Project cost and funding mix
According to AES Telasi (n.d.), the total project cost is $ 147 million. Henisz (2017) affirms that in 1998, American Electric Services Corporation (AES) acquired 75% of Telasi’s shares, while the rest of the shares remained in the hands of the Georgian government. AES offered $ 25.5 million for 75% of Telasi, plus $ 10.35 million in partial debt repayment to the government with a commitment of $ 22.6 million in the first year and $ 84 million in ten years.
Demand, supply, and risks
Didebulidze (n.d.) notes that despite the significant capital investments of the Georgian government in the modernization of the energy sector, in the late 90s, electricity generation was low and amounted to about 8 billion kWh. Moreover, given the insignificant level of oil production and the virtual cessation of coal production, the country met only 18 percent of its energy needs from hydropower.
The sector faced a financial deficit that stifled the Georgian state’s growing fiscal position, undermined the development of private sector enterprises and foreign direct investment in particular, and contributed to political and social instability each winter as electricity hours were reduced to a minimum. The development of the country’s energy potential was shackled by the violent severing of economic ties with Russia, the devastation of three military conflicts, and, most importantly, widespread corruption. The corruption problem in Georgia was one of the most serious in the world and permeated almost all aspects of everyday life. Nieto (2013) asserts that about 60 percent of economic transactions take place in the shadow market.
Initial problems with the project and final restructuring
When AES became a shareholder in Telasi, the corporation faced many challenges. Part of the problem was the untimely maintenance and repair of the company’s equipment. Furthermore, the reported collection rates ranged from 20-40% as the population stole electricity using foul lines connected to the low-voltage transmission system. The degree of degradation of Telasi’s infrastructure was staggering. Still, with the help of significant cash investments from headquarters, management covered the costs necessary to bring local factories and equipment up to world-class standards.
The AES leadership’s ability to translate these investments and their psychological impact into financial returns was, however, repeatedly stymied by a web of opponents that stretched from local corruption networks benefiting from exporting electricity to Turkey or from free electricity to Moscow, where the Russian government increasingly saw state-owned enterprises as instruments of Russian foreign policy.
Despite many measures taken, AES’s management style and organizational structure were unable to work in such a post-communist state as Georgia. Nieto (2013) notes that due to non-payment of bills, 90% of Telasi clients were disconnected from access to electricity. Finally, when an extremely harsh winter broke out in 2001, which reduced access to electricity to 3-4 hours a day, people expressed their anger on the streets, which heightened tensions. According to Henisz (2017), AES ‘net losses in Georgia reached $ 129 million. In 2003, AES sold its shares to the Russian energy giant Unified Energy Systems of Russia (UES). Currently, JSC Telasi is 75.1% owned by Inter RAO UES, 24.5% owned by the Georgian state-owned JSC Partnership Fund, and other shareholders hold a small residual. The Russian company paid AES $ 26 million for Telasi, and in return, AES paid $ 60 million in debt to Telasi, actually paying Inter RAO UES $ 34 million to get Telasi out of their hands.
References
AES Telasi. (n.d.). European Bank for Reconstruction and Development.
Didebulidze, A. (n.d.). The energy crisis in Georgia: Causes and exit strategy options. CA&C Press. Web.
Henisz, W. (2017). Introduction: Power trip or power play: the case of AES-Telasi 16. In W. Henis (Ed.), Corporate Diplomacy (pp.1-19). Routledge.
Nieto, V. (2013). Power trip [Video]. YouTube.