Croatia Needs One True Energy Cluster
Luka Miličić, President of the Dalekovod Management BoardOur interview with Luka Miličić, Dalekovod's President of the Board, was held in an office which was very much unlike those offices we are generally used to seeing when talking to our other collocutors. In comparison with other large and obviously expensively furnished offices, his office appeared modest and unchanged over the past decade. It was laden with numerous mementoes and souvenirs, and his construction worker's yellow helmet bearing the Dalekovod logo figured most prominently.
Commenting on the company's results for 2006, Miličić says they are in harmony with the company's expectations: revenues went up by 18 percent and profit by 6 percent compared to the previous year. Conversely, Miličić interprets the decrease in revenues related to export – which were almost halved in 2006 – in light of the seasonal character of the construction business and general difficulties concerning payment.
Interviewer: Većeslav Kocijan
The Lithuanian company UBIG announced a law-suit because, in their opinion, the sale of TLM was «irrational». What are your comments?
It is not up to us to comment on the decisions made by HFP and the Croatian Government.
It has been said that there was not enough time to do due diligence properly in TLM.
These are mere tales. We submitted our bid three or four months ago and we were aware of the whole situation. After that we cooled down a bit because we were also aware that we had to submit a good bid and employ additional 1400 people, but then emerged some amount of nationalist sentiment. For aluminium is the metal of the future, and only foreigners responded to the tender. I think we have made an exceptional bid in terms of its technological aspect. It will cost us some 130 million euro in investments, which is by no means little. We knew we couldn't compete with foreign capital with sheer money. Now it is all over. The hot potato is now in our hands, and we have to play our hand well – for the sake of Croatia, for the sake of our employees and for our own sake.
In which way will the fact that you are a partial owner of TLM affect the performance of Dalekovod?
There are several benefits. In the first place, this completes our offer and product range because TLM's products directly add to our coupler and suspender equipment programme for transmission lines and contact network for railways. In addition to this – in cooperation with other members of the Consortium – we have attained a higher level of synergy both in the domestic and foreign markets. We have got the opportunity to participate in – for us – a number of new programmes.
Is the consortium that has bought TLM going to respond to the tender and attempt to purchase Aluminij from Mostar? Minister Vahid Heco of the Government of the Bosnia and Herzegovina has brought the Cooperation Agreement between TLM and Aluminium into question. Does this mean that politics is getting involved in the whole affair?
Together with Feal and Aluflexpack we have submitted a bid, hoping to qualify for the submission of a binding bid which is to follow by the summer of this year. As far as the agreement between TLM and Aluminij is concerned, it is in no way questionable. Aluminij gets electricity, which is very important for the company, and in return it delivers commodities. Aluminij is in fact a question of national importance and now a few players, who have so far had no business activities in this sector, have also joined the game. We will also, as was the case in our acquisition of TLM, make a good bid, but if this turns out to be a question of money alone, then we don't have much of a chance. Our bid will certain be sound in the technological sense, but we will not offer more money than the company is worth. Their starting price is about 75 million euro. I still don't know how much we will offer – 100 million or a bit more than that – but we certainly cannot afford, say, 700 million. As far as we are concerned, this is not so much a question of profit as it is a question of image and a question of securing necessary materials.
At the beginning of this year you made the acquisition of TIM from Topusko. Are you planning any further acquisitions in Croatia or in the region?
These are only links in the chain, and the purpose of this is to enable us to improve our business offer and our products in accordance with the «full service» concept. Hence, at this moment, we are not planning acquisitions which would add to the scope of our main business activity. This doesn't mean, however, that we are not planning other, new things – for example, in the construction business, tourism, production and trade of electrical energy etc.
Are you planning any new strategic alliances abroad. Many people get the impression that Croatian companies are not sufficiently interested in forming alliances for their activities abroad?
I completely agree with you. Companies simply aren't making alliances as much as they should. Unfortunately, that is the mentality. There are situations today where in tenders abroad we have three Croatian and then additional two foreign companies competing. I can't believe that we can't agree and act together. I think that the football championship in Poland and Ukraine is an enormous opportunity for our companies, especially taking into account these countries' infrastructure. Here lies the opportunity for a larger Croatian consortium, a consortium, for example, like the one which was formed by companies that built the Croatian motorway. I am convinced that we will find an agreement and manage to act jointly. What I have in mind are companies such as Konstruktor, Vijadukt, Hidroelektra, Dalekovod, Tehnika... There is no doubt that we can sell our knowledge in underdeveloped countries of Africa and the Orient. A true cluster operating in the energy sector and similar areas could do wonders. But we're stuck. The question is, who is going to be the leader?
What is your competitive edge? How do you explain the fact that you have got contracts as far as Island and Africa?
Our people. We have a very strong project and planning bureau. In fact, we have it all – production of lattice steel towers and materials for suspenders as well as the people. We got the last four contracts competing against the best foreign companies and in very demanding markets: in Norway, Kazakhstan, Albania. Ten companies competed in Albania, but only two of them managed to prequalify for the tender. In Iceland we were 30 percent more expensive than the Germans, but in Iceland you have to pass before a board, as if you were back in university, a full engineering exam – on what you're going to build, how you're going to build it, how much you're going to pay your workers and how satisfied they are. In case of the contract we got in Norway, for which we were up against seven other companies, six of our people sat at a table for six hour sessions for two days straight answering their questions. When they had «passed», we got the contract. So you have to have the knowledge and the name, you have to honour deadlines and stand for quality. Our prices aren't the lowest. The company must, much like a manager of a football team, see who it is playing against, where it is playing and come up with the appropriate strategy. Our advantage lies in that we export our products to more than 80 different countries. Naturally, some of these contracts aren't very big, but one makes contacts in the process. It is very important to keep track of all the tenders, as we do.
Do you have to contend with the problem of corruption in any of the countries in which you do business?
In some countries, it is an integral part of the bidding process. We, however, have to distance ourselves from it as much as possible because such things are very dangerous. Perhaps we have lost some contracts because of it, but I still think this is more talk than reality. Corruption related problems may emerge when countries have their own capital invested, but for most of our projects we receive loans from the World Bank and EBRD, which means that there is the highest degree of control.
You get contracts in countries which are not members of the EU – Iceland, Norway, Switzerland. Is it easier to get contracts in these countries than in the EU?
There is no difference. In these countries, though they are not members of the EU, legal regulations are almost identical to those of the EU. On the other hand, it is a public secret that the EU would have recourse to any legal means so as to give preferential treatment to EU companies.
In what way?
They limit you in terms of employees, permits and so on. You're not allowed to bring your people in or they limit you in terms of their number, they force their equipment on you. Beside that, most companies that compete for these contracts are in fact engineering firms with a strong financial background and they manage to collect the cheapest bids about – and that's that.
Do you use the services of lobbyists?
Yes. They are extremely important to us and we employ their services as often as possible. Only after you have fully come in terms with the importance of lobbying can you depend on your quality, your ability to meet deadlines and your price to decide.
What are your experiences with economic diplomacy?
Unfortunately, economic diplomacy doesn't exist in this country. I think that diplomacy should include economic experts and people who are well acquainted with the Croatian economy. It is something Croatia must do urgently if it wants our products and our entrepreneurs to succeed abroad. In fact, the very opposite is taking place. Diplomacy brings competition to our own turf. I think that the Government has finally realised that changes need to be made. The Ministry of the Economy, HBOR (Croatian Bank for Reconstruction and Development) and HGK (Croatian Chamber of Commerce) have recently been helping us more and more – and the pleasure has been mutual.
Are you satisfied with the way currency related risks are managed in Dalekovod?
We try to protect ourselves against that by entering into contracts stipulating fixed prices and by procuring the necessary materials as soon as possible so as not to be taken by surprise, for example, by an increase in the price of aluminium and similar things. So far we have been successful. If, for some reason, the situation becomes worse, we will try to deal with it by having recourse to hedging and similar risk control instruments.
You are a client of Zagrebačka banka (Bank of Zagreb). How important to you is their support in the process of getting contracts abroad?
Extremely important. They supported us even when we were, so to speak, a small company without much credibility, and they still support us and give us quality counsel. It is important to know that ZABA approves the highest limits in the Republic of Croatia and that Dalekovod as a client has the highest approved limit in the bank, which is to say that Dalekovod is, technically speaking, the most demanding client in the Republic of Croatia, but also that it is getting the highest quality service from its home bank. For example, we grew very suddenly and hence exceeded the limit which ZABA, or the UniCredit Bank, allows its clients to have. Mind, we have considerable liabilities towards the bank in the shape of various guarantees which have never been protested. We ask that we be freed of these liabilities. Instead we would issue bills of exchange, as our investors might find our bills of exchange more valuable as a guarantee that deficiencies will be removed in the relevant period than the bank's guarantee. Due to the company's growth, this limit has now been reached and has become insufficient. UniCredit has accordingly increased this limit exclusively for us; HBOR has stepped in as well; the World Bank has contacted us saying they are willing to give us their backing.
What does the Croatian "export offensive" mean to Dalekovod?
We realised a long time ago that we cannot survive if we do not export. The domestic market is too small to accommodate the needs of the Croatian economy, especially those of Dalekovod. If we do not venture elsewhere soon, meaning abroad, we will stagnate. In this sense the State should make certain moves, perhaps give us a few suggestions, help us with establishing initial contacts – and then we'll take over and work on our own. This segment is still underdeveloped.
Starting on March 1 a new company structure has been in effect. What is the importance of this restructuring?
We had realised that Dalekovod had grown so much over the recent years that it could no longer tolerate any operational inefficiencies and redundancies. For this reason we merged several units – procurement, sales, warehouses, transport, etc. – and formed one profit centre, Engineering, which is in charge of revenues, whilst the other units are budgetary centres with clearly defined operational plans. We introduced the matrix organisational structure, the project-based approach and as a consequence the concept of shared responsibility. Stress was placed on cutting costs as one way of saving – which is entirely in our hands – with the aim of increasing our competitiveness. These are, however, tremendous structural changes, and such things take time. Before we can see actual results on the company level, these changes must first take place in the minds of employees.
What does introducing Oracle's Business Intelligence System mean to you and how much do you expect to save?
When you tell someone that you have introduced an integrated information system into your company, and Oracle's eBS is one such solution, you've told them that your company's operations have become more transparent – your business environment trusts you and immediately thinks of you as a healthy company. Simply by clicking on a mouse, anyone can have access to all the information about you. In other words, you are completely open. Any blotch on your company's lungs can be seen. This can certainly be dangerous for the company, but we have the ability to diagnose the problem and provide immediate cure. Secondly, at any given moment you can assess the real state of affairs in the company and hence don't need to see another doctor to hear a second opinion. We expect to save between 5 and 10 percent. If our turnover exceeds two billion, it is a lot of money which we can then invest in other things, in new technologies, in new projects, e.g., in the building we intend to build.
You have announced the project for construction of wind power plants. Končar too has such a project. Are these two projects competition to each other?
Končar has its own programme and, as far as we know, plans to manufacture wind power plants with 1MW generators. 2,3, and even 5MW generators are already being manufactured today. I hope we will start this project soon and I expect that two years from now the propellers on our wind power plants will be spinning. We have an exceptional business relationship with Končar and there is no competition here. And as far as wind power plants are concerned, we are interested in construction and possibly in manufacturing truss towers and that is the extent of it.
You will enter the wind power plant projects not only as the contractor – you will also finance it. What does this mean? You will sell power?
The idea is to get the concession, use a loan to build the plant and then sell power. There are several models. One of them is to create a mixed company, a stake in which would have some bank or some other interested party, perhaps even HEP. In any case, we will chose one of the models very soon.
How is it that you have decided to take such a step?
The goal is to reduce risk and dependency on certain sectors, and the challenge lies in creating new value. Loans for such projects are very favourable and, after all, manufacturing and building such objects is our core business. We are already registered as a seller of electrical energy, and we want to do this because it is the thing of the future, not to mention the fact that this business is proving to be extremely lucrative.
What are your experiences and your plans regarding the capital market? You have announced that your shares will be listed in the first quotation on the Exchange in the course of this year.
We have great experiences. Our shares are figuring prominently and are traded extensively. We are thinking about bonds and a new emission of shares through the capital markets as a means of raising capital and financing new projects. We haven't worked out the models yet, but we will go ahead with this soon. When it comes to being listed in the first quotation, this does not depend solely on our activities. We are trying to reach such standards of corporate management as would allow us to step into the market arena as ready as possible and with as little trouble as possible. We should bear in mind that such changes must take effect gradually so as not to cause undue stress and reflect negatively on our business activities. Truth be told, we could make the first quotation without any delay, but we are waiting for the right moment. This quotation is very important for the image of the company, and it makes financing a great deal easier.
What do you, as a manager, think of the ownership structure of Dalekovod? There are more than 1000 shareholders, 85 percent of the company is owned by physical persons, and no one shareholder is in possession of more than 1 percent stake in the company. Does this make your work more difficult for you?
It does. I am proud of the type of privatisation we have managed to conduct because I have made thousands of people relatively rich. You know, when one has 2000 shares of Dalekovod, with these two million kuna one can solve the question of housing, buy a house to live in or buy a house for one's children. The price of our shares started going up rapidly and people are selling. This poses the following question: how do we defend ourselves against a potential takeover? Some people have joined forces, so if a person wants to sell he or she must first offer his or her shares to other people in the group. This way we have bought a little bit of time. But one thing is for sure: this type of privatisation – through ESOP programmes – is the very thing that has made such growth possible. People know that they are partial owners of the company, that they are getting dividends and that somebody is taking care of them. If you come here at six or seven o'clock in the afternoon there are people everywhere, working, and no one asks that of them. Come on a Saturday or a Sunday and you'll see how people work.
How would you describe your rapport with the unions?
It's fantastic. If they ask fore something, I give it to them – and a little bit more. End of story. We also invest a lot in the education and training of our employees: IT, language courses, master's programmes, doctorates, seminars...Our people are our biggest asset. They are our strength and that is why we invest in them and will continue on doing so – permanently.