Enron v/s Iridium: similarities and contrasts (10 February 2002)
Remember Iridium LLC, the global satellite phone company that went up in smoke? Until the Enron flameout, Iridium was probably the most high-profile bankruptcy in the United States in recent times.
Iridium was Motorola’s dream experiment, which envisaged 66 artificial satellites girdling the globe and connecting up with terrestrial systems to zap calls to user telephones anywhere on earth. I remember Iridium’s slick talking communications official making the rounds of Indian newspapers and displaying natty little cellphone-like instruments which he said would be Iridium’s answer to the suitcase-sized Inmarsat phones that were the only satellite-linked alternative then.
In India, a consortium led by IDBI but steered by Deepak Parekh and Ravi Parthasarathy (then chairman and vice-chairman respectively of Infrastructure Leasing and Financial Services) was put together to invest $70 million in Iridium LLC and a further Rs 126.09 crore for the gateway at Pune. It now turns out that the Indian institutions were victims of a well-orchestrated fraud—at least that is what they allege in a criminal complaint filed before the Pune magistrate a few months ago. Or is it that they are so overawed by the high-octane sales pitch of US companies that they turn credulous and commit themselves to totally one-sided contracts? We will know soon enough.
The Indian consortium had a five per cent stake and a seat on the board of directors of Iridium LLC and would set up the gateway. In fact, there was much huffing and puffing about the bureaucratic delay in granting permission for the gateway, which, Iridium had otherwise threatened to reallocate to China. As it happens, the Iridium phone, when it was finally launched, was nowhere near the dream that was sold to the world. Instead of a snazzy handset there was an embarrassing shoebox-sized phone, which had no chance of becoming the business executive’s favourite gizmo; instead it was sold as a communication tool for oil exploration rigs, archeological expeditions and military outfits stationed at remote locations.
Even that market was difficult to tap, because the phones and the calls made with it were far too expensive. Hence, it was no surprise that Iridium filed for bankruptcy in 1999, or, that India’s largest overseas investment had gone bust.
Now that Indian institutions have filed for criminal fraud, several interesting facts have spilled out, and they provide an interesting comparison between India’s experience with Motorola’s Iridium and Enron’s Dabhol Power Company. For starters, Dabhol was touted as the ‘largest foreign direct investment in India’ while Iridium was India’s largest investment overseas. Both Iridium LLC and Enron filed for bankruptcy, but for entirely different reasons.
Like Enron, Iridium’s parent Motorola is among America’s most respected companies. Both Iridium and Dabhol had large and disastrous investments by Indian financial institutions and in both cases, the US companies wrote themselves gold plated deals and one-sided contracts. Enron’s sweetheart deal involved a change in India’s electricity policy, and eliminated all its business risk through multiple payment guarantees. It also got itself several lucrative contracts such as the fuel supply deal and the operations & maintenance (O&M) contract giving it a separate income stream.
Its two US partners—GE Capital and Bechtel—got themselves equipment supply deals and Maharashtra was left tied to an unviable project, largely funded by Indian institutions who have even guaranteed the loans by US banks and institutions.
Look at the similarity between this and the allegations made by Indian institutions against Iridium. They say that Motorola promoted Iridium LLC, only to use the project for ‘developing new technology at other people’s cost’. Also, while a global consortium of countries invested in the equity and gateway projects, Motorola allegedly raked in the moolah. It pocketed a hefty $6.5 billion as payments from Iridium LLC.
As against its equity investment of a mere $315 million, it earned $3.68 billion in equipment supply contracts etc at ‘artificially high prices’. Like in the Dabhol case, it cornered the O&M contract, the terrestrial network development contract and the space system contract at Iridium LLC.
This ensured that Motorola began to recover its money right at the beginning irrespective of whether or not the Iridium experiment worked. Further, its contracts with Iridium were not only ‘exorbitant’, but were structured in such a way that although ‘Iridium paid all the development costs, the most valuable assets of the system would still be owned by Motorola’.
Moreover, Motorola had protected itself by quietly using various debt and equity raising exercises to discharge third party guarantees that it had provided to Iridium LLC, in order to attract global investment. If this sounds astounding today, it is a pity that the Indian investors never realised what was going on during their umpteen trips abroad to tie up the deal. The institutions say that they later discovered that ‘the Iridium system was a complete failure and all the material representations made… were totally false, dishonest, fraudulent and deceitful’ and to the knowledge of Motorola officials.
In fact, the Motorola board had rejected a proposal to fund the development of Iridium on its own in the early 1990s. Far from processing fax and data, the constellation of satellites could not even generate signals that could be picked up inside buildings or in automobiles. Further, the gateway costing Rs 126 crore was a completely unnecessary and a waste (since the system itself did not work). Motorola allegedly knew that ‘the Iridium system could be operated through a single gateway and that other gateways were not absolutely necessary’. It only created the ‘subterfuge’ of the need for gateways in order to obtain licenses to operate Iridium in countries such as India.
Indian investors allege, that Motorola had become aware that Iridium was a disaster well before the commercial launch, but it suppressed this fact and ‘concealed the shortcomings’ to ‘induce’ investors to keep pumping money into the system even faster. The question is what next? When Indian investors demanded $250 million to make good the losses, Motorola slapped a counter demand on them of $6.9 million.
Undoubtedly Motorola will fight aggressively to protect itself. However, this led to the filing of a criminal complaint at Pune where again Motorola ignored the summons served on itself and its top brass. It now remains to be seen what role the Indian government will play in helping Indian institutions (the list includes IDBI, ICICI, HDFC, UTI, SBI, LIC, GIC, Exim Bank of India and IL&FS) recover their money.
If vice-president Dick Cheney and various US Ambassadors could aggressively push the Enron deal, can India do the same? Will the Indian government and its politicians stand up for its institutions without any strings attached? The next few months will demonstrate how good we are at protecting our national interest.