The main thing about reforms is discussing them

The course of reforms in Ukraine’s energy sector reminds one of a joke from the days of developed socialism. A passenger train has stopped en route due to a snow storm. The train’s manager, Leonid Brezhnev, chose not to follow the suit of his predecessors, Vladimir Lenin and Joseph Stalin, i.e., to supply the people with spades and shovels to clear the way. The wise follower of Marxist-Leninist ideas made a more popular decision, “Seal the windows and tell the passengers they’re moving.”

OTHER PEOPLE’S DIVIDENDS

The impression is that energy sector reform is being carried out under the motto that the best way to solve the problem is to forget about it, especially if solving it involves menial and ungrateful work with no political dividends in sight. On the one hand, the government demands 100% payment from power suppliers and has completely centralized the movement of money to a single and controllable account. On the other hand, it did nothing to give the suppliers the right to cut off their own deadbeats, the overwhelming majority of whom are government or state-run institutions and enterprises. State-run consumers paid last year for the energy resources they used mainly by way of centralized mutual settlements, which put the energy companies tottering on the brink of a collapse.

On the one hand, the government seemed to orient itself toward “strategic investors” while presenting Ukrainian regional power companies (oblenerho enterprises) in London and Paris. On the other, state executives pretend not to notice what those strategic investors require: scraping the existing principles of economic administration in Ukraine.

On the one hand, the reformers have fulfilled the wishes of international financial organizations by barring entities from the oblenerho tenders. At the same time, they did not do the slightest economic analysis of probable consequences ensuing from the domination of foreign elements as natural energy monopolists.

The cabinet does not seem to be doing, as Professor Preobrazhensky (a character from Dog’s Heart by Mikhail Bulgakov — Ed.) put it, “its proper business.” For a whole year of energy reform, the cabinet has not dared to make even one politically unpopular but economically sound action. Instead of doing professional work in the fuel and energy complex (FEC), the government has often resorted to political declarations, while the absence of any economic strategy was compensated for with panegyrics from yes-men journalists. The main trumps in the PR campaign to back the cabinet were the radiant smile of Western support for the government’s reforms, without the reforms being made concrete, and the reformers’ ability to stand up to so-called oligarchic clans in the political struggle. However, the government never showed the public at large any integrated economic strategy and not only in the energy sector.

The accurate fulfillment of IMF orders based on Milton Friedman’s obsolete monetarist economic theory can hardly be considered this kind of strategy. In addition, the ultimate consequences of the implementation of this theory in Ukraine still remain unknown.

OUTSIDE THE STRATEGIC FIELD

Meanwhile, the necessity of the government’s having an FEC reform strategy has long come to a head, and distributive accounts alone will not do.

As far as electricity is concerned, this is clearly expressed in a deep contradiction between the government’s course toward the privatization of energy companies and the attempts by this same cabinet to continue to manage the sector in the injunction- based hands-on mode. And what do the “strategic investors,” so much sought by the reformers, want? A letter from Credit Suisse First Boston Executive Director Matty Vengerik to Viktor Yushchenko and energy sector leaders dated December 19 clarifies this point to a large extent. As an oblenerho tender adviser, CS First Boston expresses the opinion of the potential buyers of energy facilities, so it is worth listening to its viewpoint.

What the strategic investors want is a substantial and radical increase in the rates charged for electricity, the absolute right to cut off all debtors, making the Enerhorynok (Energy Market) state-run enterprise responsible for supplying electric power to the regions, and legislative confirmation of the independent status of the National Commission for Electricity Regulation (NCER). The investors believe that the oblenerho enterprises should have their debts restructured without any fines and inflation-related indexation imposed by Enerhorynok. The government, aware of the strategic investors’ wishes, is still doing everything the other way around.

Negligible tariffs for power suppliers and continual redistribution of energy market money flows by the cabinet caused most oblenerho firms to lose money last year. Unable to radically increase the rates for electricity in Ukraine, the NCER has offered a compromise solution: to impose electricity fixed payment rates on power consumers. Fixed rates would mean transition to a more effective system of price formation for the distributor services without making a hole in consumers’ pockets. The cabinet did not support the NCER initiative and is trying to block the introduction of fixed rates. Still in force are the ten cabinet and Verkhovna Rada resolutions and instructions that forbid the cutoff of electricity to farms, residential dwellings, oil and gas facilities, educational and medical institutions, army and police units, water reservoirs, etc. The reformers never displayed any major initiative in looking for ways to make up for the losses incurred as a result of this policy of no-cutoffs of vital consumers. It is easier to fight the power suppliers, for this will not tarnish anybody’s political image. As to the oblenerho companies, let them cut the deadbeats off themselves! Conversely, last year the government subordinated to itself Enerhorynok, a state-run enterprise that keeps official monopoly on UAH 15 billion worth of the wholesale electricity market without bearing any liability to market participants. There can be no question of the NCER’s independent status, when a vice premier personally amends the algorithm of energy market fund distribution in favor of one player or another. Even the strategic investors’ simplest demand to restructure the oblenerho debts has remained unanswered because Enerhorynok wants to cash in by making power suppliers pay fines and penalties to its own current account.

DISTRIBUTE AND CONTROL

But the investors’ most radical demands, as spelled out by CS First Boston, are liquidation of the energy market’s distribution accounts system, and a clear government course toward the conclusion of direct contracts between the producers and the suppliers of electric power. The privatization adviser thinks that one of the main conditions for a successful sale of the oblenerho firms is amending to the law on electrical energy so that power suppliers would be granted the right to collect electricity money in their own accounts at the bank of their choice. Direct contracts, CS First Boston claims in particular, will allow investors to lower their investment risk and stabilize power supplies to consumers. Mr. Vengerik’s letter proposes introducing a direct contract clause in the law on the wholesale electricity market. These investors two demands take on special importance because they are in glaring contradiction with the system now in existence, whereby energy market funds are circulated via distributive accounts controlled by the government, not their owners. This distributive system seems to be, thought the then vice premier in charge of energy, the embodiment of a “transparent and fair” energy market. However, experts still remain in the dark about where the market is, for everything stated above does not imply competition among electric power producers or any direct and natural economic ties between energy companies, but it does imply a total governmental monopoly on wholesale electricity.

The true interests of the strategic investors, for whom dog-and-pony shows were arranged in Paris and London, are unlikely to fit in with the War Communism system now being promoted. Is our government prepared to demonstrate consistency, on the eve of oblenerho privatization, by trying to set in motion the energy locomotive now stuck in the plan and distribution mire? The strategic investors’ point of view was known well before CS First Boston sent its letters to the government: an AES Corporation resolution of January 14, 1998, says, “To improve the functioning of Enerhorynok and provide the oblenerho enterprises with cheap electrical power, the former should be reformed. The oblenerho structures should be given an opportunity to conclude direct contracts with generating companies via the energy market.” Another clause reads, “The oblenerho transit (now distributive) accounts should be eliminated. It is unrealistic to expect a strategic investor to accept a situation when a privatized oblenerho will be deprived of a chance to control the collection of payments.” At about the same time, the government also was sent similar conclusions from Electricite de France International S.A.

THE ENDS JUSTIFY THE MEANS

Unfortunately, the energy sector does not show any government strategy but displays quite a few various innovations. For example, last December Yuliya Tymoshenko decided to resuscitate the forgotten project of introducing outside control over the power companies. The idea proved quite opportune two months before the end of the tender, the more so that no road show was planned at the time. It is planned to muster as many forces as possible, including judicial bodies, for the final and decisive administrative assault on the oblenerho entities.

At a meeting chaired by the then vice premier on December 18, a cabinet task force was ordered to draw up a draft instruction from the resident to the High Court of Arbitration and Office of the Prosecutor General to introduce administrative management in “one of the worst regional power supplying companies.” The same meeting resolved to hold a separate sitting “to coordinate actions of Ukraine’s High Court of Arbitration over sanctions applied against those oblenerho entities, which have the worst energy market settlement results.”

One gets the impression that, as far as the bureaucrats are concerned, the ends still justify the means, especially if it is a question of gaining a direct access to the energy companies’ financial flows without having to go through wholesale markets. Addressing energy company managers, the then vice premier admitted she was holding “consultations” with arbitration court representatives. This admission gives rise to fears that these consultations between the two branches of government could end up with the cabinet applying direct pressure on the court in violation of the principle of division of powers, one of the basic gains of democratic society.

Nor do the top officials take the trouble to assess the legitimacy of their own actions. For example, sometime earlier, the Prosecutor General’s Office protested against some clauses in Cabinet of Ministers resolution No. 1139 of July 19, 2000, On the Approval of the Procedure of Applying Sanctions for Violating the Electric Energy Law, one of which was the introduction of outside control over the oblenerho entities.

According to the Prosecutor General’s Office, the government resolution contravenes, in particular, two articles of the Constitution, the laws On Enterprises in Ukraine, On Economic Partnerships, On Controlling Corruption, and Cabinet of Ministers decree No. 9-92 On Managing State Property.

The prosecutors’ protest also emphasized that the procedure of introducing the provisional administration envisioned in the resolution “will constitute a threat to the energy security of Ukraine because the withdrawal of an oblenerho’s managing body and transfer of its powers to the provisional administration is bound to jeopardize performance of the power supplying company.” Nonetheless, the government has not dropped the idea challenged by the prosecutors, keeping it as a weapon in its further confrontation with energy market players.

It looks like somebody in the cabinet intends to enter the third millennium on a new wave of confrontation with the energy companies. This is very sad, for, as we all know, in war there are no winners, only casualties. And it will never push the energy locomotive forward.