AES-Telasi: Power Trip or Power Play? (A, B, C)

Authors: Henisz, Witold J.; Zelner, Bennet A.
Source: The Wharton School
Year: 2006
Company Name: AES-Telasi
Number of pages: 20, 3, 7

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Abstract:

While Michael Scholey was proud of what he and AES Corporation had accomplished so far in the Republic of Georgia, AES-Telasi had still incurred operating losses of $40m during its first year of operation, had already exceeded its ten-year investment target, and the company faced several important challenges going into its second year. Scholey had not yet rooted out the corruption networks within his firm, nor had he eliminated the influence of the "energy mafia" linking Georgian industrial interests, Georgian politicians and the Russians. He also had to find a way to improve the financial position of the firm without raising tariffs to the point that consumers would be unable or unwilling to pay. He knew that he would have to make some important changes. He would need new allies with deep pockets and local influence to help him in his efforts. Who else could he trust? Who shared his mission to provide electricity to all households that were willing to pay for it, and consequently helping to stabilize the political and economic situation in this war-torn country?

In the fall of 2001, Michael Scholey was promoted to lead the AES regional office in Turkey. As Scholey packed his office in Georgia, he reflected on his successes at AES-Telasi and on the challenges that he had left his successor to face. On the one hand, his combination of massive investment into AES-Telasi, aggressive response to bureaucratic and government obstacles, and high-level public relations engagement had successfully rallied public support behind AESTelasi, and against corruption in the Energy Ministry and the government more broadly. Consumers increasingly saw AES as part of the solution, not the problem. Furthermore, some of Scholey's regional managers had accomplished remarkable feats, bringing collections up to 85 percent or more, far above the financial breakeven point of 70 percent. Still, the financial corner seemed to be even further ahead. The Russians were increasingly blocking the path to financial viability through their local channels of influence. Moreover, the investments that AES had now made in Georgia were staggering: the company had invested more than twice as much in the first two years ($190m) as it had initially planned to invest over a decade ($83m)1. To make matters worse, Scholey's efforts to share this financial burden with actors other than AES shareholders had met with limited success. What strategy should Scholey recommend to his successor?

When Ignacio Iribarren took over the leadership of AES-Telasi in the fall of 2001, his approach was, in many ways, the antithesis of Michael Scholey's. Whereas Scholey had focused on investment in assets and employee empowerment, aggressively combating external corruption, and shifting consumer mindsets through public relations, Iribarren focused exclusively on the financial bottom line. As a result, he suspended investments in assets, closely monitored employees, more aggressively reduced payments to the government and deliveries of electricity to nonpayers. He was partly forced into these changes by AES's suspension of financial flows to AES-Telasi, a move made partly in response to the company's losses in multiple foreign operations, as well as the challenges of the post-Enron environment. Would this radical shift in management style work or backfire?