By Emil Danielyan
Armenia's state-run power utilities are undergoing a major shake-up which government officials and Western donors say should make them more attractive to foreign investors who showed little interest in buying them last year.
Preparations are now underway for leasing one of the most reformed but still inefficient sectors of the Armenian economy to a foreign company capable of ending its huge losses and improving its management.
"The energy distribution companies are being prepared for a transfer of management," Energy Minister Armen Movsisian told a news conference this week. "We will be able to call an international tender by the end of the year."
Referring to last year's collapse of two tenders for a majority stake in the four power grids covering the entire country, Movsisian said, "For us, past failures are a certain experience which allows us to assess the situation more correctly. They also allowed prospective investors to have a closer look at our distribution networks". Several Western and Russian companies took an interest in the solicited takeover. But none of them eventually submitted a bid.
Officials have blamed the fiasco mainly on external factors, notably the worsened global economic outlook following the September 11 terrorist attacks in the United States. But they do admit that chronic problems crippling the sector also played a role.
The government decided late last year to lease the network to a foreign operator instead of again trying to sell them. The decision was approved by the World Bank and other Western donors that have for years pushed for the privatization of the Armenian energy sector. Salman Zaheer, a senior bank official, said at the time that the donors see the lease option as a "credible, even though a second-best, way of achieving what was intended to be achieved through the privatization."
Gevorg Sarkisian, who coordinates the World Bank's infrastructure projects in Armenia, said on Friday that it also has better chances of success. "In this case, the foreign company will share with the government all the risks involved," he told RFE/RL in an interview.
World Bank officials also welcome the ongoing re-structuring of the electricity companies, which is aimed at making them more attractive to foreign companies.
In March the four utilities that had notoriously bloated staffs were merged into a single company, the Unified Electrical Distribution Network. According to Movsisian, some 3,200 jobs have already been slashed as a result and more layoffs are expected later this year. The minister claimed that the restructuring will enable the government to improve collection of electricity bills and reduce the sector's financial losses by "by 2.5 to 3 times" this year.
The losses, which mainly result from widespread fraud and mismanagement, are estimated to cost Armenia between $50 million and $60 million each year, making the sector one of the main sources of government corruption. Its privatization, or at least foreign management, are seen as the only realistic way of tackling the problem.
"Reducing the losses, increasing bill collection and proper re-structuring would definitely have positive effects," the World Bank's Sarkisian said.
"The government, together with its consultants, is now preparing all relevant documents, including the pre-qualification requirements and the draft [lease] agreement," he added. "Presumably, it will be possible to start the bidding this summer."
Ensuring improved management and efficiency of the consolidated electricity company will likely be the main requirement to its prospective operator. The latter will also be required to have a solid experience with power distribution. By contrast, the main legal criterion for the selection of winners in last year's privatization tenders was the amount of capital investments pledged by the bidders. The investment commitments will be of secondary importance in the upcoming bidding -- another factor which experts say bodes well for greater foreign interest.
Armenian energy officials have said repeatedly that more than $100 million needs to be invested in the power grids over the next three years in order to modernize its aging Soviet-era equipment and facilities. The World Bank and other donors have pledged to provide part of the sum if the future operator succeeds in turning the distribution network into a viable business.
The network was already reformed extensively in the mid-1990s, allowing Armenia to end severe power shortages that had kept consumers in darkness for several consecutive years. The creation of a strict, and at times ruthless, mechanism for the enforcement of electricity bills was central to the success of the effort. Despite widespread poverty, Armenia now boasts the highest rate of bill collection in the Commonwealth of Independent States.
According to official data cited by Movsisian, Armenian consumers paid for 90 percent of supplied electricity in the first quarter of this year -- a very high indicator by CIS standards. Fee evasion is virtually non-existent among individual Armenian consumers.
Movsisian described this fact as the main trump card in Armenia's drive to lure foreign investors into its energy sector. "Our distribution networks are in a much better shape," he claimed.
The start of the new bidding will also enable the Armenian government to receive a $20 million budgetary loan from the World Bank which was pegged to the privatization of the utilities. The money was due to cover a considerable part of the government's 2001 budget deficit.
Sources said the bank will unblock its release once the government formally begins the bidding process.
Armenia's state-run power utilities are undergoing a major shake-up which government officials and Western donors say should make them more attractive to foreign investors who showed little interest in buying them last year.
Preparations are now underway for leasing one of the most reformed but still inefficient sectors of the Armenian economy to a foreign company capable of ending its huge losses and improving its management.
"The energy distribution companies are being prepared for a transfer of management," Energy Minister Armen Movsisian told a news conference this week. "We will be able to call an international tender by the end of the year."
Referring to last year's collapse of two tenders for a majority stake in the four power grids covering the entire country, Movsisian said, "For us, past failures are a certain experience which allows us to assess the situation more correctly. They also allowed prospective investors to have a closer look at our distribution networks". Several Western and Russian companies took an interest in the solicited takeover. But none of them eventually submitted a bid.
Officials have blamed the fiasco mainly on external factors, notably the worsened global economic outlook following the September 11 terrorist attacks in the United States. But they do admit that chronic problems crippling the sector also played a role.
The government decided late last year to lease the network to a foreign operator instead of again trying to sell them. The decision was approved by the World Bank and other Western donors that have for years pushed for the privatization of the Armenian energy sector. Salman Zaheer, a senior bank official, said at the time that the donors see the lease option as a "credible, even though a second-best, way of achieving what was intended to be achieved through the privatization."
Gevorg Sarkisian, who coordinates the World Bank's infrastructure projects in Armenia, said on Friday that it also has better chances of success. "In this case, the foreign company will share with the government all the risks involved," he told RFE/RL in an interview.
World Bank officials also welcome the ongoing re-structuring of the electricity companies, which is aimed at making them more attractive to foreign companies.
In March the four utilities that had notoriously bloated staffs were merged into a single company, the Unified Electrical Distribution Network. According to Movsisian, some 3,200 jobs have already been slashed as a result and more layoffs are expected later this year. The minister claimed that the restructuring will enable the government to improve collection of electricity bills and reduce the sector's financial losses by "by 2.5 to 3 times" this year.
The losses, which mainly result from widespread fraud and mismanagement, are estimated to cost Armenia between $50 million and $60 million each year, making the sector one of the main sources of government corruption. Its privatization, or at least foreign management, are seen as the only realistic way of tackling the problem.
"Reducing the losses, increasing bill collection and proper re-structuring would definitely have positive effects," the World Bank's Sarkisian said.
"The government, together with its consultants, is now preparing all relevant documents, including the pre-qualification requirements and the draft [lease] agreement," he added. "Presumably, it will be possible to start the bidding this summer."
Ensuring improved management and efficiency of the consolidated electricity company will likely be the main requirement to its prospective operator. The latter will also be required to have a solid experience with power distribution. By contrast, the main legal criterion for the selection of winners in last year's privatization tenders was the amount of capital investments pledged by the bidders. The investment commitments will be of secondary importance in the upcoming bidding -- another factor which experts say bodes well for greater foreign interest.
Armenian energy officials have said repeatedly that more than $100 million needs to be invested in the power grids over the next three years in order to modernize its aging Soviet-era equipment and facilities. The World Bank and other donors have pledged to provide part of the sum if the future operator succeeds in turning the distribution network into a viable business.
The network was already reformed extensively in the mid-1990s, allowing Armenia to end severe power shortages that had kept consumers in darkness for several consecutive years. The creation of a strict, and at times ruthless, mechanism for the enforcement of electricity bills was central to the success of the effort. Despite widespread poverty, Armenia now boasts the highest rate of bill collection in the Commonwealth of Independent States.
According to official data cited by Movsisian, Armenian consumers paid for 90 percent of supplied electricity in the first quarter of this year -- a very high indicator by CIS standards. Fee evasion is virtually non-existent among individual Armenian consumers.
Movsisian described this fact as the main trump card in Armenia's drive to lure foreign investors into its energy sector. "Our distribution networks are in a much better shape," he claimed.
The start of the new bidding will also enable the Armenian government to receive a $20 million budgetary loan from the World Bank which was pegged to the privatization of the utilities. The money was due to cover a considerable part of the government's 2001 budget deficit.
Sources said the bank will unblock its release once the government formally begins the bidding process.