Only in the past year has Enron’s name become synonymous with corporate scandal and impropriety in the United States. Enron’s fall – which represents the largest bankruptcy in U.S. history – revealed a network of corrupt practices that stretches from the paper-shredders at the Arthur Anderson consulting firm to the scores of Congresspeople who benefited from the 5.95 million dollars in campaign contributions that the company made between 1989 and 2001. The company’s convoluted schemes to hide debts and exaggerate profits paid off for executives who cashed in their stock options early, but ultimately cost thousands of people their jobs or their retirement funds.
Such misdeeds, however, seem less surprising to citizens in the developing world, where Enron has long earned a reputation for infamy. Aided by publicly-funded institutions, Enron led efforts to privatize public utilities in Guatemala and elsewhere. In the process, it helped instate policies that led to rioting in locales as diverse as India, Panama, and the Dominican Republic. Charges of corruption against the company come not only from U.S. Congressional hearings, but from officials in Bolivia and Colombia as well.
Around the world, the International Monetary Fund (IMF) and the World Bank persist in promoting neoliberal economic policy, touting private investment by companies like Enron as the cure to poverty and other social ills. Yet, as scandals within major transnational corporations continue to unfold, Enron’s corrupt example becomes less an exception, and more an illustration of how such policies have failed. Enron’s actions in Guatemala showcase the pitfalls of relying on for-profit companies to fill the coffers of cash-strapped governments.
International financial institutions in developing countries vigorously promote privatization, whereby governments sell state property and services to private companies. Governments theoretically sell industries that are not profitable and use the revenue from the sales to invest in social services. Often, electricity and water distribution, communication and transportation infrastructure, health care and educational facilities, and other basic public services are sold. Once in the hands of private companies, price controls and other consumer safeguards are often abandoned, jobs tend to be eliminated, and only the most profitable areas of the businesses are maintained. In private hands, for instance, electricity services tend to be concentrated in urban areas and catered to wealthier consumers.
Enron stood out as an early leader among the foreign interests that took command of Guatemala’s power sector, one of the first state industries to be privatized. A recent report by the Institute for Policy Studies in Washington, D.C., explains that until 1992, “the state-owned National Institute of Electricity (INDE) held more than 83 percent of the capacity serving Guatemala’s power” needs. Before privatization, the government was also the majority owner of the Guatemala Electricity Company (EEGSA), which held the remaining percentage.
This situation changed dramatically over the next decade. In what would become the first privately-financed power project in Central America, Enron signed a 15-year power purchase agreement with the EEGSA to build the Puerto Quetzal thermal plant in 1993. Puerto Quetzal was a US$92 million, 110 Megawatt project consisting of ten diesel-fired generators on two barges.
Furthermore, Enron created a company, the Puerto Quetzal Power Corporation, to sell power from the plant to the EEGSA. In addition to holding an initial 50% stake in this company, Enron operated the plant and served as its fuel supplier. (The remaining 50% share was owned by King Ranch, Inc., a US-based company with energy and agribusiness interests.)
In Guatemala, as in many ventures throughout the world, Enron relied on taxpayer money. Financing from international financial institutions helped to make the Puerto Quetzal deal possible. The World Bank Group’s International Finance Corporation approved a US$20 million direct loan toward the project, as well as a US$51 million syndicated loan. OPIC, the U.S. government’s Overseas Private Development Corporation, lent its support with a US$73 million guarantee in 1992. And the U.S. Maritime Administration (MARAD) financed guarantees on the power barge construction in 1994.
Early on, Guatemala’s public officials charged that Enron failed to pay its public debts. During a 1994 government revenue crisis, the Attorney General revealed that the company had not provided any of the US$14 million it owed from the Puerto Quetzal plant. Also distressing was the fact that Enron (like many businesses) paid no taxes at all to the Guatemalan government. This situation was not unique to Guatemala: In the United States, Enron succeeded in paying no taxes in four of the last five years, despite its rise to its peak status as the seventh-largest corporation in the country. However, in the Guatemalan context, its avoidance of taxes made a prescient point, refuting one of privatization’s leading rationales: that foreign investment would enrich the public with tax revenue.
The Electricity Protests
The Enron deal represented a first step for Guatemala on the road of privatization – the beginning of a process that would spark years of outrage and resistance throughout the country. The International Labor Organization reports that as early as 1992, members of the Electricity Workers Union at INDE took action to oppose the sale of public electricity assets. Their 20-day strike forced the government to suspend its plan temporarily.
More than the threatened elimination of secure jobs, it was the specter of price hikes that launched a wave of mass protests in the spring of 1993, when the drive to privatize had resumed. Opposition to the government’s proposal to end subsidies for electricity and to increase prices for consumers formed a central issue in the April 2 Huelga de Dolores march by students at the national public university. Later that month, the government actually instituted price hikes that increased the average household electricity bill by 47 percent. Public protest exploded.
By April 29, flaming barricades blocked access to major roads in Guatemala City. Thousands took to the street in May Day marches that denounced the price increases. Moreover, in a move that would dramatically expand his popularity, then-Human Rights Ombudsman Ramiro de León Carpio filed a court case claiming that the “arbitrary and unilateral” price hikes “flagrantly violate[d]” the economic rights of the Guatemalan people. He also criticized the government’s intention to exempt the country’s largest industrial consumers from increases. Remarkably, a judge sustained the legal challenge on May 7. Faced with resistance on all fronts, the government backed down and suspended the hikes.
Ramiro de León Carpio and other critics identified the original decision to raise prices as a move designed to prepare the country for the full privatization of electrical utilities – a measure prescribed by the IMF. Indeed, in the same month as the electricity protests, the government announced its intention to begin sale of EEGSA shares that summer (along with the airline Aviateca).
In the context of popular unrest created by the electricity protests, President Jorge Serrano attempted an auto-golpe (self-coup). On May 25, he announced that he had suspended the Constitution and dissolved Congress and the Supreme Court. He declared martial law, ostensibly to allow him to fight corruption and drug trafficking. But Serrano was unable to secure solid military backing for his coup, especially as international condemnation and threats of sanctions from the U.S. mounted. Within a week it was over. Himself mired in charges of corruption, the ex-President fled to Panama. Guatemala’s Congress swiftly replaced him by elevating Ramiro de León Carpio to office.
In the long term, Serrano’s ousting did little to disrupt the plans of the neoliberals. Although the decreed sale of public utilities was suspended by the Constitutional Courts, business leaders regrouped within a few years. In October 1996, over the objection of labor groups and other opposition, the Guatemalan Congress passed an electricity law that effectively deregulated the country’s power sector. As the Energy Information Administration reports, “the reforms gave private companies unrestricted access to the power grid, distributors, and wholesale customers.”
One of main limits against business monopoly included in the law was a provision preventing electricity interests from concentrating in more than one of the main areas of generation, transmission, and distribution. Cerigua Weekly Briefs explained that this had the convenient effect of requiring INDE to sell off many of its operations. Before long, both government electricity agencies were for sale. Privatization of EEGSA completed with the sale of an 80% share to a Spanish-led consortium on July 30, 1998.
Enron’s Puerto Quetzal venture flourished in the climate of heightened privatization. IPS reports that by 1997, Puerto Quetzal was supplying 15% of Guatemala’s energy. In 2000, OPIC provided a US$50 million loan to help Enron expand the capacity of its plant to 234 Megawatts. The UK’s Commonwealth Development Corporation also assisted with financing by acquiring 25% ownership of the project. Enron maintained a 37.5% share.
Enron’s strategy of avoiding taxation and oversight also thrived during this time. In September 2000, the company requested permission from MARAD to change the flag of its barges from Guatemala to Panama, a country which long ago passed lax vessel registration laws that made it famous in the maritime world as a lucrative tax shelter. MARAD, a publicly-funded agency, approved the request. As a result, Guatemalans have no say about how the workers on the plant’s barges are treated, and the Panamanian registration removes the possibility that the company would ever pay taxes on its international commerce or its capital gains.
The costs of electricity privatization in Guatemala include lost jobs, consumer electricity rates consistently higher than pre-privatization prices, and the lost opportunity cost of the public money that helped to finance the project. Meanwhile, the potential benefits of foreign investment in Guatemala’s utility sector were minimized by tax evasion and the creation of off-shore shelters to avoid possible debts to the public.
Enron’s Global Empire
Enron’s investment in Guatemala provides but a glimpse into its operations throughout the world. Public financial institutions have provided over US$7.2 billion for Enron-related projects since 1992, according to the IPS report. Despite its filing for bankruptcy protection, the company still holds many global assets. These range from interests in power plants in the Philippines and China to pipelines in Colombia and Argentina.
Shockingly, Enron is still eligible to receive public money. The Inter-American Development Bank (IDB) is currently considering a US$125 million loan for an Enron-related venture in Bolivia. IDB spokesperson Daniel Drosdoff recently told Fortune magazine that the gross improprieties perpetrated by Enron in the U.S. are a “concern,” but that the IDB doesn’t “think at this point that that should be a poison pill.”
While it constitutes a relatively small case, the Puerto Quetzal experience is nevertheless representative in many respects of the process that gave rise to Enron’s global empire. It demonstrates that Enron established several of its now-famous practices – pushing industry deregulation, avoiding oversight, and dodging public obligations – in the developing world. And it reveals that the International Monetary Fund and the World Bank have given millions to projects that fuel the growth of multinational giants like Enron – projects that, far from alleviating poverty, actually raise consumer prices and wreak havoc on publicly-owned industries. As more such corporations become enmeshed in scandal, it becomes clear that we must call into question these institutions’ neoliberal economic policies, which for too long have dominated the terms of development in Guatemala, and beyond.