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INVESTMENT LEADERS

Interview with Carl-Ernst Giesting, CEO of VSE

He was born in 1960 in West Germany, and entered the energy firm RWE in 1986, moving to Leipzig in East Germany in 1990 after the wall came down. In 1998 he was sent to head up one of RWE's subsidiaries in Hungary, and since its January 2003 privatization, has been the CEO of the VSE energy distributor in Košice. Carl-Ernst Giesting.
photo: Courtesy of Carl-Ernst Giesting

The Slovak Spectator (TSS): Did your experience in Hungary prepare you for running VSE?

Carl-Ernst Giesting (CEG):Yes, definitely. Both companies were formerly state-owned energy companies in a monopolistic framework, so their starting point was almost the same.


TSS: What are the main challenges in taking over such a company?

CEG: The biggest challenge is to create an electricity company that is able to survive on the open market. The other main task is to change the attitudes and mindsets of the managers and employees. These may sound like simple things, but they're actually not that easy.


TSS: What about the environmental impact of the business? Has there been a great deal of damage to repair?

CEG: Due to the fact that we supply a huge part of Slovakia, about one-third, and that we have to increase our CAPEX by a huge amount, we have to take care of this. We supply 15,500 square kilometers of territory, and you can see if you walk around that our poles and lines cover every region. You can't avoid having an impact on the environment with an operation that big, and what we have to do is to change people's thinking from just being concerned with what is technically feasible, to include the option that has the least impact on the environment.

Until now there was no screening done to see what the former state company did to the environment. We are just now doing an environmental audit, a deep analysis of the actual situation, of concrete things that might have happened in specific places, such as oil spills and so on. We have already spent several million Slovak crowns on changing soil and things like that.

The other thing we are working on, in close cooperation with national non-profit organizations, is bird protection. We have thousands of kilometres of [high voltage] lines that can be a danger to birds, so we want to do something about that.


TSS: Isn't environmental due diligence usually part of the overall due diligence you do before buying a company? Why are you only completing it now, and what happens if you discover extensive damages? Will the government share some of the cleanup costs?

CEG: First of all, during the due diligence phase auditors are working under great time pressure, and due to the huge area involved, you're not able to cover everything. At the time the state-owned company made some small audits, and then the seller said: "Everyone knows that there might be something there, so that should be taken into account and covered in the purchase price you offer." If we find something totally atypical that could not have been foreseen with best practices, we might be able to find someone on the other side who is willing to defray the cost. But the principle is that it [possible environmental damage costs] should be taken into account in the purchase price. The most important thing is to avoid any damages, and only then as a second step would we think about getting compensation.


TSS: Where do you see electricity prices going in the near future? To what extent do you try to be sensitive to domestic spending power in Slovakia?

CEG: We can't pick up and move our production halls somewhere else if the market stops increasing, so we have to take into account the economic situation of our current customers. I'm talking about the regulated side of our business here. We have to make sure we cut costs as much as possible to come up with the best possible prices. We strongly support the regulator to ensure that all actors in the regulated market are doing the same thing. This is the customer protection function the regulator has.

One of the biggest cost factors is wholesale price, and here everything is affected by the fact the market is not liquid, but instead is dominated by Slovenské elektrárne [SE, electricity utility]. This will not change soon, for SE's market dominance is one of the reasons Enel [Italian investor that won the privatisation tender for SE] is coming to Slovakia. It will take a few years to establish a liquid market here in which energy is constantly flowing in and out of the country. In the meantime we have to find a way to deal with our "sandwiched" position, in which we are completely dependent on the wholesale market. We are working hard on finding a partner with whom we could build our own power plant in Slovakia and generate some of our own electricity.


TSS: In the past, arguments in favour of building new power sources have been based on the need to secure energy self-sufficiency for Slovakia. Now that Slovakia is in the EU and borders are softening, is energy self-sufficiency still an important goal?

CEG: I don't think we will see a totally open energy market in Europe in the near future, for both historical reasons and due to the investments that have been made. In such a situation it is the duty of each country to secure it [independence], otherwise you will be totally dependent on imports, which makes no sense.


TSS: In Slovakia's case, is the completion of the Mochovce nuclear plant essential to secure energy independence?

CEG: In Germany, as you know, political opinions on nuclear energy are quite different than here. My personal opinion is that we definitely need nuclear power in this country, as it is the most environmentally sound, and because of the global increase in the demand for energy, there is no alternative. You just have to do it. I believe this solution is good for Slovakia.


TSS: Are higher energy prices forcing domestic consumers to save energy, or corporate consumers to consider setting up their own generating facilities?

CEG: You have to distinguish between customer segments. Within the household segment we are definitely seeing people saving, and as consumer spending power goes up people are also exchanging old equipment for new, which also makes them more energy efficient. On the other hand we are also seeing more electricity theft, and we just started a huge project that we will communicate strongly in the coming months. Electricity thieves are a burden on normal customers.

In the industrial segment we are working closely with our clients to help them shift their electricity use and allow us to achieve a better portfolio, which in turn allows us to pass on savings in wholesale prices directly to them under a policy called "load management".

Normally, for an industrial client, it makes no sense for them to build their own power plant if they have a demand only for electricity. For companies that have an additional demand for steam it can be feasible, and in Hungary we had a couple of such projects where we helped companies build combined heat and electricity power plants.


TSS: You fired about a dozen people last summer for accessing pornography on company computers. Was that an isolated incident, or did it symbolize a continuing gap between the Slovak and Western work cultures?

CEG: It was a totally isolated incident, and something that could have happened in Germany, France or the US.

We have just completed a group-wide employee survey in which we asked our employees about their attitudes, feelings and motivations. The outcome was exactly what we expected. Blue-collar workers are satisfied with their work, they like the jobs they are currently doing, and it would take a lot for them to change companies. In other words, they are highly motivated.

Where we still see a lack is in leadership functions. In the past, not everybody who was put in a leadership position had the necessary leadership skills. This is what we saw in East Germany, what I first faced in Hungary, and what we faced here. In the past we had a huge number of management positions, which we cut by almost 70% from 170 down to 60 managers. Of these 60 managers about half are new. We did a management audit at the beginning to find out if people's skills fit the requirements of the jobs they held, and based on the results brought in 30 new people. We also started a management training programme for the remaining people. So leadership skills is our biggest issue. You've got extremely motivated people, but they need leaders with the right skills.


TSS: The state received dividends last year of Sk1.1 billion from its 51% stake in VSE last year, up from Sk853 million in 2003. How have you been able to make it so much more profitable than when it was a state firm?

CEG: There are two main reasons. The first is the regulatory framework, which gave us a secured period that will end next year, during which we have a guaranteed return on the so-called "regulated asset base". The result was a quite high increase in energy prices. This produced higher revenues, which in turn allowed us to pay out higher dividends to shareholders and to more than double our investments in our network.

The other factor is cost cutting. We eliminated all non-core activities that were just eating money, such as a hotel in the High Tatras that was costing us Sk5-7 million a year - for nothing. We had a lot of facilities that were not producing anything for us, just costing us, so we cut them.


TSS: Although you have only 49% of VSE, you have management control. Is RWE interested in buying a larger stake, and do you think the government will be selling?

CEG: We definitely want to buy more, we're just waiting for the government to start negotiations. Slovakia fits perfectly into our overall strategy, and we would like to be doing much more here than we are currently. We want to use VSE as RWE's footprint in Slovakia, and getting into other activities here is of course easier if you have a majority. There are a lot of ways we could expand, such as building power plants with our industrial customers, or getting into the gas and water market. I think it's just a question of time.


TSS: Do you see VSE also having a cross-border role?

CEG: Each country we are involved in has its major company, and here it's VSE, whose sales area also extends into Central and Western Slovakia, including energy solutions for industrial clients. We are heavily involved in electricity production and distribution in Hungary, in the gas and water business as well, while in Poland we have more than 80% in a Warsaw electricity distributor, we are now negotiating for an electricity company in Bucharest, and we're a big player in the Czech gas market. We're not currently involved in the Ukraine, but again, I believe it's just a matter of time. It needs a more stable political environment and less corruption, because in the electricity business especially you're talking about long-term investments.


TSS: You earmarked Sk390 million last year for an investment support fund. What did you spend it on?

CEG: It was earmarked for Kechnec [industrial park near Košice], especially for securing the electricity supply for [auto industry investor] Getrag-Ford, which relies heavily on secure electricity demand. We will use the money to build more than 30 kilometres of high-voltage line and new transformer stations. It was one of the biggest demands Getrag-Ford had for coming to the eastern part of Slovakia. It's the biggest single investment VSE has done, and our people are working like hell to get it finished by the middle of next year.


TSS: To what extent are energy producers and distributors involved in securing large foreign investment projects?

CEG: Electricity is definitely one of the most important issues. It's fine to have good highways, but these don't help an investor much if he can't produce anything because he doesn't have a secure energy supply. We have a close connection to [the state investment agency] SARIO as well as to the US Steel-funded Eastern Slovakia Development Fund. I have made several speeches to potential investors as a representative of German investors on the ground here. I take this very seriously, and I try to give them as honest a picture as possible.


TSS: What are the components of this picture? Many investors on the ground here are now complaining of a shortage of skilled labour, in contrast to the government propaganda about Slovakia having an abundance of cheap, skilled labour.

CEG: I don't think that low costs are even a mid-term goal. Especially in our business, you can't rely on low costs. Sure, the war for talent has now started, that was to be expected. We now have people from Deloitte, from ABB, from IKEA Prague, and at the same time we have just lost someone to Hyundai. It's very fluid.

We've found some very educated people who are willing to move, even abroad to spend some time in the RWE Group. You have to have a programme that sets you apart from the rest. One of our biggest tasks here is to get to a situation where we don't need any Germans in VSE management, and in the near future the last of the Germans here will be going home. But when you look at the managers we are searching for, the Slovak market is already too small. We have about 50% new managers, and to fill these positions we widened our recruiting into the Czech market.


TSS: Is the government's strategy of focusing on labour-intensive investments a sensible one, given the tendency of these investments to move on once cheaper labour markets open up to the east?

CEG: It's easy to judge such decisions after the fact, and you have to look at the environment in which they were taken. We would be happy in Germany to have the kind of economic growth that Slovakia is enjoying. We would be happy to have the kind of strong government that is able to push through all the reforms that have been done here. We would be happy to have a government that was able to put through the flat tax, because at the time [2004] it was absolutely the best thing Slovakia could have done. You see this when you look at the FDI results compared to other countries. Germany would be happy to have even a portion of all this.

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