World Bank Knew About Enron's Payoffs in Guatemala

Vol. 6, No. 2

September, 2003

by Jim Vallette
Sustainable Energy and Economy Network (SEEN)

A U.S. Senate report has found that the World Bank and other U.S. taxpayer-backed agencies
knew that Enron was paying commissions to a shadowy company called Sun King to win a
contract to build a power plant on a barge in Puerto Quetzal, Guatemala, ten years ago. Today,
Enron International still controls the project, and U.S. taxpayer monies are intertwined, through
outstanding OPIC and Maritime Administration project finance.

The bipartisan Senate Finance Committee report, released in late July 2003, including contracts
and corporate correspondence, says: "Enron benefited from taxpayer support and multilateral
organization support to extend its international reach, including the Guatemalan power project
with its questionable payments."

The report is a revelation about the shady world of international project finance, a game that
Enron perfected hand-in-hand with institutions like the World Bank, and U.S. government
agencies like the Overseas Private Investment Bank (OPIC). Reading between the lines, one
can see a lethargic, perhaps negligent, response by these agencies when they were warned of
potentially dodgy deals in which they were involved.

Enron, backed by World Bank and U.S. government money, bought out a publicly-held stake
in the power plant in 1993. Guatemalan President Jorge Serrano smoothed the transition. “The
Serrano government is a staunch proponent of free market economic policies, and includes
privatization as a cornerstone of its platform,” reads a 1992 Enron memorandum. The memo
requested a $71 million loan from the International Finance Corporation (IFC), the World Bank’s
private sector arm. The IFC approved the loan in March 1993. OPIC also supported the plant
with a $73.8 million political risk insurance package in 1992.

As part of the deal, Enron agreed to pay 6% of the plant's gross revenues to a
politically-connected investment group called Sun King. Subsequent events swept Sun King
and President Jorge Serrano from the power plant, and power itself.

In 1993, after the Puerto Quetzal plant came on line, Enron started paying tax-free
“commissions” to Sun King. According to Enron memoranda contained in the Senate report, Sun
King had a relationship with President Serrano that “could prove embarrassing.” The same
description could be true of the World Bank, OPIC, and Enron's relationships with this project.

One Enron memorandum notes that the “Sun King payments do not represent any REAL
[original emphasis] service to Puerto Quetzal Power Corp.” Another states that Sun King “talked
him [President Serrano] into signing the [privatization] contract. It is the typical ‘finder fee’
arrangement. As wealthy individuals that they are, they have the capacity to establish contacts,
make pressure, and represent your interest. One of the guys seems to be closer to the army
than others, [and] this can be of some benefit if in a given situation if we need to approach the
army. [W]e definitely don’t want them against our interests if something goes wrong.”

The IFC, in reviewing Enron’s proposal, apparently knew about the Sun King arrangement, at
least according to an Enron memo dated March 12, 1993.

As the project finance was completed, President Serrano proposed an increase in electricity
rates. The price hike, which totaled as much as 100 percent for some customers, was part of the
principal complaints of the demonstrators who took to the streets in Guatemala City during the
spring of 1993. President Serrano responded to the unrest by declaring martial law, and by
attempting to dissolve the Guatemalan Congress. His reach for government-by-decree failed
when he was unable to win the support of the military. Serrano fled the country, to exile in
Panama, in May 1993, and the rate increases were suspended.

After Serrano was forced to flee, the value of Sun King to Enron eroded. After making nearly $5
million of monthly payments since April 1993, Enron bought out Sun King’s interest for $12
million. This buyout used U.S. taxpayer dollars. The Senate investigation found that “Enron
used World Bank funds and funds from U.S. taxpayer supported agencies and lending
organizations to finance the Guatemalan power project as well as the questionable payments to
Sun King.” In 1999, the Houston office of the Internal Revenue Service informed the Securities
and Exchange Commission and the Department of Justice that Enron “may have violated the
Foreign Corrupt Practices Act” in Guatemala.

Enron rose to international heights on the back of public institutions, particularly the U.S.
Export-Import Bank, OPIC, and the World Bank. Since 1992, at least 21 agencies,
representing the U.S. government, multilateral development banks, and other national
governments, helped leverage Enron’s global reach by approving $7.2 billion in public
financing toward 38 projects in 29 countries.

The company was the darling of these institutions’ global energy privatization strategy, first
engineered by the Reagan administration’s Treasury Department. In 1983, the department
called upon the World Bank to end its “socialist drift” toward public energy projects and to
instead “remove impediments and adopt policies which foster private sector involvement in
energy development.”

Even after Enron’s collapse, the U.S. government remains on the hook for many standing OPIC
and ExIm deals with Enron. The Bush/Cheney administration even failed to oppose a new
project in which Enron International is a leading player: the expansion of the Transredes gas
pipeline system in Bolivia. Last December, the Inter-American Development Bank, in which the
U.S. government is the leading investor, approved a $125 million loan for this project.

Here, again, U.S. government and multilateral bank officials have neglected accusations of
financial malpractice and corruption. According to Jorge Cortes of the Bolivian NGO, CEADES,
a May 2002 investigation by Bolivia’s Parliament found that Enron had created a “ghost
foundation” used by company staff to buy shares in the Cuiaba pipeline, thus increasing its
value while defrauding legitimate shareholders. The Bolivian government has also admitted that
government officials received $2.5 million dollars from Enron, allegedly for travel expenses,
while the public gas pipeline company was being privatized. Further, charges Cortes, the
Bolivian President benefits from a secret private gas line leading from the Transredes system to
his own gold mine. The mine, in turn, is supported by an IFC investment.

As the U.S. Senate investigation reveals, such (projects) are occurring with some knowledge of
the federal government and multilateral development banks. The contagion was noted by
anti-corruption activists, traditionally a fairly conservative group, at the 11th International
Anti-Corruption Conference, in Seoul, Korea, in May 2003.

Their final communiqué declared:

"We believe that water and energy resources should be considered public goods, access
to which is a fundamental human right… When it appears likely that officials in privatized water or
energy utilities may have engaged in corrupt practices, an independent commission should
investigate them together with any public agencies – including international financial institutions
(IFIs) and export credit agencies – that may have financed the transactions… When international
agencies are found to have financed such corrupt transactions, they – not the consumers – must
bear appropriate responsibility for outstanding loans and credits. We recommend that IFIs and
donors should end the practice of insisting on privatization as a condition of loans and allow for
the consideration of the full range of public and private sector models."

The full version of this article, originally prepared for CorpWatch in August 2003, can be
accessed at www.corpwatch.org.

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