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 1 2 3 4 05 04 03 World Bank Working Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accor- dance with the procedures appropriate to journal printed texts, and the World Bank accepts no responsibility for errors. 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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 . ..