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by Michael Cardinale, MBA2
mcardina@umich.edu
Scene from summer 1998: Every day Nicolae Turculet Calustian wakes up in his state-owned apartment at 5:00 AM and walks to work. Mr. Calustian, also known as Nicu, is a driver for Renel, the state-owned electric monopoly for Romania. At promptly five minutes to eight, Nicu jumps into his assigned car and drives down the parking lot to the Renel maintenance building. There he waits for his four daily passengers, the William Davidson Institute team working with the FRE Bacau subsidiary of Renel.
Background of Romania and Project
Nicu grew up in Bacau, an industrial town and regional center 200 kilometers north of Bucharest, under the ironfisted rule of Nicolae Ceaucescu. In December 1989, Ceaucescu was violently ousted from power and killed. During his twenty-four-year reign, Ceaucescu destroyed the economy in his fanatical attempt to make Romania a self-sufficient country. As a result, Romania started the transition to a market economy in a difficult position when compared to countries such as Poland and Hungry. In fact, for the first seven years after the fall of Ceaucescu, Romania took slow and hesitant steps toward creating a privatized market, the result being that virtually no restructuring of the largest monopolies occurred during the years following Romania's revolution. The willingness to reform, however, seems to have changed as the current Prime Minister, Radu Vasile, has vowed to accelerate the privatization of the largest state-owned companies, particularly that of Renel and of CFR, the state-owned train company.
Renel is responsible for the generation, transmission, distribution and sale of electricity throughout Romania. The 1998 William Davidson Institute Renel Team (the team) was asked by Renel to provide a business plan for the privatization of the FRE Bacau Distribution subsidiary, which is one of seventeen transmission and distribution entities within Renel. Citibank sponsored the team's project with Renel. The team consisted of two fellows from the University of Michigan Business School, Michael Cardinale and John Westlund, and of two Romanian fellows, Mircea Baetoniu and Dragos Boros, MBA students at the International Management Center in Budapest. The team was supported by Radu Deac, an established Romanian banker and Senior Adviser to the Davidson Institute.
The Project
After spending a one-week orientation period in Bucharest, the team took a train north to Bacau, situated in the Moldavia region in eastern Romania. The city spreads out around a main avenue, and is populated by uninspired concrete buildings built during the communist regime. People who do not own an old and beaten fifteen-year-old Dacia walk or ride their bicycles, as the price of a new Dacia became too expensive for most Romanians after 1989. Wooden wagons pulled by ancient horses and donkeys continue to be a primary means of transportation in Moldavia. Water is available only eight hours per day and even then is undrinkable.
We adjusted to living in Bacau during our first intense days of work. During the first few weeks, the team spent hours interviewing and speaking with people. The management and staff at FRE Bacau were open, honest and willing to share information important to our project. Many people were interested in our opinions and wanted to know how things operated in the States.
Our team soon understood that the problems at FRE Bacau did not lie with the employees of the subsidiary, but with the colossal task of dismantling a government-subsidized electric monopoly with 90,000 employees. The social and economic consequences associated with this restructuring are nearly impossible to comprehend. For instance, many employees were quick to point out that Romanians pays less than one quarter the price per kilowatt-hour of electricity than the typical consumer pays throughout the world. This would not be a problem if Renel produced electricity at a quarter the cost of its counterparts, but this is not the case. The reason for the low rates in Romania is that the government subsidizes the rates. Raising the price of electricity by four times would have significant impact on the life of typical Romanians. For example, Romaniaís per capita GDP is $1,520 per year. If average Romanians were asked to pay $30 of their monthly salary towards an electric bill, they would likely be forced to go without electricity in order to make ends meet.
Of course, a William Davidson Institute team could not solve such problems in a fourteen week period. What we attempted to do was to share with the FRE Bacau management what we know about doing business in a privatized market. To this end, the team proposed some changes. First, we suggested a new organizational and functional structure (the marketing department is currently in charge of vehicles). Second, we are created a proposed monthly operating package that will allow FRE Bacau to critically analyze all aspects of its operations. Finally, we worked with FRE Bacau management to develop a breakeven analysis that will provide FRE Bacau with a tool to set electricity prices in a competitive market.
Despite the hardships Romanians face, the people we met and worked with are a very spirited people full of energy and life. Our driver Nicu realizes that the government subsidizes the price of his apartment, of his electricity, heat, and so forth. Yet he, along with many of his fellow countrymen, embrace change and the challenges it may bring. For me, having the opportunity to become good friends with Nicu and to make a real impact on the privatization of the Romanian electric authority, made being a William Davidson Institute fellow a fulfilling experience.
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