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Bribes are illegal in Italy. Even if bribes were common practice there, would this justify paying them?

Bribes are illegal in Italy. Even if bribes were common practice there, would this justify paying them?

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
Problem 1CE
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Question: Bribes are illegal in Italy. Even if bribes were common practice there, would this justify paying them?

Closing Case Nicolo Pignatelli and Gulf Italia N icolo Pignatelli, president of Gulf Italia (a sub- sidiary of Gulf Oil), stared at the notice from the Italian government. "How could this be possible?" he thought. The government had given Pignatelli permission to build an oil refinery with a capacity of almost 6 million tons. He had just completed it at a cost of several hundred million dol- lars. Now the Italian government was telling him that he could only operate at slightly more than 50 percent capacity (3.9 million tons of the total 6 million ton capac- ity). On top of that, the notice from the government also said that not only would he need to get "production permission" to go from 3.9 million to 6.0 million tons in actual production, he would also need a separate "imple- mentation permission" to put into effect the "production permission." Pignatelli didn't know whether to be intimidated or infuriated. The government had given him permission to build a 6 million ton facility. However, they were now allowing him to operate at only 3.9 million tons. Because of the plant's high fixed cost, it needed to operate near capacity to make money. Operating at 3.9 million tons would lose millions of dollars and was out of the ques- tion. Shutting down the plant completely would also cost money. Pignatelli was understandably upset-he had spent seven long years implementing a strategy to take the company from one of the small fries in the Italian oil and gasoline industry to one of the major players. When Pignatelli took over, Gulf gas stations were located in northern Italy. To build a national presence, Pignatelli acquired 700 gasoline stations, primarily in central and southern Italy, from Marathon Oil. This purchase allowed Gulf to have gas stations throughout Italy. Gulf also had crude oil operations in southern Italy and in the nearby Middle East, which it could use to supply crude oil to Italy. What Gulf lacked was the middle part of the chain-a refinery. Without it, Pignatelli was dependent on competitors for a refined gasoline supply and had to take whatever wholesale prices they dictated. Pignatelli felt Gulf needed its own refinery to complete the chain from the wellhead to the gas pump and thereby control its own destiny. Building a refinery in Italy was a long and expensive task. Even after receiving permission to build the refinery in northern Italy, local community opposition resulted in five location changes before construction could finally start. These location changes alone cost Gulf an additional $16 million. To ensure that the smoke and fumes would not contribute to city smog, Pignatelli spent extra money on a 450-foot smokestack (twice as tall as normal). Pignatelli also installed a special combustion chamber so that flare towers (used to burn off waste gas) and the loud noise and noxious fumes associated with them weren't neces- sary. He also added a state-of-the-art water purification system. Pignatelli demonstrated the quality of the system by personally drinking the waste water. These environmen- tal additions added several million dollars to the project. So that the refinery would be profitable, Pignatelli wanted to assure strong demand for the supply created by the refinery. In addition to the internal demand from Gulf gas stations, Pignatelli arranged a joint venture with Mobil Oil. Mobil had many service stations in northern Italy where Gulf's refinery was located but no refinery of its own. This would secure demand for the refinery's products, and the money Mobil was to invest for its equity share would reduce Gulf's financial burden in building the refinery. However, Mobil had the option of pulling out of the deal if Gulf's refinery could not operate at capacity because in that case, the refined gas would be too expensive for Mobil to buy. It had taken seven years for the refinery to be approved and built. Hundreds of millions of dollars were on the line. On top of this, Pignatelli personally had sold the expansion strategy (both the acquisition of the retail stations and the building of the refinery) to senior execu- tives at Gulf's global headquarters. As a consequence, his personal reputation was also on the line. Trying to obtain approval to operate at capacity and a separate authorization to implement that approval might take many more months, if not years. Pignatelli wondered if he was being purposely set up by government officials. Four options occurred to Pignatelli: 1. He could play it straight and try to gain govern- ment authorization. 2. He could ask his more-influential partners (for exam- ple, Mobil) to pressure government officials to quickly grant the two needed permissions. 3. He could pay a large sum of money ($1 million deposited to a Swiss bank account) to a "consult- ant" who had "debottlenecked" problems like this before and who promised Pignatelli that he could fix the situation quickly. 4. He could pay money "under the table" directly to government officials to obtain the permissions needed to run the refinery economically. Pignatelli considered each option. Playing it straight would likely take several months and possibly years before gov- ernment authorization could be obtained. In the mean- time, the refinery would not operate, or would operate at such a low capacity that it would lose millions of dollars. Pignatelli was not certain that pressure from his partners would influence government officials. He wondered about the effect of going to the media. Given the current cost of the project, the thousands of jobs that depended on an
Transcribed Image Text:Closing Case Nicolo Pignatelli and Gulf Italia N icolo Pignatelli, president of Gulf Italia (a sub- sidiary of Gulf Oil), stared at the notice from the Italian government. "How could this be possible?" he thought. The government had given Pignatelli permission to build an oil refinery with a capacity of almost 6 million tons. He had just completed it at a cost of several hundred million dol- lars. Now the Italian government was telling him that he could only operate at slightly more than 50 percent capacity (3.9 million tons of the total 6 million ton capac- ity). On top of that, the notice from the government also said that not only would he need to get "production permission" to go from 3.9 million to 6.0 million tons in actual production, he would also need a separate "imple- mentation permission" to put into effect the "production permission." Pignatelli didn't know whether to be intimidated or infuriated. The government had given him permission to build a 6 million ton facility. However, they were now allowing him to operate at only 3.9 million tons. Because of the plant's high fixed cost, it needed to operate near capacity to make money. Operating at 3.9 million tons would lose millions of dollars and was out of the ques- tion. Shutting down the plant completely would also cost money. Pignatelli was understandably upset-he had spent seven long years implementing a strategy to take the company from one of the small fries in the Italian oil and gasoline industry to one of the major players. When Pignatelli took over, Gulf gas stations were located in northern Italy. To build a national presence, Pignatelli acquired 700 gasoline stations, primarily in central and southern Italy, from Marathon Oil. This purchase allowed Gulf to have gas stations throughout Italy. Gulf also had crude oil operations in southern Italy and in the nearby Middle East, which it could use to supply crude oil to Italy. What Gulf lacked was the middle part of the chain-a refinery. Without it, Pignatelli was dependent on competitors for a refined gasoline supply and had to take whatever wholesale prices they dictated. Pignatelli felt Gulf needed its own refinery to complete the chain from the wellhead to the gas pump and thereby control its own destiny. Building a refinery in Italy was a long and expensive task. Even after receiving permission to build the refinery in northern Italy, local community opposition resulted in five location changes before construction could finally start. These location changes alone cost Gulf an additional $16 million. To ensure that the smoke and fumes would not contribute to city smog, Pignatelli spent extra money on a 450-foot smokestack (twice as tall as normal). Pignatelli also installed a special combustion chamber so that flare towers (used to burn off waste gas) and the loud noise and noxious fumes associated with them weren't neces- sary. He also added a state-of-the-art water purification system. Pignatelli demonstrated the quality of the system by personally drinking the waste water. These environmen- tal additions added several million dollars to the project. So that the refinery would be profitable, Pignatelli wanted to assure strong demand for the supply created by the refinery. In addition to the internal demand from Gulf gas stations, Pignatelli arranged a joint venture with Mobil Oil. Mobil had many service stations in northern Italy where Gulf's refinery was located but no refinery of its own. This would secure demand for the refinery's products, and the money Mobil was to invest for its equity share would reduce Gulf's financial burden in building the refinery. However, Mobil had the option of pulling out of the deal if Gulf's refinery could not operate at capacity because in that case, the refined gas would be too expensive for Mobil to buy. It had taken seven years for the refinery to be approved and built. Hundreds of millions of dollars were on the line. On top of this, Pignatelli personally had sold the expansion strategy (both the acquisition of the retail stations and the building of the refinery) to senior execu- tives at Gulf's global headquarters. As a consequence, his personal reputation was also on the line. Trying to obtain approval to operate at capacity and a separate authorization to implement that approval might take many more months, if not years. Pignatelli wondered if he was being purposely set up by government officials. Four options occurred to Pignatelli: 1. He could play it straight and try to gain govern- ment authorization. 2. He could ask his more-influential partners (for exam- ple, Mobil) to pressure government officials to quickly grant the two needed permissions. 3. He could pay a large sum of money ($1 million deposited to a Swiss bank account) to a "consult- ant" who had "debottlenecked" problems like this before and who promised Pignatelli that he could fix the situation quickly. 4. He could pay money "under the table" directly to government officials to obtain the permissions needed to run the refinery economically. Pignatelli considered each option. Playing it straight would likely take several months and possibly years before gov- ernment authorization could be obtained. In the mean- time, the refinery would not operate, or would operate at such a low capacity that it would lose millions of dollars. Pignatelli was not certain that pressure from his partners would influence government officials. He wondered about the effect of going to the media. Given the current cost of the project, the thousands of jobs that depended on an
operating refinery, and time pressures, $1 million seemed like a small price to pay to a consultant to get things de- bottlenecked. He might be able to gain approval for even less money if he went directly to government officials.
Transcribed Image Text:operating refinery, and time pressures, $1 million seemed like a small price to pay to a consultant to get things de- bottlenecked. He might be able to gain approval for even less money if he went directly to government officials.
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