Power Project Brings Light to Moldova

Power Project Brings Light to Moldova

March 1, 2002—From noon to six pm every day, graphic designer Yuri Ambros would stroll aimlessly along the streets of Chisinau, a squat city of 700,000 in the heart of Moldova, Eastern Europe's poorest country. Power outages virtually paralyzed the city and made work impossible, he says: "I don't remember how long the power was out, because I don't remember bad things. We pray to God these things don't happen again."

Employee at work at Union Fenosa's distribution facility in Chisinau	Equipment upgrades, illustrated by the contrasting old ad new meters, are part of an effort to reduce technical and commercial energy losses

As bad as it was, there were many who were worse off. Outside the capital, some people lived without electricity, heat, and water for up to 20 hours a day for eight or so years.

The situation reached a crisis point by January 2000, brought on by years of inefficient use of energy supplies by the state-owned power company, poor maintenance of distribution networks, low levels of bill collection, and an unsustainable debt level. People were suffering and the economy sputtering. The former Soviet country had seen its per capita income drop to just around $400 a year. In the decade since its independence, about a quarter of the population had left the country.

By April 2000, an important step was taken toward changing the situation. Power shortfalls and blackouts had ended in the areas served by a new MIGA-backed project. Three-quarters of the country's residents, from the capital to the countryside, now had electricity 24 hours a day. The turnaround was the result of the privatization of three electricity distribution companies, purchased by Unión Fenosa Internacional SA, a 120-year old Spanish ompany. The sale included the purchase of a 25-year operating license.

Anatol Gaina, a small business owner, talks about how power shortages disruptd production and led to commercial losses	Jetta Ambros, who designs and manufactures sweaters and textiles, displays one of her handmade pieces

The privatization was part of an energy sector overhaul engineered by the World Bank, the Moldovan government, and other agencies to help revive the economy. MIGA provided a $61 million guarantee, protecting the investment against the risks of transfer restriction, expropriation, war and civil disturbance, and breach of contract. The International Finance Corporation of the World Bank Group and the European Bank for Reconstruction and Development both lent $25 million to the project.

A key part of Unión Fenosa's decision to go ahead with the purchase was MIGA's insurance coverage, says Ignacio Ibarra, executive president of Unión Fenosa Internacional: "If MIGA hadn't guaranteed our investment, it would have been a very risky situation. With MIGAthe investment is protected against noncommercial risks, which is critical to our remaining in Moldova."

Adds MIGA Vice President and General Counsel, Luis Dodero: "This project goes to the heart of what MIGA is all about-catalyzing investment, giving investors the confidence they need to make an investment, and having a strong development impact, especially in countries like Moldova that are in dire need of foreign investment."

The project's chief aim is to reduce technical and commercial energy losses-resulting mainly from poorly maintained equipment and low levels of bill collection-that made the state-owned companies financially unsustainable and led to unreliable power supply.

"For eight years people living outside the capital had power just a few hours a day, usually at night. You can't run an economy with blackouts of 14-18 hours a day. Companies simply cannot exist without electricity," says Ibarra. "Within two months of being here, we had restored power to 24 hours a day without interruption. That's our track record for the past 20 months. You can see the impact on the economy."

The distribution network of Retelele Electrice Distributie in Chisinau

About 50 miles south of the capital is the Family Medical Center of Cimislia. Hospital Administrator Ludmila Capcelea says the blackouts there, lasting 4-5 hours a day, took their toll. "We could only take emergency cases," she says. "We didn't have water, light, or heat. Power would go out during operations. We had a generator, but it didn't always work. We would use a gas lamp. This was a very dangerous situation, especially in the middle of surgery when the scalpel was in a patient. Thankfully, no one died. We had some serious complications though.

The situation could have been worse, Capcelea says, but the government made an effort to get power to hospitals and other essential services. The story was different at home, where blackouts lasted up to 16 hours a day. Kids couldn't go to school or even study at night because there was no light. "We had to use candles or gas lamps to do anything. The fumes were noxious and really uncomfortable. Food spoiled because nothing would keep. I don't even want to think about the situation before. It's so much better now."

The problems didn't discriminate. People in towns and cities experienced fewer outages, but were more likely to use electricity for their heat and cooking in addition to lighting. That meant the country's urban dwellers had to find unusual ways to cook food when the power was out. Many started building small cooking places outdoors, fueling their impromptu stoves with wood and coal.

Schools were also hit hard by the power shortages, often staying open in the summer when there was more light and no need for heat. Gheorghe Rusnac, president of the State University of Moldova, the largest university in the country, says classes had to shut down during the outages, impacting a student body of 18,000. "When the power was out, we didn't have heat or water. We had a lot of equipment here at the university that we couldn't operate, such as TVs, computers, laboratory equipment. It was hard to operate normally."

In a country where daily temperatures in January average -4 to -7 C (about 23 to 27 F), this is more than an inconvenience. "Electricity is a component of life that is impossible to do without, or to explain," Rusnac says. "It is as necessary as the air we breathe. If we don't have air we die; the same goes for energy."

Businesses felt the brunt too. Anatol Gaina, a small business owner, says power outages constantly disrupted production at his fruit drink factory. Gaina had to use a generator for 8-16 hours a day, which raised costs by 17 percent. He ended up dropping one of his lines of production because costs were too high. The blackouts also had a psychological impact on people, he says. "People are uncertain and say, 'Why buy something that isn't essential?'" Sales went down 20-30 percent. Gaina says the impact of companies like Unión Fenosa is reducing production costs.

Jetta Ambros also felt the impact of the crisis. Ambros designs and manufactures sweaters and textile, with the help of four other women. Ambros lives in a dilapidated Soviet-era apartment building, which often serves as the base for her cottage industry. "During the blackouts, it was really hard because there was no electricity or heat," she says. "Without electricity, you can't do anything, especially when dusk falls, which happens to be around 4 pm in the winter. It was very bad indeed. Now things have changed. We have heat, we receive a bill and don't have to check the meters ourselves."

The project represents the company's first investment in Eastern Europe, and the first privatization investment in the country's energy sector. "When we came here, it was a huge change in every sense of the word," Ibarra says, who works on business development in all the former Soviet countries. "This is a country that has been free for only 10 years. The country is still working on basic rights issues and learning what the private sector is, what competition is."

That kind of thinking was evident in the workforce when the company took over, says Silvia Radu, corporate director. Radu, a 30-year old Moldovan national, came to Unión Fenosa from the Ministry of Energy. She says people were robbing the company because they couldn't live on the slaries they were being paid. "We raised incomes 25 percent in the first year. Those who do good work were rewarded."

"When we came here, people thought we'd be here for just a few months, they didn't think we'd last," Ibarra adds. "Now we're coming up on the two year mark. We're profoundly changing how business is done here. This project is in many ways serving as a model for other investors. Everyone is watching what happens."

Unión Fenosa brings to Moldova a whole new business culure and management style, says Vladimir Munteanu, advisor to the World Bank Group's Executive Director for Moldova. The company, he says, "serves as a benchmark for other foreign investors and local businesses, and demonstrates that business can be done in Moldova, although it may not be easy and a lot still has to be done to improve the investment climate."

Unión Fenosa is the leading company in Moldova in terms of revenue, chalking up $100 million in sales in its first year of business. Thecompany covers 75 percent of the country's 3.2 million residents, and generates one-third of the country's tax revenues on its own.

"The company's presence in Moldova had a important impact on GDP growth," says Munteanu. "For the first time in ten years, Moldova has shown signs of sustained growth, registering gains of 1.9 percent and 6.1 percent in 2000 and 2001 respectively." He attributes the growth to the steady supply of electricity, which "brought certainty to businesses, made it possible to plan better, and allowed them to focus on marketing and production instead of facing frustration and looking for extremely expensive alternative sources of energy, which not everyone could afford."

Since implementing a new bill management system, which involved reconstituting and relocating 120,000 old meters to the outside of homes, Unión Fenosa has seen a 30-40 percent increase in bill collection. An education blitz accompanied the billing to explain what the new system was and why it as operating that way.

But can everyone afford it? Affordability is a big issue in a country where people aren't used to paying electricity bills, and where true costs are not reflected in prices. And the price of power has gone up marginally since Unión Fenosa took over, rising from 4¢ per kilowatt hour to 5¢ per kw hour. As a profit-oriented entity, Unión Fenosa sets prices at a level that reflects the full cost of service.

Before the privatization, a billing honor system and aaffordable, near-universal household energy subsidy encouraged profligate energy use at little expense to the consumer. A new government program, supported by USAID, is now targeting subsidies to reach the most vulnerable segments of the population, rather than blanketing the public with assistance. This should contribute to the subsidy program's sustainability, while freeing up government revenues for other social programs.

Another issue when considering affordability is the high cost of lighting a house with candles or lamps, which in some parts of the world can be as much as fifty times the price of electricity.

Unión Fenosa is very much aware of the need to make its product affordable. "We sell a basic social good: electric enegy. But we can't act like any private company," Ibarra says. "We're not a shoe company, because what we give and sell to society is something people can't live without. There would be no economy. They would suffer physically. Our focus is private, but we can never forget that we provide a public service."

Ibarra jokes that he has more contact with Moldovans than any other company. "We enter their houses every day," he says. "If I do my job well, people live well. If I do poorly, people live poorly."

Unión Fenosa, like many companies whose investments are guaranteed by MIGA, demonstrates strong corporate citizenship. The company sponsors many cultural events in Moldova, including theatre, concerts, and films, and runs a scholarship rogram that provides 10 full scholarships and 70 partial scholarships a year. The company also has a foundation that is putting the finishing touches on a food kitchen that will serve around 250 needy people a day in the capital. A full-time doctor is available to all staff at company headquarters.

"We have this social orientation in all our projects," says Radu. "It's our philosophy."