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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

DANCING AROUND THE ENERGY MARKET WILL THE STATE GIVE UP CONTROL OVER ENERGY SPHERE FINANCE?

17 March, 1998 - 00:00

In terms of energy market reforms, in the first place we mean forming a competitive wholesale energy market. Until recently this problem was quite complex, because, despite the Ministry of Energy's great efforts in the sphere of structural reform, problems remain, solutions to which have not been yet found neither by state nor energy market officials.

Various Ministers of Energy have supported the idea of energy market creation for five years, which was recently legalized by the law on electrical energy. Unfortunately not everyone realizes its meaning and Deputy Minister Luchnykov had to remind participants at the recent general meeting of the energy market members, that the energy market has gone through certain changes since the law came into effect: energy is now no longer a service but a product. The state supported the idea of creating an energy market while it continued controlling finances, rates, and many other of its aspects. This is why they cannot complain that the energy market mechanisms, which have been created but not put into practice, do not bring the expected results.

THE ROMANCE OF FINANCE

The energy sector along with all energy companies, both generating and supplying, can be declared bankrupt. They are not able to pay their workers wages and settle their debts. Only the absence of clear mechanisms prevents it. However, it still could happen, because bankruptcy will become an effective tool in the immediate future.

Our association is particularly interested in using financial tools to stabilize the sector, because its members, so-called no-tariff energy suppliers, are the main creditors of the Ukrainian energy sector. They have invested a great deal of money in the last few years by supplying fuel for atomic and heat power stations. The debt now reaches several hundred million hryvnias and no payoff is likely with out financial stability. With the payment crisis renewing turnover funds will be very difficult.

However, current government experience shows that simple administrative measures will not bring about serious changes. The government has a unique opportunity to stabilize the financial situation in the sector by using funds secured by privatization. Of course, the government tends to use this money for budgetary purposes or for wages, but this would be an unforgivable mistake, because there will be no better chance to eliminate barter operations in energy. If the funds secured by privatization are not used to achieve financial stabilization, energy companies are unlikely to get another chance to avoid bankruptcy.

Margaret Thatcher conducted successful energy privatization in Great Britain some years ago. By so doing, the Iron Lady secured investments not only into the energy sector but also into the British economy in general. In fact, wholesale energy market was the foundation for reform in Great Britain, and this is why the British experience may be useful for Ukraine. The government should develop and master a clear plan for financial stabilization based on the idea of renewing the enterprises' turnover funds and eliminating mutual write-offs, addressed supplies, and barter.

APROPOS SPECIAL FEATURES

The privatization of energy generating and supplying companies calls forth great interest. No-tariff energy suppliers are particularly interested in getting control of these companies. However, privatization models, developed by the SPF and the Ministry of Energy, give no clear answer to the question how effective management will be secured.

The management structure will have to be changed, because the corporate and financial management stipulate the appearance of a responsible owner. The companies' assets are huge and domestic capital representatives are unlikely to become this "owner" and there are currently no foreign investors with enough money.

At the beginning of this century, Henry Ford said that anything can be sold, even rusty nails, it is only a question of price. Certainly, it is easy to sell the assets of our companies at the price of rusty nails, but then we would not be able to solve the sector's problems. This is why considering foreign investors' suspicion of Ukraine's economic policy, which fails to create a profitable investment climate, we should not rush with energy branch privatization to attract foreign investors. We think monitoring of the privatization process should be launched instead of current privatization programs. If energy prices remain low, the government will have to understand that proper conditions for foreign investors have not been yet created, and the sale of assets is premature. In order not to stop reforms and secure a conversion to corporate management, state stock packages in energy enterprises can be leased to Ukrainian private companies and banks, which are particularly interested in effective management. However, they should take into an account that foreigners will also participate in the contest under equal conditions. In this case Ukrainians will have less chance, because they will need money not only for deposit, they will also have to offer a financial management program for each company.

Dances around these problems continue but the solution has not been yet found.

 

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