#128 AES in Georgia. When things get REALLY bad in international markets
Looking for interesting documentaries to watch, I recently came across Power Trip, and it was fascinating. Yes, you will have experienced better film-making and more interesting storytelling, but for someone interested in international business, the documentary is an intriguing reminder how tough things can be in foreign markets. The movie tells the story of AES, a global energy supply and power company. In 1998, as part of the newly independent Republic of Georgia’s privatization efforts, AES acquired Telasi, a public utility in Tbilisi, Georgia. The deal must have sounded like a great opportunity to AES executives on paper – liberalization, potential economic growth, infrastructure investments by the government, and an established customer base. What was overlooked, apparently, was that the vast majority of customers had never received a bill in their entire life from the state run utility. AES, answering to shareholders and seeking to upgrade the electrical grid in Georgia, introduced a $24 per month fee for electricity, which represented about 50% of the monthly income of average Georgians. Not surprisingly, 90% of Telasi’s customers chose not to pay their electricity bills. When AES disconnected them from the grid, the more creative Georgians started to install their own makeshift wiring, stealing electricity from their neighbors. And sometimes even from the high voltage grid, which presented a severe safety hazard. Many paying customers discovered that they had been cheated on their payments by corrupt government officials which diverted not only their money to other channels, but also provided energy to industrial cronies instead. Finally, when an extraordinarily harsh winter hit in 2001 that reduced the availability of electricity to only 3 to 4 hours per day, people simply took their anger to the streets. Tension mounted, violence occurred. In 2002, AES-Telasi’s CFO, Niko Lominadze, was even found murdered in his apartment.
After AES had lost a reported $300 million in its four years in Georgia, it sold Telasi to Russian company Inter RAO UES for $26 million in 2003 – after it had paid $60 million of Telasi’s debt, causing AES to eventually paying $34 million to get rid of Telasi.
In these modern times, we often ignore political risk, wrongly assuming that aside from a few rogue countries, the rule of law and ethics has reached even the darkest corner of the globe. There’s a lot to be learned about that from AES’s experience with poverty and corruption in unknown territories.
March 13, 2018 @ 10:23 am
Once again we see a perfect example of insufficient preparation when expanding and doing business in a foreign country – what seems to be the “right” choice on paper does not necessarily work out in real life.
When AES decided to expand to Georgia, opportunities and the potential looked great (e.g., overall market size, customer base, energy facilities) but what their analysis missed was the fact, that Georgia’s average Household Income per Capita per year was about $250. Charging a flat-fee of $24 per month may sound reasonable and comparably cheap, but for Georgian folks, it just was not affordable at all. Especially the fact that they have never seen a bill for energy consumption before, made them not accept the services from AES. Also, in Georgian culture, stealing energy was deemed a trivial offense not causing any harm.
Furthermore, the political situation was still unstable in Georgia; corruption, as well as bribery, occurred on a daily basis. Saying that, when things got worse, AES did not get any help from the government and was left alone with their problems.
Thus, in my point of view, AES should not have decided to expand to Georgia – there were no things that they could have changed to better the situation. It was the general economy of Georgia at that time that caused this “adventure” to fail. They should have realized that when they thought about the target market selection as usually the micro- and macroeconomic situations of a country are evaluated at this stage. Especially the income levels per person should have been assessed.
July 15, 2018 @ 12:26 pm
The decision makers of AES obviously relied too much on hard facts, numbers and reports, that probably still described a lot of the actual situation and the financial benefits of the deal. There were a lot of evident advantages of expanding to Georgia, including for example the infrastructure investments provided by the government.
Their problem was, that they probably did no market research at all, because they even missed the fact, that people simply can’t afford their services. All that backfired really badly, because people obviously still need electricity to live. All in all I think the deal was neither beneficial for AES nor for the Georgian government.