KEDS CEO on Kosovo Privatization and Energy Opportunities for Foreign Investors

KEDS CEO: Mr. George Karagutoff

George Karagutoff enlightens our readers on the business of KEDS’ privatization, the energy distribution company for which he heads, but importantly too, on what Kosovo needs from the foreign investor in this potentially lucrative sector. Hailing from Bulgaria Mr. Karatugoff represents the Turkish investment in Kosovo since 2013 when private operations first began. He’ll be the first to say it’s never an easy endeavor taking one company and diverging into separate units, let alone when that company was a State-Owned entity. We get a deeper perspective of what that process was like and how an investor should approach Kosovo when considering opportunities outside your comfort zone.  

 

Mr. Karagutoff. Please offer our readers a brief on KEDS and how the investment came about.

KEDS I would say is the end result of a lengthy project started under USAID which was aimed at the structuring and re- organization of the energy sector in Kosovo. Everything started about six or seven years ago, achieving several milestones along the way including; mining generation with KEDS handling the distribution side of things. To accomplish this end USAID selected about 30 consultants from Tetra Tech, a US firm, who worked inside the company to try and reshape the organization by placing new process and efficiency measures in preparation for separating distribution and generation while simultaneously privatizing the former. This process ended on May 2013 when assets and personnel were transferred from KEK (Kosovo Energy Company] to KEDS, owned by Calik-Limak consortium from Turkey, who are now responsible for distribution where KEK manages the generation-side. Calik-Limak has tremendous experience in energy in Turkey where they are responsible for 40% of energy distribution and own several companies operating in Kosovo, including Prishtina’s international airport.

At the moment we are the only private company operating in the energy sector with the Government of Kosovo owning and operating KEK. For KEDS, distribution means collecting from the end customer as well as handling the required import and export of electricity, depending on the time of year.

 

Why was the distribution side the only part chosen for privatization?

The answer is straightforward enough. At the end of the day there definitely needs to be new sources of energy production but in order to attract those very capital intensive investments there first must be more certainty, therefore, security on the distribution side. Naturally, a new investment producing energy needs to have a guaranteed market to sell to and an efficient apparatus in place to distribute the energy they are creating.

 

I would imagine the process of separating the different functions of the energy network and privatization of such a critically important business was a difficult process.

Indeed, normally privatization is basically buying out the shares of a company and taking over from there. However, as you asserted, our process was a lot trickier because it involved separating into two different companies. Again, because energy is of such importance we had to ensure a seamless process for the end consumer so they did not experience any sort of outage. It was definitely more difficult, but an interesting process that I think was completed quite successfully.

We’ve also managed to separate the supply side license from KEDS into a separate business, KESCO, which was required by law in order to open up the market for greater competition.

 

What were some of the challenges you faced during this process but also since separation nearly two years ago?

The challenges were many. The network we inherited was over 40 years old, so naturally it required much streamlining and maintenance. This is something we are perpetually working on and as part of the agreement we have committed ourselves to investing 300m EUR over the next 15 years. In the last 18 months alone we’ve invested 35m EUR towards that goal; in fact, this morning we were working on the selection of new contractors that will be completing another 20m EUR this year under the KEDS Investment Program.

 

 

So all these investments are primarily allocated towards infrastructure?

The majority yes, but the most critical pertains to the prioritization of those investments. It’s important to us because things in the energy sector move a little more slowly. Another challenge is both connected to the network and the level of losses experienced when compared to those in neighboring countries. When we started losses stood at about 32%. These losses stem from energy traveling from the transmission sub-station to the end-user and non-payment from customers. These challenges are the most important to fix because it is not only beneficial for us but also the customers. This is because the lower the losses, the lower the tariffs are when having to supplement those losses through imports, which ultimately reflects upon the final user’s bill; this of course leads us to the final challenge which in non-payment.

Kosovo is not like other countries. When you have unemployment at 40-50% you have to be more considerate towards the market and this requires flexibility. To this end, we are one of the few companies that allow for partial payment from customers in order to keep their electricity on. Aside from that fact, our ability to collect has a ripple effect in the energy sector as a whole. When we cannot collect we cannot afford to buy from abroad, which costs 2-3x more than local generation. But having said that, our team in Turkey has introduced some of their traders to Kosovo and we now have 38 active agreements with energy suppliers from abroad which allow us to negotiate better prices for imports, through this we’ve reduced import costs by 25%.

 

Kosovo eventually needs a solution fitting their own social makeup. Really though, the country requires a lot of investment in the energy sector so we can do away with energy imports and their associated tariffs, many investments are actually underway.

 

We noticed that you have a training program for potential new employees. How is the local talent in Kosovo?

I would say for our work the talent is better than other privatizations I’ve witnessed in nearby countries. This may have to do with the 5 year lead time that local mid-level management experienced while working with the international consultants prior to total privatization. This allowed them to start thinking of how to work in a private sector environment well before it was private. Also, their English skills allowed for a much easier transition compared to other countries where communication with local employees is a major obstacle. Currently, we also have 11 expats who are working here temporarily in order to offer continuous training to the staff. In terms of finding people with the required education or experience, well you just have to look, like anywhere else.

Regarding the training program, we recognized that we are one of the largest companies in the country and that we have a certain obligation to assist in the country’s overall development. So we decided to start KEDS Academy in conjunction with a university in Turkey, which is wholly funded by us. It’s a yearlong program for 50 students selected every year where the program is recognized as part of their curriculum in the university. Importantly, the program ends with a 40-hour internship; which can be difficult to find as many companies are not able to offer these hours, but we do, with the end result of offering employment at KEDS to 50% of the students. It’s also very important as a strategy for KEDS where the average age of an employee is about 55. We are training and hiring for the next generation and have received several STEVIE awards for this program, we are quite proud of that.

 

It seems that the program is geared towards technical education. A major deficiency in most developing countries is business aptitude. Are you preparing students for management positions, future leaders?

Right now we are focused still on our restructuring and reorganization, so the current training program reflects the needs of that reorganization. However, as mentioned, we have many people learning from the 11 international experts, management training will be our next step.

 

Are you satisfied with the KEDS’ figures thus far?

The figures are looking ok; of course, we want them to be better. At the end of the day we do not set the prices so what we do is optimize our expenses and ensure efficiency. Additionally, we are one of the few private businesses operating in a field that is completely regulated. We are regulated by incentives, so if we outperform those regulatory parameters we are benefiting, if we do not it is our loss.

 

Do you consider the regulations as being fair and reasonable?

The regulation set forth for a five year parameters is functioning well. Regulation in terms of tariffs and setting yearly energy costs is not an easy process however. Naturally, any tariff increase affects consumers directly and can cause quite the stir among the people. It’s a sensitive issue so there needs to be social safety nets to supplement any tariff fluctuations. For instance, in Greece, there exists an energy subsidy of 70-100 EUR for the poorer segment of the population. Kosovo eventually needs a solution fitting their own social makeup. Really though, Kosovo requires a lot of investment in the energy sector so we can do away with energy imports and their associated tariffs, many investments are actually underway.

 

Let’s talk about some of these investments. What are some of the opportunities you see?

Kosovo mostly needs investment in generation. I remember in 2013 when I arrived the process for the selection of the new power plant, Kosova C, was several years in the works and based on EC parameters set forth for 2017 and 2020. However, if there are no additional capacities at that time imports will continue at double the price or go dark. So the investments can either come in the form of new construction or rehabilitate current power plants.

Another aspect in Kosovo is the energy efficiency of buildings. If you take a look around, especially in the countryside, you’ll see many homes built on bricks with no insulation or siding. There could be a solution where grants and new programs can address these issues offering a solid backing for private investors. Generation investments will include lignite; although not a clean source of energy, one that does provide the greatest opportunity since the country has such large reserves.

 

Looking at the next several years, if you could accomplish one or two things for the company, what would those be?

Mostly in the next 2-3 years I’d like to see energy losses go down to below 20%. Regarding the sector, I would love to see the first dig on Kosova 3 and opening the market by introducing new competition through cost reflective tariffs and proper allocation of expenses within the different tariffs groups. And again, proper safety nets for the poor and which would help eliminate us having to justify our actions every year when prices increase through tariffs.

 

If you could, please deliver a personal message directly to our investor readers regarding Kosovo and the energy sector.

Generally, don’t be overcome by the idea of risk. There are so many international organizations that are involved in the development of Kosovo that in one form or another they are offering some degree of security. Yes, there will be road bumps but this is the case everywhere you go. The point of investing in this part of Europe is that you will not find this kind of opportunity in the more developed western part. It might seem difficult, it might seem crazy, but you will find everything you need from infrastructure to legislation. Let’s not forget that Kosovo’s legislation is essentially a mirror of the European Union’s. There will be segments that are still under development but this is normal. Even the court system has improved since there are now private bailiffs clearing backlogs and getting settlements handled in a far more expedient manner. Many of the core issues that an investor may see as a deterrent are moving. Finally, and importantly, the country is so small you can easily find the person that you need to handle a situation quite easily.

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