#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.

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