Chaos as a Special Kind of Order
REFORMS IN PROGRESS: YOU OWE US
It will be recalled that the key point in the energy policy of the officially dismissed but still working self-described team of reformers is switching over to exclusively money-based settlements for electric power through a system of energy market distribution accounts. However, consumers did not pay fully for the energy used, and centralized money flow leaves suppliers short of current assets. In addition, nobody bothered to determine what ought to be done with the multibillion-dollar debts of the electric companies?” So the oblenerho system was left defenseless against creditors.
In its turn, the ban on non-cash settlements for electrical power on the wholesale market also lured into the trap the generating companies which could no longer settle with their creditors by means of electricity. The government tried a very quaint method to solve the problem of current assets shortage in the sector: it forced the electric companies to take out short- term bank loans. Moreover, the borrower’s account was opened with its principal creditor. The debt noose was tightened more and more.
Generating company managers repeatedly warned about the danger of an energy pyramid being built during meetings at all levels throughout last year. “We are being forced to take out loans we cannot pay off. We are being driven into a debt deadlock with no chance to break it!” Ihor Smyrnov, Donbasenerho chairman of the board of directors, said more than once. Further developments proved him right.
But the cabinet ignored the energy people’s arguments. Those in charge of the energy sector were doing nothing to solve the debt problem, nor were they seeking out the sources from which public sector consumers, the heaviest debtors (and immune from being cut off — Ed.), could pay their bills. The cabinet and its immediate subordinate Enerhorynok again made an original decision. Enerhorynok, as a wholesale trader in electricity, filed lawsuits to recover debts from practically all the regional power-supply oblenerho enterprises. In addition, Enerhorynok, which handles the system of means and payments on the wholesale market, was set up by the self-proclaimed reformers precisely “to introduce effective mechanisms for organizing the wholesale market of electrical power.” Certainly, somebody’s opinion had a decisive effect on Mr. Prodan, the then chairman of Enerhorynok. In any case, it is lawsuits that he considered to be the most “effective mechanism.” However, he obviously knew that electric companies were in no position to pay off their debts with anything but their own property.
Thus the property of Luhanskoblenerho was auctioned off March 24 precisely on Enerhorynok’s initiative.
In the fall of 2000 the Enerhorynok legal advisor told an information agency about a forthcoming planned experiment to recover the debts Luhanskoblenerho owed the wholesale market by auctioning off the company’s property. Apparently, the “handlers of wholesale market funds” were inspired by the precedent, when some of the Donetskoblenerho power grids were sold in June 2000. But the experiment concept must have finally matured in the minds of Enerhorynok executives only after detailed preliminary consultations in the High Court of Arbitration.
Luhanskoblenerho specialists took a dim view of the coming experiment. The point is that it was planned, under the Enerhorynok suit, to put company property worth UAH 700 million on the auction block, while Luhanskoblenerho’s total debts to the wholesale market reached more than billion and a half at the time. Moreover, it looked doubtful that Enerhorynok could get even the amount mentioned in the suit (i.e., one raised at the auction). It was obvious that the overwhelming majority of Luhanskoblenerho’s debts to the state-run Enerhorynok would remain frozen forever as a result of the experiment.
“I don’t understand what Prodan is up to,” a Luhanskoblenerho representative exclaimed in a press interview. Whether Mr. Prodan himself understood this after the March 24 tender is a rhetorical question. Having already become head of the National Energy Regulation Commission (NERC) by that time, he could conclude that one of the results of his activities as Enerhorynok boss was that Luhanskoblenerho property had been auctioned off for UAH 115 million, out of which Enerhorynok acquired less than UAH 100 million, i.e., 5.8% of the company’s total debt. The remaining 94.2% assumed the status of eternal debts to the energy market and the electricity generating companies.
Ukrsotsbank acquired the company property minus assets, which means that almost UAH 1.6 billion in electricity debts still remain on the balance sheet of Luhanskoblenerho, a company that formally exists but is stripped of property.
Incidentally, the bank paid for the Luhanskoblenerho property an amount 2.1 times below the bidding price of the controlling shares of Kyivoblenerho, 1.6 times that of Zhytomyroblenerho, and 1.1 times that of Rivneoblenerho. Yet, the Luhansk company’s annual turnover was $253 million last year, i.e., 3.3 times that of Kyivoblenerho, 5.5 times that of Zhytomyroblenerho, and 8.4 times that of Rivneoblenerho.
Thus Ukrsotsbank Chairman of the Board Khoroshkovsky had a good occasion on March 24 to open a bottle of champagne: in terms of attractiveness, the deal perhaps deserves a place in the Guinness Book of Records.
Incidentally, at the same energy market meeting which announced the sale of the Luhansk company, Mr. Prodan refused to comment in detail on the fait accompli, referring to lack of information on this matter. Really? Now that a scandal has erupted it is still more interesting to know the details of the ill-fated auction. But Mr. Prodan continues to remain silent. Yet, there must be some bodies in Ukraine which the NERC CEO could not leave uninformed.
DESPITE GOVERNMENT OBJECTIONS, THE SHOW GOES ON
Next in the “historical” importance for the Ukrainian energy sector comes the auction sale of three out of five Donbasenerho power plants. The Zuyiv, Kurakhiv, and Luhansk thermal power plants were auctioned off on April 28 for the ridiculous sum of UAH 208 million (VAT included), while the balance-sheet value of the company’s property is UAH 1.2 billion. Ten days on after the tender, the Cabinet of Ministers reacted to this with an official letter of protest the essence of which boiled down to the phrase that the government objects.
Protesting (in word) against the shadow privatization of state energy property, which is supposed to be marketed through open and transparent tenders, the government continued drafting a scheme to hand over a controlling interest in Kyivenerho to Kyiv in exchange for administrative buildings.
Stock market experts estimate that the state budget will lose at least $100 million as a result of the planned exchange. It is this price at which they think 50%+1 shares of Kyivenerho could be sold to a strategic investor through an open and transparent tender.
On May 8 the venerable statesmen reacted to the virtual loss of the largest electricity generating company in the Donetsk region by passing a resolution. The dismissal of the Ukrspetsiust director became the most specific item in a long list of vague measures aimed at protecting strategic enterprises from being sold to commercial ventures. Most likely the contractor’s top executive took the biggest share of the blame for organizing the so-called shadow sales of the Ukrainian energy sector, even more guilty than, say, Mr. Prodan who presided over Donbasenerho board from December 21, 1999 to April 26, 2001. Many claim today it is he who briefed commercial figures on how to acquire state property without tenders at knockdown prices. But, so far Mr. Prodan has not faced any consequences for his actions while he was the Enerhorynok chief and continues to hold the high-ranking office of chairman of the “body to regulate energy.”
As to the high-sounding government protests, they seem to have been made as part of the “compulsory program,” to quote a current phrase. At any rate, since the Donetskoblenerho grids were auctioned off in June 2000, the government has taken no serious steps to comprehensively solve the problem of bankruptcy and energy company sales. Nor has it audited and analyzed the debts of the enterprises, considered a possible mechanisms to write them off, or introduced in Verkhovna Rada amendments to certain laws in order to declare a moratorium on the bankruptcy of fuel and energy facilities. Instead, energy bureaucrats have been speeding up the shadow sales of energy facilities by means of their loan and debt policy toward the companies as well as Enerhorynok lawsuits. In addition, the incompetence and half-measures of officials have assumed a systemic nature over the past year. This gives good reason to doubt the naivete of those who initiated a series of lawsuits and bankruptcies. It is worth remembering that Enerhorynok went to court over the sale of Luhanskoblenerho property only after the final failure of Vice Premier Yuliya Tymoshenko’s attempts to introduce outside management in this company. The former energy-sector vice premier’s idee fixe was to deprive suppliers of the right to sell and then hand them over to perhaps quite definite commercial entities.
Quite telling in this connection is the comment of former minister Serhiy Yermilov, “After I saw that Ms. Tymoshenko was trying to turn the situation to her own advantage, our positions went their separate ways.” Mr. Yermilov meant Mrs. Tymoshenko’s attempt to introduce external management in the companies. It is not excluded that other actions of the former vice premier and her comrades- in-arms (some of them still at the helm) also suggested “turning the situation to their advantage.” In any case, control over distribution accounts, the shortage of current assets in the energy companies, and multibillion debts in combination with lawsuits are powerful levers for seizing the energy property by means of the administrative resource.
One way or another, the new government will inherit a mountain of the energy market’s court and debt problems without the solution of which the future of the Ukrainian energy sector appears dubious. The information submitted by the energy market board’s task force at the May 17 meeting is really impressive. As of mid-May, courts had sustained the suits to recover a total more than 3 billion hryvnias from the oblenerho enterprises, including over a billion hryvnias at the expense of property. The bulk of the suits, claiming 6.2 million, was lodged by Enerhorynok.
The generating companies fare no better either: under the suits, they are called upon to pay UAH 565.5 million, including UAH 494 million at the expense of property.
A court decision on property recovery means that the auction can occur any day even without wide publicity.
Courts are at present considering suits over the bankruptcy of Dniprohydroenerho, Dniproenerho, and the Siversky Donets thermal power station.
Energy market council directors admit that further shadow privatization of electricity facilities through bankruptcies and auctions will lead to unpredictable consequences in the energy sector and the nation’s economy as a whole.
First, the competitive privatization of electricity supplying companies will be foiled as early as this year, with the budget running short of planned revenues.
Secondly, Ukraine will fail to receive a number of loans from foreign banks, while the investment climate in this country will slide to absolute zero.
And, thirdly, the auction-based sales of energy facilities could destroy the structure of both the companies and the Ukrainian energy market in general, thus putting this field on the verge of complete chaos.
