The upstart multinational and the Himalayan kingdom
From politicians to policy-makers and intellectuals to bureaucrats in Nepal, the news of Enron's arrival could not have come at a better time. In 1995 the World Bank, castigated by Nepali social auditors for its poor projects economics, had pulled out of the 201 MW Arun III hydropower project. One year on, the Nepali Parliament had ratified by a two-thirds majority the controversial "Integrated Treaty on Mahakali", albeit with four conditions that reinterpreted the provision made in the original treaty (see Himal, April 2001). It was in such 'volatile' circumstances that the Texan giant Enron, having just secured a contract to op erate the first phase of the Dhabol Thermal Power Plant in Maharashtra sought a license to build the 10,800 MW Karnali-Chisapani hydropower project in the country's west — long regarded as a site to make a mega dam to deliver mega dollars. A "prestigious" energy company had shown confidence in the government of the Himalayan Kingdom. For believers, the proposal was motherhood and apple pie; only the misguided and the malign would question it.
Enron's proposal followed Prime Minister Sher Bahadur Deuba's visit to India in February 1996. During the course of this visit, the concerned secretaries of Nepal and India signed the Power Trade Agreement in Bombay. Immediately thereafter, Nepal's suave Water Resource Minister, Pasupati Sumshere Rana, speaking to Indian businessmen, invited foreign investors to develop Nepal's hydropower. Sais1.111 ". you can pick from the shelf whether you want a 10 MW or 10,000 MW project". Enron, with no track record of building a single hydropower project anywhere in the world, opted for the mighty 10,800 MW Karnali hydropower project. And in typical Enron fashion, it did not make its approach through the formal channel, the Electricity Development Centre that is authorised to issue licenses, but forwarded its application through the Prime Minister's Office.ele
The company's 1996 proposal aimed to sell power to Xian in China, roughly 2500 km away across the Himalayas from the Chisapani dam site. This was only a ploy to co-opt Nepali politicians who swallowed this impractical idea, hook, line and sinker. The promised fiscal utopia to Nepal: the government would make USD 70 to 130 million annually over the first 15 years. This figure was hypothetical because the only legal instrument of that period, the 1992 Hydropower Policy, stipulated a two percent royalty on the sale price per unit of electricity. In this case, there was not even a buyer, let alone any decision on sale price. Even more absurd was the proposal to sell the output to China, which had never expressed any desire to buy power from Nepal. India, though interested in the Karnali- Chisapani, the Pancheswar and other high dams, had not stated the price it was willing to pay.
The Karnali project would dam the Karnali River at Chisapani gorge where it emerges into the plain from the Himalayan mountains. Conceived initially in the early 1960s, the project passed through various incarnations until Himalayan Power Consultants (HPC prepared its latest design. This version has a 270 m high rock fill dam that would permanently inundate Nepal's valley in the mid-west to create a 20 billion cubic metre capacity reservoir. This water, regulated through the turbines, would generate 10,800 MW of peak power.
The regulated water would be able to provide additional irrigation benefits to command areas in Uttar Pradesh, which HPC calculated could generate a revenue of USD 416 million annually. The irrigation benefit was not part of Enron's proposal, which focused only hydropower. Sharing irrigation and other benefits is an unresolved issue between Nepal and India.
What incentives led the company to solicit license for the mammoth hydro-project in the Himalaya? Whether it was consumed by its own hype or by some other purely monetary instinct is moot. What was more important was the sheer scale of constraints the company seemingly failed to consider. For one, it had overlooked the physical uncertainties of a project of this size, the first of its kind in these mountains, including the high social, environment and economic costs. The project's reservoir would inundate about 339 square km of land and directly displace 60,000 people. Furthermore, the company also seemed to have overlooked the project's political dimensions — the uncertain state of the country's politics in the aftermath of treaty on Mahakali River, and Article 126 of Nepal's Constitution. This provision required any agreement involving natural resources, and the distribution of their uses, to be ratified by a majority of two thirds of the members of both Houses of Parliament present at a joint sitting.
Considering the unanimity of opinion on the merits of the project among a wide and influential cross section of the Nepali decision-and-opinion-making classes, it was left to dissenting civil society groups in the country to raise questions and concerns. These concerns were not purely local. Questions of a similar nature were being posed in international quarters as well. Enron, however, did not heed these questions.
When it sought the license, three water projects in South Asia, conceived under the aegis of the World Bank – Arun III (Nepal), Sardar Sarovar Project (India) and Flood Action Plan (Bangladesh) – had emerged at the centre of a major controversy. The Bank withdrew from all three, triggering serious questions about the approach to water development. Faith in the benefits of large water projeithus could no longer innocently be sustained when e n an institution as orthodox as the World Bank had begun to accommodate opinion critical of large dams. Given the changing climate of opinion, the Karnali-Chisapani project could not have been insulated from some of these difficult questions, even if the Nepali government and Enron wanted to.
But as the Dhabol deal had demonstrated, the company displayed complete disregard for logic and the voice of circumspection. Leave alone civil society groups who dissented, the Central Electricity Authority in New Delhi had argued against the power purchase rate that Enron sought at Dhabol. Even the World Bank had warned that the rate was untenable for the Maharastra State Electricity Board. Compared to Enron, the World Bank appeared benign. It could be forced to respond to criticism, as the formation on World Commission on Dams showed, but not the behemoth. Enron's actions on the ground were real, but its presence highly ephemeral.
If the company was motivated by the thought of securing a lucrative deal of the kind it had clinched in Dhabol, the possibility of it materialising was remote. Perhaps, as in other instances in other countries, Enron may have been supremely confident of moulding opinion to suit its ends, despite Nepal's cantakerous politics and active civil society in the hydropower sector. But even with manipulation, profit would be remote: there were hard financial realities to be dealt with. Even if all the physical, political and social constraints were overcome, the project would have taken, at a minimum, almost fifteen years to complete. The revenue stream to fill its coffers would not commence until then.
Neither Enron nor the Kathmandu government paid attention to uncertainties and risks. In the euphoria of an imminent construction of a large project by a multinational giant there were no takers for contrary opinion. The only question from within the government came from the Water Resources Minister, Pasupati Sumsher Rana, but even his disinclination to award the license to Enron rested more on procedural grounds than on paradigmatic or philosophical differences.
This partiality for gigantic projects has a long pedigree in Nepal. Since 1950, when Nepal began interacting with 'modern' world, the philosophy of building high dams in the Himlaya for the export of power to earn revenue captured popular and bureaucratic imagination alike. The focus on high dams is based on the western United States-model (large-scale supply-guided projects, and public subsidy) and its irrelevance to Nepal was never considered. The energy produced by such projects was meant to enhance economic linkages in the western US states of California, Idaho and Montana and not for export. In Nepal, such projects are conceived of as technological artifacts in the same vein, with the difference that they are dedicated to export-based end-use. Yet after 50 years, this grand conception has yielded electricity to only 15 percent of the people. Donor funded hydropower projects have given Nepalis expensive tariffs, even as the investments in developing these projects make little contribution to the local economy.
It is only Nepal's disorganised and unstable politics that saved the country from such a potentially disastrous investment decision. And murky politics was eventually what led to Enron's exit without the license it sought. The company's proposal was made when Nepal's first coalition government was in power in 1996. A year and a half later, Nepal was still governed by a coalition. When politics became so unpredictable as to prevent 'rational' forecasts on all the corollary 'investments' necessary for a project of this size, Enron withdrew unilaterally, perhaps the only recorded instance ever of the upstart multinational conceding defeat. It takes an unruly polity to exasperate a behemoth. To put a face-saving gloss on this retreat, Enron declared that the "regional market for power may be insufficient at this time for us to continue our development efforts".
Enron's defeat, as it turned out, was both temporary and costly for Nepal. In the short period that the company was around it inflicted damages of a fundamental nature on Nepal's body politic. The democratic foundation of the polity was undermined as political parties of all ideological persuasions, by lobbying for Enron, vied with each other to invite on themselves a crisis of legitimacy. Enron had practically assumed the status of political talisman. It was, therefore but natural that Girija Prasad Koirala, who was just assuming office at the head of a new coalition government, took the news of Enron's withdrawal rather badly. He treated it as a grave a grave political setback since a potential investor's exit coincided with his assumption of office. His first act in office was therefore to actually request Enron to reconsider its decision.
Ever the obliging investor, Enron, despite the absence of a "regional market for power", responded positively, saying it was still interested in Karnali-Chisapani. How it chose to deal with the absent regional market was neither questioned nor explained. This time around, there was one serious critic from within the government. Sailaja Acharya, long-time political agitator of the Congress Party and at that time the Water Resources Minister in the Koirala cabinet, was the only person within the administration and in the entire political establishment to take note of both the risks and the unresolved issue of downstream benefits. Minister Acharya asked her secretary to write to the company asking it to wait until Nepal resolved with India the question of downstream water rights arising from the Mahakali Treaty and the Pancheswar project.
What was a considered and reasoned position by the minister became embroiled in the convolutions of domestic politics. Rather than examine the merits or demerits of her position, the debate focused on the minister's supposed motives. Former Prime Minister Manmohan Adhikari (of the mainstream left, no less) went so far as to accuse Acharya of cold-shouldering Enron and declared in Parliament that "he would make this an issue". The Nepali Congress Central Committee directed the government to ignore the minister's objections and commence negotiations with the company. The larger practical issue did not get the attention it merited. Simply put, could an economy with a national budget of USD 1 billion be in a position to take up simultaneously two high dams, Pancheshwar and Karnali-Chisapani, that required an investment in excess of 10 billion dollars?
Ideological differences, the essence of multi-party democracy, became more or less notional. For all practical purposes, at least on the Enron issue, the ideological denomination of parties became symbolic markers to merely distinguish distinct groups of similar people. Every political actor of every major party believed that Enron would do the needful and negotiate with India on the outstanding and unresolved issues arising from the Mahakali treaty and other water-sharing and power-related matters, including the issue of downstream benefits. A senior leader of one of the parties echoed this expectation to this baffled writer, "Enron would bargain with India, on behalf of Nepal". The illusory salvation from Nepal's woes had all but arrived. The Karnali project's regulated water flow would benefit downstream India, and the formula on how India would pay for this significant benefit was something for the two governments together, and not Enron, to decide. This was practically an abdication of the responsibilities regarding Nepal's sovereignty under the multinational's umbrella.
At that stage, it had already been evident that profit, profit and profit was the company's sole motive. But those in power in Nepal refused to even listen. The dealings of Enron's leaders even while the company came crashing down showed that profit was only for themselves and not even their shareholders; they did not represent any nation, community or value. In Nepal, the middle ground politics where philosophical differences could be contested began to get evaporated.
Nepal's present crisis of governance and the political vacuum in the country could be attributed to the death of the country's middle ground politics in the mid-1990s and which in turn is partially the result of the total reliance on an inappropriate development model that united the political spectrum. The nation's social and political realities had' necessitated a cautious and prudent approach to create a competitive, but regulated market and simultaneous efforts to ensure that large sections of the population still in the informal sector were not left out in its wake.
From the panchayat era, which ended in 1990, Nepal's development was equated with export-driven power projects. In the time of democracy the definition of development remained unchanged. Politics had eroded itself in the pursuit of one policy to the exclusion of all other considerations. Nobody in power paused to reflect on why and how a private company with track record of raking unjustified profit, would help lift the country's economy. If hubris escaped nemesis a second time around, it was not through acumen but happenstance. Enron just happened to collapse in time.
Lessons
Enron's saga has several lessons relevant for the Glocal (local and global). At the local level, the company's first stint in Nepal was damaging. The company's proposal should have surprised all: how would a project of such magnitude be build in a country with a weak economic base, institutional capacity and deteriorating political context. No nationalism here, it is the bare and simple truth. Also the company did not have a track record of building hydropower plants. Perhaps smart executives wanted to project a facade of work ethos and professionalism as the cornerstones of their corporate existence. So it seemed, until the later months of 2001. The company's appearance was totally deceptive.
At its core Enron was a corporate mirage created to fool the public while its unscrupulous leaders enriched themselves by shafting shareholders even while the company came crashing down. The company's answer to every problem was to bulldoze its way through using financial and political clout. Its managers were told to "go out there and secure". They did that by flouting all the rules of the game. Questions were swept under the carpet. And the political establishments of both India and Nepal bent over backwards to accommodate it's illegitimate demands. The company just could not have continued. Enron imploded like a house of cards under the weight of its own hubris.
In Nepal, did those in the parliament really believe what they said? Did they understand the implications? Were they trying to look nice, and be politically correct? At best, perhaps each was trying to be nice. At worst, they just refused to learn the things they did not know. Fortunately, thanks to its murky politics the country was saved from signing the multibillion-dollar project involving a counter guarantee to Enron. Its failure should be a boon in disguise in terms of the lessons; avoid hype, rebuild the lost political middle-ground, and make the effort to build the nation's institutions.
How would one characterise Enron's activities? It was simply bhrastachar (practices unbecoming of its dharma). The market, within which the company functioned, is a necessary institution because that is where innovations and creativity flourish. The market is an equaliser: for the right price markets make no distinction between a millionaire and a commoner. Markets, however, need regulation. The market too has its dharma; competition, fair play and risk taking. Enro' flouted dharma by violating all three. The company s ultimate in hubris was the vulgarity of hoping to convert everything into a commodity. The first was energy, water was to be the next, where would it have ended if it were still around; the sea, air, weather?
Enron's leaders were not accountable to its shareholders or principals. Its leadership was concerned more with managing stock prices, and profiting from it rather than managing the company by securing legitimate business. The fiasco shows that not all is well with global corporate governance. How would accountability through appropriatet checks and balances be achieved? How many others are out there doctoring their books?
The experience also underscores the importance of building and maintaining strong social auditing capacities in all societies. Cautionary voices were raised against Enron's hype in Nepal, but they were labeled anti-developmental. It is beyond the scope of this article to analyse the role of the US media and civil society vis-à-vis the company's foray in South Asia. The Wall Street Journal considered Enron's decision to pull out of Nepal the biggest debacle for the Himalayan Kingdom. Apart from this comment, which clearly reflected poor judgment, no questions were raised. If they had been raised, the company's many improprieties would perhaps been exposed early on and the unpleasant surprises could have been avoided.
This oversight on the part of social auditors in the US particularly and the West generally can be traced to the post-1990 global hype, dominated by visual images, the internet and a techno-fanatical mindset. Consequently, companies like Enron got a lot of mileage out of the dot.com hype: its CEO once even suggested that the company was "virtually" integrated. For the average American getting over Monica Lewinski, Enron's collapse, in the words of Robert Hersh of Resource for Future (RFF), came as a "conceptual inverse".
The modern world operates on the rationality of using information for evidence and the logic of reasoning. Simply put, educated individuals would make 'rational' decisions within the professional boundary thus set. The connivance of Enron's leadership and its financial auditor has seriously undermined this concept of rationality, raising questions about professionalism, contract and bhrastachar. In Enron's case, at least in its Dhabol deal, bhrastachar was a contractual element. The emphasis on achievement seemed to make even malpractice, momentarily at least, the pinnacle of professionalism. When it collapsed, Enron tarnished both the self-image and the ethics of the market. Enron's failure should be the catalyst for rethinking many comfortable assumptions.
The saving grace is that Enron was a US company. Imperfect though they may be Western societies have in place some sort of in-built mechanisms of checks and balances — a legal system, an active media and civil society groups contesting power. More robust and secure arrangements need to be put in place, not just in the West, but also in developing countries. The question of checks and restraints, however, should not be a one-time response because the restraining techniques and instruments become inadequate in responding to emerging challenges. How will impropriety be identified and differentiated from financial innovations?
The key is societal balance of power. As per its principles, this balance needs to be maintained between three active institutional sectors. The process consists of ensuring space at all levels (from a rural hamlet of a developing country, to the state and global corporations of the political and financial centres of gravity) for a genuine market that is open and competitive, egalitarian social auditors with transparent volunteerism, and honest regulation that is not driven by hubris or rent seeking propensities on the part of the state.