CEZ ambitions to be the leading energy business in Central and Southeast Europe now lie in ruins. But the reasons for its failure are to be found at home, not on the streets of Tirana and Sofia.

Unhappy natives protest against Czech colonisers

In the last two weeks, we have been bombarded with images of tens of thousands of angry Bulgarians protesting at energy prices 'imposed' upon them by three foreign distributors of electricity, including, of course, CEZ.

Foreign energy companies are a soft target for racketeering politicians in Tirana and Sofia -and not only there. It’s a good story but it is old hat. Five years ago, E.ON Bulgaria's offices in Varna were attacked by thugs working for racketeers. It managed to sell its Bulgarian business to the Czech Energo Pro in early 2012. CEZ will not find it so easy to find a buyer willing to pay a fair price. More likely, it will offload its Bulgarian assets in a firesale to local firms with the kind of political muscle that CEZ enjoys in Prague but clearly lacks in Sofia.


It was all smiles back then. Milan Urban and Martin Roman are toasted by the Bulgarian deputy PM on their acquisition of local power distributors in 2004.

CEZ's recent experience in the Balkans is a distraction from the firm's single biggest handicap -its own management. The protests on the streets of Sofia tell us very little about why CEZ's ambition to be the leading energy company in Central and Southeast Europe now lies in ruins.

Balkan unrest is an easy alibi for CEZ's own failings closer to home. If you want to understand why CEZ has failed, you need look no further than the foothills of the Krušné hory.

Two weeks ago, I drew your attention to the case of the missing French boiler in Ledvice. Just to remind you, in late 2007 CEZ’s Skoda Praha Invest signed a deal with the French firm Alstom to supply a very tall "tower boiler" to CEZ’s Ledvice power plant. The refitted plant was due to come into operation in 2012 but problems with the boiler, which was supposed to have been in place already in 2011, have meant that the plant remains idle to this day.

The Ledvice upgrade is costing CEZ some 30 billion crowns, of which around one third is earmarked for Alstom. It is estimated that each year of delay in commissioning Ledvice costs CEZ a billion crowns in lost income.

In October 2012, CEZ revealed that the firm was seeking compensation from Alstom (see here). Given the vast sums of money being lost as a result of the delays, this seems only right. But it is not that simple. There are at least three noteworthy aspects to this particular story.

The first and by far the most compelling fact, at least if you are a boilerman, is that the new boiler house at Ledvice is apparently the tallest building in the Czech Republic. And if that is not compelling for you, then you might like to consider the following, relevant facts.

The contract between CEZ’s Skoda Praha Invest and Alstom Power (Stuttgart) and Alstom Brno was signed in October 2007. This is noteworthy because Radek Bencik, an executive director of Skoda Praha Invest at the time of the signing, left the firm at the end of September 2007 to lead Alstom Brno in March 2008 –in other words, the very division in Alstom that Skoda Praha Invest had been negotiating with on behalf of CEZ.

The terms of Bencik’s employment with Skoda Praha Invest must have been wonderfully flexible to allow for such a remarkable career move.

The other noteworthy fact is that CEZ today maintains that the Alstom boiler will be delivered on time, in 2014, and strictly according to the terms of the contract -as if all was in order.

CEZ's press office behaves as if we have memories the size of carp. In English courts, we swear on the Holy Bible "to tell the truth, the whole truth and nothing but the truth". One can always rely upon CEZ’s spokesman, Ladislav Kriz, to supply "nothing but the truth" –the problem is that that he rarely supplies "the whole truth".

It may very well be the case that there is a contract between Skoda Praha Invest and Alstom which stipulates a delivery date of 2014. But this must mean that the original contract has either been amended or superseded, in either case shifting the deadline by three years.

And this brings us back to the money. Recall what we were told by CEZ in October 2012, that CEZ was seeking compensation from Alstom. We must assume that it was doing so based upon the terms of the original contract signed in 2007. In which case, it might reasonably follow that CEZ, successful in its claims against Alstom, went on to amend or end the old contract.

However, there is another, much less satisfactory explanation which Mr Kriz would be eager to avoid having to make. This is that CEZ actually tore up the 2007 contract because it was toothless. In which case, it would be good to know what exactly was wrong with it.

There is evidence to suggest (though not yet to prove beyond all reasonable doubt) that the management of CEZ tunneled the state-owned firm during Martin Roman’s tenure. The case of Ledvice is further evidence of mismanagement, perhaps even of criminal fraud. The news that the police are investigating Skoda Praha Invest might mean that the police are investigating the 2007 boiler contract.

Of course, there may be a legitimate explanation for the late delivery of Ledvice’s boiler and for Radek Bencik’s astonishingly timed move to Alstom. And yet I wonder whether the 2007 contract signed with Alstom was sufficiently robust in protecting CEZ’s bona fide commercial interests, for example in the matter of penalties for late delivery –and if not, whether any failings in the contract were there by design.

CEZ’s future profitability depends on the efficient execution of its Czech CAPEX plan. Protracted and overpriced extension of the firm’s nuclear capabilities and renewal of its lignite-fired fleet may burden free cash flow, parts of which are now tied up in financing foreign acquisitions of questionable value to investors.

And given the government’s cavalier approach to scrutiny of the management it appoints, the risk to the investor that the management of CEZ may be tempted to seek rents while executing the investment plan remains high. Recent procurement decisions, such as the choice of contractor to supply the boiler in Ledvice, strengthen doubts about management commitment to maximising shareholder value.

In conclusion, I suggest we seek an explanation from Ladislav Kriz in the first instance. Here are four simple questions for him. A ‘Yes’ or ‘No’ answer would suffice.

1. Does the CEZ Group today allow its senior managers to move directly to a top management position with a significant supplier to the group, especially if that supplier has a current contract with the group negotiated by the senior managers in question?

2. Did it allow them to do so in 2008?

3. Did the CEZ Group succeed in extracting financial compensation from Alstom on the basis of the 2007 contract between itself and the French firm?

4. If the answer to Question 3 is ‘No’, has the 2007 contract been superseded by a new contract?