AES, the U.S.-based energy company, provides power in developing countries. Beca

Question

AES, the U.S.-based energy company, provides power in developing countries. Because it
does business in Colombia and Brazil, the problems of regimes, corruption, and expropriation are not unusual ones for the company. However, its operation of the Maikuben
coal mine in northern Kazakhstan was new and different even for the seasoned international player AES had come to be.
When AES opened the mine in the former Soviet republic in 1996, it had a management experience about which most companies will only dream. The local residents who
were miners there dug coal in freezing temperatures and took only tea breaks every other
hour to warm up before going right back to digging. As AES expanded its operations to
include power plants and transmission lines, it found a workforce with high technical
abilities. Further, the work ethic of the Kazakhs was remarkable. It took only five to
seven AES managers to supervise 6,500 Kazakhs.
If the employees were great, the customers were terrific. Electric utility customers,
grateful for the consistency of electric service, paid on time, even with 20 percent rate
increases in some years.
However, the company’s relations with the Kazakhstan government were also a
unique experience. At one point, in 2005, twenty-four foot soldiers, armed with AK-47s
entered the office of the Maikuben mine and demanded documents for a tax case the
government had brought against AES. AES officials were able to negotiate a pullback of
the forces after two days of phone conversations with regional government officials. The
soldiers left, AES paid a fine, and the tax case continued. By 2008, with continuing tense
relationships and demands, AES, despite a $200 million investment in a power plant in
the country, walked away. AES sold its assets there at fire-sale prices.
The tax rate for companies in Kazakhstan is 30 percent, plus the country’s value-added
tax. In addition, the regional tax officials do come calling on the companies for collection of
additional revenues. Kazakhstan is a country that is rich not only in resources, but also abundant in corruption. Parker Drilling, a company with $655 million in revenue and $104 million in net profits in 2008, paid $51 million that same year in taxes for its drilling rights to
Kazakhstan. ExxonMobil paid a $5 billion fine for project delays.
AES managers were grilled about their political affiliations and placed under investigation because, as local officials explained, they worked for “Americans who steal from
us.”14 Many managers left the country once AES was charged with antitrust violations,
because of a fear that they would be arrested. One manager explained that what was
once at least considered taboo, that is, the jailing of business managers, has become the norm in the country. AES and others continue to pursue the assets taken by the government through arbitration in London.

1. What is the underlying cause of AES’s difficulty in
doing business in Kazakhstan?
2. Use the three cases in this segment to develop a list
of questions and concerns for companies considering
expansion into countries with rich resources but
rugged due process and governance.
3. What factor must be evaluated in doing the numbers related to operations or drilling?

Explanation / Answer

1) Underlying cause of AES's difficulty in doing business in Kazakhastan is taxation policy of the government and their way of collecting the tax.

2) Questions and concerns for companies considering expansion into countries with rich resources but rugged due process and governance are as follows:

3) Factors to be evaluated in doing the numbers related to operations or drilling are,

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