University Of Pune Question Paper
M.B.S. (Semester – I) Examination, 2014
101 : INTERNATIONAL BUSINESS MANAGEMENT
(2008 Pattern)
Time : 3 Hours Max. Marks : 70
Instructions : 1) Section – II Q. No. 7 (Case Study) is compulsory and it carries
25 marks.
2) Answer any three questions from Section – I.
3) Q. No. 1 to 6 carry 15 marks each.
SECTION – I
1. What are Tariff and Non-tariff barriers to international trade ? Explain Trade Blocks with
suitable examples.
2. What do you know of Ricardo’s Theory of Comparative Advantage ? Explain the assumptions
considered in this theory.
3. Explain the globalization of market. Analyse the steps taken by Indian Government to globalize
the economy.
4. What are the ethical issues an international manager has to consider in an International
business ?
5. Explain India’s competitive advantage in IT industry.
6. Write short notes (any 3) :
• Balance of payment
• Letter of credit
• IPR, TRIPS, TRIMS
• Global sourcing and its impact on Indian industry
• WTO.
SECTION – II
7. Solve the following case.
Enron’s Indian Negotiation Debacle
In the early 1990s, the US energy giant Enron, decided it needed to diversify by expanding its
growth abroad with emerging countries. In June of 1992, Enron engaged in negotiations with the
government of India. Enron had identified the state of Maharashtra, the third largest state in India
with a population of roughly 79 million, and containing India’s commercial capital of Mumbai, to
negotiate a major energy project. Maharashtra was governed by the Congress Party.
Negotiations began with both the state government and with the Maharashtra State Electricity
Board (MSEB). Enron’s mega project proposal was for the construction of a US$3 billion,
2015-megawatt power plant. As a great deal of liquefied natural gas would be required to power
the plant, Enron decided it would import this gas from a joint venture that Enron had with Qatar
which was 1200 miles away. Being the largest project ever undertaken in India, Enron proposed
that the project be broken down into 2 phases. Initially, in phase 1 they proposed to produce
695 megawatts and would use locally produced natural gas. Phase 2 would produce
1,320 megawatts and for this they would use the natural gas imported from Qatar. Enron choose
the town Dabhol, situated on the Indian Ocean as the project site.
The most important element of the deal was to secure a long term purchaser of electricity to lock
in long term debt financing and to generate a sufficient return to investors in the project. In order
to realise the project, MSEB, the only potential buyer available, would have to enter into a long
term contract with the Dabhol Power Project Company. In less than five days a memorandum of
agreement was signed. It was agreed that the Dabhol project would charge no more than
2.40 rupees (7.3 cents US) per kilowatt hour to MSEB.
Three problems immediately emerged : First, the World Bank, acting as a consultant to the
Indian government said that the project would produce an excess capacity of electricity for
years and would be too costly in comparison to the more traditional sources of fuel, such as
coal, already in use. Enron responded by launching a successful campaign by promoting the
positive environmental impact of its project.
1) The second problem entailed the Enron’s projected 26.52 rate of return to its shareholders :
India’s central government and the government of Maharashtra disagreed and countered
with a 20 % return as being more reasonable. Ultimately they agreed on 25.22 %.
2) The third major hurdle was mounting public opposition to the project and concerns raised
over the electricity tariff, government official bribery, and about the project not being open to
competitive bidding.
Despite this mounting opposition, negotiations continued.
Enron joined with two other US firms, General Electric and Bechtel, each holding 10 % as junior
partners. In December, of 1993, MSEB signed the power purchase agreement with Enron thereby
inaugurating the Dabhol Power Project.
As the project commenced, public opposition to the project swelled as activists and an assortment
of differing organisations challenging the legitimacy of the project filed suit against the project in
the India High Court. As elections loomed in Maharashtra in March of 1995, the opposition parties,
the Shiv Sena Party and the Bharatiya Janata Party (BJP) used their opposition to the project as
a primary election issue. Focusing on a nationalistic viewpoint they alleged that the proposed
electricity tariff was excessive and would hurt the poor. As a consequence, the Shiv Sena and
BJP coalition won the elections and tossed the incumbent government. An investigation was
carried out into the overall project in May which subsequently resulted in MSEB cancelling the
power purchase agreement with the Dabhol Power Company. At this point in the project, US$300
million had already been invested and Enron and its partners were facing a daily loss of
US$250,000 each day the project was delayed.
As per the terms of the original agreement, Dabhol and its partners initiated arbitration proceeding
against MSEB and the Maharashtra government. The government in turn launched legal action
to invalidate the arbitration action alleging that illegal means had been employed to secure the
contract. Maharashtra’s government officials responsible for the investigation also stated firmly
they had no wish to consider renegotiation.
In the fall of 1995, Enron managed to persuade the government of Maharashtra to reopen
negotiations which would take place in the fall. Subsequently, Chief Minister Joshi announced
that a review panel would carry out a review of the project. The review panel not only began to
discuss the restructuring with Enron executives, they also heard the major opponents to the
deal. The major issues entailed the electricity tariff, the capital costs of the project, the payment
plan and also the environment.
In terms of the renegotiation, MSEB gained a 30 % partnership with Enron and its interest reduced
from 80 % to 50 %. The original electricity the plant would produce was actually increased from
the initial proposed outage of 2,015 megawatts to 2,410 after the completion of phase 2. Capital
cost was reduced from US$2.85 billion on US$2.5 billion and the tariff was lowered from
7.03US cents to 6.03US cents subject to the cost of fuel and inflation.
In January of 1996, the Maharashtra government agreed to the renegotiation proposal submitted
by the review panel. After much internal debate, the Indian government gave their approval and
extended their guarantee of Maharashtra’s obligations. Enron dropped their arbitration proceedings
and Maharashtra dropped its counter suit. Despite these agreements, the project still could not
continue because a host of various groups including unions, activists and other public interest
groups filed 24 legal actions in the courts in an effort to stop the project. The courts ruled that the
project could not proceed until all these suits were heard. Eventually the courts dismissed the
last suit in December of 1996.
In May of 1999, phase 1 of the project was completed and the plant began to operate while Enron
sought and obtained financing of US$1.87 billion for phase 2 which they expected to complete
toward the end of 2001. Not long after the phase 1 of the plant began to operate however, MSEB
was no longer able to pay for the electricity it had negotiated. By 2001, MSEB had accumulated
a debt of US$45 million forcing the Dabhol Power Company to close down and file suit against
MSEB, the central government and the government of Maharashtra. That same year Enron’s
collapse was total. After a string of financial setbacks, Enron declared bankruptcy.
Questions :
1) What were the reasons for debacle to Enron ? 15
2) Explain what strategies should have been used to keep the project on ? 10
——————
M.B.S. (Semester – I) Examination, 2014
101 : INTERNATIONAL BUSINESS MANAGEMENT
(2008 Pattern)
Time : 3 Hours Max. Marks : 70
Instructions : 1) Section – II Q. No. 7 (Case Study) is compulsory and it carries
25 marks.
2) Answer any three questions from Section – I.
3) Q. No. 1 to 6 carry 15 marks each.
SECTION – I
1. What are Tariff and Non-tariff barriers to international trade ? Explain Trade Blocks with
suitable examples.
2. What do you know of Ricardo’s Theory of Comparative Advantage ? Explain the assumptions
considered in this theory.
3. Explain the globalization of market. Analyse the steps taken by Indian Government to globalize
the economy.
4. What are the ethical issues an international manager has to consider in an International
business ?
5. Explain India’s competitive advantage in IT industry.
6. Write short notes (any 3) :
• Balance of payment
• Letter of credit
• IPR, TRIPS, TRIMS
• Global sourcing and its impact on Indian industry
• WTO.
SECTION – II
7. Solve the following case.
Enron’s Indian Negotiation Debacle
In the early 1990s, the US energy giant Enron, decided it needed to diversify by expanding its
growth abroad with emerging countries. In June of 1992, Enron engaged in negotiations with the
government of India. Enron had identified the state of Maharashtra, the third largest state in India
with a population of roughly 79 million, and containing India’s commercial capital of Mumbai, to
negotiate a major energy project. Maharashtra was governed by the Congress Party.
Negotiations began with both the state government and with the Maharashtra State Electricity
Board (MSEB). Enron’s mega project proposal was for the construction of a US$3 billion,
2015-megawatt power plant. As a great deal of liquefied natural gas would be required to power
the plant, Enron decided it would import this gas from a joint venture that Enron had with Qatar
which was 1200 miles away. Being the largest project ever undertaken in India, Enron proposed
that the project be broken down into 2 phases. Initially, in phase 1 they proposed to produce
695 megawatts and would use locally produced natural gas. Phase 2 would produce
1,320 megawatts and for this they would use the natural gas imported from Qatar. Enron choose
the town Dabhol, situated on the Indian Ocean as the project site.
The most important element of the deal was to secure a long term purchaser of electricity to lock
in long term debt financing and to generate a sufficient return to investors in the project. In order
to realise the project, MSEB, the only potential buyer available, would have to enter into a long
term contract with the Dabhol Power Project Company. In less than five days a memorandum of
agreement was signed. It was agreed that the Dabhol project would charge no more than
2.40 rupees (7.3 cents US) per kilowatt hour to MSEB.
Three problems immediately emerged : First, the World Bank, acting as a consultant to the
Indian government said that the project would produce an excess capacity of electricity for
years and would be too costly in comparison to the more traditional sources of fuel, such as
coal, already in use. Enron responded by launching a successful campaign by promoting the
positive environmental impact of its project.
1) The second problem entailed the Enron’s projected 26.52 rate of return to its shareholders :
India’s central government and the government of Maharashtra disagreed and countered
with a 20 % return as being more reasonable. Ultimately they agreed on 25.22 %.
2) The third major hurdle was mounting public opposition to the project and concerns raised
over the electricity tariff, government official bribery, and about the project not being open to
competitive bidding.
Despite this mounting opposition, negotiations continued.
Enron joined with two other US firms, General Electric and Bechtel, each holding 10 % as junior
partners. In December, of 1993, MSEB signed the power purchase agreement with Enron thereby
inaugurating the Dabhol Power Project.
As the project commenced, public opposition to the project swelled as activists and an assortment
of differing organisations challenging the legitimacy of the project filed suit against the project in
the India High Court. As elections loomed in Maharashtra in March of 1995, the opposition parties,
the Shiv Sena Party and the Bharatiya Janata Party (BJP) used their opposition to the project as
a primary election issue. Focusing on a nationalistic viewpoint they alleged that the proposed
electricity tariff was excessive and would hurt the poor. As a consequence, the Shiv Sena and
BJP coalition won the elections and tossed the incumbent government. An investigation was
carried out into the overall project in May which subsequently resulted in MSEB cancelling the
power purchase agreement with the Dabhol Power Company. At this point in the project, US$300
million had already been invested and Enron and its partners were facing a daily loss of
US$250,000 each day the project was delayed.
As per the terms of the original agreement, Dabhol and its partners initiated arbitration proceeding
against MSEB and the Maharashtra government. The government in turn launched legal action
to invalidate the arbitration action alleging that illegal means had been employed to secure the
contract. Maharashtra’s government officials responsible for the investigation also stated firmly
they had no wish to consider renegotiation.
In the fall of 1995, Enron managed to persuade the government of Maharashtra to reopen
negotiations which would take place in the fall. Subsequently, Chief Minister Joshi announced
that a review panel would carry out a review of the project. The review panel not only began to
discuss the restructuring with Enron executives, they also heard the major opponents to the
deal. The major issues entailed the electricity tariff, the capital costs of the project, the payment
plan and also the environment.
In terms of the renegotiation, MSEB gained a 30 % partnership with Enron and its interest reduced
from 80 % to 50 %. The original electricity the plant would produce was actually increased from
the initial proposed outage of 2,015 megawatts to 2,410 after the completion of phase 2. Capital
cost was reduced from US$2.85 billion on US$2.5 billion and the tariff was lowered from
7.03US cents to 6.03US cents subject to the cost of fuel and inflation.
In January of 1996, the Maharashtra government agreed to the renegotiation proposal submitted
by the review panel. After much internal debate, the Indian government gave their approval and
extended their guarantee of Maharashtra’s obligations. Enron dropped their arbitration proceedings
and Maharashtra dropped its counter suit. Despite these agreements, the project still could not
continue because a host of various groups including unions, activists and other public interest
groups filed 24 legal actions in the courts in an effort to stop the project. The courts ruled that the
project could not proceed until all these suits were heard. Eventually the courts dismissed the
last suit in December of 1996.
In May of 1999, phase 1 of the project was completed and the plant began to operate while Enron
sought and obtained financing of US$1.87 billion for phase 2 which they expected to complete
toward the end of 2001. Not long after the phase 1 of the plant began to operate however, MSEB
was no longer able to pay for the electricity it had negotiated. By 2001, MSEB had accumulated
a debt of US$45 million forcing the Dabhol Power Company to close down and file suit against
MSEB, the central government and the government of Maharashtra. That same year Enron’s
collapse was total. After a string of financial setbacks, Enron declared bankruptcy.
Questions :
1) What were the reasons for debacle to Enron ? 15
2) Explain what strategies should have been used to keep the project on ? 10
——————
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