Is Georgia Worth All the Trouble?

For Ignacio Iribarren, it's a "brass-knuckles business" running a power plant and distribution company in the former Soviet republic of Georgia for AES Corp. (AES ), the Arlington (Va.)-based utilities giant. Frequent blackouts and rationing have turned tiny, mountainous Georgia into a nation obsessed with power--the electrical kind, that is, not the political kind.

People of every age and background, from schoolboys to pensioners to chief executives, are expert in the art of stealing electricity. Some clamp on crampons, climb a power pole, splice their own cable into the lines, and siphon off current from AES for free. Less hardy types simply tamper with their meters at home. "It's a nation of electricians," says Iribarren.

This national talent for stealing juice is a major headache for AES. And it's an object lesson in the difficulty for Western companies of finding their fortunes in the Caucasus. AES is able to collect payments on only 65% of the power transmitted over its lines in Georgia, even though it recently installed monitoring devices so it can identify where thefts are taking place.

Granted, that's a big improvement from the 10% collected in 1999 when AES acquired control of a distribution company and two units of a local power plant in a public auction. At the time, AES was expanding all over the globe, and was happy to pick up assets on the cheap. But executives back in Virginia who had to invest more than $250 million on upgrades are getting impatient. "Georgia turned out to be much harder than we imagined," says Iribarren, 41, who previously worked for AES in Venezuela. Last year, the Georgia unit lost $52 million on sales of $44 million, prompting the executive committee of the parent company to meet last month to discuss a pullout.

But just as the board was meeting, the Georgia business reported its first-ever profit: $2.2 million for the first quarter. The executives granted Georgia a reprieve and postponed a final decision. But AES, like all energy companies, is working to clean up its balance sheet as it comes under increasing investor scrutiny following the collapse of Enron Corp., and is looking very hard at underperforming assets. Dennis W. Bakke, CEO and president of AES, arrived in Georgia on May 14 to discuss the company's investment with Georgia President Eduard Shevardnadze.

AES is no stranger to difficult climates. It has investments in Kazakhstan, Tanzania, India, and Latin America. But it is finding Georgia one of the toughest. Last year, the government forced AES to pay value-added taxes on $10 million worth of electricity that had been stolen. "The government just destroyed us. It was highway robbery," says Iribarren. It finally managed to persuade the government to revoke the tax, but not until November. To stay in Georgia, AES says it has to hammer out an agreement with international agencies to restructure payments on a $60 million loan.

A pullout by AES, which is the largest foreign investor in Georgia, would be a major embarrassment for Shevardnadze. "The Georgian government will take all the steps necessary to convince AES to stay," Georgia Energy Minister David Mirtskhulava says. "AES's presence is important for the future investment climate." Fine words. Now it's time for action.

By Catherine Belton in Tblisi

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