WORLD BANK WORKING PAPER NO. 8
Private Sector Participation in Public Disclosure Authorized the Power Sector in Europe and Central Asia Lessons from the Last Decade
Venkataraman Krishnaswamy Gary Stuggins Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK Washington, D.C. Copyright © 2003 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing: June 2003
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ISBN: 0-8213-5529-5 eISBN: 0-8213-5530-9 ISSN: 1726-5878
Venkataraman Krishnaswamy is Consultant in the Infrastructure and Energy Services Department in the Europe and Central Asia Region at the World Bank. Gary Stuggins is Lead Energy Economist in the Energy Unit of the Energy and Water Department at the World Bank.
Library of Congress Cataloging-in-Publication Data Krishnaswamy, Venkataraman, 1934- Private sector participation in the power sector in Europe and Central Asia: lessons from the last decade/ Venkataraman Krishnaswamy, Gary Stuggins. p. cm. -- (World Bank working paper; no. 8) Includes bibliographical references. ISBN 0-8213-5529-5 1. Electric utilities--Deregulation--Europe. 2. Electric utilities--Deregulation Europe, Eastern. 3. Electric utilities--Deregulation--Asia, Central. 4. Privatization--Europe. 5. Privatization--Europe, Eastern. 6. Privatization--Asia, Central. I. Stuggins, Gary II. Title. III. Series.
HD9685.E82K75 2003 333.793’2’0947--dc21 2003049710 TABLE OF CONTENTS
Foreword ...... v Executive Summary ...... vii
1. Introduction, Background, and Methodology ...... 1 The approach in 1990s and its rationale ...... 1 Current situation ...... 2 The limitations of the new sector reform ...... 2 Study methodology ...... 3
2. Getting the Conditions Right ...... 7 Focus on stabilization ...... 7 Focus on non-payment ...... 7 The fallacy of reforms before commercialization ...... 8 Legal reforms ...... 9 Tariff and regulatory reform ...... 10 Key components of commercialization ...... 10 Preconditions for privatization ...... 11
3. Getting the Market Structure Right ...... 13 Non-discriminatory approach ...... 13 Approach to small systems ...... 14 Fragmentation of distribution systems ...... 14 Single buyer model ...... 15 Other wholesale market models ...... 16 Power pools ...... 16 Capacity additions ...... 16 Clarity of objectives ...... 17 Likely structures ...... 17
4. Private Sector Participation ...... 19 Privatization to follow commercialization ...... 19 The independent power producers ...... 19 Transfer of operating rights ...... 20 Majority or minority shares? ...... 20 Prevention of resale and arbitration ...... 21 Privatization of generating units ...... 22 Privatization of distribution ...... 22 Concept of strategic investors ...... 24 Equity for debts swap and assets stripping ...... 24 Franchising and management contracts ...... 25
iii IV TABLE OF CONTENTS
Commercialize and wait for better investment climate ...... 25 Treatment of Bank loans and IDA credits ...... 25 Post-privatization phase ...... 26
5. Social Safety Net Issues ...... 27 Concerns relating to employees ...... 27 Concerns relating to consumers ...... 27 Social protection measures ...... 28
6. Conclusions and Recommendations ...... 31 Conclusions ...... 31 Recommendations ...... 32 For the EU accession countries ...... 32 For other countries ...... 32 For the Bank ...... 32
Case Studies ...... 33 Georgia ...... 35 Hungary ...... 45 Kazakhstan ...... 53 Kyrgyz Republic ...... 61 Lithuania ...... 69 Moldova ...... 79 Poland ...... 85 Tajikistan ...... 97 Turkey ...... 103 Ukraine ...... 109 Bibliography ...... 117 FOREWORD
his brief desk research study reviews the experience of the Bank’s operations in the electricity Tsector in ECA countries during the 1990s. The operations during this decade focused on sector restructuring, privatization, and introduction of competition to improve the performance of the sector. These efforts met with a measure of success in certain countries and great deal of difficulties and problems in others. Four case studies relating to countries which are preparing for EU accession and six case studies relating to former Soviet Union countries have been prepared; based on these studies and on the information relating to other countries, lessons have been drawn on the sequence of reforms and essential preconditions for success. Key lessons relate to the importance of legal reform, tariff reform, social protection measures, and comprehensive commercialization of the operations of the utilities before undertaking structural changes, introduction of competitive markets, and privatization. The study highlights the importance of not using any single model of reform in all countries and the imperative need to design the content, the level of sophistication, sequencing, and timing of the reform package for each country based on the endowments and the conditions prevailing in that country. In particular, the importance of choosing market structures appropriate to the circumstances of each country has been emphasized. Good practices enabling successful and sustainable privatization of power sector assets to strategic investors and securing optimal privatization receipts have been identified. In the context of declining interest of strategic investors in the emerging markets, the present report is topical and should help staff in refocusing their attention to the core objectives of the Bank’s operations, and preparing the utilities and the sector more fully for privatization when the investor interest revives.
Hossein Razavi Director Infrastructure and Energy Services Department Europe and Central Asia Region
v
EXECUTIVE SUMMARY
Introduction The focus of the Bank’s operations in the electricity sector shifted in the late 1980s from financing projects and programs seeking to improve the performance and efficiency of the utility and the sec- tor to financing government programs. These programs were designed to restructure the sector to enable the provision of electricity services by the private sector in a competitive milieu. At the beginning of the new century, the appetite of strategic investors for the emerging market utilities seems to have declined. Some of them have disinvested their recent acquisitions and most of them appear to have overstretched themselves. Opportunities and returns available in the developing world appear to them more risky and less rewarding. The Californian power crisis appears to have greatly rekindled the latent doubts on moving to more competitive market structures for such an essential service as electricity. The recent collapse of Enron and several other industrial giants, as well as doubts about the reliability of external audits (resulting, in particular, in the collapse of Arthur Anderson) and the slide in the stock values of AES and other companies has eroded the confidence in the institutional pillars of the market, such as corporate disclosure, external audit, and oversight by regulators and Security Exchange Com- missions. Major energy investors, at least in North America, seem to be anxious to clean up their balance sheets to eliminate from their portfolio unprofitable and risky investments. Against this backdrop, the objective of this study is to review the experiences in the ECA region1 in the 1990s in relation to the private sector participation in the power sector and draw possible lessons and to identify the approaches that enable successful privatization of the power sector and securing optimal privatization receipts. Brief case studies for 10 countries, essentially based on a desk review of the Bank’s available records, were prepared, and information on a few other countries was collected. The emerging findings and preliminary insights were shared with a wide range of Bank staff in a well-attended brainstorming session in July 2002, and the decision draft of the report (prepared on the basis of reactions and suggestions received in that session) was circulated widely within the Bank and discussed in a meeting in October 2002. The final version has been prepared after taking into account the comments made in that meeting, as well as the comments received from select Country Directors or their staff and other comments received from within and outside the Bank.
Common Features The countries for which case studies were prepared are: (a) Hungary, Lithuania, Poland, and Turkey - all candidates for EU accession; and (b) Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, and Ukraine – all former Soviet Union countries. Some of their common relevant features are: