Question: Bribes are illegal in Italy. Even if bribes were common practice there, would this justify paying them? Closing Case Nicolo Pignatelli and Gulf ItaliaNicolo Pignatelli, president of Gulf Italia (a sub-sidiary of Gulf Oil), stared at the notice fromthe Italian government. "How could this bepossible?" he thought. The government hadgiven Pignatelli permission to build an oilrefinery with a capacity of almost 6 million tons. He hadjust completed it at a cost of several hundred million dol-lars. Now the Italian government was telling him that hecould only operate at slightly more than 50 percentcapacity (3.9 million tons of the total 6 million ton capac-ity). On top of that, the notice from the government alsosaid that not only would he need to get "productionpermission" to go from 3.9 million to 6.0 million tons inactual production, he would also need a separate "imple-mentation permission" to put into effect the "productionpermission."Pignatelli didn't know whether to be intimidated orinfuriated. The government had given him permission tobuild a 6 million ton facility. However, they were nowallowing him to operate at only 3.9 million tons. Becauseof the plant's high fixed cost, it needed to operate nearcapacity to make money. Operating at 3.9 million tonswould lose millions of dollars and was out of the ques-tion. Shutting down the plant completely would also costmoney.Pignatelli was understandably upset-he had spentseven long years implementing a strategy to take thecompany from one of the small fries in the Italian oil andgasoline industry to one of the major players. WhenPignatelli took over, Gulf gas stations were located innorthern Italy. To build a national presence, Pignatelliacquired 700 gasoline stations, primarily in central andsouthern Italy, from Marathon Oil. This purchase allowedGulf to have gas stations throughout Italy. Gulf also hadcrude oil operations in southern Italy and in the nearbyMiddle East, which it could use to supply crude oil toItaly. What Gulf lacked was the middle part of thechain-a refinery. Without it, Pignatelli was dependenton competitors for a refined gasoline supply and had totake whatever wholesale prices they dictated. Pignatellifelt Gulf needed its own refinery to complete the chainfrom the wellhead to the gas pump and thereby controlits own destiny.Building a refinery in Italy was a long and expensivetask. Even after receiving permission to build the refinery innorthern Italy, local community opposition resulted in fivelocation changes before construction could finally start.These location changes alone cost Gulf an additional $16million. To ensure that the smoke and fumes would notcontribute to city smog, Pignatelli spent extra money on a450-foot smokestack (twice as tall as normal). Pignatellialso installed a special combustion chamber so that flaretowers (used to burn off waste gas) and the loud noiseand noxious fumes associated with them weren't neces-sary. He also added a state-of-the-art water purificationsystem. Pignatelli demonstrated the quality of the systemby personally drinking the waste water. These environmen-tal additions added several million dollars to the project.So that the refinery would be profitable, Pignatelliwanted to assure strong demand for the supply createdby the refinery. In addition to the internal demand fromGulf gas stations, Pignatelli arranged a joint venture withMobil Oil. Mobil had many service stations in northernItaly where Gulf's refinery was located but no refinery ofits own. This would secure demand for the refinery'sproducts, and the money Mobil was to invest for itsequity share would reduce Gulf's financial burden inbuilding the refinery. However, Mobil had the option ofpulling out of the deal if Gulf's refinery could not operateat capacity because in that case, the refined gas wouldbe too expensive for Mobil to buy.It had taken seven years for the refinery to beapproved and built. Hundreds of millions of dollars wereon the line. On top of this, Pignatelli personally had soldthe expansion strategy (both the acquisition of the retailstations 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 toobtain approval to operate at capacity and a separateauthorization to implement that approval might takemany more months, if not years. Pignatelli wondered ifhe 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 toquickly grant the two needed permissions.3. He could pay a large sum of money ($1 milliondeposited to a Swiss bank account) to a "consult-ant" who had "debottlenecked" problems like thisbefore and who promised Pignatelli that he couldfix the situation quickly.4. He could pay money "under the table" directly togovernment officials to obtain the permissionsneeded to run the refinery economically.Pignatelli considered each option. Playing it straight wouldlikely 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 atsuch a low capacity that it would lose millions of dollars.Pignatelli was not certain that pressure from his partnerswould influence government officials. He wondered aboutthe effect of going to the media. Given the current cost ofthe project, the thousands of jobs that depended on an operating refinery, and time pressures, $1 million seemedlike a small price to pay to a consultant to get things de-bottlenecked. He might be able to gain approval for evenless money if he went directly to government officials.

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Answered: Bribes are illegal in Italy. Even if…

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

Understanding Business

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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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