Better times for UEDC

Power struggle

UEDC was one of Georgia's most troubled companies. Now, after a remarkable turnaround, it is one of the most successful.

by Rhymer Rigby, World Business magazine
Last Updated: 23 Jul 2013

Dean White reels off the salient facts about UEDC: "We were collecting only 10 cents on the dollar; there was no cash; the bank accounts had been seized by creditors; the hard drives had all been stolen and fires had been set to destroy documents. It was the most corrupt company in the most corrupt sector of a country where corruption is endemic ..." UEDC is the business White heads up as part of his role at PA Consulting. "Basically," he sighs, "it was a criminal racket."

Georgia is a small republic in the former Soviet Union; it shares the wide isthmus between the Black and Caspian seas with Azerbaijan and Armenia.

Although undeniably beautiful - it is sometimes called 'Switzerland by the sea' - it tends to get in the news for all the wrong reasons, most recently because of the revolution in 2003 when Eduard Shevardnadze's government was forced to step down.

It also suffers from serious instability along its northern flank where it borders Chechnya, and has its own breakaway region of South Ossetia.

Corruption is also a problem: Georgia comes joint 130th (out of 159) in Transparency International's Corruption Index, lower than Albania, Niger and Sierra Leone. Not, in short, the kind of place you might choose to do business.

Georgia's state-owned electricity distribution company is the United Energy Distribution Company (UEDC). As White has already indicated, it was somewhat troubled; in fact, it was a poster child for all the problems in Georgia. The company, a consolidation of 59 smaller companies, was a financial, technical and operational disaster. Hugely indebted and largely incapable of collecting charges for electricity supplied, it could not pay its taxes, borrow funds or even use a bank account, let alone attract new investment. Earlier government attempts to privatise the business' assets had, understandably, failed.

"It was," says White, "corrupt on every level, from the senior management to the shop floor." Employees were paid erratically and often had to give kick-backs to their supervisors to keep their jobs. With average salaries as low as $50 per month, UEDC often lacked the right staff and found it hard to recruit new talent. The former management had no accurate headcount of employees - it reported that it had 3,200, but PA found almost twice as many on the payroll.

Nor was White seeing all of this through the eyes of some newbie parachuted in from a cushy desk job in New York or London. "I'd been in Georgia since 1995 and I thought I understood the place, but this was something else," he says.

The company's remit included supplying electricity to minority ethnic groups, lawless areas and impoverished customers. And its service was terrible: some customers had no electricity at all for most of the winter; those who did usually had up to six hours' supply each day, but sometimes zero. Few customers had anything approaching a 24-hour supply unless they stole it. Even in summer, daily supply disruptions were common. The company had no means of paying for any additional electricity. Its infrastructure had seen little investment, or even maintenance, in years. More often than not, faults were repaired by the customers themselves.

So how did a consultancy come to be running a power company, let alone this one? PA cheerfully admits that it was an "exceptional" case, but the reason was simply that something had to be done. "The Georgian government," says White, "was at its wits end." In 2002, it approached the US government for help in running its basket case. PA had a contractual relationship with the Georgian government and the US Agency for International Development (USAID), which is sponsoring the project. The consultancy was selected by USAID through competitive tender.

In 2003, PA was contracted to manage the UEDC for an initial period of 18 months (it was later extended for a further 24). The major objectives of the contract were to enhance the commercial and technical operation of the company, to improve financial management and accounting systems, billing and collection, increase revenue, reduce cash shortfalls, assist the company to observe market rules, to meet wholesale electricity consumption targets, attract investment and, eventually, to privatise UEDC. In short, PA was asked to rebuild the business from the ground up.

At the beginning, White admits, "it turned out to be even worse than we'd anticipated". But, he continues, "we moved fast. We were very quick to tackle corruption. One strategy was to sack many of the incumbents. At the senior level, we actually brought in a lot of people with backgrounds in corporate law. We prosecuted cases, both for electricity theft and internal corruption."

In fact, although this is unlikely to be something a utility in the West would boast about, White says, with a note of pride, that there is now only one engineer in the top two tiers of management, adding that this was necessary given that the company's problems were "about criminality, not engineering". Overall, he reckons that the headcount was reduced by a third.

As well as the headline-grabbing drive against corporate crime, PA used a host of other approaches designed specifically for the country. To address the appalling collection rates, it introduced communal metering whereby UEDC customers took joint responsibility for paying for electricity via a single meter. This worked because in Georgia it is acceptable to steal from state enterprises, but taboo to steal from your neighbours.

It replaced the management system with clear levels of accountability and responsibility; it recognised that not all UEDC's customers were the same (with significant and often isolated Azeri and Armenian communities, Georgia is very diverse) and encouraged the regional offices to pursue their own PR and outreach efforts. And in rebuilding the inadequate IT systems, PA came up with solutions to unique Georgian problems such as multiple languages and poor telecoms.

Of course, things were far from smooth: criminals do not give up their rackets easily. "It was clear that we stepped on a lot of toes," says White. "It was just the nature of what we had to face. We were threatened many times; people shot at the office buildings and we had to use a lot of security. But if it had got too bad, we would have pulled the plug. We were not about to risk our employees' lives."

It was, he continues, a case of rebuilding from the ground up. "We had less than nothing and just had to put basic systems in place. It took a year before management really had the ability to control the business." Most of these problems, he says, were particularly difficult in the early days, and under the old government there would have been the risk of PA being used as a scapegoat, but that changed with the revolution. "There's good support now," he says.

Another difficulty was staff attrition and attracting new people. "We were not an attractive employer and this project scared off a number of prospective employees. Even when we had people we wanted to hire, the risks for them were too high." But, he says, as they slowly sorted things out - and began to pay wages on time - this situation turned around.

"Now we're quite an attractive employer. And, to help with the turnaround, we've attracted some of the best managerial talent in Georgia. They may not have come from energy, but this company's problems were never electrical."

The turnaround, by almost any yardstick, is remarkable. On average, about 30% more electricity is delivered to customers than in the past, through a better ability to manage, and pay for, wholesale electricity supply. People paying in full now have a 24-hour supply. Monthly collections of payments have risen from 1.3 million Georgian lari (GEL) ($715,000) to last August's GEL7 million, and then to December's all-time high of GEL9.5 million.

Average salaries have tripled to GEL280 a month, enough to support a family. The company pays in full and on time, something unknown previously.

It has also paid all its taxes, whereas before it was often unable to pay more than a third of its bills in any given month. And it has repaid all debts to commercial banks and foreign energy suppliers, which amounted to millions of US dollars.

Amazingly, all this has been accomplished with very limited external investment. Commercial financing for UEDC would have been unthinkable two years ago, but now KfW, the German development bank, has agreed to a financing package of EUR25 million. Under PA, UEDC achieved a collection rate superior to a more favourably located Georgian competitor, Telasi, which received more than 50 times as much investment. The company's performance has also made privatisation a possibility at the end of the management contract later this year, which could yield an investment commitment of at least GEL200 million from the private sector.

Unsurprisingly, the government is pretty happy. Alexander Khetaguri, Georgia's first deputy minister of fuel and energy, is thrilled: "They took on the challenge of reforming a company that many felt was impossible to turn around. We consider the reform of the UEDC to be one of the most - if not the most - important successes to date in our energy reform programme." Similar plaudits have come from sources as diverse as labour leaders, such as Lasha Chokheli, and ordinary Georgians, who now enjoy the 'luxury' of being able to cook when they want to.

As for White, he's been given the national equivalent of a knighthood and says that he will stay until later this year. "The government doesn't want UEDC to be state-owned. Public ownership has not proved effective." As for privatisation: "We'll see how it goes. If it succeeds, that's great. We've put all the systems in place, so that whoever takes over can step into a company that can be managed - and one that is not dependent on a single person."

But how does one follow this? "Well," says White, "nothing's definite, but I wouldn't mind heading east to Azerbaijan." This is a country that, if anything, is in a greater energy mess than Georgia. "Their domestic system is really suffering, and it's a very interesting corner of the world."

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