Potential buyers are not the only people closely following the process of privatization of the Ukrainian oblenerho regional electric companies. Effective sale of four out of seven energy companies is one of the mandatory conditions on which the EBRD will provide credit to finish the construction of the Rivne and Khmelnytsky nuclear power stations meant to make up for the power deficit caused by the closure of Chornobyl. In addition, oblenerho privatization must be done with the aid of a consultant; this is a rigid IMF requirement.
Lawyers believe, however, that some changes made at a level which is anything but high could spoil the energy privatization program. The Enerhorynok [Energy Market] state enterprise seems to have made its own corrections in the procedures approved by the cabinet for restructuring the debts of the entities offered for sale.
As Ukraine’s wholesale electricity monopoly, Enerhorynok appears to have interpreted the oblenerho bidding rules in its own way. Now the strategic investors venturing to buy such energy companies will have to negotiate their energy future in Ukraine not only, and not so much with the cabinet or State Property Fund. They will have to surmount a far more formidable barrier, the Enerhorynok bureaucrats. And the latter appear omnipotent. Inter alia , they can sever the debt-restructuring contract of a company being acquired or increase the amount of such liabilities. They can further make the oblenerho bought by an investor go bankrupt or put the compensation up for sale “as resolved by Ukraine’s Supreme Court of Arbitration” (as was the case with Luhanskoblenerho).
Also, these “managers of wholesale market funds” (this is one of Enerhorynok’s key functions) can block the privatization of Ukraine’s power industry. Do any of our strategic investors suspect that the dog and pony shows staged in Paris and London, highlighting the Ukrainian oblenerho privatization procedures, could turn out somewhat different in reality? It is not likely that CS First Boston Ukraine, as energy company privatization adviser, allowed for a subjective yet very substantial factor in the conditions presented to the strategic investors: Ukrainian bureaucrats responsible for the implementation of top-level decisions. This factor could well become the crucial determinant of whether the energy companies are privatized or not. Moreover, it might have a substantial impact on the future of the entire Ukrainian energy complex.
Potential foreign investors formulate their principal expectations as follows: restructuring of the debts of oblenerhos put up for sale, the right to cut off all deadbeats, independent status of the National Electricity Regulatory Commission (NERC). Add here rates allowing the energy companies to turn a profit. So far, the cabinet has made a halfway decision with regard to just one point on the list of requirements presented by the privatization adviser. The government did not muster the courage to rid the energy companies of their debts. Instead, it has offered investors a five year deferral with a two year grace period.
In its resolution of October 18, the cabinet approved the bidding rules with regard to each of seven power distribution companies, instructing Enerhorynok to make debt-restructuring contracts with the oblenerhos within a month. Formally, these contracts will come into force simultaneously with the signing of sale contracts with the successful bidders.
Enerhorynok, however, is interpreting the cabinet assignment in its own way. Or maybe someone told them how to interpret it. Be it as it may, the restructuring procedures approved by the cabinet were amended with Enerhorynok changes, such as additional requirements on the oblenerhos. For example, its lawyers prepared the text of the debt-restructuring contract with Khersonoblenerho, such that Enerhorynok reserves the right to terminate it if the supplier does not make 100% payments for electricity. Clause 4.5 reads: “As of 10.01.2000, the Debtor shall pay the Creditor 100% of the value of electricity purchased by the Debtor from the Creditor after 10.01.2000. If the Debtor fails to make such 100% payment for the electricity purchased from the Creditor after 10.01.2000, this contract will become null and void.” Is Enerhorynok management not exceeding its authority here, distorting the restructuring procedures the cabinet mandated? The more so that the state enterprise must have made this decision without coordinating it with either the government or privatization adviser, CS First Boston Ukraine.
Power industry experts were amazed by the 100% payment requirement. They are afraid this addition to the contract will frighten off investors. In addition, such 100% payments by energy distributors are unrealistic; budget-sustained enterprises and organizations at all levels are not accustomed to paying their electricity bills in good faith. Electric companies have no way to bring their habitual debtors to account. At present, there are a dozen directives and resolutions of the cabinet and parliament banning disconnection of some consumers or another. Also, the power companies are faced with resistance from local administrations, and they must bear in mind the ecological and social consequences of such disconnection along with a multitude of other general and local factors. Could it be that perhaps Yuri Prodan, director of Enerhorynok, does not know that disconnecting a chemical combine will be immediately followed by charges from the prosecutor’s office? Or is he unaware of the share of energy resources claim in the national and regional budgets in 2000? Could all those power energy bureaucrats have problems with formal logic? Because their logic looks strange. It must be some logic of state.
On the strength of this special logic, Enerhorynok plans to take future strategic investors hostage, without assuming any responsibility to them. Does this mean that the “lower middle class” power energy bureaucrats have laid a trap for investors in the absence of any mechanism of insurance of their financial risks in Ukraine? As it is, an investor signing a purchase contract with the State Property Fund will have to come to terms with the Enerhorynok bureaucrats empowered to sever this contract a month from the date of the company’s privatization and commence bankruptcy proceedings a month later.
One is also amazed by Enerhorynok’s juggling with figures when establishing oblenerho debts as of October 1. For example, the accounts payable by Kirovohradoblenerho reflect the amounts paid by the company under the law and entered in the accounting reports. Moreover, the company now has to part with “surplus” funds simply because the inflation index is unlawfully taken into account.
And this is not the end of logical discrepancies. The text of the restructuring contract signed by Enerhorynok management provides it that the fixed amount of liabilities as of October 1 shall be computed “allowing for the official inflation index, 3% annual interest, and penalties.” One could well assume that Enerhorynok wants to squeeze as much out of the suppliers as possible and share this money with poverty-stricken generating companies. Think again. The “official inflation index, 3% annual interest, and penalties” proceeds must be transferred not to the power market’s distribution but to Enerhorynok’s account in Prominvestbank! And everybody knows that this account covers its own expenses. Restructuring or no, one has to take care of one’s own interests. It would be interesting to know whether Enerhorynok, being a non-profit organization, not to be held liable with its property for the electricity supplied by state-run companies, will be able to impose penalties on the generating companies using its own revenues. Or how the Enerhorynok bureaucrats intend to spend the “official inflation index, 3% annual interest, and penalties” proceeds, apart from buying the computers and other office equipment, stationery or furniture required by every financial operator. The more so that Enerhorynok’s expenses on everything listed are financed by the wholesale energy market operators (to whom Enerhorynok is not subordinated).
Most likely, the strategic investors do not have the slightest idea about the surprise lurking in wait for them. And it is not difficult to predict their reaction when they learn of it. Possibly the gentlemen in the cabinet will have to look for other public property from which to obtain the promised 2001 privatization money.
Take one vivid example, Luhanskoblenerho. This October, the Supreme Arbitration Court ruled to sell the public joint stock company’s property to pay about UAH 700 million due Enerhorynok. “We established a precedent in this way,” an Enerhorynok official admitted in an interview with a news agency. It is also true that Luhanskoblenerho’s debt had doubled by November 1, reaching UAH 1,418 million, since Enerhorynok filed its claim. No prospective buyer is likely to pay such money for the regional company’s networks and substations. Even if Enerhorynok does receive some money on account of the debt after the auction, the principal will remain unpaid. In other words, the economic benefit Enerhorynok expects from this operation defies logic, especially since Enerhorynok cannot actually deal with its debtors in such a way. Coal mines will not bring much and those in the agrarian sector, as well as spending units, let alone the people, cannot be put up for auction. But perhaps the logical explanation of this operation is to be found in another plane.
Thus, an auction can be attended by certain structures connected with someone in the cabinet or at regional state administration of Luhansk, meaning they would be able to buy the company at a very reasonable price. And forget about all those tenders and long-term privatization programs. And if rivals suddenly appear, this would still be no problem. The history of Ukrainian privatization provides ample solutions to this problem.
In this sense, the Enerhorynok, formally subordinate to the cabinet, acts so as to torpedo the oblenerho privatization program, yet this policy can be explained quite logically. Why should the state enterprise and those watching over it deny themselves the status of an operator handling UAH 15 million worth of annual electricity market turnover? But it seems unlikely that strategic investors will tolerate such “management” of their funds. Their logic is somewhat different.
