Summary
Restructuring to survive and succeed
Nils Melngailis, has contributed to the growth of Parex, Lattelecom, IBM and PricewaterhouseCoopers
It is difficult to put the past 15 years and the next 15 years into one frame. As a general premise one
can say that crisis is very good. You may say that greed is good. But considering what has happened in
the global economy, it may lead to problems – it may lead to a blinding effect on business. During the
past three years we have changed from the fastest growing economies into the slowest growing
economies. In the ‘90s when the three Baltic States restored their independence, it was a time of
euphoria, but also a time of extreme economic crisis and challenge. I think the crisis had a positive
effect on economists and politicians – they took advantage of the opportunity that independence gave
us at that time. The ‘90s also saw the professional services industry develop very quickly. We have a
very high-quality professional services industry in the Baltics in terms of the legal profession,
accounting and corporate finance, for example. This ensures that we will get significant investment in
the future and professionalism is an exportable product.
In 2004 I took over Lattelecom. At that time it was not very sexy to be in the fixed line business. How
many of you are using your fixed line to make a call? Not many. People ask me why did I take on that
job? Lattelecom at that time had declining revenues, declining profit margins. The only way to ensure
that you had profits was to cut costs. In 2004–2008 all businesses were booming, especially mobile
operators. But Lattelecom was in crisis and that enabled us to do radical things. We split the company
into four businesses, we cut our staff and focused on network maintenance business, Internet and
television. Today Lattelecom is probably the most profitable company in Latvia.
Crisis is also necessary for governments to make tough decisions. At that time we developed the idea
with some companies to buy out Lattelecom and a mobile operator and we basically signed an
agreement with the government to do the transaction provided that we raised the funding. Although
we raised the money, the government could not make the decision. They basically found reasons why
not to make the decision. And I think the reason was that there was no burning platform. For
politicians it is always safer to do nothing than to make a decision and be responsible for it. So, a very
significant deal did not go through for the wrong reasons. Six months later, after I had left Lattelecom –
the financial crisis had started – I got a call from the government to come in and manage Parex.
Latvia actually needed the crisis, it was a positive catalyst. Estonia had the foresight to cut costs in
good times, to establish a reserve fund. Latvia was not in a position to do that and the government was
not going to do anything until there was a burning platform. The crisis forced the government to look
at itself, the international community had to get involved. Had there not been a burning platform, the
decision to take over Parex would not have been made. At the bank there were two things we had to
do. On the one hand, we had to negotiate with 60 banks who had lent money to Parex to convince
them that they needed to restructure the debt. And on the other hand we needed to tell the
customers that everything was OK. Eventually we managed to restructure the syndicate debt. Another
critical moment for us was five weeks ago when we split Parex into a good bank, Citadele, and nonperforming assets. We managed to do a very successful rebranding campaign. London agencies are
revising their ratings on us. And we have managed to build trust. This was a critical milestone for us.
Here are a few general points I would like to make based on my experience:
Government ownership is a very bad thing, especially if you work for them. The administrative
system is very complicated. We spent about half of our time on reporting. In this type of situation
the government is very nervous and should delegate the job to professionals.
We need to invest in regulation. Assuming that most business will be private, it is very important
to have highly professional and competent regulators in all industries. There should be rotation
between the private sector and the regulatory environment to increase the quality of regulation.
It is necessary that the regulators are able to see strategically what is facing industries rather
than looking at details and auditing for auditing’s sake. Thanks to a lot of hard work by
governments and thanks to the staff of Parex, the Baltic region now is a very clean slate as
compared to Greece, for example. The only issue we have not dealt with yet is communication.
Although from an operational point of view the three countries are different, we are seen as a
region and should try to overcome our issues together and cooperate more.