Plugging Into Africa
Utility giant AES's plan to electrify the benighted country of Cameroon almost imploded. Now it's shaping up as one of the most unusual turnarounds in global business.
(Business 2.0) – The gods were displeased.
That was beyond question to the delegation of tribal chieftains and shamans who gathered one blistering afternoon in 2003 in front of the offices of American utility giant AES in Douala, the largest city in Cameroon, a western African nation of 16 million. The rains had failed to come. Rivers had run dry. Locusts were moving in from the north. Lethal gases had suddenly boiled up from a placid lake in the highlands, killing dozens of villagers.
It was also abundantly clear to the delegation that AES was a target of this divine ire, and most likely its prime cause. AES runs Cameroon's electricity system, and the drought meant no water to operate hydroelectric dams, which in turn meant a plague of power outages. So the chiefs had arrived, beating drums and leading a menagerie of goats and dogs and chickens, with a proposal: They would slaughter animals and recite the incantations needed to get AES right with the gods, in hopes that the rains would come and the lights would return.
AES officials declined the offer. In retrospect, even AES chief executive Paul Hanrahan concedes, "That was probably a mistake."
Five years ago, Virginia-based AES came to Cameroon to try something never before attempted in business history: taking over the entire power system of an African country. And not just any African country, but Cameroon, perpetually impoverished and one of the most difficult places in the world to do business. In the late '90s, Transparency International, the anticorruption watchdog, ranked Cameroon the most corrupt country in the world--two years running. In the latest rankings, Cameroon improved. It now places better than Iraq.
The state-owned utility company from which AES took over was broke, milked dry by the government and some of its own employees, who had created their own mini empires by reselling power siphoned from the bedraggled network of power lines and decades-old electricity meters. Bill payment was erratic--in part because of the government's curious practice of requiring everyone to pay their monthly bills in cash, in person, on nearly the same date, and at a few select payment centers. Crowds routinely swelled into the thousands. Customers dispatched children or hired hands before dawn to wait in line for hours and hours in their stead.
AES expected to whip the system into shape by applying some of the lessons it had learned in years of work elsewhere on the wild frontiers of capitalism. It has overcome a coup in Venezuela, street-gang sabotage in Brazil, brutal cold in Kazakhstan, and pervasive corruption in the Ukraine. But from the start, AES's Cameroon adventure seemed cursed, quite apart from the drought. The company made blunder after blunder and was repeatedly tripped up by logistical nightmares, cultural barriers, and the nation's intractably odd ways. As recently as 18 months ago, AES was in danger of being evicted from the country, and its Cameroonian experiment seemed destined to join the long, sad list of promising economic projects done in by the developing world's familiar array of toxins: greed, incompetence, and poverty.
That it has not turned out that way makes AES's foray into Cameroon perhaps the most astounding tale of business adaptation and resiliency now unfolding. During the past 18 months, AES has begun to fill Cameroon's power vacuum--in large measure thanks to the leadership of an unlikely local hero. Things started to turn around for AES when it pulled its top American managers from the country and put a Cameroonian-born engineer and technocrat, Jean-David Bile, in charge. He has managed to curb corruption, expand capacity, and increase collections. For the past year, AES has actually made money in Cameroon.
Bile's success--and AES's--is much more than good corporate news, of course. Electrifying Cameroon is crucial to its development; if the country is ever to pull itself out of poverty and backwardness, electricity will power the engines that do it. On a less lofty level, AES's progress in Cameroon exemplifies the scrappy, entrepreneurial nature of the utility, which has made its bones in the savagely competitive international electricity business by taking on challenges that most other utilities wouldn't touch with a 10-foot power pole. Its experience in Cameroon holds lessons for anyone trying to do business in today's increasingly globalized economy, particularly for those hoping to tap into the large but maddeningly difficult markets in Africa and other parts of the Third World. Many of these lessons won't be found in the teachings at any business school or even in the street-level hustle of New York or Shanghai. Some might scoff, for instance, at one of Bile's first moves: At the opening of a new oil-fired plant, he invited chiefs to chant and pour libations of water, wine, and whiskey to seek favor from the gods.
The plant has operated smoothly ever since. And the rains came.
In a sense, AES was built to take on gnarly projects like Cameroon. The company was established in Arlington, Va., in 1981 expressly to take advantage of what its founders foresaw as an inevitable wave of global liberalization and privatization. The company owns a single electric utility in Indianapolis and about 20 generation plants in the United States; the rest of its operations are scattered over 27 countries. Lubricated by purchases of state-owned utilities, AES's revenues have jumped 80 percent since 2000 to $9.5 billion last year. AES earned $386 million in 2004 and has a market cap of about $10 billion.
When Cameroon's government, run by strongman Paul Biya for the past 23 years, announced that it would sell a majority stake in its electricity system, CEO Hanrahan saw it as a perfect fit for AES's global approach--and as a way to position AES for what he believes will be a wave of utility privatizations in other African countries. The project also appealed to Hanrahan's do-gooder side. "Cameroon is probably our most important investment," he says. "We can demonstrate that companies can go in and be successful in Africa, and that privatization can work for the good of impoverished people."
The absence of other bids on the project might have hinted that AES was in for a struggle. The company plunked down $70 million in cash in 2001 for a 56 percent stake in the state-run utility, known as Sonel--and quickly learned that it had gotten a mixed bag. On the plus side, Cameroon has many rivers, and Sonel owned three major dams that with the right management could produce a lot of power. But the dams had been neglected. The largest had cracks that, while not posing an immediate threat of collapse, would require some $40 million to fix. Vital flood protection equipment at another dam didn't work. Tens of thousands of wooden power poles were rotten and would have to be replaced.
The company's initial efforts at Sonel often only made matters worse. AES's first country manager in Cameroon was an American who had never worked in Africa and spoke no French, the nation's lingua franca. He embarrassed the Cameroonians by firing virtually every native senior manager and installing American replacements, none of whom had significant African experience either. Moreover, because AES had never run the electricity system of an entire country and because its new American team emphasized power generation, the company ignored the critical needs of the retail side of the business: working with individual consumers and small businesses, fielding complaints, and managing its image.
Customer dissatisfaction lay at the core of AES's African challenge. As part of the purchase agreement, the company was granted the right to raise rates four years running. The first American boss enacted two hikes. That would have triggered complaints in the best of times. But by then the drought had taken hold, causing massive outages even as the company charged more. In most parts of the country, the power went off every single day; one local writer described Cameroon as "a nation drifting into permanent darkness." Customer payments, already spotty, worsened. Government agencies, which use about 5 percent of the power generated in the country, routinely stiffed AES. Even the state body charged with regulating the utility refused to pay its bill for months at a time. AES ultimately shut off the agency's power.
In 2002, AES brought in a new country manager, a British national who spoke French and had African experience. She tightened controls and pushed through an ambitious plan to diversify electricity sources, raising $70 million from international lenders for the oil-fired power plant in the coastal city of Limbe.
But she faced an unexpected delay in completion of the Limbe facility due to her own naïveté. She believed a government minister who blithely told her she could import essential equipment for the project without paying duties. When the equipment arrived, however, the government imposed duties. She refused to pay. The government simply seized the equipment. For weeks she frantically sought to get the government to reverse course, which it finally did only when AES paid the taxes. By then, however, construction on the Limbe plant had fallen nearly two months behind schedule.
Meanwhile, power outages grew even worse, and public displeasure became more pointed. Demonstrators sometimes wore T-shirts emblazoned with "AES, Go Home." Even the company's largest customer, an aluminum smelter that received cut-rate electricity under a long-term contract, sued AES over power failures that shut down the smelter. Other customers did the same--by the hundreds. The company soon faced so many lawsuits that it actually stopped counting them, according to Henri Epesse, who recently became the company's chief counsel. "When we were owned by the government, people were afraid to sue us," Epesse says. "When the Americans took over, people thought, 'The Americans are rich, they'll pay off easy.'"
By late 2003, furious legislators were calling for AES's expulsion from Cameroon. "AES didn't have the know-how to deal with this kind of business," recalls Justin Ndioro, Biya's top energy adviser. "The situation was dreadful. Everything was wrong." Ndioro, who was also chairman of the Cameroon utility, intervened in early 2004, forcing AES to remove its country manager and demanding that a Cameroonian be put in charge.
Hoping to salvage AES's investment, Hanrahan turned to one of the few Cameroonians still in a high-ranking position at the utility--Jean-David Bile, a mild-mannered, 58-year-old son of a former government minister. If Hanrahan thought the move would calm things down, he was mistaken: Newspapers immediately denounced Bile as a patsy sent in to take the heat for the electricity mess and to mark time until the Americans sold out and quit the country.
Bile wasn't put off by the reaction. When the government dispatched two bodyguards to protect him, he sent one back. But even his closest friends told him he was a fool. "How can you make a miracle?" one friend admonished. "Your effort will just collapse."
Bile, who has a doctorate in economics from the Sorbonne and an undergraduate degree in engineering, formally took over as head of AES's Cameroon operation in February 2004. He had worked at the utility for 27 years and may know more about its mysterious inner workings than anyone. He also had a clear vision of how to rescue AES.
He knew he had to ease the bad blood between Cameroonians and the company. He canceled a scheduled rate hike; rates had risen some 30 percent since AES took over, and Bile knew that further hikes would only inflame the company's critics. He also came up with creative ways to attack one of the most damaging vestiges of the state's long years of control: its bloated workforce. AES's American managers had made little progress in trimming headcount, in part because the government opposed firing significant numbers of workers. But Bile broke the stalemate by offering what he calls "negotiated departure agreements" to poor performers; in essence, he gave them three years' pay to leave. Hundreds have done so, and Bile has managed to get the utility's staff down to 3,000 people, about 25 percent fewer than it employed when AES took over.
To further control costs, Bile attacked a procurement system of almost comic inefficiency. When he took charge, the utility still had an astonishing 3,000 suppliers, each of whom negotiated directly with the company. Many contracts were steered to cronies. Bile modernized the system by requiring multiple bids for everything, down to the paper clips. Now the company is saving roughly 50 percent on a wide array of supplies, from copper wire to turbine parts to printing toner. In some cases, Bile has gone to suppliers and simply asked for a price concession--and gotten it, as he did recently on the service contract for company cell phones. "Changing our mind-set is our main challenge," Bile says.
Better systems help. Bile is revamping the bizarre billing system, installing new computers that should cut waiting times dramatically and, for the first time, allow customers to pay their bills at any electric company office in the country. He's upgrading safety; for instance, he's solved a long-running, if hard to fathom, steel ladder problem. Over the decades, a number of workers have been electrocuted as they stood on these ladders inside generating plants. When another died that way early this year, Bile reported the death to AES's U.S. headquarters, which air-freighted him dozens of fiberglass ladders. They don't conduct electricity.
He focuses most of his attention, however, on what he sees as the most poisonous threat to AES: corruption, inside and outside the company. As much as 25 percent of the power produced by the utility is stolen, and Bile is determined to cut that figure in half by the end of 2006. Days after he took charge, he gathered employees together and made a short statement: "If you guys have been stealing, taking bribes, stop it now," he told them. "If I catch you, you're finished."
He meant it. He has fired more than 50 people for wrongdoing, and he expects to fire dozens more in the months ahead. Government ministers have asked him to give errant employees a second chance. Tribal chieftains have made pilgrimages to his office carrying the same message. "The answer is always the same: No," says Jean-Pierre Moudourou, Bile's personnel chief. Bile also outsourced the task of meter reading because he came to the conclusion that too many of the readers were in cahoots with customers to lower monthly bills. He's launched a hotline to report wrongdoing by employees, encouraging customers to expose scams. And he insists that cases of suspected corruption by staff members be closed quickly. "We know if we don't move fast," he says, "people change their stories and cases fall apart."
Customer thievery represents a larger threat to AES, and a more complicated one. "Our first three years, we were so controversial it wasn't possible to crack down," Bile says. But in recent months, he has created aggressive "loss reduction" teams that are not merely responding to tips but analyzing usage patterns to identify and halt large frauds. He has encouraged a crackdown on the scores of government workers who still feel entitled to free electricity (a holdover from the days of state ownership when they could easily avoid paying). And he is vigorously attacking one of the system's most insidious problems: rogue networks set up by thieves who tap into the company's lines and go into business, running power to entire neighborhoods, usually offering lower prices than AES. There are hundreds of such networks in Cameroon.
Robert Rim, one of Bile's top fraud-busters, directs attacks on the rogue networks in Yaoundé, the nation's capital. On a recent afternoon, Rim and two armed cops enter a shantytown on the city's outskirts. An electricity thief here has constructed a private network, complete with his own poles, cables, and meters. Earlier that morning the police came and hauled away the thief, but his electricity is still flowing. Rim and his team are here to shut it down.
A crowd gathers. The people aren't happy; they're about to lose their electricity, which powers the few lights, refrigerators, and TVs they have. Rim's technicians push through the front door of the house of the man who ran the illegal network, followed by the two policemen brandishing AK-47s. In the living room is a rat's nest of wires, one for each of his customers. "We've found the source," Rim exults. The network is dismantled, the poles pulled down.
Just then a woman walks toward the house, carrying shopping bags. She's the wife of the man busted for stealing electricity. The police gruffly tell her of her husband's arrest. When she opens the door to her house, she sees the swarm of technicians in her living room. Her face falls. Her illicit business is gone; her husband too. "We were giving the electricity away for free," she says. No one believes her.
Bile himself joins some of the more important raids. On a warm Saturday evening, he climbs into an unmarked SUV and joins a convoy headed toward the capital's most popular nightclub, a jumping joint called Protocole. The club is suspected of stealing electricity on a fabulous scale, and Bile wants it raided to set an example to the many other nightclubs that he believes also steal juice. In the old days, utility employees didn't work on Saturdays, and no one ever checked on suspected weekend power thieves; Bile wants to make Saturday night raids routine. When he reaches Protocole, the club is ablaze with lights, ready for business. Half a dozen senior technicians pry open a box containing two electricity meters. They aren't moving.
From the ground, the technicians can see the illegal connection. Bile and his team enter the club, snaking through a back room and emerging at one end of a long bar. They count eight air conditioners, all churning. Dozens of lights are on. At the peak of the evening, more than 500 people will jam into the club. The electricity tab, for this night alone, could be hundreds of dollars. Bile looks past the bartender at a row of French champagnes, and touches a large bottle of Dom Pérignon. "The club is selling the most expensive champagnes, yet it can't pay its electricity bill," he sniffs. Nearby, the police are grilling the club manager, who asks if he can make a payment on the spot, so he can open tonight. "Too late to negotiate," one of Bile's men says, and the police take the man to jail.
The combined effect of Bile's initiatives is promising. AES's Cameroon plants now produce 20 percent more electricity than before the company arrived. Time lost by workers due to accidents has fallen by half. The company has suffered no outages as a result of a major power production failure this year, although the electricity still goes off sometimes, mostly because of vandalism. Bile has improved bill collection by 10 percent. Despite all the problems it has had, Bile expects the utility to generate about $250 million in revenues in 2005 and earn a profit of about $30 million, which AES will split with the Cameroonian government. Bile anticipates that profits will grow as theft declines. "We didn't give up, despite the public outcry," Hanrahan says. "Our attitude is, 'We're going to make this work.' We're turning Cameroon around now."
Brightening prospects in Cameroon mirror AES's improving results around the world. The company's stock, which fell as low as $3 per share in mid-2002, has risen 60 percent in the past year to about $16 per share.
Still, whether Cameroon will prove to be, as AES hopes, an entryway to other business in Africa, or even a long-term winner, is no sure thing. For starters, no other African country is seriously considering fully privatizing its grid right now. "We expected more privatization," Hanrahan concedes, although he still believes there will be more in the future. And Cameroon remains a challenging, unpredictable place to conduct business. "I can take the best executive in the world, put him in Cameroon, and by noon he'll be curled up under his desk in the fetal position," says one American familiar with the country's power sector.
Bile, for one, remains decidedly upright and undaunted, fighting hard to rid the utility of more of its old and often odd ways. He has initiated a program to deal with the utility's meters; many were installed in 1945, and another big batch dates back to 1958. They are almost invitations to fraud. Customers can stop the aged meters from clocking electricity usage by simply turning a screw. "A child could do it," says Alice Moudika, a veteran meter reader.
Bile is also overhauling the company's crown jewels, its dams. The program features its own unusual challenges and occupational hazards. On a recent afternoon at the Edéa Dam, the nation's second-largest, an engineer stands above the rust-colored waters of the Sanaga River and points out the floodgates. They're wide open. They've been that way for years. They don't work, and there are no spare parts. The design, unusual for its time, dates back to the 1940s. Every other dam in the world that used the design had its floodgates removed and replaced years ago. Bile has a plan to finally replace the antique floodgates at Edéa, but it will cost millions, and the actual work is complicated by many unusual factors. There are the crocodiles, for instance. More worrisome are the pestilential black flies--the ones that cause river blindness. Even though the company sprays chemicals upriver to kill the flies, many survive. "We check for how many flies are out there before we go down to the floodgates," says the dam's chief engineer, Yufonyui Fai. "You don't want to get too many bites."