in a gas field at vastly undervalued prices. Perhaps a politician or two would be exposed and be forced to resign. But soon thereafter the public finance would begin to flow -- from US and other export credit agencies, multilateral development banks, and private financiers. And another project would be on its way.
The Dominican Republic
One specific case in point is the Dominican Republic. In the early 1990s, the Dominican Republic opened its doors to independent power producers, to help the cash-strapped country produce power for its citizens. On July 22, 1994, the World Bank's IFC approved a $132.3 million loan, and a year later, an additional $1.5 million currency swap, in support of a 185-megawatt combined-cycle power facility mounted on a barge at Puerto Plata. The barge-mounted power plant was owned by Enron's subsidiary, Enron Global Power & Pipelines, which acquired the parent company's 50% share in the barge power plant in 1995.1
In December of 1996, the U.S. Maritime Administration (MARAD) provided a $50 million guarantee toward two Enron power barges for this project.2 In January 1998, the World Bank's IBRD approved a $20 million loan to privatize the country's power sector. The goal, said the World Bank, was to open up the power sector to private companies, through reforms at the state agency, Corporacion Dominica de Electricidad (CDE).
When the government privatized its power sector, Enron (along with several other firms) rushed in to buy a stake in the generating capacity of the Dominican Republic, while AES and Union Fenosa of Spain bought into the distribution networks. Shortly after the private companies took over, power rates skyrocketed by 51-100% or more. Consumers refused to pay the higher rates, and ultimately forced the government to absorb most of the tariff increase.
As a result, the government paid around $5 million per month to the power companies, with an accumulated debt of more than US $135 million. The mounting debts in turn caused Enron and others to turn off the power, with blackouts sometimes lasting as much as 20 hours, affecting hospitals, businesses, and schools. By early 2001, widespread frustration with the situation triggered protests, some of which turned violent after police clashed with demonstrators. At least nine people died in the protests, including a 14-year-old boy.
In June 2001, the President of the Dominican Republic announced that the contracts awarded during the privatization of the power sector would be investigated. In a situation with similarities to California's 2001 energy debacle, shortages were originally blamed on private power generators, which at the time of the crisis were only supplying a little less than half of the 815,000 kilowatts they were capable of producing. The electricity issue also sparked a confrontation between the Dominican government and the U.S. Embassy, after the former accused the Smith-Enron joint venture of outright fraud for failing to deliver its promise to generate at least 175 megawatts a day.3
Officials of the current and previous administration have been publicly trading responsibility for the chaos in the electricity sector. Meanwhile a familiar name has turned up in a report done for the Dominican Republic's Senate. The Senate report claimed that the assets of the CDE had been undervalued by $2.1 billion. It questioned whether the payment from the private companies had ever entered the country. The auditor who valued these public assets at such fire sale prices? A local subsidiary of Arthur Andersen.
Some Lessons
After a detailed study of Enron's overseas activities over the past decade in 27 countries, Institute for Policy Studies researchers have reached the following 4 conclusions:
1. Using taxpayer monies, US Government agencies were the largest backers of Enron's activities abroad.
Although Enron-related projects obtained more than $7 billion in public financing from all over the world from 1992 to 2001, US Government agencies (the US Overseas Private Investment Corporation, Export-Import Bank, the US Maritime Administration Trade and Development Agency) lead the way with $3.4 billion in support of Enron-related projects abroad. This assistance, and other, less tangible favors, was provided by US officials and institutions despite widespread evidence of Enron's involvement in fraud, corruption, and human rights abuses.
2. The World Bank was the second largest supporter of Enron projects abroad.
Despite some reluctance to support several deals obviously favorable to Enron, the World Bank did provide $745 million in support for Enron-related overseas projects from 1992 to 2001. Beyond direct support for specific projects, it also provided Enron an entre to many developing countries by pushing its agenda of privatization and deregulation of the energy and power sectors as conditions on further loans.
3. When the World Bank or US agencies decided Enron's projects were financially or politically untenable, other export credit agencies and regional financial institutions eagerly stepped into the breach.
A host of development and aid agencies -- from the multilateral European Investment Bank and the Inter-American Development Bank to the bilateral Commonwealth Development Corporation of the UK -- provided over $3 billion in financing for 19 Enron-related projects, adding non-US Government taxpayer support to Enron's risky ventures abroad.
4. Enron's collapse calls into question the policy of energy deregulation that Enron, together with its partners in the United States Government, the World Trade Organization (WTO), the International Monetary Fund (IMF) and World Bank have advocated domestically and worldwide.
The World Bank and IMF have been pursuing deregulation and privatization of the power and energy sectors for two decades. Energy deregulation has resulted in the energy needs of the vast majority of citizens-the poorest as well as those in need of power for businesses, hospitals, schools and other public services to function-being routinely sacrificed for private gain. So long as the World Bank, IMF, WTO, US Government and corporations continue to advance this agenda of energy and power deregulation, all signs suggest that future "Enrons" will continue to occur, with devastating public consequences.
Endnotes
For further details on the ownership struggle at the Puerto Plata plant, see court case: Smith/Enron Cogeneration Ltd Partnership, Enron International, et al., vs. Smith Cogeneration International Inc., United States Court of Appeals for the Second Circuit, Docket No. 99-7101, Argued Sept. 15, 1999, Decided Dec. 8, 1999.
MARAD approved guarantees to build three power barges for this project. In 1994, MARAD approved a $34.3 million guarantee for McDermott's construction of one barge mounted power plant for the Puerto Plata project. In 1996, MARAD approved a $50 million guarantee toward the construction of two Smith-Enron barge mounted power barges constructed (TK) by Trinity Marine of Beaumont, Texas.
PSIRU Enron Report, June 2001
Daphne Wysham is the director of the Sustainable Energy and Economy Network (SEEN), a project of the Institute for Policy Studies and the Transnational Institute. Jim Vallette is the research director at SEEN.