Czech energy giant’s departure highlights the tough realities of doing business in Albania
By ANDI BALLA
TIRANA, Feb. 1, 2013 – Last October, hundreds of drivers on the main four-lane highway linking Albania with Kosovo were stuck near the city of Kukes for several hours. Residents from the nearby villages had blocked the road, angry that the power distribution company, CEZ Shperndarje, had cut off their electricity, citing non-payment of bills. Some protesters said they had paid the bills. Others said they were too poor to do so. Nonetheless, there had been a collective cutoff. The protesters invaded the local power distribution station, which forced the company to shut off the power to the entire city, over safety concerns at the station. The situation went back to normal only after the company was forced to turn the power back on for everyone. The overdue bills simply went unpaid.
This was just one of many similar incidents the Czech state-owned CEZ Group faced in the last few months as it tried desperately to save its business in Albania, CEZ Shperndarje, which managed Albania’s power distribution system. CEZ went as far as switching off power to public companies like water supply systems נwhich had not paid their bills נan action that landed some of the company’s employees in police custody and forced the Albanian government to resort to a court order to force the company to back off, arguing CEZ had committed “an unprecedented act which severely compromises citizens’ security, public security and the country’s national security.”
Within weeks, the verdict was in נCEZ wanted out נputting its Albanian business up for sale. “For CEZ Shp쳮darje was not acceptable to constantly subsidize Albanian citizens and state institutions, which are not used to pay for their electricity bills,” says Barbora Pulpanova, a spokeswoman for CEZ Group.
And the Albanian authorities נangry the Czech company had failed to fulfill its contractual investments and increase payment levels נwanted CEZ out too. The Energy Regulatory Entity, ERE, took away CEZ Sherndarje’s license and placed a state administrator at the helm of the company. In effect, authorities nationalized CEZ Shperndarje, the first time in post-communist Albania this had happened to such a large company.
ERE’s head, Sokol Ramadani, said the company’s license was being taken away because it did not fulfill its contractual obligations, plunging the system into collapse and risking massive power cuts. He identified CEZ’s failure to cover its rising grid losses with imports as the key reason for the removal of the license. Since September 2012, when CEZ declared its financial inability to carry out its compulsory power imports, state-run power corporation KESH was forced to carry out all imports, a situation which further deteriorated the utility’s finances and forced government to award several loan guarantees to secure power supply.
“CEZ Shperndarje is responsible for damage caused to ERE, the Albanian government and market operators. The Council of Ministers is charged with immediately acting on the expropriation of CEZ Shperndarje’s assets at a fair compensation under procedures foreseen in the law on expropriations and temporary takeover of private property for public interest,” ERE’s commissioners wrote in their decision.
The dispute is now headed for international arbitration, because the Czech company says it doesn’t trust the local courts to deliver a fair verdict, a practice in line with what major investors do in many other countries as well. Prague-based CEZ Group says it is very optimistic it would be successful at the arbitration court asking for some 200 million euros in lost investments.
No matter the outcome, the case of CEZ and the realities it faced in Albania will be a case study for years to come both for foreign companies wanting to do business in Albania as well as for future privatizations and Albanian joint ventures with large foreign investors. While the saga might be over, independent experts say the outcome appears clear: Doing business in Albania is no picnic, and often things universally understood and accepted in a developed economy don’t work in Albania. But they also note CEZ is not entirely innocent in the affair, failing to deliver on promised investments and unable to navigate Albania’s cultural issues any better than when the company was state owned.
The sweet deal that turned sour
It wasn’t supposed to be this way. When Czech energy giant CEZ arrived in Albania back in 2009 to take over the country’s power distribution network by purchasing the state-owned monopoly, OSSH, the sale promised millions for state coffers and massive improvements to Albania’s problematic power distribution network. CEZ would give 102 million euros for 76 percent of OSSH and promised 400 million more in investments to the grid. Plus, Albania gained a major, credible foreign investor with billions of euros in capital.
Almost four years later, much of the promised investment never materialized, and there was a major public spat between the company and the government נeach accusing each other side of owing millions. The Albanian government says CEZ owes state-owned power corporation KESH and transmission operator OST around 300 million euros in unpaid bills. CEZ also claims Euro 165 million euros from Albanian state institutions, of which 38 million euros by water supply companies.
Finance Minister Ridvan Bode had earlier warned government was concerned because of CEZ’s performance negatively affecting public finances and the budget. The government awarded KESH 14 million euros from its contingency funds in early 2012 to make electricity imports and 40 million euros few months later and is also negotiating with the World Bank over a new $100 million loan to cash-strapped power corporation to secure electricity imports.
CEZ says this was an Albanian government problem and it should have not been burdened on the foreign investor.
“The situation in Albania got more complicated early last year when, due to the drastic drought of last year, the Albanian state-owned company KESH had to import power from abroad for much higher prices, which brought it on the verge of bankruptcy,” says Pulpanova, adding the Albanian government had to give KESH money to keep it afloat. “The local government tried to resolve the situation with a decision unprecedented in Europe: All costs were placed on the shoulders of the foreign investor, CEZ Shp쳮darje,” she added.
The Albanian authorities focus on other items as well. In its detailed report of 110 pages over CEZ’s violations, ERE identifies that consumers’ complaints filed over over-billing, and economic damage climbed to 1,720 in 2012 up from 350 in 2010 and 1,019 in 2011. ERE says that grid losses at the end of 2012 climbed to around 45 percent, higher than 32.7 percent at the end of 2008 when the distribution system was under state management. Under the regulatory agreement approved by ERE, grid losses should have dropped to 24 percent at the end of 2012. Albanian authorities say CEZ’s investments during the past two years also failed to meet set targets. CEZ invested around 2 billion lek (14 million euros) in 2011 and 934 million lek (6.5 million euros) in 2012, fulfilling only 39 percent and 14 percent of the annual targets respectively.
Political consequences
When CEZ arrived in Albania back in 2009, the Czech Republic held the rotating presidency of the European Union, and Albania had just officially applied for membership. Such a large Czech investment in Albania appeared to be an excellent match of political and economical interests intertwining.
Fast forward to 2013, and revocation of the license of CEZ has sparked anger in Prague.
Czech Prime Minister Petr Necas warned the move by Albanian regulators would hurt Tirana’s chances of joining the European Union and gave his government’s full backing to CEZ’s decision to seek financial arbitration over the dispute.
“I see the removal of a license from CEZ, the largest Czech investor in the region, by the Albanian authorities as a very negative signal for the traditionally very good and friendly relations between the two countries,” Necas told reports. “For membership in the European Union, Albania must show that it is a state which respects the rule of law and observes the basic rules which govern the standard market environment.”
The comments worried Albanian authorities enough to immediately call the Czech ambassador to Tirana for a meeting.
Albanian Deputy Prime Minister and Energy Minister Edmond Haxhinasto said the “very good” relations between the countries should be separated from the problems of the commercial dispute. After the meeting with the Czech ambassador he added: “Every call to mix these two problems is damaging and does not help anybody.”
A tough business environment
But in addition to likely financial losses for both Albania and CEZ, the break up carries perception costs that can’t be immediately calculated. It tells a lot about the difficulties of doing business in Albania and the state of the country’s development, something prospective foreign investors will likely weigh in.
CEZ says its case is a negative commentary for the case to invest in Albania.
“For foreign investors this is a clear signal that in Albania is unstable and unpredictable business environment,” says Pulpanova, the CEZ spokeswoman.
Senior government officials also admit that the failure of such a large strategic privatization doesn’t look good for Albania, but that this was a unique case.
“The departure of a big investor such as CEZ is not good news. It was an investor which could have helped us in the electricity area, but they showed they did not meet criteria in performance and revenues. We cannot risk the Albanians’ interest for the sake of a reputable company,” Finance Minister Bode said in a recent interview with and Albanian television.
Pavel Cyrani, the chief strategy officer at CEZ Group, says Albania was the exception to the rule of other CEZ investments in the Balkans
“It is important to mention that the overall performance of foreign acquisitions is excellent. CEZ has already recouped 71 percent of its investment. For example, CEZ’s efforts in optimizing operating costs and reducing grid losses in Bulgaria and Romania were successful,” he said in an interview with Prague Post.
EU experts note that many of the problems Albania faces demand a cultural shift. The laws on the books might be up to par with EU standards, but their implementation often is not.
Local experts also note that cultural shift is nowhere more evident that 40 to 50 percent of the electricity in Albania goes to “network losses” נa large portion of which is electricity which is used but not paid for. Many parts of the country simply use the energy without paying נhiding behind improper infrastructure or corruption. As a result, many Albanians – families and institutions – do not pay their electricity bills – either because they can’t afford to do so, or because they claim they are owed money themselves, Albanian analysts note.
The CEZ situation is also a hot potato for the government which entering an election year is unwilling to do anything that would upset potential voters.
But at the end of the day, it was a dispute about money, and running a profitable business that led to the divorce.
The Albanian government claims that CEZ’s failure to fulfill its contract obligations over imports, investments and reducing grid losses has caused the state $1 billion in damages, which will probably end up as a claim when the dispute is examined by an international arbitration court. CEZ says it has launched legal steps to activate a 60 million euro ($76.8 million) guarantee issued by the World Bank for its power-distribution operations in Albania. CEZ received its guarantee from the World Bank, as an incentive to take over Albania’s OSSH power distributor in 2009.
Cyrani told the Czech newspaper that financial pressures stemmed from authorities not allowing CEZ to reflect higher energy costs in the prices for Albanian consumers as well as banning the company from effectively collecting even the low payments for supplied electricity when police forced it to reconnect state-owned waterworks that have long failed to pay their electricity bills.
“Such a situation is not at all sustainable for us. Our team has been and still is working very intensively to solve the situation in Albania, but the behavior of the Albanian side is very unpredictable,” he said.
Ervin Lisaku contributed to this report.
