Comes of Age

Mr. ANDREJ DEVECKA GM of Zapadoslovenske Energeticke (ZSE)

Interview with

GM of Zapadoslovenske Energeticke (ZSE)


ZSE is one of the three regional energy suppliers in the Slovak republic. Can you briefly tell us what have been the main steps that marked the development of ZSE until now, especially focusing on the time since it became an independent state enterprise?

The company was created in 1922, and until 1990 everything concerning electricity was state-owned. In 1990 the company was divided into the production and transport of electricity and into the three distribution companies located in the western, central and eastern regions of Slovakia. The companies that took care of distribution weren't joint stock companies until this year, but this production and transformation system became a joint stock company later so we are the first one out of the three distribution companies that became a joint-stock company.

Regarding the evaluation of our development, it is very difficult to judge, because we became a Joint Stock Company on 1st November 2001. It's a pity because the government planned to do this since the beginning of April 2001, and energy companies in Slovakia normally work by using a yearly plan. Due to the stock company reorganization made on 1st November, we are in the middle of the economic year and that creates some problems in the area of taxation. Therefore, this change should have happened earlier and right now, it is very difficult for me to tell you this. Due to the transformation that happened on November the 1st, for October and November, the company is going to have a negative balance.

Can you tell us more about the nature of your activity, your network specifications, your power source, etc.?

We are just a distribution company and that's why we buy energy. We buy the energy from the Monopoly Company and from some smaller companies that have production surplus. Our main supplier is Slovenske Elektrarne (Slovak electricity utility)

By the time we became a joint stock company, we owned two heat power plants: one in Bratislava and one in Trnava. But by a government decision on 1st November 2001 these two plants became two independent joint stock companies. We have 930,000 customers that buy electricity from us and we are in charge of 110kV and 22kV networks as well as very low voltage nets that can supply the last consumer. We still operate by a system of natural monopoly, so basically they are the only distributors in the area of Slovakia.

Since you are responsible for the distribution of energy in the Western Slovakia we would like to know more about the percentage of supplied energy versus the production capacity of the company.

The 110kV net can take more than it's being used for. If there are any problems it's with the low voltage nets, 22kV, as they are located in the cities and because some of these nets in some places are at the end of their transmission potential. This is mainly because after1990 there was the possibility to create small businesses and our net wasn't adjusted to this new situation. For example Bratislava's Old town used to be a place where older people lived but now it's completely renovated, you can find companies, headquarters, embassies, and the nets that should take care of it are too old. Actually, the nets need to be modernized, we need to invest more money into low and middle voltage nets, even though low voltage nets are used only at 30%, they are old-fashioned and need to be renovated. The nets aren't built up properly and the transformation capacity is used at only 30%.

Who are actually your main customers? In what measure do they contribute to your turnover and profitability?

The figures for next year aren't a problem, the problem is the transformation from a state-owned company to a joint-stock company. The first problem is that the prices they buy and sell for are regulated by the state. The money we make on this difference has been the same for three years. We start with a figure of 23% when we sell, but today it's just 19% because the state is trying to keep us at the same level of prices, due to inflation, which is 7-10% each year. The price at which we buy is much higher, so actually the margin decreases. So let's say that in 1995, the profit we posted was 800 million SKK, last year it was just 80 million. Logically, if this trend continues next year, we would have to be in negative balance.

By the way we run the business, most of the customers pay a regular amount of money every month, but the real amount of energy needed in summer is much smaller that in the winter. In summer, we actually get more money from the customer than we need to spend, as winter comes, the situation changes, so we actually spend more money to buy the energy than we actually get paid by our customers. When the state company stopped running the business in October, we were still in positive balance because of the summer. The business was over in October, still with the profits from summer. Actually the joint stock company could have used those profits now but that has to be closed because the profits have to be taxed. If they could have waited for two more months the profit wouldn't be so high that means that the taxes wouldn't have to be so high either, but the profit that was taxed was big, so a different amount is now available.

Secondly, due to a lot of people that owe money from the past ourselves and our auditing company Arthur Andersen asked to put in correction items. All the money that was owed was 800millio crowns, and this money had to stay in the state company because the joint stock company isn't able to use this money and we actually have this as a minus because we had to create this fund again. In general we work with an amount of money worth 14billion crowns a year, that makes about 1billion crowns a month. The question is however where to get the 800million from. If we became a joint stock company in the summer as planned we wouldn't have had any problems. Or the same would apply if it happened on January the 1st. Happening this autumn was the most inappropriate time for us.
We also would like to have your opinion on the achievements of the company. Do the 2001's figures fulfill your expectations?

The biggest company that owed us money was Slovenske Zeleznice (Slovak Railway Company) we had a meeting in May and agreed on debts to be paid off by Christmas 2001. There are also companies that we aren't able to claim the money from and these cases are taken to court. There are some other options though if companies didn't pay us got their electricity turned off. We have a sophisticated system for this process, for people not paying regularly. We send him a notice that says that the claim is supposed to be paid in 14 days, if this doesn't happen by that time he gets sent a new notice, after that a second notice stating when the electricity will be turned off. Basically, with this system we are pretty much in control of the customers the only problem are created state-owned institutions like hospitals and schools because we just cannot turn them off.

Are you intending to remain focused on your core activities or rather diversify them? We have read about your participation in Energotel…

Our idea is that the energy sector has got quite a sophisticated capacity for data transmission. These capacities are much greater than the energy companies are able to use. When the market for data transmission was liberalized we offered our capacities to companies operating this service, one of our major clients is Globtel. The problem that appeared afterwards was that this business is not a core business of the energy sector and if the company has problems with financing core business it's difficult to invest into its side activities and into the development of these networks. That's why we decided to create a daughter, joint stock company Energotel that is in charge of running the business with the unused capacities of the energy sector for example when it comes to data transmission. Otherwise we would loose the trust of our clients because we wouldn't be able to operate our services and we had to decide and go this way and focus on our core business. It's a shame because every bigger town has some network or is connected to it and this network is connected to our distribution system. The problem is that we need to build the "last mile", to get close to our clients and that requires a substantial amount of money. That's not the core business of a distribution company.

The privatization of the energy sector, a key sector in Slovakia is taking place these days and should be finished by next year. Could you give us an overview of the importance of the future of this sector for the Slovak economy and its competitiveness level with the neighboring countries?

The privatization of the energy sector is going to have a huge impact on the liberalization of prices. It is going to place huge pressure on government officials to time the steps of price liberalization. What we have now, we have a set price for buying electricity and a set price for selling, that is going to be replaced by liberalized prices and some other regulatory officials are going to take care of this, not the Ministry of Finance. Beginning in 2003 the regulatory officials are going to set the prices for transmission, distribution and that's a positive thing that such an office was created. If these regulatory officials are going to regulate prices according to our expenses, it's going to have a positive impact on distribution companies and we have very positive experience with the Czech republic where this actually happened and it has had a positive effect on distribution companies.

How would you see your company in five years?

We'd like to keep up when the privatization is over, to keep the customer, and be the best one, so that the customer has the opportunity to choose when the market is liberalized. I am aware of the fact that when the market is liberalized there's going to be a lot of new competitive companies. We would like to focus on providing the best services for our clients. What is very important is to create a department that is able to tell us how much we need to buy because at the moment there's just one supplier. When the market is liberalized we are going to have more choice, so we need this department to take care of this area. According to government plans the market is going to be liberalized thoroughly by the end of 2005, small consumers are going to be able to choose their supplier. We don't have much time to prepare for this situation so we will have to be very accurate in predicting our supply. What we also have to focus on is to decrease the expenses of company. We would like to start a process system of management and to decrease financial losses. Because the price of electricity is going to rise and it will be very interesting to see how this influences the actual price so that we have to be aware of this. These are the main goals we would like to focus on in the next five years.

What can you tell us about the investment opportunities in Slovakia, in the energy sector?

The current investment opportunity in the energy sector in Slovakia is to participate in a tender and become a buyer of one of the energy companies, e.g. in Slovenske Elektrarne (Slovak electricity utility). You can invest in any sector in Slovakia because the human potential is big because there are a lot of people with high potential but unfortunately due to the opportunities of free market and because a lot of companies stopped their business because of lack of technical equipment not because of lack of human resources, these people weren't able to find a place at the market but that's not their fault, it's part of the transformation. It's very usual that a lot of foreign companies create their business here in Slovakia and they supply their mother business abroad.

Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions.

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World INvestment NEws, 2002.
This is the electronic edition of the special country report on Slovakia published in Forbes Global .
May 27th, 2002 Issue.
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