Foreign Aid

The divine power of profit

Deepak Gopinath
Institutional Investor
March 1, 2001

A dam near the source of the White Nile would obliterate the Bujagali Falls: a spiritual site for Uganda’s 2.5 million-strong minority Busoga, who believe their tribe’s spirits reside in the churning water; and a tourist river-rafting destination.
Dennis Bakke presents AES Corp. as a do-gooder global power company that selflessly does God’s work by bringing electricity to the wretched of the earth. Are they for real?

"I am trying to sell a way of life," says Dennis Bakke, chief executive officer of AES Corp., the world’s largest independent power producer. "I want the world to change."

Bakke brings the evangelical fervor of his father and brother, both Lutheran ministers, to his work. His calling, he believes, is to provide electricity to the masses. "I am a minister, but in a different area," Bakke proclaims. "In Genesis our job is to steward the garden. To steward the resources of the world is the essence of social responsibility, and providing electricity is the most wonderful way to change things."

Bakke takes every opportunity to promulgate his company’s credo of "fairness, integrity, social responsibility and having fun." The first three are self-evident, but by "fun," Bakke means delegating authority as far down the ladder as he can. AES is highly decentralized; executives in the field make almost all their own decisions. Bakke proudly maintains that profits and shareholder value are not among his company’s main goals. "Our mission is to serve the world," he says.

His shareholders have done very well, too. The company, then called Applied Energy Systems, was founded two decades ago by Bakke and Roger Sant. Last year it had revenues of $6.7 billion, with earnings of $641 million ($1.40 per share). Return on equity has averaged 20 percent annually over the past five years, and AES’s market capitalization is about $28.5 billion. Bakke, 55, became CEO in 1994, replacing Sant, 69, who remains chairman. Since going public in 1991, AES’s stock price has increased 17-fold. Bakke and Sant each own stock worth $1 billion.

The company’s philosophy has garnered praise from the Harvard Business Review and other publications, while its returns have wowed Wall Street. "Out of all the companies pursuing the competitive model, AES is the most successful," says Raymond Niles, Salomon Smith Barney’s analyst for independent power companies. "The decentralized management structure makes them nimble. They have some of the highest returns on equity in the industry."

Bakke likes to boast that AES puts service to the world and social responsibility first, even if it means not maximizing profits. But AES’s internal hurdle rate of return on investment for projects is 16 percent to 20 percent, depending on risk. That’s not throwaway pricing; it’s hard-nosed business.

Thanks to its constant harping on its social values, AES long managed to escape the kind of scrutiny to which other power companies are routinely subjected. Now the negative publicity from two recent problems — a fine for air pollution in Southern California and an environmentally and culturally questionable hydroelectric project in Uganda — is inviting closer public inspection of Bakke and of AES’s vaunted values. "We don’t include AES in our funds," says Elizabeth McGeveran, vice president of research at Friends, Ivory & Sime, which has $3 billion in screened funds. She cites a lack of transparency about environmental impact as the reason.

To spread Bakke’s gospel of power to the people, Arlington, Virginia–based AES has operations around the world, including projects in such unlikely places as Bangladesh, Pakistan, Kazakhstan — and Uganda. Most foreigners still associate the latter with Idi Amin’s bloody dictatorship. Nature buffs, however, know Uganda as the home of the endangered mountain gorilla and the waterfalls that mark the source of the White Nile near Lake Victoria.

In the early 1990s Ugandan President Yoweri Museveni proclaimed that he wanted a hydroelectric plant on the Nile. AES snared the $500 million deal to build a dam that would produce 250 megawatts without having to go through costly competitive bidding, signing a memorandum of understanding with the Ugandan government in 1994. In early 1997 Bakke hosted a dinner at his Arlington home for Museveni, who was in Washington, D.C., to attend that year’s National Prayer Breakfast. The two men, both devout Christians, hit it off. Bakke hired Christian Wright, now 29, to serve as AES’s in-country representative in Uganda. Wright had the right connections: His father, Charles Wright, was an organizer of the National Prayer Breakfast. AES got the contract.

Four years and $25 million later, construction on the project has yet to begin, largely because the proposed site for the dam has inspired fierce opposition. The reservoir would obliterate the Bujagali Falls, a series of waterfalls and rapids swirling around small islands near the headwaters of the White Nile. The rapids have been described as offering "the wildest commercial rafting ride in the world," making them a popular tourist attraction. More important, they are a spiritual site for Uganda’s 2.5 million-strong minority Busoga, who believe their tribe’s spirits reside in the churning water.

Many other Ugandans have also voiced reservations about the dam. Members of Parliament questioned the project’s merits and the means by which AES was awarded the contract. Indeed, Parliament delayed approval, green-lighting the project only in 1999. Local nongovernmental organizations charge that the dam ignores more appropriate alternatives; is environmentally, economically and culturally unsound; and is too expensive and will not help the poor, despite the promises of AES and the government. These local NGOs have joined forces with more influential pressure groups in the U.S. and Europe to try and halt the project. "Our concern is that it is a risky project for Uganda," says Lori Pottinger, head of Africa campaigns at Berkeley, California–based International Rivers Network. "It will exceed the country’s needs, and there is no evidence that it will help the poor."

It annoys Bakke that anyone should question AES’s public image as a socially responsible company. "For others [social responsibility] is a deodorant for self-interest," he declares. "We are different."

Lately, though, a chorus of socially responsible investors have been reassessing the company. Julie Gorte, an environmental analyst at Calvert Group, which runs $2.3 billion in socially responsible funds that hold AES stock, notes that the company takes credit for all the carbon dioxide amelioration from a tree-planting scheme in South America — even though it funded only 15 percent of it. "AES has made some attempt to mitigate [emissions] through carbon sequestration," says Gorte. "It is nice, but it is not the answer. We are taking a deep look at California and Uganda and are reevaluating our position on AES."

AES’s commitment to the social values it proclaims may be in doubt, but there is no question that the company has been an impressive business success. Dennis Bakke met Roger Sant when they worked together on energy conservation at the Federal Energy Administration (now the Department of Energy) during the administration of president Gerald Ford. Sant was head of the Office of Conservation and the Environment. Bakke had joined Energy from the Office of Management and Budget, where he developed enduring friendships with two stalwarts of the current Bush administration, Treasury Secretary Paul O’Neill and Secretary of State Colin Powell.

Sant and Bakke left government to join a Carnegie Mellon University think tank, where they advocated the then-radical idea that electricity generation doesn’t need to be a state-run monopoly and should be deregulated. Acting on their convictions, Bakke and Sant founded AES in 1981 with $60,000 of their own money and $1 million from other investors.

AES took off by aggressively building and, later, buying plants. It now has interests in 153 facilities with 53,000 megawatts of capacity in more than 20 countries. AES has more than 50,000 employees and continues to buy up power plants and distribution companies across the globe — from Pakistan to Chile, from Nigeria to Hungary — as well as in the U.S.

Originally laid out by Sant, the company’s values govern the way AES operates. The overarching tenet is social responsibility, which AES defines as sensitivity to the needs of the communities where it operates. This means lowering customer costs, paying attention to safety, increasing employment and promoting a cleaner environment. To AES, providing electricity to the underserved is an unquestioned good. Profits are a reward for investors and a means for the company to do further good.

Now largely retired, Sant, a lapsed Mormon and an agnostic, is concerned that AES not get carried away by the righteousness of its mission. "There are a lot of business models that work," he says. "I would be appalled if we became evangelical and tried to convert others."

Bakke, however, sounds very evangelical. "I am the keeper of values and principles, the chief teacher," he proclaims. "I am the chief adviser. This is the one requirement in our company — to ask for advice." Like many missionaries, Bakke refuses to mold AES’s values to different cultural contexts. "I am a cultural imperialist," he says. "This is what we believe no matter where we go — our values are consistent with all faiths."

For most companies social responsibility is enlightened self-interest: doing good to do well. Bakke insists that AES’s employees do good to do good, period. But he acknowledges that the company’s image helps it do business. "The reputation that we have for doing the right thing, being sensitive to the community and being very careful with the environment will in fact make it easier for us to do things, as opposed to somebody who’s there primarily for the profit," he says. "We certainly have a better chance with the governments themselves."

The problem is that AES doesn’t always look like the company Bakke claims it is. As one of the biggest global power developers, AES is by definition a major polluter. "If I were totally green, I wouldn’t invest in a power company, because we still pollute," Sant says bluntly. Yet AES doesn’t belong to organizations like the Coalition for Environmentally Responsible Economies or the World Business Council on Sustainable Development, which seek to get corporations to work with environmental groups.

Some of AES’s hard-nosed business practices are less than saintly as well. AES routinely eliminates jobs at companies it buys; most recently, it cut half of the 5,000 jobs at Electricidad de Caracas, a Venezuelan power distribution company it acquired in a hostile takeover last summer. That’s understandable activity — for a company driven by profits, but not for a corporate prophet of social values. Unless, of course, those values are conveniently adaptable.

In Bakke’s view layoffs not only help society at large, but the individuals fired as well. "We believe it is socially irresponsible to keep even one extra person employed when he or she cannot help operate the business more effectively," Bakke wrote in the 1999 annual report. "That extra person stunts everyone’s growth, freedom and fun. Furthermore, by freeing a person from an unproductive, overstaffed job, society gains another problem-solving citizen."

Tell that to a laid-off worker.

Sant, a former chairman of the World Wildlife Fund, offers a different perspective. "Having these values doesn’t mean we always succeed in being socially responsible," he says. Sant cites some examples: In 1991 AES wanted to build a coal-fired power plant in Bucksport, Maine. When the town board voted against the project, AES sued, unsuccessfully, to force it to allow construction to begin. In 1993 AES workers falsified water treatment records at a power plant in Shady Point, Oklahoma; the company paid a $125,000 fine. That same year, AES was forced to sell its partially completed cogeneration plant in Jacksonville, Florida, when project lenders balked after the state moved to revoke the company’s site certification, claiming it had been misled when AES applied for the permit. And in Pakistan the company spent more than $3 million in discretionary funds on education programs, rather than investing in antipollution equipment for its power plants.

But no AES project inspires more controversy than its plan to build the dam across Bujagali Falls. Critics argue that the electricity, to be sold at 7 cents per kilowatt hour, will be too expensive for most of Uganda’s desperately poor, rural population. The vast majority of Ugandans earn less than $1 per day, and fewer than 10 percent are connected to the national power grid. In mid-1998 Stephen Linaweaver, an American operating rafting trips on Bujagali Falls, was arrested and asked to leave Uganda for "inciting unrest." Linaweaver had begun a campaign to oppose construction of the dam. "I was trying to educate people about the effects of the dam," he says.

One of those interested in Linaweaver’s efforts was Ugandan businessman and former local politician Martin Musumba, who created the Save Bujagali Crusade. "I started SBC to lobby the government and Parliament to look at the project to see how economically beneficial it was, as opposed to tourism, vis-à-vis the purchasing power of Ugandans, and also how it would affect people culturally," he says.

Musumba persuaded Frank Muramuzi, president of Uganda’s National Association of Professional Environmentalists, to assess the project. "We looked at AES’s environmental impact assessment and found it didn’t spell out how resettlement aspects would be dealt with or comprehensively review the hydrology," says Muramuzi.

Musumba and Muramuzi got together a group of Ugandan NGOs to form a coalition against the dam. They also turned to International Rivers Network to lobby the World Bank not to support the project. "We are amplifying Ugandan NGOs’ voices. They were being ignored by the powers that be in the World Bank," says IRN’s Pottinger. "The whole country assumed that once the president agreed it was a done deal."

In keeping with its approach to all its undertakings, AES funds its local projects with as much nonrecourse financing as possible. The company owns 100 percent of AES Nile Power Uganda but will put up $100 million, or 20 percent in equity. The World Bank’s private sector financing arm, the International Finance Corp. (whose president, Peter Woicke, happens to be a close friend of Bakke’s), has been asked to lend $200 million, or 40 percent of the project cost, with the rest coming from other investors. The World Bank also plans to provide a partial risk guarantee that would cover the Ugandan government’s contractual obligations, such as paying for electricity or maintaining the regulatory environment. The activists hope that their protests will cause the World Bank to refuse to participate in financing the dam, and without its support, AES is unlikely to convince private investors to back the deal.

Based on Muramuzi’s findings, the IFC, already under fire from NGOs for funding environmentally unsound projects, like an oil pipeline in Chad and a gold mine in Peru, rejected the environmental impact assessment submitted by AES as lacking enough work on the environmental and social impact of the dam. The company plans to submit a revised EIA this month, and the IFC board is expected to vote on the project by midyear.

"One thing NGOs have been very successful [in] is delaying the process," says Bakke. "But you know what? We don’t go away. Unless people chase us out, we are staying. There is no question that this particular solution is the best thing for the people of Uganda."

Bakke is indignant that NGOs are involved at all. "The opposition is not being led by Ugandans," he says, ignoring the actions of Musumba, Muramuzi and the Ugandan coalition. "The people there have a legitimate government, and they need to address those things with their government, not going out and getting an NGO. It is not legitimate to put forward the ideas of the individual citizen over the elected government."

The Ugandan Parliament approved the project in 1999 after a yearlong debate. At public hearings people living near the falls said they supported the project. Ugandan activists say that AES promised the poverty-stricken local residents money and that others were intimidated into silence. "There is so much poverty that people will sell anything to get money," says Musumba. Adds Muramuzi: "Although AES says they have good intentions, on the ground they are telling people lies. They told people that when [the] dam is built, they will all get jobs, light and money. But the real issue in Uganda is not electricity. It is poverty." Bakke responds that even if the poor don’t get electricity, the project will provide a steady power supply to hospitals and schools that they use.

Even supporters of the dam are not exactly enthusiastic. "We are disappointed to find that only people close to the project will benefit from roads and electricity and that AES has provided $1 million for people close to the project," says William Kiwagama, the prime minister of Kyabazinga, the kingdom of the Busoga. "But we think in the end the benefits will spread to people further away from the project."

Yet to be resolved is the way in which the Bujagali spirits will be propitiated. AES asserts that the Jaja Bujagali, the chief priest and spirit medium who is the Busoga’s communicator with the spirits of the Bujagali Falls, agreed to a "relocation" of the spirits at a public hearing. "I have never agreed," said the Jaja Bujagali in a December interview with Ugandan researchers. "If they want to relocate it to another place, will they carry the whole river or falls to that place? They think that a Musambwa [spirit] is like a goat that can be transferred from place to place."

"The spirits represent the collective of the people and cannot be moved," says Musumba. On the other side, Kiwagama, the Kyabazinga prime minister, scoffs at the Jaja Bujagali’s objections. "If the project goes ahead, the spirits will have to move," he says. "The Jaja Bujagali will be prevailed over."

Bakke says the Ugandan Parliament’s decision to approve the project is all the justification AES needs to go ahead. "We have found few people — no official folks, no respectable groups of any consequence — who oppose the dam," he says.

But Uganda is not exactly a paragon of democracy. Museveni took power in a 1986 coup and banned all political parties. He was elected president in 1996 and is running for a second term in this month’s presidential elections. "In Uganda people usually don’t oppose a project, especially when the president is involved," says Musumba. "People are intimidated."

Various allegations of corruption have swirled around the project. One comes from the accounts manager of AES Nile Power Uganda, a local hire whom AES accuses of having embezzled $400,000 from the company. The employee, Harriet Kabayondo, claims that the $400,000 was authorized by AES Uganda director Wright to pay bribes to local politicians. Wright denies allegations of misconduct. He says his signatures were forged. "We have paid no one at any stage in the project," he says. "No one has made false promises, and we have been very careful not to raise expectations." The case is now in Ugandan courts. Bakke also denies any untoward dealings by Wright. "He has more integrity than you or I will ever have."

The project’s fate now lies in the hands of the World Bank, which faces a difficult decision. The German development bank, Deutsche Investitions und Entwicklungsgesellschaft, decided to withdraw in December. Even if the World Bank approves the project, Bakke will have to make sure that his rhetoric matches his company’s actions. "I’m not trying to maximize earnings," he insists. "We are going where we can make a difference. We are as committed to the people of Uganda as the World Bank and certainly as any of the people talking to NGOs. We are much more committed than these people because that’s our mission."

Fun in the California sun

One of the values that AES Corp. cofounders Roger Sant and Dennis Bakke hold dear is that employees should "have fun." They define "fun" as decentralizing management down to the executives in the field. Is Bakke, now CEO, concerned that young executives might make mistakes? "The danger is they won’t make enough big mistakes," he says.

Sometimes, though, you can have too much fun.

Last summer AES should have made a killing in California. A massive power shortage had sent prices soaring, and most electricity generators selling power to utilities were reaping what state officials condemned as windfall profits.

Alas, AES was not one of the beneficiaries of the price spike. In 1998 it had signed a 20-year, fixed-price contract to deliver the output of three plants in California with almost 4,000 megawatts of installed capacity to Williams Energy, a power marketer, which then sold the electricity on the open market. When prices rose, Williams, not AES, was able to sell power at whatever the market would bear.

Worse, AES ran out of NOx permits. What are NOx permits? In the arcane world of electric power generation in the U.S., the right to pollute the air is a tradable commodity. If you have a plant that belches noxious fumes, you can always buy "permits" from those with cleaner plants.

In July AES’s three main plants exceeded nitrogen oxide (NOx) emission limits. In December the company was fined $17 million by the Southern Coast Air Quality Management District for not shutting down the plants when they ran out of NOx permits.

AES was caught in a classic squeeze play. The state desperately needed electricity to keep air conditioners running and asked Williams to take more power from the AES plants under its contract. Bakke says the company was faced with the choice of shutting off the juice to sweltering Southern California or violating emissions rules. Local managers thought they had an agreement with regulators to keep the plants running until a solution was worked out.

Bakke insists that AES could not have bought additional NOx permits since they were both scarce and expensive. So while AES didn’t profit from the higher electricity prices in California, it had to pay a fine for polluting. Indeed, it lost revenue as well when its plants periodically broke down because they were running for longer periods than normal. Williams got the profits; AES and its self-proclaimed value of environmental responsibility got a black eye from the environmental regulators. "Sometimes it is a tough world," Bakke shrugs. "You try to be the big guy and save the world, and it doesn’t always pay off in the short run."

Still, keeping its plants running may have paid off for AES by building goodwill with California officials. In return for paying the $17 million fine and installing pollution control equipment, regulators agreed to accelerate permits for AES to expand the capacity of one of its plants by 450 megawatts (which would be sold directly to the state).

After factoring in revenues from its single 120 megawatt California plant that sells directly to the open market, AES reported a net loss of $11 million in the state last year. Last month AES found itself facing a squeeze similar to what befell it last summer. This time the state’s independent system operator obtained a court order enjoining AES to keep its plants running even though environmental regulators were again insisting they be shut down.

But Bakke has apparently decided his field executives have had enough "fun" in California. "We made a mistake [last time]," says AES investor relations chief Kenneth Woodcock. "This time we will shut down."

But faced with such threats, Southern California environmental regulators have issued a temporary order that exempts power generators from NOx emission rules.

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