Directory UMM :Data Elmu:jurnal:J-a:Journal Of Business Research:Vol50.Issue1.2000:
ENDESA
Esteban R. Brenes
INCAE
Jon Martı´nez
UNIVERSIDAD ADOLFO IBA´N˜EZ
Esteban S. Skoknic
ENDESA
This is the success story of an electric company that was founded in the
1940s as a public enterprise but that has been run since its founding as
though it were a private company. Throughout the years, it has operated
efficiently and with a high level of technology. The company was privatized
in 1987, and its performance improves still further, making it a success
model for Latin America. As frequently happens with successful, highgrowth companies in the region, ENDESA began to face some limits to
expansion in its domestic market and began generating a surplus beyond
its investment requirements. In fact, the company projected that its cash
flow would exceed projected investments by 500 million dollars. Most
Latin American companies, when confronted with this kind of situation,
would invest within its home country, in nonrelated businesses, creating
a diversified business group. In contrast, ENDESA decided explicitly not
to diversify in nonrelated businesses but rather to pursue its core business
in other countries, beginning with neighboring Argentina. This first project
outside Chile required a large financial investment, an enormous organizational effort, and the need to forge strategic alliances with multinational
enterprises. The case describes this initial experience in detail, emphasizing
the importance of human resources in any internationalization effort. It
is clear from the case that ENDESA’s most valuable assets for success in this
effort were managerial. The dilemma now facing ENDESA management is
whether to continue investing in Argentina. A new opportunity for the
expansion of electric power has arisen, but an investment of $100 million
is required. ENDESA must make this investment decision in an environment of economic decline in Argentina. Other options include seeking
investments in other South American countries, or perhaps investing in
other sectors in Chile. J BUSN RES 2000. 50.57–70. Elsevier Science
Inc. All rights reserved.
Address correspondence to E.R. Brenes, INCAE, P.O. Box 960-4050, Alajuela,
Costa Rica.
This version of the case was written by Esteban R. Brenes, Profesor of
Business Administration, INCAE, based on the case study, “The Internationalization of ENDESA” and “Note on the Electrical Industry in Chile and Latin
American”, prepared by Esteban S. Skoknic, ENDESA executive and graduate
of the Executive MBA Program at Valparaiso Business School, Adolfo Iba´n˜ez
University, and Professor Jon Martı´nez E., from the same university.
Journal of Business Research 50, 57–70 (2000)
2000 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010
Buenos Aires, May 15, 1992
In the SEGBA Hall of the Board of Directors, Jose´ Yuraszeck,
President of the Board, and Jaime Bauza´, General Manager,
were euphoric as the consortium headed by ENDESA was
awarded the contract for 60% of Central Costanera S.A. Located in Buenos Aires, Argentina, Costanera was the largest
thermoelectric plant in South America, with almost 1,260 Mw
of installed capacity. With assets worth more than US $3
billion and annual sales of US$400 million, ENDESA was
Chile’s largest private company and the country’s leader in
generation and transport of electrical energy. This was the
first time ENDESA would be investing in a foreign country
(See Table 1).
Buenos Aires, August 3, 1992
Headlines on the front page of an Argentine newspaper: “Chileans head electric business in Buenos Aires,” in reference to
the contract awarded to the Distrelec consortium in which
ENDESA was participating, with 51% participation by Edesur,
the business responsible for distributing over 50% of Buenos
Aires’ electrical energy.
Santiago, November 18, 1992
The ENDESA board meets to make a decision on whether to
participate in the next bid opening in the Argentine electrical
sector, and in particular the Hidronor hydroelectric installations, to be awarded in February 1993. Just one year after
deciding to go international, ENDESA had already invested
something over US $96 million in Argentina. A new investment in Hidronor could easily double that amount. Board
members asked themselves if it was a good idea to continue
investing in Argentina or whether it would be better to wait
for opportunities in other Latin American countries.
While privatization of the Argentine electric sector, begun
ISSN 0148-2963/00/$–see front matter
PII S0148-2963(98)00108-8
58
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Table 1. ENDESA Financial Statements
December 31,
1987
Consolidated Balance Sheet (US$millions)
Total assets
2,100
Current assets
218
Cash and time deposits
56
Marketable securities
39
Accounts receivable
112
Others
11
Fixed assets
1,775
Property, plant, and
equipment
2,545
Accumulated depreciation
2895
Net fixed assets
1,650
Others under construction
125
Other assets
107
Investments in selected works
and others
46
Deferred charges
56
Others
5
Total Liabilities
2,100
Current liabilities
85
Short- and long-term notes
payable
55
Accounts payable
14
Other
17
Long-term liabilities
743
Long-term obligations
717
Other
26
Minority interest
2
Owners equity
1,209
Capital stock and reserves
1,207
Retained earnings
62
Interm dividends
Operations income
110
Use income
300
Use costs
2174
Sales and administration
expenses
215
Nonoperating income
248
Interest revenue
20
Interest expenses
268
Exchange adjustment
216
Other nonoperating income
15
Income taxes
0
Total Income
62
Minority interest
0
Net income
62
December 31,
1988
December 31,
1989
December 31,
1990
December 31,
1991
June 30,
1992
2,246
265
103
36
116
10
1,880
2,480
300
125
50
96
29
2,010
2,672
233
84
37
79
33
2,113
3,049
246
88
13
103
43
2,653
3,317
248
103
12
101
32
2,884
2,737
21,006
1,731
149
101
2,532
2982
1,550
460
170
2,864
21,181
1,683
430
326
3,872
21,328
2,544
109
150
4,231
21,502
2,729
155
185
57
29
15
2,246
95
2
128
40
2,480
116
164
115
47
2,672
149
38
70
42
3,049
104
84
52
49
3,317
185
65
18
12
688
660
28
17
1,446
1,299
179
232
154
389
2222
73
34
9
856
818
38
50
1,458
1,381
105
228
115
349
2222
99
24
26
825
791
34
0
1,696
1,619
104
225
122
432
2297
109
8
53
1,046
1,006
40
16
1,819
1,722
179
282
204
437
2216
101
7
76
1,118
1,063
54
18
1,996
1,888
158
250
124
217
282
213
24
9
267
58
24
0
178
0
179
212
29
14
260
18
19
0
106
0
106
214
218
15
263
21
9
0
104
0
104
217
220
9
277
41
7
23
181
22
179
211
38
3
239
69
4
22
100
22
158
one year ago, was unfolding as planned, the country’s economy
was behaving erratically. This led to a discussion of the major
concern that ENDESA management had voiced when investments were initiated in Argentina: the macroeconomic situation in this neighboring country and the political consequences should the situation deteriorate.
Company Background
Ever since the first installations were established for public
lighting at the end of the nineteenth century and up until the
beginning of the 1940s, Chile’s electricity had been supplied
exclusively by private companies. A shortage of supply during
the 1930s, due to financial difficulties caused by the world
depression, and the artificially low prices resulting from growing governmental regulation led to active state participation
in the development of the electric sector through the creation
of ENDESA, an affiliate of the Production Promotion Corporation (Corporacio´n de Fomento de la Produccio´n.), or CORFU.
The National Electric Company (Empresa Nacional Ele´ctrica, ENDESA) began operations in 1943 with the mission
of carrying out the national “Electrification Plan” prepared
ENDESA
J Busn Res
2000:50:57–70
59
Table 2. ENDESA Shares on December 31
CORFU
AFPa
Enersis Manso de Velazco
Other companies
Individuals
a
1986
1987
1988
1989
1990
1991
1992
99
—
—
1
—
999
4
—
2
4
48
21
—
3
30
1
22
11
1
53
1
26
12
19
42
—
29
12
23
38
—
29
12
25
34
Retirement funds administrator.
by CORFU. In order to give the company broad managerial
autonomy, it was decided from the outset to establish ENDESA
as a corporation, controlled by CORFU. Its initial activity
involved the design and construction of facilities, principally
hydroelectric plants, as well as the development of transmission systems for these plants.
In compliance with its mission, ENDESA had built and
put into operation 70% of Chile’s electrical generation capacity
during the last 50 years (85% if only public utilities are considered). ENDESA also had developed the transmission networks
that ultimately became the “Central Interconnected System”
and the “Great Northern Interconnected System.” This, along
with the development of distribution in various areas of the
country, had made it possible to broaden coverage of electrical
supply; in 1945, only 25% of the population had electricity,
but this percentage had increased to 80% by 1992. During
this period annual consumption per capita had risen from
125 to 1,060 Kw.
From its creation, ENDESA was distinctive for its development of national engineering capacity and technical excellence. The first aspect was demonstrated by the company’s
emphasis on providing technical training for its professionals
in order to solve problems in which Chile had no experience.
As a consequence, ENDESA could use its own engineering to
conduct the construction of large works and to make efficient
use of installations. As a result, the company earned high
prestige throughout Latin American and received numerous
requests for consulting services in other countries. The philosophy of technical excellence had led to the delivery of top
quality service in comparison with international standards.
The emphasis on efficient management was reflected in the
stability of its administrative personnel. There had been only
eight general managers during 45 years under government
control.
ENDESA continued to be responsible for executing the
Electrification Plan until 1978, when the National Energy
Commission (Comision Nacional de Energı´a or CNE) was
created. This new agency took charge of determining sectoral
policy and planning, thus limiting ENDESA’s role to that of
producer. One of CNE’s major activities was to define strategies for sectoral development consistent with the government’s
overall economic policy, which emphasized the establishment
of conditions for economic efficiency in the energy sector
under the framework of a government-owned subsidiary.
Along with these events, decentralization policies were being applied in the energy sector. This included deconcentration of activities though the creation of several different enterprises working in the generation, transmission and
distribution of energy. In 1980, ENDESA began a process of
gradual organizational transformation in order to adjust to
the new policies. Its most important actions had been the
formation of regional distribution companies, organization
of the Pullinque and Pilmaique´n hydroelectric projects as
affiliates, the creation of the large Colbu´n-Mchicura and Pehuenche generation projects as independent subsidiaries of
CORFU, and transfer to CORFU of electric companies outside
the Central Interconnected System.
Transfer of distribution affiliates and the Pullique and Pilmaique´n power plants to the private sector took place between
1981 and 1986. During the second half of 1987, CORFU
began to privatize ENDESA by selling public shares, with
preference given to company workers and public employees.
Stock ultimately was placed among more than 60,000 shareholders. Table 2 illustrates the evolution of ENDESA shares
on December 31st of each year.
In April 1990, ENDESA’s first Board of Directors without
government representation was selected. The new Board then
proceeded to name Jaime Bauza´, a 47-year-old civil engineer
with extensive experience in the Chilean electric sector as
General Manager of the company. Mr. Bauza´ had been a
director of Chilectra, general manager and board member of
Chilgener, and, at the time he was hired, general manager of
Pehuenche.
The new management’s first concern was to further improve efficiency and create a decentralized organization. To
achieve this, activities were structured into separate companies
(Figure 1), each reporting separately to the Board and related
to one another only by the market.
For tax purposes, ENDESA’s principal activities, the generation and transmission of electric energy, remained as company
divisions. Engineering and project administration were organized in an affiliate company called Ingendesa, which provided
engineering services for the companies in the group and also
sought to apply its abilities in penetrating other national and
international markets. It was expected that by 1992, 35% of
Ingendesa’s income would be generated by work performed
for third parties. The Pangue S.A. company also was formed to
60
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Figure 1. Company configuration and equity structure. Note: Direct and indirect participation as of October 1992.
carry out construction and later exploitation of hydroelectric
facilities of the same name, located on the Bio-Bio River.
Employee health services were awarded to Ispe´n, and Enigesa was in charge of administering ENDESA’s nonproductive
properties. Financial management, personnel policy, and selection of new investment projects were centralized in the
corresponding management areas of finance, industrial relations, and development.
Accompanying these changes in organization structure
were modifications in administrative policy. New executives
who had received their formation in the private sector were
hired for the financial area, and greater emphasis was placed
on the company’s participation in capital markets. In the
personnel area, changes were made in criteria for promotion,
and the salary structure was reviewed in order to gear it to
productivity rather than to seniority. After an analysis of the
organization revealed an excess of personnel in all areas of
the company, there was a reduction of almost 20% of the
workforce. By June 30, 1992, ENDESA and its affiliates had
a total of 2,369 employees.
Since the company’s privatization, it had attained significant capitalization. ENDESA shares were now among those
ENDESA
J Busn Res
2000:50:57–70
Table 3. Closing Stock Prices and Market Value in December of
Each Year
Price/share ($)
Market value
1981
1988
1989
1990
1991
1992
15.2
505
13.9
446
21.0
561
32.0
158
118.5
2532
156.5
3354
most heavily traded in the stock market, representing 15 to
20% of daily market activity. Table 3 shows closing stock prices
and market value at nominal par in December of each year.
The Electric Energy Sector in Chile
Activities in Chile’s electric energy sector were fragmented
among a number of mostly by public utility companies. In
addition, industrial and mining companies auto-produced
electrical energy to supply their own needs. Total installed
capacity in Chile amounted to 5,100 Mw in 1992, and gross
production in Chile during 1991 had equaled 19,808 GWh,
of which approximately 20% came from auto-production. The
1992 estimate for this figure was 21,500 GWh.
In terms of electrical supply, there were three autonomous
zones with interconnected systems: Great Northern, Central,
and Southern. The Great Northern Zone included the Tarapaca´ and Antofagasta area and joined all the cities between
Anca and Antofagasta and the mining centers between Chuquicamata and Escondida. This was a desert region with very
few hydroelectric resources, so for the most part generation
was based on coal-based steam plants, representing 18% of
national production. The major generator in this zone was
CODELCO’s 563 Mw Tocopilla Thermoelectric Plant. In addition to supplying Chiquicamata, the company also sold energy
to Edelnor (96 Mw), the only public utility generator in the
Great Northern Interconnected System. In 1991, total generation in the zone amounted to 3,498 GWh, of which 2,674
came from auto-production and the rest from public utility
generators.
The Central Interconnected Zone supplied a 2,000-km–
long area from Taltal, to the north, and Isla de Chiloe´, to the
south. The zone consumed 81% of the country’s electrical
energy, and production was 60 to 90% hydroelectric, complemented by coal-based thermoelectric generation. Total installed capacity for public service was 3,830 Mw, 78% of
which was hydroelectric. Principal producers included ENDESA (1,928 MW), Chilgener (756 MW), Pehuenche (500
Mw), and Colbu´n-Machicura S.A. (490 Mw). Auto-producers
had their own installed capacity of 6,056 GWh, including
1,323 GWh generated by auto-producers and the rest by
public utilities. Principal distributor companies were Chilectra
Metropolitana, Chilectra Quinta Regio´n, Compan˜ı´a General
de Electricidad Industrial, Saesa, Frontel, EMEL, EMELAT,
and EMEC.
The Southern Zone was comprised of Chiloe´ Continental,
61
Ayse´n, and Magallanes. The few centers of population in this
zone were separated by large distances. Production of electrical
energy represented barely 1% of national production and
consists primarily of hydroelectric generation in Ayse´n and
gas generation in Magallanes. Total generation in the zone
during 1991 was 253 GWh, of which 115 GWh came from
auto-producers and the rest from public utilities. Generation
and distribution were carried out by DELAYSEN, in Ayse´n,
and EDELMAG, in Magallanes.
Overall energy consumption in Chile had increased by 5.1,
4.5, and 4.5%, respectively, during the 1960s, 1970s, and
1980s; during the same periods, these rates were 6.8, 5.7,
and 4.8% in the Central Interconnected System. Expected
growth rates in the Central Zone for energy consumption
derived from public utilities during the 1990s were estimated
at an accumulated average of between 5 and 6%.
The Provision and Regulation
of Electric Energy
Provision of electric energy service involved three processes:
generation, transmission, and distribution. Each of these processes had different characteristics at both micro and macro
levels and in terms of government regulations.
It was accepted that no significant economies of scale existed in electric energy generation, and the focus was on
creating conditions for “regulated competition” through the
elimination of plant construction permits (except for water
use and safety standards), freedom in the prices applied to
large customers (over 2 MW), determination of regulated
prices for marginal short-term costs of production, and the
promotion of coordinated operations between generators and
the spot markets. Finally, free and equal access by transmission
systems was guaranteed.
Important economies of scale were recognized in the transmission of electricity. Required payments by generators for
use of third-party transmission were calculated in relation to
mean annual costs of investment and operation. Nevertheless,
these costs were not established by the authorities but by
common agreement among the parties or through arbitrage.
In the distribution sector, the existence of natural monopolies by geographic area was recognized. Concessions were
granted for certain zones, and companies were obliged to
provide services in those particular areas. Prices for small
consumers (under 2 MW) were set by authorities on the basis
of the cost of purchasing energy and power from generators,
plus a mean distribution cost. Calculation of this distribution
cost was made on the basis of a typical company making
investment decisions and operating efficiently. This cost was
reviewed every four years by independent consultants contracted by the authorities and companies.
Contribution to the total cost of electric energy at each
stage of production depended on the characteristics of each
particular electrical system. In the case of the Central Intercon-
62
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Table 4. Share of Generation (%)
ENDESA
Pehuenche
Chilgener
Calbu´n
Others
1981
1988
1989
1990
1991
1992(e)
60
14
8
24
8
58
19
11
19
8
50
49
44
42
29
15
6
11
14
6
11
9
8
12
21
6
nected System, estimated average costs in U.S. cents per KWh,
calculated by the National Energy Commission in 1989, were
3.2¢3 for generation (51%); 0.7¢ for transmission (11%); and
2.4¢ for distribution (38%).
ENDESA’s Situation in 1992
ENDESA participated in generation and transmission of electric energy in the Central Interconnected System, which accounted for 95% of all energy provided by public utilities in
Chile. For electricity generation, the company had 1,928 Mw
of installed capacity (83% hydroelectric) in 15 plants, including its affiliate Pehuenche (a 500-Mw power plant). Also participating in this market were the private company Chilgener
(756 Mw), the state-run Colbu´n (490 Mw), and several smaller
companies (156 Mw), all of which competed for customers
and for the execution of future projects.
As shown in the Table 4, ENDESA’s participation in the
Central Interconnected System had fluctuated during recent
years, depending on hydrological conditions.
Generating plants that would be entering service in 1997
had already begun or were about to start up construction. A
simulation of future operations indicated that participation
by ENDESA and its affiliates would remain constant at around
60% during the 1990s. ENDESA’s share of customer sales
had been approximately 65% in recent years, which was
greater than its own production because the company bought
energy from local generators. However, it was expected that
in the next few years ENDESA would be adjusting its production to meet projected sales.
ENDESA had over 9,000 km of transmission lines, equal
to 75% of the high-tension network in the Central Interconnected System. Since no important expansion at the national
level was planned for the next few years, it was expected to
maintain its dominant role in this activity for the near future.
Projections for 1992 indicated that 86% of the Transmission
Division’s income would come from tolls charged to ENDESA’s Generation Division and Pehuenche.
As the reorganization process continued, an analysis was
begun of the company’s growth potential in order to formulate
a development strategy. This analysis revealed that ENDESA
could meet its objective of supplying electric energy to the
Central System with investments of between US$1.2 to 1.4
billion during the next 10 years. “This investment program
could be carried out without any problem.” exclaimed the
general manager. “And without affecting our classifications
and commitments with the banks, we could even make another $500 million worth of investments.”
ENDESA’s Board President, Mr. Yuraszeck, also expressed
his opinion, saying, “Given its capacity and abilities, though
it wouldn’t be easy, the company could successfully diversify
into other fields such as telecommunications, forestry, or mining. However, this would make it a ’monster’ that Chile would
probably not be willing to accept. Overly diversified companies don’t fit the new environment.”
Other Board members agreed that, given its primary capacities and abilities, ENDESA should focus on exploring new
businesses within the energy sector, in segments involving
intensive use of electric energy and hydroelectric resources,
and/or related activities in foreign-based projects with a high
content of civil or hydraulic engineering in response to opportunities opening up in other countries of the region. In point
of fact, by this time the Board already had approved investing
up to 10% of the company’s assets in the foreign electric
energy sector.
The Electric Energy Sector in
Other Latin American Countries
In 1950, most electrical companies in Latin America were
privately owned and served the most important centers of
population. During the 1950s and 1960s, nationalization took
place in all the countries, leading to the formation of large
national electric companies. Advances in geographic coverage
and increases in generating capacity had been significant up
until the mid-1980s. Nevertheless, the electric energy sector
had been accumulating a series of problems that, in most of
the countries, resulted in a serious crisis that was interrelated
with the overall economic crisis of that period. These problems
included inadequate resource allocation, inefficient management of public sector electric companies, subsidized prices,
and high levels of debt, all of which had led to serious financial
difficulties resulting in poor maintenance, delays in project
start-ups, and ensuing shortages in supply (Table 5 summarizes some of the most significant numbers for the sector).
Argentina
The National Interconnected System provided 93% of the
electric energy consumed and covered practically the entire
country, except for the zones in southern Patagonia and the
province of Misiones. The system was also connected with
Uruguay by means of the binational Salto Grande power plant
on the Uruguay River. Installed capacity at the end of 1990
was 13,210 Mw, of which 6,370 Mw were thermally generated, 5,820 Mw were hydraulically produced, and 1,020 Mw
were nuclear. Of the energy generated, 38% was hydroelectric.
Consumption of public utility energy had grown at 7.9,
7.8, and 2.8%, respectively, during the 1960s, 1970s, and
ENDESA
63
J Busn Res
2000:50:57–70
Table 5. Latin America Electric Sector
Argentina
Bolivia
Brazil
Colombia
Costa Rica
Chile
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Dominican Rep.
Uruguay
Venezuela
Population
1990
millionsa
GNP 1990
US$/capitaa
GDP
Annual Rate
80%–90%a
Service
Coverage
1969-%b
Installed
Capacity
(MW)c
Production
(GWh)c
Hydrogeneration
(%)d
Generation
Annual Rate
80%–89%d
32.3
7.2
150.4
32.3
2.8
13.2
10.3
5.2
9.2
5.1
86.2
3.9
2.4
4.3
21.7
7.1
3.1
19.7
2,370
630
2,680
1,260
1,900
1,940
980
1,110
900
590
2,490
s.i.
1,830
1,110
1,600
830
2,560
2,560
20.4
20.1
2.7
3.7
3.0
3.2
2.0
0.9
0.8
2.3
1.0
22.2
0.2
2.5
20.3
2.1
0.3
1.0
95
25
70
64
90
91
65
46
31
34
66
38
58
46
38
38
87
85
17,197
683
54,136
8,925
915
5,100
2,322
703
696
290
27,338
395
898
6,528
4,187
1,065
1,795
18,822
64,808
2,293
256,681
38,226
3,408
19,566
7,175
2,099
2,319
1,095
119,600
1,073
2,800
2,893
14,471
3,843
5,191
65,294
30
66
93
77
98
54
86
69
90
80
19
25
78
100
27
18
68
57
2.8
2.3
5.7
6.0
4.8
4.7
6.2
3.5
4.1
1.9
6.7
0.1
4.1
15.3
3.8
5.4
6.2
5.9
a
World Bank.
World Bank–OLADE.
c
South America: CIER (generation 1 import 2 export, 1991), remander: ECLA (generation 1989).
d
ECLA.
b
1980s. Forty percent of consumption was concentrated in
Buenos Aires. Growth rates in consumption for the next few
years were estimated at 5 to 6%. For the most part, this
increase would be covered by integrating the Piedra del Aguila,
Yacireta´ and Pichi Picu´n Leufu hydroelectric plants and the
Arucha II nuclear plant, all under construction. There was a
possibility of additional plants using natural gas. Until 1991,
almost all installed capacity was in the hands of federal or
provincial companies, as was distribution, with the major
companies being Agua y Energı´a (3,940 Mw), SEGBA (2,680
Mw), Hidronor (2,720 Mw), Salto Grande (1,260 Mw), and
the National Energy Commission (1,020 Mw.)
As of 1991, the Argentine government decided to privatize
installations under federal control, except for the two binational plants, Salto Grande and Yacireta´, and the nuclear
plants. Methods for carrying out privatization were determined, and the legal foundation was established for development of the sector. The principal concepts within the regulatory framework were the ban on simultaneous participation
in activities involving transmission and generation or distribution of energy; coordinated operation of generator plants
within the national interconnected system; creation of a spot
market for generators, distributors, and large customers for
transactions at the marginal generation cost from instant to
instant; the possibility of establishing free price contracts between generators and distributors; competition in the area of
generation; and regulated monopoly in the areas of transmission and distribution.
Peru
Generation in Peru was essentially hydroelectric, although
greater participation was anticipated for thermal generation
in the future. Electricity was provided by the state enterprise,
Electroperu´, and 10 companies. The most important of these,
Electrolima, supplied 50% of the country’s consumers. In
the 1980s, the Peruvian electric sector was characterized by
inefficient operations, artificially low prices, and significant accumulation of foreign debt. Combined with the country’s deteriorated economic conditions, this situation had seriously affected
the sector’s capacity for expansion. Annual growth in consumption was estimated at 6.6% during the next few years.
Colombia
In Colombia, generation was fundamentally hydroelectric, a
situation that would remain constant in the near future.
Growth in consumption was forecast at an annual 6.7% for
the decade. Almost all electrical energy was generated, transmitted, and distributed by seven companies: three municipal
companies (Bogota, Medallı´n. and Calı´), three regional state
enterprises (CCVC, CORELCA, and ICEL), and one-fourth
owned by other companies in the sector (ISA). The financial
situation of the electric energy sector was seriously eroded due
to the insufficient self-generation of funds and devaluation.
Venezuela
Supply in this country was essentially hydroelectric complemented by petroleum-based thermal generation, a situation
64
J Busn Res
2000:50:57–70
that was expected to persist into the future. Growth in consumption for the coming years was estimated at 8.1% a year.
The electric sector consisted of four state-run enterprises (CADAFE, EDELCA, ENELVEN, and ENELBAR) and seven private
companies, with Electricidad de Caracas being the most important of these. The sector had developed significantly during
recent years thanks to the use of an important part of the
country’s petroleum resources. It was currently facing difficulties due to an inadequate pricing policy and a weak financial
situation.
Uruguay
Uruguay’s electric energy supply was primarily hydroelectric
in origin and was generated by state-run enterprises and the
binational Salto Grande power plant. Use of thermal generation was expected to rise slightly in the future. Generation,
transmission and distribution were under the responsibility
of the National Administration of Power Plants and Electrical
Transmission (UTE.) The sector had developed satisfactorily
except for heavy debt resulting from the construction of hydroelectric projects. This had created pressure to reduce investment in distribution, with the corresponding consequences.
Brazil
Brazil’s electric energy was almost exclusively hydroelectric.
Although coal- and natural gas–based thermal generation also
was being considered, the Brazilian system would continue
to be primarily hydroelectric. Growth in consumption was
predicted at an annual 5.5% for the 1990s. Brazil’s electric
energy sector was one of the largest in the world. The government-owned ELECTROBRAS served as both a holding
company and development bank for the sector. Its four subsidiaries, Furnas, Chef, Electrosul, and Electronorte, were responsible for generation and high-tension transmission. It also
administered 50% of the Itaipu´ tri-national power project.
State governments owned the distribution companies serving
their populations. A policy of low pricing for inflation-control
purposes had hindered financial stability and economic efficiency in the sector, and the government had consequently
been obliged to provide significant contributions. The financial resources needed for investments were calculated at some
US$9 billion a year; this could not be financed by the sector
and external capital was needed.
E. R. Brenes et al.
Ecuador
Electric energy in Ecuador was hydroelectrically generated,
with thermal generation used for emergency situations. Consumption was expected to rise 6.7% a year. Generation and
transmission was the responsibility of INECEL, a governmentrun company supplying electricity for 18 regional distribution
companies. Given the low prices and high foreign debt, the
electric sector was facing difficulties in financing projects for
expansion and satisfaction of future consumption demands.
El Salvador
Generation in El Salvador was basically hydroelectric and
geothermal, a situation that was expected to remain constant
during the 1990s, with annual growth in consumption predicted at 4.2%. Practically all generation was in the hands of
the Lemper River Executive Commission, a state-run enterprise that sold energy to private regional distributor companies. The electric sector had been seriously affected by the
economic situation in El Salvador. Accumulation of debt and
the shortage of resources had made it difficult to maintain
installations and carry out investment for expansion.
Bolivia
In Bolivia, electric energy supply was primarily hydroelectric,
but thermal generation had been growing and would continue
to grow in the future, given the ample availability of natural
gas in the country. Annual growth in consumption was estimated at 9.3%. The state-owned National Electric Company
(ENDE) was responsible for generation and transmission of
electrical energy, while distribution was assigned to regional
companies. Bolivia had one of the lowest rates of coverage in
the region despite its efforts during the last two decades.
During the 1980s, the electric energy sector had maintained
satisfactory financial indices with little state funding required.
Solutions to the problems of the Latin American electric
energy sector included a range of possibilities, from the injection of private capital—practically nonexistent before
1992—to the integration of capacity for project management
and efficient exploitation. Structural reforms of the sector
were being studied in most countries, and in some cases the
privatization of existing installations was moving forward. It
was anticipated that these reforms would keep pace with the
speed and intensity of structural changes within the economy
of each country.
Mexico
Generation in Mexico was primarily petroleum based and
complemented by hydroelectric power. An increase of production using coal was expected. Annual growth in consumption
was anticipated at 6.7%. The Federal Electric Commission
and its distribution branch, the Central Power and Lighting
Company, supplied all electricity. Due to growing demand
and subsidized prices, this sector had contributed significantly
to the fiscal deficit.
The Argentine Opportunity
In 1991, Argentina decided to privatize all government-owned
activity in the generation, transmission, and distribution of
electric energy, until then carried out by three state-owned
enterprises: SEGBA, Hidronor, and Agua y Energı´a. The process would begin with the sale of the large thermal plants
located in Buenos Aires (Puerto, with 1,009 Mw, and Costan-
ENDESA
era, with 1,260 Mw), and then continue with some of the
smaller thermal plants, the transmission network, and the
hydroelectric plants. At the same time, distribution of electric
energy in Buenos Aires, to be divided between two companies,
would be opened to bidding. Privatization would be carried
out within the framework of Argentina’s economic structural
reform program, in which a regulatory framework was being
created for the sector. The goal of the reform was to provide
a stable and consistent process to achieve the long-term objective of improving productivity in the sector.
The opening of bidding on electric generation companies
in Argentina occurred just as ENDESA was searching for new
business. The opportunity to acquire large plants that were
already operating within an electric system three times bigger
than the one in Chile was not to be underestimated. In addition, there was the possibility of a future physical interconnection between the Chilean and Argentine electrical systems
by means of a 200-Mw–capacity line that would join the
substations near Santiago and Mendoza. According to
ENDESA officials, however, any decision to invest in Argentina
would have to be taken independently of this potential interconnection.
With respect to internationalization, Mr. Yuraszeck stated,
These opportunities only come around once in life. In
a world as interrelated as it is today, the most natural
development for a company interested in growing is to go
international.
Along with the decision whether to participate in the privatization of Argentina’s electric energy sector, ENDESA also
had to determine the best way of getting into the business.
The company needed to decide if it should enter by acquiring
the large thermal plants that would justify the effort required,
by acquiring small thermal plants to gain experience, or by
waiting for bidding to open on the large hydroelectric plants
that were closer to the company’s previous experience and
that apparently had fewer technical problems.
ENDESA executives felt that it was essential participate
in the first round of bidding in order to acquire sufficient
information about the Argentine electric energy sector, its
new regulatory framework, and the relevant labor and tax
legislation. Significantly, the Chilean companies were the only
private businesses in Latin America that operated under rules
of the game that were similar to those being considered for
application by other countries in the region. As Mr. Yuraszeck
mentioned,
Chilean companies in general and ENDESA in particular
had already gone through what Latin American electrical
companies were either experiencing or about to experience.
For the privatization of the large thermal plants, the Argentine
Government had invited bidding on 60% of the company
shares; 30% would be sold later on in the stock market, and
the remaining 10% would be offered to workers. The Puerto
J Busn Res
2000:50:57–70
65
and Costanera plants would be sold, along with a contract
for sale of energy to distributor companies for a period of
eight years, with a price expressed in dollars and indexed in
relation to the price of fuel. According to existing regulations,
the companies would be required to operate in coordination
with the rest of the plants in the National Interconnected
System. These plants made up the market where surplus
would be sold and shortage would be purchased according
to the different supply contracts. This system had been selected
to promote efficient management, assure maximum availability of equipment, employ flexibility in satisfying changes in
energy demand in Argentina, and regulate decisions by third
parties in regard to expanding generation.
With respect to the question of “how,” Yuraszeck said,
I think it’s crazy for Chilean companies to go into Argentina
without local partners; while it may not be easy to find
them, Argentina is a much bigger country than Chile and
to reach the top level of Argentine companies, we’ll have
to pound on a lot of doors.
To participate in the first round of bidding on the thermal
plants, ENDESA promoted the formation of a consortium in
which it would have 50.1% participation through its affiliate
ENDESA Argentina, a company created for this purpose. Another 20% would be owned by the Chilean distributor companies Chilectra Metropolitana and Enersis, 25% owned by the
Argentine group Pe´rez Companc, and 5% by U.S. Public Services of Indiana. The consortium was awarded 60% of the
Costanera plant. It also bid on Puerto, but this was later
awarded to the Chilean companies Chilgener and Chilectras
Quinta Regio´n. Under the structure developed, ENDESA
would assume total responsibility for operating the Costanera
plant.
Elsewhere, ENDESA had 10% participation in the Inversora
Distralec consortium, which was granted 51% of the distributor company, Buenos Aires Edesur, for US$511 million. Besides ENDESA, this consortium consisted of Chilectra Metropolitana and Enersis (39.5%), the Pe´rez Companc group
(40.5%), and Public Services of Indiana (10%). Chilectra Metropolitana would be the operator in this consortium.
The Experience at Costanera
Gunther Prett, a Chilean engineer with 40 years of experience
at ENDESA and Manager of the Transmission Division, assumed the position of General Manager at Costanera. Mr.
Prett commented that during his first months of work he had
never felt the days go by so quickly. The 12-hour workday
at the plant seemed too short a time to solve the problems
that confronted him every day. The machines were in poor
condition, and the plant had never functioned as an integrated
business unit. Even so, progress was made: when ENDESA
took charge the plant was operating at 435 Mw, but a few
66
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Figure 2. Costanera power plant organizational chart (asterisk signifies Chilean).
months later it was over 900 Mw. By September the company
had earned US$2.2 million in profits.
The investment plan to rehabilitate machinery and start
up the plant at Costanera was estimated to require US$200
million, including the manufacture of new equipment and
the necessary working capital. Initially these funds would be
obtained through loans from the Costanera partners themselves, but it was expected that in the near future the company
would have the debt capacity to obtain the additional outside
resources needed.
As the operator of Costanera, ENDESA was responsible for
its technical and administrative management, which meant
getting the maximum utilization of its equipment and turning
it into an efficient company. ENDESA’s commitment required
that it designate the principal executives. Of 14 managerial
positions, 10 were named by ENDESA and 4 by its Argentine
partners (see Figure 2). There were 14 permanent Chileans
and a support group that traveled from Chile for brief periods
at Costanera’s request. Data on personnel occupying top-level
positions at ENDESA’s corporate offices and at the Generation
and Transmission Divisions are presented in Table 6.
According to Rodrigo Manubens, Vice-President of ENDESA, it had not been easy to fill positions at Costanera. Said
Manubens,
This was a problem we had not expected because of the
proximity and attractiveness of Buenos Aires, but the transfer of our people affected their family life. This is not a
problem that is quickly solved, and it is one that is experienced by all Chilean companies that go international. The
most they imagined was one or two years abroad and back
to Chile. We have not had enough time to prepare for the
decision to invest outside of Chile. This is a key issue, given
that what ENDESA is doing is exporting management, midlevel positions, and technology.
It was expected that labor issues would be among the most
conflictive. ENDESA had determined that considerably fewer
people were needed to run the plant than were working there
at the time of the acquisition. Moreover, the prevailing work
habits—some established by written agreement and others
accepted as normal—were incompatible with efficient administration. New management’s first measure was to offer a plan
for voluntary retirement, which required supplementing the
government retirement funds available. Some of the eligible
employees did in fact retire. By the end of the first year there
were 730 people working at the Costanera plant, 320 less
than the original number, but new management felt this was
still too high.
Another key labor issue was a new collective agreement
that incorporated clauses for improving efficiency levels to
meet international standards, including changes in work hours
ENDESA
67
J Busn Res
2000:50:57–70
Table 6. Personnel Statistics High-Level Positions at ENDESA
Age (years)
Under 40
40–50
50–60
Over 60
Average
Time at ENDESA (years)
0–10
10–20
20–30
More than 30
Average
Profession
Engineering
Engineering business
Law
Others
With graduate degree in management
With graduate degree in finance or project evaluation
Experience in other companies
and restrictions on overtime. Though no problems had yet
arisen in Costanera, other companies attempting to impose
similar clauses had experienced acts of sabotage in their production facilities. Mr. Prett observed that while morale among
the engineers was high, because “they now had the resources
to do things that had not previously been possible,” there was
uncertainty as management awaited the results of collective
bargaining.
The business style of Costanera executives was different
than that to which people from ENDESA were accustomed.
For example, calls for bidding on services or acquisitions
did not seem to promote genuine competition among the
participants, nor was there any concern that the rules of the
game in selecting bids be objective. In some cases there was
doubt as to whether the company was really the primary
interest. Consequently, though oversight responsibility for
ENDESA’s affiliates was generally delegated to their boards,
it was felt that the situation at Costanera required special
attention, and it in fact occupied most of the time of its Board
President, Jaime Bauza´.
Future Action
Despite these problems, Mr. Bauza´ felt that the results of these
first efforts toward internationalization had been extraordinarily successful. He did have some concerns for the future,
which he expressed as follows:
The first point that concerns me is the organization of
ENDESA, which I would say is in a crisis of growth. All
of us who work in the different areas are now involved in
a sort of clearing of the decks. This cannot last long without
Corporate
Offices
Generation
Division
Transmission
Division
8
17
15
2
48
2
6
6
6
54
2
4
9
1
52
21
21
12
6
16
2
4
5
9
27
1
3
6
6
27
22
5
9
6
2
3
21
16
2
0
2
1
2
3
15
1
0
0
0
1
1
us losing control. As a result there is an urgent need for
structuring the organization in order to manage this new
stage successfully. One option would be to decentralize
management as much as possible, but establishing a program of control that would let us know exactly what’s going
on and enable us to make corporate decisions quickly. The
second point that concerns me is what I call the $500
million plan. We need to continue having sufficient information for analyzing the investment options to make this
plan a reality. My third concern is that all this will essentially be financed through additional debt, so we need to
have suitable financing sources. . . .
Privatization in Argentina was now being continued with
the Hidronor hydroelectric plants and transmission networks,
and this required that ENDESA review its internationalization
strategy. In contrast to earlier positive expectations regarding
Argentina’s currency convertibility plan put forward by Minister of Economy Domingo Cavallo, there were now signs of
economic deterioration with the accompanying political risk.
It was expected that the balance of trade would show a deficit
of over US$1 billion in 1992, the first negative balance in 10
years. Accumulated inflation was at 41% since the value of
the dollar had been established, and the recently announced
measures to tax exporters and increase customs duties were
seen as forms of covert sectoral devaluation. Elsewhere, industrial production had been stagnant since March, and a drop
in activity was predicted for 1993, in addition to the expectation of a decrease in capital flows. In general, the economic
panorama was bleak, inspired distrust, and was reflected in
a fall of over 50% in the stock market since the end of May.
Finally, the first general strike against the Government of
68
J Busn Res
2000:50:57–70
Figure 3. Argentine indicators: Industrial consumption of electricity (top panel); salarial wages, March 91 5 100 (middle panel), and
market index (bottom panel).
President Menem had begun on November 9th. Figure 3
presents current indicators of the Argentine economy.
Considering this situation, one option that ENDESA had
to explore was to consolidate in Argentina and make further
investments in other nations whose economies were being
E. R. Brenes et al.
restructured. The country that had made the greatest advances
in privatizing the electric energy sector was Peru. It was expected that a bill to regulate the sector, very similar to Chilean
legislation, would be passed soon and that by early 1993
the process of privatizing existing installations would begin.
ENDESA was assessing the possibility of forming joint negotiation units with the major generators dependent on Electroperu´
and Electrolima. It was felt that since risk in Peru was high
at that time, the sales price of electric companies could be
very attractive.
The current situation in other Latin American countries
was as follows: In Colombia, electrical shortages resulting in
cuts of up to 25% in consumption had precipitated a crisis.
A law to restructure the sector and permit participation by
private investors had been presented to Congress. Nevertheless, the sale of assets was not expected to take place in the
near future.
In Venezuela, privatization of electric companies had been
on the table for some time. However, an attempted military
coup had placed the stability of the elected government of
Carlos Andre´s Perez in doubt and had delayed the timetable
for the sale of electric companies. It was anticipated that the
new regulatory framework for the electric sector would be
passed in early 1993, accelerating the process of privatization.
In Uruguay, the government was planning to call a plebiscite in December 1992 to present t
Esteban R. Brenes
INCAE
Jon Martı´nez
UNIVERSIDAD ADOLFO IBA´N˜EZ
Esteban S. Skoknic
ENDESA
This is the success story of an electric company that was founded in the
1940s as a public enterprise but that has been run since its founding as
though it were a private company. Throughout the years, it has operated
efficiently and with a high level of technology. The company was privatized
in 1987, and its performance improves still further, making it a success
model for Latin America. As frequently happens with successful, highgrowth companies in the region, ENDESA began to face some limits to
expansion in its domestic market and began generating a surplus beyond
its investment requirements. In fact, the company projected that its cash
flow would exceed projected investments by 500 million dollars. Most
Latin American companies, when confronted with this kind of situation,
would invest within its home country, in nonrelated businesses, creating
a diversified business group. In contrast, ENDESA decided explicitly not
to diversify in nonrelated businesses but rather to pursue its core business
in other countries, beginning with neighboring Argentina. This first project
outside Chile required a large financial investment, an enormous organizational effort, and the need to forge strategic alliances with multinational
enterprises. The case describes this initial experience in detail, emphasizing
the importance of human resources in any internationalization effort. It
is clear from the case that ENDESA’s most valuable assets for success in this
effort were managerial. The dilemma now facing ENDESA management is
whether to continue investing in Argentina. A new opportunity for the
expansion of electric power has arisen, but an investment of $100 million
is required. ENDESA must make this investment decision in an environment of economic decline in Argentina. Other options include seeking
investments in other South American countries, or perhaps investing in
other sectors in Chile. J BUSN RES 2000. 50.57–70. Elsevier Science
Inc. All rights reserved.
Address correspondence to E.R. Brenes, INCAE, P.O. Box 960-4050, Alajuela,
Costa Rica.
This version of the case was written by Esteban R. Brenes, Profesor of
Business Administration, INCAE, based on the case study, “The Internationalization of ENDESA” and “Note on the Electrical Industry in Chile and Latin
American”, prepared by Esteban S. Skoknic, ENDESA executive and graduate
of the Executive MBA Program at Valparaiso Business School, Adolfo Iba´n˜ez
University, and Professor Jon Martı´nez E., from the same university.
Journal of Business Research 50, 57–70 (2000)
2000 Elsevier Science Inc. All rights reserved.
655 Avenue of the Americas, New York, NY 10010
Buenos Aires, May 15, 1992
In the SEGBA Hall of the Board of Directors, Jose´ Yuraszeck,
President of the Board, and Jaime Bauza´, General Manager,
were euphoric as the consortium headed by ENDESA was
awarded the contract for 60% of Central Costanera S.A. Located in Buenos Aires, Argentina, Costanera was the largest
thermoelectric plant in South America, with almost 1,260 Mw
of installed capacity. With assets worth more than US $3
billion and annual sales of US$400 million, ENDESA was
Chile’s largest private company and the country’s leader in
generation and transport of electrical energy. This was the
first time ENDESA would be investing in a foreign country
(See Table 1).
Buenos Aires, August 3, 1992
Headlines on the front page of an Argentine newspaper: “Chileans head electric business in Buenos Aires,” in reference to
the contract awarded to the Distrelec consortium in which
ENDESA was participating, with 51% participation by Edesur,
the business responsible for distributing over 50% of Buenos
Aires’ electrical energy.
Santiago, November 18, 1992
The ENDESA board meets to make a decision on whether to
participate in the next bid opening in the Argentine electrical
sector, and in particular the Hidronor hydroelectric installations, to be awarded in February 1993. Just one year after
deciding to go international, ENDESA had already invested
something over US $96 million in Argentina. A new investment in Hidronor could easily double that amount. Board
members asked themselves if it was a good idea to continue
investing in Argentina or whether it would be better to wait
for opportunities in other Latin American countries.
While privatization of the Argentine electric sector, begun
ISSN 0148-2963/00/$–see front matter
PII S0148-2963(98)00108-8
58
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Table 1. ENDESA Financial Statements
December 31,
1987
Consolidated Balance Sheet (US$millions)
Total assets
2,100
Current assets
218
Cash and time deposits
56
Marketable securities
39
Accounts receivable
112
Others
11
Fixed assets
1,775
Property, plant, and
equipment
2,545
Accumulated depreciation
2895
Net fixed assets
1,650
Others under construction
125
Other assets
107
Investments in selected works
and others
46
Deferred charges
56
Others
5
Total Liabilities
2,100
Current liabilities
85
Short- and long-term notes
payable
55
Accounts payable
14
Other
17
Long-term liabilities
743
Long-term obligations
717
Other
26
Minority interest
2
Owners equity
1,209
Capital stock and reserves
1,207
Retained earnings
62
Interm dividends
Operations income
110
Use income
300
Use costs
2174
Sales and administration
expenses
215
Nonoperating income
248
Interest revenue
20
Interest expenses
268
Exchange adjustment
216
Other nonoperating income
15
Income taxes
0
Total Income
62
Minority interest
0
Net income
62
December 31,
1988
December 31,
1989
December 31,
1990
December 31,
1991
June 30,
1992
2,246
265
103
36
116
10
1,880
2,480
300
125
50
96
29
2,010
2,672
233
84
37
79
33
2,113
3,049
246
88
13
103
43
2,653
3,317
248
103
12
101
32
2,884
2,737
21,006
1,731
149
101
2,532
2982
1,550
460
170
2,864
21,181
1,683
430
326
3,872
21,328
2,544
109
150
4,231
21,502
2,729
155
185
57
29
15
2,246
95
2
128
40
2,480
116
164
115
47
2,672
149
38
70
42
3,049
104
84
52
49
3,317
185
65
18
12
688
660
28
17
1,446
1,299
179
232
154
389
2222
73
34
9
856
818
38
50
1,458
1,381
105
228
115
349
2222
99
24
26
825
791
34
0
1,696
1,619
104
225
122
432
2297
109
8
53
1,046
1,006
40
16
1,819
1,722
179
282
204
437
2216
101
7
76
1,118
1,063
54
18
1,996
1,888
158
250
124
217
282
213
24
9
267
58
24
0
178
0
179
212
29
14
260
18
19
0
106
0
106
214
218
15
263
21
9
0
104
0
104
217
220
9
277
41
7
23
181
22
179
211
38
3
239
69
4
22
100
22
158
one year ago, was unfolding as planned, the country’s economy
was behaving erratically. This led to a discussion of the major
concern that ENDESA management had voiced when investments were initiated in Argentina: the macroeconomic situation in this neighboring country and the political consequences should the situation deteriorate.
Company Background
Ever since the first installations were established for public
lighting at the end of the nineteenth century and up until the
beginning of the 1940s, Chile’s electricity had been supplied
exclusively by private companies. A shortage of supply during
the 1930s, due to financial difficulties caused by the world
depression, and the artificially low prices resulting from growing governmental regulation led to active state participation
in the development of the electric sector through the creation
of ENDESA, an affiliate of the Production Promotion Corporation (Corporacio´n de Fomento de la Produccio´n.), or CORFU.
The National Electric Company (Empresa Nacional Ele´ctrica, ENDESA) began operations in 1943 with the mission
of carrying out the national “Electrification Plan” prepared
ENDESA
J Busn Res
2000:50:57–70
59
Table 2. ENDESA Shares on December 31
CORFU
AFPa
Enersis Manso de Velazco
Other companies
Individuals
a
1986
1987
1988
1989
1990
1991
1992
99
—
—
1
—
999
4
—
2
4
48
21
—
3
30
1
22
11
1
53
1
26
12
19
42
—
29
12
23
38
—
29
12
25
34
Retirement funds administrator.
by CORFU. In order to give the company broad managerial
autonomy, it was decided from the outset to establish ENDESA
as a corporation, controlled by CORFU. Its initial activity
involved the design and construction of facilities, principally
hydroelectric plants, as well as the development of transmission systems for these plants.
In compliance with its mission, ENDESA had built and
put into operation 70% of Chile’s electrical generation capacity
during the last 50 years (85% if only public utilities are considered). ENDESA also had developed the transmission networks
that ultimately became the “Central Interconnected System”
and the “Great Northern Interconnected System.” This, along
with the development of distribution in various areas of the
country, had made it possible to broaden coverage of electrical
supply; in 1945, only 25% of the population had electricity,
but this percentage had increased to 80% by 1992. During
this period annual consumption per capita had risen from
125 to 1,060 Kw.
From its creation, ENDESA was distinctive for its development of national engineering capacity and technical excellence. The first aspect was demonstrated by the company’s
emphasis on providing technical training for its professionals
in order to solve problems in which Chile had no experience.
As a consequence, ENDESA could use its own engineering to
conduct the construction of large works and to make efficient
use of installations. As a result, the company earned high
prestige throughout Latin American and received numerous
requests for consulting services in other countries. The philosophy of technical excellence had led to the delivery of top
quality service in comparison with international standards.
The emphasis on efficient management was reflected in the
stability of its administrative personnel. There had been only
eight general managers during 45 years under government
control.
ENDESA continued to be responsible for executing the
Electrification Plan until 1978, when the National Energy
Commission (Comision Nacional de Energı´a or CNE) was
created. This new agency took charge of determining sectoral
policy and planning, thus limiting ENDESA’s role to that of
producer. One of CNE’s major activities was to define strategies for sectoral development consistent with the government’s
overall economic policy, which emphasized the establishment
of conditions for economic efficiency in the energy sector
under the framework of a government-owned subsidiary.
Along with these events, decentralization policies were being applied in the energy sector. This included deconcentration of activities though the creation of several different enterprises working in the generation, transmission and
distribution of energy. In 1980, ENDESA began a process of
gradual organizational transformation in order to adjust to
the new policies. Its most important actions had been the
formation of regional distribution companies, organization
of the Pullinque and Pilmaique´n hydroelectric projects as
affiliates, the creation of the large Colbu´n-Mchicura and Pehuenche generation projects as independent subsidiaries of
CORFU, and transfer to CORFU of electric companies outside
the Central Interconnected System.
Transfer of distribution affiliates and the Pullique and Pilmaique´n power plants to the private sector took place between
1981 and 1986. During the second half of 1987, CORFU
began to privatize ENDESA by selling public shares, with
preference given to company workers and public employees.
Stock ultimately was placed among more than 60,000 shareholders. Table 2 illustrates the evolution of ENDESA shares
on December 31st of each year.
In April 1990, ENDESA’s first Board of Directors without
government representation was selected. The new Board then
proceeded to name Jaime Bauza´, a 47-year-old civil engineer
with extensive experience in the Chilean electric sector as
General Manager of the company. Mr. Bauza´ had been a
director of Chilectra, general manager and board member of
Chilgener, and, at the time he was hired, general manager of
Pehuenche.
The new management’s first concern was to further improve efficiency and create a decentralized organization. To
achieve this, activities were structured into separate companies
(Figure 1), each reporting separately to the Board and related
to one another only by the market.
For tax purposes, ENDESA’s principal activities, the generation and transmission of electric energy, remained as company
divisions. Engineering and project administration were organized in an affiliate company called Ingendesa, which provided
engineering services for the companies in the group and also
sought to apply its abilities in penetrating other national and
international markets. It was expected that by 1992, 35% of
Ingendesa’s income would be generated by work performed
for third parties. The Pangue S.A. company also was formed to
60
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Figure 1. Company configuration and equity structure. Note: Direct and indirect participation as of October 1992.
carry out construction and later exploitation of hydroelectric
facilities of the same name, located on the Bio-Bio River.
Employee health services were awarded to Ispe´n, and Enigesa was in charge of administering ENDESA’s nonproductive
properties. Financial management, personnel policy, and selection of new investment projects were centralized in the
corresponding management areas of finance, industrial relations, and development.
Accompanying these changes in organization structure
were modifications in administrative policy. New executives
who had received their formation in the private sector were
hired for the financial area, and greater emphasis was placed
on the company’s participation in capital markets. In the
personnel area, changes were made in criteria for promotion,
and the salary structure was reviewed in order to gear it to
productivity rather than to seniority. After an analysis of the
organization revealed an excess of personnel in all areas of
the company, there was a reduction of almost 20% of the
workforce. By June 30, 1992, ENDESA and its affiliates had
a total of 2,369 employees.
Since the company’s privatization, it had attained significant capitalization. ENDESA shares were now among those
ENDESA
J Busn Res
2000:50:57–70
Table 3. Closing Stock Prices and Market Value in December of
Each Year
Price/share ($)
Market value
1981
1988
1989
1990
1991
1992
15.2
505
13.9
446
21.0
561
32.0
158
118.5
2532
156.5
3354
most heavily traded in the stock market, representing 15 to
20% of daily market activity. Table 3 shows closing stock prices
and market value at nominal par in December of each year.
The Electric Energy Sector in Chile
Activities in Chile’s electric energy sector were fragmented
among a number of mostly by public utility companies. In
addition, industrial and mining companies auto-produced
electrical energy to supply their own needs. Total installed
capacity in Chile amounted to 5,100 Mw in 1992, and gross
production in Chile during 1991 had equaled 19,808 GWh,
of which approximately 20% came from auto-production. The
1992 estimate for this figure was 21,500 GWh.
In terms of electrical supply, there were three autonomous
zones with interconnected systems: Great Northern, Central,
and Southern. The Great Northern Zone included the Tarapaca´ and Antofagasta area and joined all the cities between
Anca and Antofagasta and the mining centers between Chuquicamata and Escondida. This was a desert region with very
few hydroelectric resources, so for the most part generation
was based on coal-based steam plants, representing 18% of
national production. The major generator in this zone was
CODELCO’s 563 Mw Tocopilla Thermoelectric Plant. In addition to supplying Chiquicamata, the company also sold energy
to Edelnor (96 Mw), the only public utility generator in the
Great Northern Interconnected System. In 1991, total generation in the zone amounted to 3,498 GWh, of which 2,674
came from auto-production and the rest from public utility
generators.
The Central Interconnected Zone supplied a 2,000-km–
long area from Taltal, to the north, and Isla de Chiloe´, to the
south. The zone consumed 81% of the country’s electrical
energy, and production was 60 to 90% hydroelectric, complemented by coal-based thermoelectric generation. Total installed capacity for public service was 3,830 Mw, 78% of
which was hydroelectric. Principal producers included ENDESA (1,928 MW), Chilgener (756 MW), Pehuenche (500
Mw), and Colbu´n-Machicura S.A. (490 Mw). Auto-producers
had their own installed capacity of 6,056 GWh, including
1,323 GWh generated by auto-producers and the rest by
public utilities. Principal distributor companies were Chilectra
Metropolitana, Chilectra Quinta Regio´n, Compan˜ı´a General
de Electricidad Industrial, Saesa, Frontel, EMEL, EMELAT,
and EMEC.
The Southern Zone was comprised of Chiloe´ Continental,
61
Ayse´n, and Magallanes. The few centers of population in this
zone were separated by large distances. Production of electrical
energy represented barely 1% of national production and
consists primarily of hydroelectric generation in Ayse´n and
gas generation in Magallanes. Total generation in the zone
during 1991 was 253 GWh, of which 115 GWh came from
auto-producers and the rest from public utilities. Generation
and distribution were carried out by DELAYSEN, in Ayse´n,
and EDELMAG, in Magallanes.
Overall energy consumption in Chile had increased by 5.1,
4.5, and 4.5%, respectively, during the 1960s, 1970s, and
1980s; during the same periods, these rates were 6.8, 5.7,
and 4.8% in the Central Interconnected System. Expected
growth rates in the Central Zone for energy consumption
derived from public utilities during the 1990s were estimated
at an accumulated average of between 5 and 6%.
The Provision and Regulation
of Electric Energy
Provision of electric energy service involved three processes:
generation, transmission, and distribution. Each of these processes had different characteristics at both micro and macro
levels and in terms of government regulations.
It was accepted that no significant economies of scale existed in electric energy generation, and the focus was on
creating conditions for “regulated competition” through the
elimination of plant construction permits (except for water
use and safety standards), freedom in the prices applied to
large customers (over 2 MW), determination of regulated
prices for marginal short-term costs of production, and the
promotion of coordinated operations between generators and
the spot markets. Finally, free and equal access by transmission
systems was guaranteed.
Important economies of scale were recognized in the transmission of electricity. Required payments by generators for
use of third-party transmission were calculated in relation to
mean annual costs of investment and operation. Nevertheless,
these costs were not established by the authorities but by
common agreement among the parties or through arbitrage.
In the distribution sector, the existence of natural monopolies by geographic area was recognized. Concessions were
granted for certain zones, and companies were obliged to
provide services in those particular areas. Prices for small
consumers (under 2 MW) were set by authorities on the basis
of the cost of purchasing energy and power from generators,
plus a mean distribution cost. Calculation of this distribution
cost was made on the basis of a typical company making
investment decisions and operating efficiently. This cost was
reviewed every four years by independent consultants contracted by the authorities and companies.
Contribution to the total cost of electric energy at each
stage of production depended on the characteristics of each
particular electrical system. In the case of the Central Intercon-
62
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Table 4. Share of Generation (%)
ENDESA
Pehuenche
Chilgener
Calbu´n
Others
1981
1988
1989
1990
1991
1992(e)
60
14
8
24
8
58
19
11
19
8
50
49
44
42
29
15
6
11
14
6
11
9
8
12
21
6
nected System, estimated average costs in U.S. cents per KWh,
calculated by the National Energy Commission in 1989, were
3.2¢3 for generation (51%); 0.7¢ for transmission (11%); and
2.4¢ for distribution (38%).
ENDESA’s Situation in 1992
ENDESA participated in generation and transmission of electric energy in the Central Interconnected System, which accounted for 95% of all energy provided by public utilities in
Chile. For electricity generation, the company had 1,928 Mw
of installed capacity (83% hydroelectric) in 15 plants, including its affiliate Pehuenche (a 500-Mw power plant). Also participating in this market were the private company Chilgener
(756 Mw), the state-run Colbu´n (490 Mw), and several smaller
companies (156 Mw), all of which competed for customers
and for the execution of future projects.
As shown in the Table 4, ENDESA’s participation in the
Central Interconnected System had fluctuated during recent
years, depending on hydrological conditions.
Generating plants that would be entering service in 1997
had already begun or were about to start up construction. A
simulation of future operations indicated that participation
by ENDESA and its affiliates would remain constant at around
60% during the 1990s. ENDESA’s share of customer sales
had been approximately 65% in recent years, which was
greater than its own production because the company bought
energy from local generators. However, it was expected that
in the next few years ENDESA would be adjusting its production to meet projected sales.
ENDESA had over 9,000 km of transmission lines, equal
to 75% of the high-tension network in the Central Interconnected System. Since no important expansion at the national
level was planned for the next few years, it was expected to
maintain its dominant role in this activity for the near future.
Projections for 1992 indicated that 86% of the Transmission
Division’s income would come from tolls charged to ENDESA’s Generation Division and Pehuenche.
As the reorganization process continued, an analysis was
begun of the company’s growth potential in order to formulate
a development strategy. This analysis revealed that ENDESA
could meet its objective of supplying electric energy to the
Central System with investments of between US$1.2 to 1.4
billion during the next 10 years. “This investment program
could be carried out without any problem.” exclaimed the
general manager. “And without affecting our classifications
and commitments with the banks, we could even make another $500 million worth of investments.”
ENDESA’s Board President, Mr. Yuraszeck, also expressed
his opinion, saying, “Given its capacity and abilities, though
it wouldn’t be easy, the company could successfully diversify
into other fields such as telecommunications, forestry, or mining. However, this would make it a ’monster’ that Chile would
probably not be willing to accept. Overly diversified companies don’t fit the new environment.”
Other Board members agreed that, given its primary capacities and abilities, ENDESA should focus on exploring new
businesses within the energy sector, in segments involving
intensive use of electric energy and hydroelectric resources,
and/or related activities in foreign-based projects with a high
content of civil or hydraulic engineering in response to opportunities opening up in other countries of the region. In point
of fact, by this time the Board already had approved investing
up to 10% of the company’s assets in the foreign electric
energy sector.
The Electric Energy Sector in
Other Latin American Countries
In 1950, most electrical companies in Latin America were
privately owned and served the most important centers of
population. During the 1950s and 1960s, nationalization took
place in all the countries, leading to the formation of large
national electric companies. Advances in geographic coverage
and increases in generating capacity had been significant up
until the mid-1980s. Nevertheless, the electric energy sector
had been accumulating a series of problems that, in most of
the countries, resulted in a serious crisis that was interrelated
with the overall economic crisis of that period. These problems
included inadequate resource allocation, inefficient management of public sector electric companies, subsidized prices,
and high levels of debt, all of which had led to serious financial
difficulties resulting in poor maintenance, delays in project
start-ups, and ensuing shortages in supply (Table 5 summarizes some of the most significant numbers for the sector).
Argentina
The National Interconnected System provided 93% of the
electric energy consumed and covered practically the entire
country, except for the zones in southern Patagonia and the
province of Misiones. The system was also connected with
Uruguay by means of the binational Salto Grande power plant
on the Uruguay River. Installed capacity at the end of 1990
was 13,210 Mw, of which 6,370 Mw were thermally generated, 5,820 Mw were hydraulically produced, and 1,020 Mw
were nuclear. Of the energy generated, 38% was hydroelectric.
Consumption of public utility energy had grown at 7.9,
7.8, and 2.8%, respectively, during the 1960s, 1970s, and
ENDESA
63
J Busn Res
2000:50:57–70
Table 5. Latin America Electric Sector
Argentina
Bolivia
Brazil
Colombia
Costa Rica
Chile
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Dominican Rep.
Uruguay
Venezuela
Population
1990
millionsa
GNP 1990
US$/capitaa
GDP
Annual Rate
80%–90%a
Service
Coverage
1969-%b
Installed
Capacity
(MW)c
Production
(GWh)c
Hydrogeneration
(%)d
Generation
Annual Rate
80%–89%d
32.3
7.2
150.4
32.3
2.8
13.2
10.3
5.2
9.2
5.1
86.2
3.9
2.4
4.3
21.7
7.1
3.1
19.7
2,370
630
2,680
1,260
1,900
1,940
980
1,110
900
590
2,490
s.i.
1,830
1,110
1,600
830
2,560
2,560
20.4
20.1
2.7
3.7
3.0
3.2
2.0
0.9
0.8
2.3
1.0
22.2
0.2
2.5
20.3
2.1
0.3
1.0
95
25
70
64
90
91
65
46
31
34
66
38
58
46
38
38
87
85
17,197
683
54,136
8,925
915
5,100
2,322
703
696
290
27,338
395
898
6,528
4,187
1,065
1,795
18,822
64,808
2,293
256,681
38,226
3,408
19,566
7,175
2,099
2,319
1,095
119,600
1,073
2,800
2,893
14,471
3,843
5,191
65,294
30
66
93
77
98
54
86
69
90
80
19
25
78
100
27
18
68
57
2.8
2.3
5.7
6.0
4.8
4.7
6.2
3.5
4.1
1.9
6.7
0.1
4.1
15.3
3.8
5.4
6.2
5.9
a
World Bank.
World Bank–OLADE.
c
South America: CIER (generation 1 import 2 export, 1991), remander: ECLA (generation 1989).
d
ECLA.
b
1980s. Forty percent of consumption was concentrated in
Buenos Aires. Growth rates in consumption for the next few
years were estimated at 5 to 6%. For the most part, this
increase would be covered by integrating the Piedra del Aguila,
Yacireta´ and Pichi Picu´n Leufu hydroelectric plants and the
Arucha II nuclear plant, all under construction. There was a
possibility of additional plants using natural gas. Until 1991,
almost all installed capacity was in the hands of federal or
provincial companies, as was distribution, with the major
companies being Agua y Energı´a (3,940 Mw), SEGBA (2,680
Mw), Hidronor (2,720 Mw), Salto Grande (1,260 Mw), and
the National Energy Commission (1,020 Mw.)
As of 1991, the Argentine government decided to privatize
installations under federal control, except for the two binational plants, Salto Grande and Yacireta´, and the nuclear
plants. Methods for carrying out privatization were determined, and the legal foundation was established for development of the sector. The principal concepts within the regulatory framework were the ban on simultaneous participation
in activities involving transmission and generation or distribution of energy; coordinated operation of generator plants
within the national interconnected system; creation of a spot
market for generators, distributors, and large customers for
transactions at the marginal generation cost from instant to
instant; the possibility of establishing free price contracts between generators and distributors; competition in the area of
generation; and regulated monopoly in the areas of transmission and distribution.
Peru
Generation in Peru was essentially hydroelectric, although
greater participation was anticipated for thermal generation
in the future. Electricity was provided by the state enterprise,
Electroperu´, and 10 companies. The most important of these,
Electrolima, supplied 50% of the country’s consumers. In
the 1980s, the Peruvian electric sector was characterized by
inefficient operations, artificially low prices, and significant accumulation of foreign debt. Combined with the country’s deteriorated economic conditions, this situation had seriously affected
the sector’s capacity for expansion. Annual growth in consumption was estimated at 6.6% during the next few years.
Colombia
In Colombia, generation was fundamentally hydroelectric, a
situation that would remain constant in the near future.
Growth in consumption was forecast at an annual 6.7% for
the decade. Almost all electrical energy was generated, transmitted, and distributed by seven companies: three municipal
companies (Bogota, Medallı´n. and Calı´), three regional state
enterprises (CCVC, CORELCA, and ICEL), and one-fourth
owned by other companies in the sector (ISA). The financial
situation of the electric energy sector was seriously eroded due
to the insufficient self-generation of funds and devaluation.
Venezuela
Supply in this country was essentially hydroelectric complemented by petroleum-based thermal generation, a situation
64
J Busn Res
2000:50:57–70
that was expected to persist into the future. Growth in consumption for the coming years was estimated at 8.1% a year.
The electric sector consisted of four state-run enterprises (CADAFE, EDELCA, ENELVEN, and ENELBAR) and seven private
companies, with Electricidad de Caracas being the most important of these. The sector had developed significantly during
recent years thanks to the use of an important part of the
country’s petroleum resources. It was currently facing difficulties due to an inadequate pricing policy and a weak financial
situation.
Uruguay
Uruguay’s electric energy supply was primarily hydroelectric
in origin and was generated by state-run enterprises and the
binational Salto Grande power plant. Use of thermal generation was expected to rise slightly in the future. Generation,
transmission and distribution were under the responsibility
of the National Administration of Power Plants and Electrical
Transmission (UTE.) The sector had developed satisfactorily
except for heavy debt resulting from the construction of hydroelectric projects. This had created pressure to reduce investment in distribution, with the corresponding consequences.
Brazil
Brazil’s electric energy was almost exclusively hydroelectric.
Although coal- and natural gas–based thermal generation also
was being considered, the Brazilian system would continue
to be primarily hydroelectric. Growth in consumption was
predicted at an annual 5.5% for the 1990s. Brazil’s electric
energy sector was one of the largest in the world. The government-owned ELECTROBRAS served as both a holding
company and development bank for the sector. Its four subsidiaries, Furnas, Chef, Electrosul, and Electronorte, were responsible for generation and high-tension transmission. It also
administered 50% of the Itaipu´ tri-national power project.
State governments owned the distribution companies serving
their populations. A policy of low pricing for inflation-control
purposes had hindered financial stability and economic efficiency in the sector, and the government had consequently
been obliged to provide significant contributions. The financial resources needed for investments were calculated at some
US$9 billion a year; this could not be financed by the sector
and external capital was needed.
E. R. Brenes et al.
Ecuador
Electric energy in Ecuador was hydroelectrically generated,
with thermal generation used for emergency situations. Consumption was expected to rise 6.7% a year. Generation and
transmission was the responsibility of INECEL, a governmentrun company supplying electricity for 18 regional distribution
companies. Given the low prices and high foreign debt, the
electric sector was facing difficulties in financing projects for
expansion and satisfaction of future consumption demands.
El Salvador
Generation in El Salvador was basically hydroelectric and
geothermal, a situation that was expected to remain constant
during the 1990s, with annual growth in consumption predicted at 4.2%. Practically all generation was in the hands of
the Lemper River Executive Commission, a state-run enterprise that sold energy to private regional distributor companies. The electric sector had been seriously affected by the
economic situation in El Salvador. Accumulation of debt and
the shortage of resources had made it difficult to maintain
installations and carry out investment for expansion.
Bolivia
In Bolivia, electric energy supply was primarily hydroelectric,
but thermal generation had been growing and would continue
to grow in the future, given the ample availability of natural
gas in the country. Annual growth in consumption was estimated at 9.3%. The state-owned National Electric Company
(ENDE) was responsible for generation and transmission of
electrical energy, while distribution was assigned to regional
companies. Bolivia had one of the lowest rates of coverage in
the region despite its efforts during the last two decades.
During the 1980s, the electric energy sector had maintained
satisfactory financial indices with little state funding required.
Solutions to the problems of the Latin American electric
energy sector included a range of possibilities, from the injection of private capital—practically nonexistent before
1992—to the integration of capacity for project management
and efficient exploitation. Structural reforms of the sector
were being studied in most countries, and in some cases the
privatization of existing installations was moving forward. It
was anticipated that these reforms would keep pace with the
speed and intensity of structural changes within the economy
of each country.
Mexico
Generation in Mexico was primarily petroleum based and
complemented by hydroelectric power. An increase of production using coal was expected. Annual growth in consumption
was anticipated at 6.7%. The Federal Electric Commission
and its distribution branch, the Central Power and Lighting
Company, supplied all electricity. Due to growing demand
and subsidized prices, this sector had contributed significantly
to the fiscal deficit.
The Argentine Opportunity
In 1991, Argentina decided to privatize all government-owned
activity in the generation, transmission, and distribution of
electric energy, until then carried out by three state-owned
enterprises: SEGBA, Hidronor, and Agua y Energı´a. The process would begin with the sale of the large thermal plants
located in Buenos Aires (Puerto, with 1,009 Mw, and Costan-
ENDESA
era, with 1,260 Mw), and then continue with some of the
smaller thermal plants, the transmission network, and the
hydroelectric plants. At the same time, distribution of electric
energy in Buenos Aires, to be divided between two companies,
would be opened to bidding. Privatization would be carried
out within the framework of Argentina’s economic structural
reform program, in which a regulatory framework was being
created for the sector. The goal of the reform was to provide
a stable and consistent process to achieve the long-term objective of improving productivity in the sector.
The opening of bidding on electric generation companies
in Argentina occurred just as ENDESA was searching for new
business. The opportunity to acquire large plants that were
already operating within an electric system three times bigger
than the one in Chile was not to be underestimated. In addition, there was the possibility of a future physical interconnection between the Chilean and Argentine electrical systems
by means of a 200-Mw–capacity line that would join the
substations near Santiago and Mendoza. According to
ENDESA officials, however, any decision to invest in Argentina
would have to be taken independently of this potential interconnection.
With respect to internationalization, Mr. Yuraszeck stated,
These opportunities only come around once in life. In
a world as interrelated as it is today, the most natural
development for a company interested in growing is to go
international.
Along with the decision whether to participate in the privatization of Argentina’s electric energy sector, ENDESA also
had to determine the best way of getting into the business.
The company needed to decide if it should enter by acquiring
the large thermal plants that would justify the effort required,
by acquiring small thermal plants to gain experience, or by
waiting for bidding to open on the large hydroelectric plants
that were closer to the company’s previous experience and
that apparently had fewer technical problems.
ENDESA executives felt that it was essential participate
in the first round of bidding in order to acquire sufficient
information about the Argentine electric energy sector, its
new regulatory framework, and the relevant labor and tax
legislation. Significantly, the Chilean companies were the only
private businesses in Latin America that operated under rules
of the game that were similar to those being considered for
application by other countries in the region. As Mr. Yuraszeck
mentioned,
Chilean companies in general and ENDESA in particular
had already gone through what Latin American electrical
companies were either experiencing or about to experience.
For the privatization of the large thermal plants, the Argentine
Government had invited bidding on 60% of the company
shares; 30% would be sold later on in the stock market, and
the remaining 10% would be offered to workers. The Puerto
J Busn Res
2000:50:57–70
65
and Costanera plants would be sold, along with a contract
for sale of energy to distributor companies for a period of
eight years, with a price expressed in dollars and indexed in
relation to the price of fuel. According to existing regulations,
the companies would be required to operate in coordination
with the rest of the plants in the National Interconnected
System. These plants made up the market where surplus
would be sold and shortage would be purchased according
to the different supply contracts. This system had been selected
to promote efficient management, assure maximum availability of equipment, employ flexibility in satisfying changes in
energy demand in Argentina, and regulate decisions by third
parties in regard to expanding generation.
With respect to the question of “how,” Yuraszeck said,
I think it’s crazy for Chilean companies to go into Argentina
without local partners; while it may not be easy to find
them, Argentina is a much bigger country than Chile and
to reach the top level of Argentine companies, we’ll have
to pound on a lot of doors.
To participate in the first round of bidding on the thermal
plants, ENDESA promoted the formation of a consortium in
which it would have 50.1% participation through its affiliate
ENDESA Argentina, a company created for this purpose. Another 20% would be owned by the Chilean distributor companies Chilectra Metropolitana and Enersis, 25% owned by the
Argentine group Pe´rez Companc, and 5% by U.S. Public Services of Indiana. The consortium was awarded 60% of the
Costanera plant. It also bid on Puerto, but this was later
awarded to the Chilean companies Chilgener and Chilectras
Quinta Regio´n. Under the structure developed, ENDESA
would assume total responsibility for operating the Costanera
plant.
Elsewhere, ENDESA had 10% participation in the Inversora
Distralec consortium, which was granted 51% of the distributor company, Buenos Aires Edesur, for US$511 million. Besides ENDESA, this consortium consisted of Chilectra Metropolitana and Enersis (39.5%), the Pe´rez Companc group
(40.5%), and Public Services of Indiana (10%). Chilectra Metropolitana would be the operator in this consortium.
The Experience at Costanera
Gunther Prett, a Chilean engineer with 40 years of experience
at ENDESA and Manager of the Transmission Division, assumed the position of General Manager at Costanera. Mr.
Prett commented that during his first months of work he had
never felt the days go by so quickly. The 12-hour workday
at the plant seemed too short a time to solve the problems
that confronted him every day. The machines were in poor
condition, and the plant had never functioned as an integrated
business unit. Even so, progress was made: when ENDESA
took charge the plant was operating at 435 Mw, but a few
66
J Busn Res
2000:50:57–70
E. R. Brenes et al.
Figure 2. Costanera power plant organizational chart (asterisk signifies Chilean).
months later it was over 900 Mw. By September the company
had earned US$2.2 million in profits.
The investment plan to rehabilitate machinery and start
up the plant at Costanera was estimated to require US$200
million, including the manufacture of new equipment and
the necessary working capital. Initially these funds would be
obtained through loans from the Costanera partners themselves, but it was expected that in the near future the company
would have the debt capacity to obtain the additional outside
resources needed.
As the operator of Costanera, ENDESA was responsible for
its technical and administrative management, which meant
getting the maximum utilization of its equipment and turning
it into an efficient company. ENDESA’s commitment required
that it designate the principal executives. Of 14 managerial
positions, 10 were named by ENDESA and 4 by its Argentine
partners (see Figure 2). There were 14 permanent Chileans
and a support group that traveled from Chile for brief periods
at Costanera’s request. Data on personnel occupying top-level
positions at ENDESA’s corporate offices and at the Generation
and Transmission Divisions are presented in Table 6.
According to Rodrigo Manubens, Vice-President of ENDESA, it had not been easy to fill positions at Costanera. Said
Manubens,
This was a problem we had not expected because of the
proximity and attractiveness of Buenos Aires, but the transfer of our people affected their family life. This is not a
problem that is quickly solved, and it is one that is experienced by all Chilean companies that go international. The
most they imagined was one or two years abroad and back
to Chile. We have not had enough time to prepare for the
decision to invest outside of Chile. This is a key issue, given
that what ENDESA is doing is exporting management, midlevel positions, and technology.
It was expected that labor issues would be among the most
conflictive. ENDESA had determined that considerably fewer
people were needed to run the plant than were working there
at the time of the acquisition. Moreover, the prevailing work
habits—some established by written agreement and others
accepted as normal—were incompatible with efficient administration. New management’s first measure was to offer a plan
for voluntary retirement, which required supplementing the
government retirement funds available. Some of the eligible
employees did in fact retire. By the end of the first year there
were 730 people working at the Costanera plant, 320 less
than the original number, but new management felt this was
still too high.
Another key labor issue was a new collective agreement
that incorporated clauses for improving efficiency levels to
meet international standards, including changes in work hours
ENDESA
67
J Busn Res
2000:50:57–70
Table 6. Personnel Statistics High-Level Positions at ENDESA
Age (years)
Under 40
40–50
50–60
Over 60
Average
Time at ENDESA (years)
0–10
10–20
20–30
More than 30
Average
Profession
Engineering
Engineering business
Law
Others
With graduate degree in management
With graduate degree in finance or project evaluation
Experience in other companies
and restrictions on overtime. Though no problems had yet
arisen in Costanera, other companies attempting to impose
similar clauses had experienced acts of sabotage in their production facilities. Mr. Prett observed that while morale among
the engineers was high, because “they now had the resources
to do things that had not previously been possible,” there was
uncertainty as management awaited the results of collective
bargaining.
The business style of Costanera executives was different
than that to which people from ENDESA were accustomed.
For example, calls for bidding on services or acquisitions
did not seem to promote genuine competition among the
participants, nor was there any concern that the rules of the
game in selecting bids be objective. In some cases there was
doubt as to whether the company was really the primary
interest. Consequently, though oversight responsibility for
ENDESA’s affiliates was generally delegated to their boards,
it was felt that the situation at Costanera required special
attention, and it in fact occupied most of the time of its Board
President, Jaime Bauza´.
Future Action
Despite these problems, Mr. Bauza´ felt that the results of these
first efforts toward internationalization had been extraordinarily successful. He did have some concerns for the future,
which he expressed as follows:
The first point that concerns me is the organization of
ENDESA, which I would say is in a crisis of growth. All
of us who work in the different areas are now involved in
a sort of clearing of the decks. This cannot last long without
Corporate
Offices
Generation
Division
Transmission
Division
8
17
15
2
48
2
6
6
6
54
2
4
9
1
52
21
21
12
6
16
2
4
5
9
27
1
3
6
6
27
22
5
9
6
2
3
21
16
2
0
2
1
2
3
15
1
0
0
0
1
1
us losing control. As a result there is an urgent need for
structuring the organization in order to manage this new
stage successfully. One option would be to decentralize
management as much as possible, but establishing a program of control that would let us know exactly what’s going
on and enable us to make corporate decisions quickly. The
second point that concerns me is what I call the $500
million plan. We need to continue having sufficient information for analyzing the investment options to make this
plan a reality. My third concern is that all this will essentially be financed through additional debt, so we need to
have suitable financing sources. . . .
Privatization in Argentina was now being continued with
the Hidronor hydroelectric plants and transmission networks,
and this required that ENDESA review its internationalization
strategy. In contrast to earlier positive expectations regarding
Argentina’s currency convertibility plan put forward by Minister of Economy Domingo Cavallo, there were now signs of
economic deterioration with the accompanying political risk.
It was expected that the balance of trade would show a deficit
of over US$1 billion in 1992, the first negative balance in 10
years. Accumulated inflation was at 41% since the value of
the dollar had been established, and the recently announced
measures to tax exporters and increase customs duties were
seen as forms of covert sectoral devaluation. Elsewhere, industrial production had been stagnant since March, and a drop
in activity was predicted for 1993, in addition to the expectation of a decrease in capital flows. In general, the economic
panorama was bleak, inspired distrust, and was reflected in
a fall of over 50% in the stock market since the end of May.
Finally, the first general strike against the Government of
68
J Busn Res
2000:50:57–70
Figure 3. Argentine indicators: Industrial consumption of electricity (top panel); salarial wages, March 91 5 100 (middle panel), and
market index (bottom panel).
President Menem had begun on November 9th. Figure 3
presents current indicators of the Argentine economy.
Considering this situation, one option that ENDESA had
to explore was to consolidate in Argentina and make further
investments in other nations whose economies were being
E. R. Brenes et al.
restructured. The country that had made the greatest advances
in privatizing the electric energy sector was Peru. It was expected that a bill to regulate the sector, very similar to Chilean
legislation, would be passed soon and that by early 1993
the process of privatizing existing installations would begin.
ENDESA was assessing the possibility of forming joint negotiation units with the major generators dependent on Electroperu´
and Electrolima. It was felt that since risk in Peru was high
at that time, the sales price of electric companies could be
very attractive.
The current situation in other Latin American countries
was as follows: In Colombia, electrical shortages resulting in
cuts of up to 25% in consumption had precipitated a crisis.
A law to restructure the sector and permit participation by
private investors had been presented to Congress. Nevertheless, the sale of assets was not expected to take place in the
near future.
In Venezuela, privatization of electric companies had been
on the table for some time. However, an attempted military
coup had placed the stability of the elected government of
Carlos Andre´s Perez in doubt and had delayed the timetable
for the sale of electric companies. It was anticipated that the
new regulatory framework for the electric sector would be
passed in early 1993, accelerating the process of privatization.
In Uruguay, the government was planning to call a plebiscite in December 1992 to present t