Embezzlement and corruption are the major causes of the crisis in Ukraine’s coal sector, according to 69.2% of respondents to a survey conducted by the Razumkov Center for Economic and Political Studies in the country’s coal mining regions. Consumer nonpayment (32.9%) and inadequate government support (25.9%) have been cited among other reasons for decline in the sector. The majority of those polled (62.8%) are convinced that the coal sector can be reformed without grave social consequences. These statistics were released at a September 24 roundtable on the problems of restructuring the coal sector at the Razumkov Center.
The day before the World Bank publicized the results of its analysis of the state of Ukraine’s coal sector. Bank experts disagreed with the stereotype that the coal sector is unprofitable by definition and said that the root cause of such a situation lies in Its pricing policy. Currently, the average price per ton of coal is $25 against the $29 cost it costs to extract it. Simultaneously, coal extraction costs are much lower than those of alternative energy sources. Calculations show that the price of foreign coal is 40% higher than that of coal extracted in Ukraine. “An economically justified price of coal is between its prime cost and the cost of alternative energy sources,” believes Michael Haney, senior power engineering expert with the World Bank. In his view, if it were not for the understated prices, a major part of the sector would be working effectively.
The World Bank believes that the existing system of subsidies encourages managers of coal enterprises to artificially keep prices low. Having analyzed the experience of subsidies in different countries, Mr. Haney arrived at a paradoxical conclusion: subsidies do harm, since they reduce competitiveness and create unsound economic stimuli. Ukraine is no exception. Since the demand for subsidies invariably exceeds those allocated, this sector is suffering from chronic funding shortages. According to Mr. Haney, Russia’s experience speaks in favor of discarding subsidies. The Russian coal sector is still afloat, despite the fact that in late 2001 government subsidies for unprofitable mines were discontinued.
World Bank experts have proposed Ukraine two possible ways of reforming its pricing policy in the coal sector. The first option is to impose temporary coal price controls. However, to quote Mr. Haney, such a step could delay the creation of a market environment. The other option foresees an accelerated development of the market, provided managers discard the practice of selling coal at a price lower than what it costs to produce. The bank also believes that to improve management standards in the coal sector the state must win back its authority as both owner and protector of the public interest. Privatization of mines would be the best solution. But this is still a long way off for Ukraine.
World Bank Country Director for Ukraine, Belarus, and Moldova Luca Barbone stated that survey results make him feel “much more optimistic” than he was in the initial stage of providing assistance to Ukraine in a bid to complete the restructuring of the coal sector. Still fresh are memories of the scandal surrounding a World Bank loan of $300 million intended to alleviate the social consequences of closing unprofitable mines. It will be recalled that Ukraine’s Accounting Chamber pointed to ineffective and misguided use of these funds. With over 100 unprofitable mines closed, whole mining towns were left to face unsolved social and environmental problems.
