2006
Mission improbable
By
Isabel Gorst
A tale of multi-million dollar debts, theft, gunshots, car chases, a knife fight, cash in paper bags and an abandoned baby, all in one of the most corrupt places in the world
Financial Times,
20 November 2006
A project in one of the most impoverished and corrupt places in the world immersed PA Consulting staff in a tale that is very far removed from the usual run-of-the-mill day at the office. The project was to turn round the United Energy Distribution Company (UEDC), the state-owned electricity utility in Georgia. It was so successful it won PA Consulting the gold and platinum medals at the 2006 MCA Management Awards in London earlier this year.
The contract was awarded by the Georgian government and the US Agency for International Development (USAID) in an emergency response to the impending collapse of the electricity industry in Georgia, an impoverished republic in the southern Caucasus.
When PA Consulting moved into the company in February 2003, UEDC was regarded as a complete basket case.
Its distribution system was too fragile to deliver electricity to consumers for more than three or four hours a day. Thieves preyed on the network stealing not just power, but poles and wires as well.
Financially, it was crippled by multi-million dollar debts to foreign suppliers, taxmen and its own employees, who had not been fully paid for years. With collection rates sinking below 20 per cent, it had only a small chance of settling its bills.
It was a failing company in a failing state. Time was running out for the government that ran Georgia as badly as it ran its biggest utility. Within months the Rose Revolution toppled the regime of president Edouard Shevardnadze, ushering in a western-oriented leadership committed to reforming the economy.
Georgia still faces daunting challenges, not least from Russia, with which an escalating series of disputes this year culminated in October with Russia severing trade and postal routes with its southern neighbour.
But Georgia is no longer a disaster. And while UEDC still has problems, it stands out as a beacon of what fearless, dedicated leadership can do to turn around even the most delinquent organisation. The company is financially and technically sustainable, operates within a western-style management structure and has been successfully groomed for privatisation.
Alexander Khetaguri, Georgia's first deputy minister of energy, says: "The resurrection of UEDC is one of the big successes of Georgian energy reform. For the first time in 15 years Georgia is enjoying uninterrupted electricity supplies."
PA Consulting is now enjoying the plaudits of the profession. MCA Management's gold and platinum awards are like Oscars in the UK consultancy business. But PA risked its reputation when it took on UEDC without promise of generous reward. The USAID contract offered none of the performance-based incentives that consultants usually expect. External funding was stringent compared with the enormity of the task.
It is unusual for international consulting firms to assume management control of utilities. But the UEDC contract, wrapped in a package of five donor-funded projects in the Caucasus, was, in PA's assessment, a strategic imperative, despite the challenges.
PA's Dean White, the general manager of UEDC, says: "It was a bit like love me, love my dog."
USAID's approach to the UEDC reform was also highly unusual. Donors in transitional economies normally offer technical or advisory assistance to troubled organisations. The PA/UEDC contract was an exception, marking the first time USAID had hired an outside management team to promote an aggressive reform programme inside a company.
But Georgia's energy business was in an exceptional mess. International advisers had warned that the electricity shortages that plagued Georgia each winter would spill over into summer, dragging down the economy in their wake.
Mr Shevardnadze's government aimed to privatise electricity assets. But no one bid at privatisation auctions held in 2002.
Investors were discouraged by the experience of AES, a US electricity company, which incurred heavy losses during a five-year spell as owner of Telasi, a utility serving Tbilisi, the Georgian capital. AES was badly undermined by Georgian government interference. The company also encountered difficulty in securing reliable fuel supplies from Gazprom, the Russian gas monopoly.
Telasi was taken over by Unified Energy System, the Russian state electricity monopoly, raising concern that Tbilisi's consumers might end up hostage to political spats between Russia and Georgia.
Acting on the advice of the World Bank, the government formed UEDC in 2002 as a consolidation of seven regional electricity distribution networks serving 700,000 customers in an area that covered two-thirds of Georgia's territory.
But the UEDC structure lacked glue. Each of the 59 municipalities in the company's domain operated like a privately-owned fiefdom without allegiance to the centre.
John Hansen, USAID's Georgian director of energy and the environment, says: "We were looking at a colossal problem in this company. UEDC was bankrupt, losing money, its network was dilapidated, and the whole system was politically influenced."
International donors recommended that the government put UEDC under external management for five years. USAID took responsibility for funding the project, which has absorbed between $16m and $20m, according to Mr Hansen.
PA Consulting stepped in with an 18-month interim management contract intended to give the government time to organise a tender and appoint a permanent team. The tender never happened and in 2004, PA's remit was extended for two years.
The mess PA Consulting's team found when it moved in to UEDC in February 2003 was even worse than anticipated. Mr White says: "We knew we had a corruption problem. But the UEDC more closely resembled a criminal racket from top to bottom."
Most UEDC bank accounts had been hollowed out or frozen. Tax auditors pounced on any incoming funds. What little money there was moved around in paper bags.
Salaries averaging $50 per month were low, even by Georgian standards, and were rarely paid. Even the stationery cupboards were bare.
During the past year alone, UEDC had not bothered to defend itself in more than 300 lawsuits, preferring instead to plead guilty and split fines worth some $35m with the plaintiffs.
The last thing UEDC wanted was an investigation. Measures were taken to ensure PA stepped into an information vacuum. A mysterious fire destroyed company records just before PA moved in to the Tbilisi headquarters. Hard drives disappeared from computers.
Even conducting a head count was impossible. But it was blatantly obvious that UEDC was grossly over-staffed. In one regional office there were 42 drivers and two vehicles.
Groups of hostile-looking company officials dressed in black crowded the entrances to regional offices when PA managers drew up to make introductory visits. They looked more like Mafia bosses than engineers.
The supervisory board hunkered down in its office behind bulletproof doors at UEDC headquarters and refused to budge. Peopled by former government officials, the board ran a disruptive parallel management until the Rose Revolution swept away its protectors.
During the first weeks of the contract a few local members of the PA team quit, deciding the job was not just dangerous, but impossible.
Mr White says those who stayed on tended to be young and ambitious - "the sort of individual who wants to go out and change the world for the better". PA got ready to wage war on corruption. Utilities usually hire engineers. But the personnel PA sought out for UEDC had a background in criminal justice.
Newcomers included a former chief probation officer, the first deputy minister of justice and the head of the government's anti-human trafficking programme. Each one, says Mr White, "had dealt with the really nasty side of Georgian life and most importantly, had demonstrated their ability to achieve results in spite of the odds".
Zurab Nogaideli, a former minister of finance who had lately joined the opposition, was appointed as a strategic adviser. He is now Georgia's prime minister.
Mr White described his colleagues at UEDC as "highly professional and absolutely fearless". They needed to be.
During the first six months PA battled fierce, often violent resistance from employees, electricity customers, clan leaders and other groups with an entrenched interest in maintaining the status quo at UEDC.
The government paid lip service to energy reform, but there was no guarantee of solid support from the Shevardnadze regime.
The mood in Georgia was tense and volatile in the run up to the Rose Revolution.
PA consultants recall how a discussion about electricity prices with regional leaders at the energy ministry sparked a knife fight between members of rival clans who were eventually dragged apart by bewildered officials. Nobody ever discovered what the conflict was about.
PA's immediate priority was to gain control over scarce electricity supplies. An electricity rationing system introduced in areas with a particularly dismal payment record alienated the Georgian community.
Word went round that US capitalists were plotting to throttle Georgia's electricity supply.
Officials resistant to change exploited PA's unpopularity. After PA ordered the disconnection of an electricity substation in the Imereti region, the local governor, accompanied by guards and a television crew, stormed into the plant and personally turned the switch back on in front of the cameras. Viewers were informed "foreigners are treating Georgians like monkeys".
Events in Imereti unnerved USAID. A $14m grant allocated for repairs in the region was cancelled, shaking the financial foundations of PA's programme.
Mr White says: "People began asking - are we throwing money down a rat hole?" PA pondered retreat. But the tide turned in its favour after the Rose Revolution swept President Mikheil Saakashvili to power.
Mr Saakashvili's reformist government gave PA a clear mandate to push through radical changes at UEDC that were to transform the landscape of the Georgian energy business. "Tough love" is how Mr White describes the campaign fought over the next 18 months to slash UEDC's bloated workforce and prise payment from electricity customers.
Under its old management, UEDC lacked any recognisable human resources policy. Staff had no job descriptions and little idea of to whom they should report. Many lacked any relevant technical skills. David Sharashenidze, the deputy head of PA/UEDC says: "Some of the technicians did not even know the difference between a volt and an amp, let alone how to connect an electricity meter."
A third of UEDC's staff was fired during a downsizing that reduced the company's workforce to 4,000.
Wages freed by the dismissals were redistributed to those who remained. Average pay at UEDC rose to $150 a month, enough to support a family in Georgia.
The lay-offs caused raw human suffering in Georgia where unemployment was already high. One former employee doused himself with petrol and threatened to set fire to himself if he was denied compensation. The baby of a former employee was abandoned at a regional UEDC office.
Mr Sharashenidze says: "It was an upsetting and sometimes dangerous job. But it had to be done. The fate of UEDC's 700,000 electricity consumers was hanging in the balance."
PA introduced a phased programme to repay the $2m of wage arrears owed by UEDC. This measure, so far unique in Georgia and expected to take at least another year to complete, has helped ease the hardship of unemployment and enhanced support for PA, especially with the trade union representing the workers.
The most crucial element of PA's rescue operation at UEDC was to improve collection rates and ensure that payments reached the company. Cash collections at the customer's doorstep were immediately banned.
A computerised billing system revolving round a network of 35 payment and debt tracking centres in the regions was gradually introduced. An apprenticeship programme was launched to train staff in IT skills.
Most of UEDC's customers live in rural areas. PA/UEDC began installing communal meters at the entrance to villages. Communal metering systems are far cheaper than the alternative of installing individual meters in every home. Culturally, the system is well suited to rural Georgia where it is a tradition to rob the state, but taboo to cheat the neighbours. A self policing system is evolving with villagers disciplining anyone caught stealing.
In the cities UECD embarked on the slower task of placing meters in every home. More than 120,000 have been installed in urban households during the past year.
Little had changed in Georgia since Soviet times when cheap electricity was considered almost a human right. Mr Sharashenidze says: "The challenge was to change the mentality of people accustomed to getting electricity for free or for a purely symbolic price."
The government participated in PA's publicity campaign. President Saakashvilli explained on television that times had changed and electricity, like bread, had to be paid for. Compliance would be rewarded with round-the-clock electricity. The prime minister donned a UEDC uniform and attended the televised start-up of one of the first communal meters.
Once meters were in place, there was no pity for consumers failing to pay bills in full. Indebted customers were cut off. Mr White says: "It was quite simple. We told them - if you want to pay only 95 per cent, don't bother. It is 100 per cent or nothing."
The government did not flinch. Legislation sanctioning draconian penalties for theft was introduced. Fines of $350 imposed on first offenders - around three times the Georgian average monthly wage - double if the crime is repeated. Third-time offenders face prosecution. A vigilant internal security service was set up at UEDC to catch electricity thieves. So far more than 1,000 cases of theft have been investigated and $1m collected in fines.
Georgian "meter doctors", who fiddle meters for a fee, are still in business. But they charge more for their services, reflecting the greater risks of stealing electricity. PA's tough love policy met with tough reprisals. On several occasions UEDC employees were taken hostage by irate customers demanding power be restored.
Georgia was on the brink of anarchy for several months after the Rose Revolution. Mr Saakashvili's first action was to launch an anti-corruption campaign targeted on the police.
Revenge is a tradition in Georgia. Members of the PA team were threatened, shot at and pursued in car chases. Entrepreneurial shysters offered wads of cash for equity stakes in meter clusters. Inevitably, refusals met with more threats and reprisals.
Mr White says: "'There was a period when hostility to our activities was so intense that I would hesitate to answer the late night phone calls in my hotel room, figuring it would be another physical threat coming through."
Some lines of attack were more humorous. A Georgian newspaper advertised "A new product for rural Georgia. A candlestick in Dean White's shape. When the power is out, what do you see? Dean White - he cares!"
Gradually, the social benefits that accompanied the restoration of power supplies broke down customer resistance to paying bills. It is now rare to see women laden with cooking pots crossing towns to prepare food in areas with electricity supplies. For the first time in many years, local hospitals offer scheduled surgery previously only available in Tbilisi.
UEDC is almost in the black. Revenues of $38m from electricity sales in 2005, were 130 per cent greater than in 2003 when PA took over management. Its 80 per cent collection rate makes UEDC the top performer among Georgian utilities. Taxes are being covered and debts to foreign suppliers have been paid. Wage arrears should be settled in full within a year. The outlook for foreign borrowing, unthinkable two years ago, is promising. A €25m credit extended this year by KfW, a German development bank, should encourage other investors to step forward.
Privatisation, the ultimate goal of government energy policy, is happening. Energo-Pro, a Czech utility, bid at a privatisation auction this summer for UEDC. Due diligence is underway and the transaction should be closed within a few weeks. Mr Khetaguri says Energo-Pro's $312m offer for the UEDC and other assets was "quite acceptable" and proof of how successful the reforms had been.
The UEDC brand name, now a badge of success, will be retained after the company is merged with six medium-sized hydroelectricity plants together capable of generating one-fifth of Georgia's power needs. The ministry's plan is to phase out imports of electricity, most of which come from Russia.
In the past Georgia exported electricity to Turkey. UEDC's inclusion in Energo-Pro's portfolio alongside assets in Bulgaria and Turkey may allow the republic to regain its role as an electricity generator for the Black Sea region. PA Consulting is winding down the UEDC project. Assuming the sale is successful, control of the company will be transferred to Energo-Pro with Georgians in dominant managerial positions throughout. It is too soon to relax, however. Bodyguards still shadow UEDC managers everywhere.
Mr White says: "With strong government support, we have put the cure in place. The patient must continue its therapy. But there will always be people who will seek to wreck the system for their own advantage."
UEDC's revival has helped build confidence in Georgia's ability to rebuild itself as a modern, viable and outward looking state. With UEDC back on its feet, the government now plans to reform the water utility.
Mr Sharashenidze is still glowing from this spring's victory at the MCA Awards. "Winning the MCA awards was great. It meant that as Georgians we had gained international recognition for our professional skills. Now it's time to move on to the next challenge."
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