AES GROUP & WORLD BANK PARTNERSHIP

Transcription

1 AES GROUP & WORLD BANK PARTNERSHIP Energy Sector Privatization - Georgian way for Building Democracy or old recipe for developing countries? GNAA Tbilisi,

2 Co-authors: Manana Kochladze, CEE Bankwatch Network National Coordinator Gocha Jelia, Vakhtang Mgeladze, National Agency Against Corruption Levan Tavartkiladze, Nino Gujaraidze, The Greens Movement of Georgia ACKNOWLEDGMENTS We would like to thank all peoples that actively participated in preparation of our report. Our special thanks to Lika Todua for her participation and trust in our work, to Lori Pottinger for editing and good remarks, to Graham Saul and Keti Popiashvili for information and ideas providing. The Greens Movement of Georgia / Friends of the Earth Georgia 182, Agmashenebeli av. Tbilisi , Georgia. tel: / fax: Georgian National Agency Against Corruption 7 Tavisuflebis square, Tbilisi, Georgia Tel: / Fax: CEE Bankwatch Network Kratka 26, Prague 10, Czech Republic 2

3 The World Bank mission is to eliminate poverty over the globe, at the same time it spends considerable sums persuading the governments of Newly Independent Countries that they are incapable of running their power sector efficiently and pressing them for quick privatization without consideration of possible social effects. Georgia is clear example of discrepancy between theory and reality of the World Bank mission. Introduction Since 1993 Georgia has experienced an acute energy crisis, affecting citizens in a number of ways. Some elements of the crisis include the cutting off the natural gas supply from Russia; shutting down of the central heat supply systems; high level bribery and corruption; the introduction of market economy rules, which has led to the price increases and other changes. These problems are especially acute during the winter time when the population has access to the electricity services just 4-6 hours per day in the capital and central cities of Georgia, while the rural regions are often without any electricity supply at all. According to a 1999 Country profile by European Bank for Reconstruction and Development (EBRD) In principle, Georgia has enough hydropower capacity to meet domestic needs and also to export. However, the plants have suffered from the lack of maintenance and are in a precarious condition. International Financial Institutions, namely the World Bank, EBRD and other bilateral agencies actively participated in the rehabilitation of the energy sector of Georgia. In recent years about US$700 million credit was allocated for this sector. The money has been used for the basic studies and rehabilitation projects. The increased tariffs for household and industry have been set up at the same level and subsides have been eliminated. All this measures have never helped to improve the electricity supply of consumers, even allowed uncontrolled disbursement of all IFI and ECA credits. To finish up with burden in energy sector only solution the Government found out - privatization of energy distribution and generation state companies. In the Parliament of Georgia adopted many regulations and amendments to privatize the energy sector. It also established an independent tariffs regulatory state body and reallocated responsibilities and obligations among the different state energy regulatory bodies. Meanwhile the process of privatization does not seem to be different from the processes that created existing burden in energy sector of Georgia. The privatization itself is neither good nor bad. Everything depends how it will be done. Sometimes privatization supports creation of new monopolist or systems that do not take into account demands of public. From their side public 3

4 often could not pay the tariffs, because of poverty. All these show how carefully and with highest rate of transparency privatization process should go to satisfy the needs of society, support rehabilitation and facilitate development of sector in future. Judging about the positive sides of privatization is rather difficult as there are several questions without any answers. How effectively and professionally governmental official will review the contract with private companies if they have not got salaries already for two years? Do the foreign private consultant companies, paid by World Bank or other donors, take into account the needs and concerns of local population, or only support their own country based TNCs? Is it right to carry out the process of privatization taking into account only economic indicators, not thinking about compensation measures for society? In spite of the legend that there is an economic growth observed in Georgia, the majority of population are still poor. Thousand of Georgian citizens already pay very high prices for electricity supply compared with their salaries (up to 30-40%!). People just can not pay more. How can increase in electricity tariffs improve bill collections? The first example of huge privatization in Georgia is purchasing by AES Group of Telasi Energy Distribution Company, units 9 and 10 of Gardabani Power Station and Khrami-1, Khrami-2 hydropower stations. The case of Georgia clearly shows how the G-7 country based companies operating in developing countries with IFI s support increase their monopoly and welfare. The crucial question is whether these activities at all favor development of Georgia or not. AES Group and World Bank Partnership for Development AES Groups (US based transnational consortium) is one of the largest power company in the world. Since its establishment in 1981, AES gained a big portfolio of power stations in the US, Brazil and other countries of South America. It possesses gas, coal and hydropower stations, and distribution and transmission systems. Since 1998 AES Groups starts to operate in NIS countries (Kazakstan, Uzbekistan, Georgia, Ukraine) its assets surprisingly increasing from 5 milliard US$ to 14 milliard US$ during the two years. AES is fulsome in its praise of the World Bank and its private enterprise arm the International Financial Corporation; We have developed an excellent partnership 4

5 with the World Bank and IFC. These institutions have been very supportive of our efforts to supply electricity in nations with emerging economies (AES Corporation, Annual Letter 1999.) Probably this excellent partnership was the reason for the IFIs to recommend to the Kazakstan Government to sell 4000 MW Ekibastuzi Power Station to AES for 3.7 mln USD. This operation rising AES s assets for several milliards. However, when the state decided to buy the station back the company surprisingly defined a new price - 1,000 milliard USD! The privatization of Energy sector in NIS (Newly Independent States) countries is getting more and more support from IFIs, without monitoring and analyzing the impacts of allocated credits as well there has been little support to deal with the social-economical problems caused by IFI s policy. For example EBRD Document Energy and Transport in the Black and Caspian Sea regions barriers and gateways to regional integration (realized in EBRD AGM, May 2000, Riga) even gives positive evaluation of the Energy Sector Privatization in these two countries: There are indications that policy reforms required for a functioning power market is beginning to take a place. Perhaps the best example is that Georgia, which is making a serious attempt to reform the power sector (a necessary step to expand the export of seasonal hydropower) and of Kazakstan which is the most advanced country in region in terms of reforming its electricity market. It has concluded management contracts with foreign companies for some its electricity distribution companies and is planning to privatize others in According to the World Bank policy statements, it tries to develop energy reform, assuring that reform and private sector participation can help the poor in many ways: it can refocus subsidies, reduce their costs and free scarce fiscal resources to fund high priority social spending; mobilizing private funds, decentralizing decisions and improving efficiency, it expands energy access, voice and choice for consumers; [and] by enhancing environmental management, it serves the poor who happen to be the most exposed to pollution (from About Markets and Reform - Energy Markets and Reform, It is really interesting how reform and private sector participation helps poor in the country which is becoming famous because of a huge gap between theory and practices of the Bank. The reality is that the Bank is making recommendations and lobbying in favor of particular companies. As a result, the state monopoly is changed by the private one, but nothing is changed for the consumers, they are still without electricity. 5

6 STEP 1. In July 1998 Ministry of State Property announced the tender on privatization of 75% of shares of Telasi - Energy Distribution Company. This Company served the biggest city of Georgia Tbilisi, with consumers. The US based Investment Bank Meril Linch won the tender to carry out the energy sector privatization process on behalf of the Georgian Government. Consultancy fee was funded by WB. According to the state officials the company has been chosen as one of the top investments Consultancy firms, with capital 21,000 milliard USD and great experience in increasing of assets of its clients. AES Silk Road Holdings B.V. won tender for privatization of Telasi company, followed with big scandal in media and government. The decision of Tender Commission was doubtful for public, because the conditions of another applicant Georgian-French Consortium ( consisted Saur Internacional (France) and Georgian TBC group) was much better from investment point of view. The explanation provided by AES supporters, about the decision of Tender Commission, was very strange and unclear AES will invest in 10 years 83 MLN USD, since defeated consortium have planned to invest 123 mln USD. However during assessment process of applications in these kinds of tenders planned amount of investments has comparatively less significance. If company could really meet its obligations, the amount of planned investments to achieve the goal had no sense. As a result of this self-contradictory declaration the preference was given to the company that paid more in cash at the moment of the purchase, but planned less to invest for distribution network rehabilitation and thus would provide worse service for consumers. According to the contract in case of violation of the tender requirements the winner company has to pay the penalty of 10% of non-paid sum or non-executed investments. In case of violation repetition company looses the right to manage shares, and disbursed sums would not be repaid. According to the agreement signed between Government of Georgia and AES Silk Road Holdings B.V the company purchased 75% shares of the Telasi for 25.5 mln USD, plus obligation to invest 83,8 mln USD in ten years and pay 10 mln USD Telasi debt. One of the main requirements of the tender was to get into the order remetering of electricity consumption, make contracts with consumers and installation of personal electricity meters before the year Up to now the company have not fulfilled the tender requirements: AES Telasi is still one of the biggest debtors to the state (in August 2000, the taxation inspection has frozen its account); no order has been reached in either metering or bill collection. But instead of being punished for this the company managed to use its failure for its benefit. 6

7 Surprisingly, on 12 January, 2000 IFC together with EBRD agreed to provide 60 mln US$ for a 13 year corporate loan to AES Telasi to finance initial working capital and critical investments in consumer re-metering, billing, information technology, and network components to create a modern, efficient and commercial electricity distribution company. The project is expected to improve efficiency of distribution to the consumer and greatly improve collections necessary for reinvestment and modernization in the sector as a whole. The IFC local office refused to announce details of annual interest rates and name of guarantee agency. Debt should be repaid in This is a very soft loan for Georgia. Such loan has been given by the Banks only once for the Chiraq Early Oil project. However, AES Telasi has just installed outside of apartments electricity meters, doing nothing to improve the distribution network parameters that is continuous problem for energy losses. STEP 2 AES bought Telasi only with guarantee that they will also buy in future generation plants: Gardabani Power Station (,,Tbilsresi the only state thermal power station in Georgia), Two hydros Khrami I and II. Tender was announced for generation plants Tbilssresi (City Gardabani) 80% of shares; Hydros Khrami I and Khrami II, 100% of shares. The estimated price for these plants was about 300 mln USD. The winner was obliged to pay 80 mln USD Tbilsresi debt of WB, EBRD and KfW. In the tender was participated only AES. Australian Company P.M.S. refused to participate in tender when it found out conditions of Telasi privatization agreement. The total working capacity of these generation plants is 1223 MW of which 1000 MW comes on gas power station and 223 MW on hydro power. As the winner of the tender, AES reviewed the condition of agreement and instead of purchasing whole Tbilsresi power station, bought only best two units 9 and 10, with working capacity 600MW. The negotiations for new agreement between State and AES lasted for several months, with intensive participation of the WB and EBRD. Finally AES Group bought 823 MW generating facility for US$11 million. The government of Georgia, namely the Ministry of State Property keep the contract negotiations secret, explaining that the global process of privatization in Georgia still is not finished. However, the Presidential decree N403 and the constitution of Georgia require transparency and access to information in 7

8 privatization process. We still come back to the question is transparency essential for the country s development or not? According to the tender, the purchaser was obliged to pay back the debts of Tbilsresi that amounted 80 mln USD loan of WB, KfW, EBRD. This debt was used in years by the state for renovation of Tbilsresi 9 th and 10 th units. AES has agreed to this responsibility but at the same time is trying to avoid it. According to the final contract it was agreed that AES would start to repay this debt at the end 2007 and will finish it at But state has already started repayment of interest rates and should pay the main sums after However, AES is apparently trying to avoid or reduce its responsibility, by claming that its investments in rehabilitation of Tbilsresi should be considered as a loan repayment. According to the statement by Mr. Robert Riss, one of the official representatives of AES Group, AES has already paid back 60 mln USD, through investments in Tbilsresi. STEP 3 At the End of 1999, a new company AES-Transenergy was established, founded by AES together with the Ministry of Fuel and Energy. The company received electricity transmission right (65% of quota on export) on route Russia- Georgia-Turkey (owned by state). Also it managed to receive exclusive rights: prior right for export, direct purchasing of electricity from generation objects for low price with ignoring of electricity market law, right to manage all financial aspects with Russian and Turkish partners and taxation holidays till The Ministry of Fuel and Energy receives 15% of profits. At the same time company and state officials try to keep agreement materials as secret as possible. What is the advantage of export? As State officials are saying all Georgia high voltage lines for export are used to transfer electric energy from Russia to Turkey but according to the experts opinion these lines are used for re-export. Georgia is buying electricity from Russia for 2.3 cents, it is added with domestic cheap hydro energy (0.8 cent) and sells in Turkey for 3.45 cent. That s why AES was interested in electricity export and now it has hydro (Khrami-1, Khrami-2), thermal ( AES - Tbilsresi ) generation systems plus local distribution (AES- Telasi) and export ( AES-Transenergy ). Reportedly, profits received from export will be used for generation expensive electricity from Tbilsresi owned by AES. Generated electricity will be provided to electricity market during the winter. Apparently this electricity will be bought by AES-Telasi. This complicated scheme in fact represents indirect subsidy from state to AES. Meanwhile, for population the company and state uses scare-stories about Georgia s shortage of electricity. In reality, experts are saying that 50% of electricity received from internal and external sources are exported to Turkey. The question of the specialists why Georgia exports electricity instead of tackling local crisis, the state and company officials explain it 8

9 with the low re-payment of consumed electricity. In fact, this gives answer why electricity tariffs for population increase so rapidly - the more electricity costs the less part of Georgian population can pay the bills, the easier it is to explain importance of the export for the company. Huge electricity losses in distribution system and rapidly increased tariffs, without any supporting social scheme decrease electricity bills payment and provides good reason to intensify the export. Expected Transitional Impact It appears that the IFC and EBRD are investing not in the creation of an efficient electricity sector, but instead are just supporting the creation of a private monopoly system in Georgia. The banks strongly favored using an US-based Company. In 1999 the AES started to lobby the government to abandon the VAT from Electricity payments and suggested to pay VAT only from repaid electricity bills. The State position was that the main aim of privatization was to establish a well managed system of electricity bill collection; it was believed the abandonment the VAT for AES will establish the bad precedent for other companies. Unfortunately, IMF representative Mr. Emmanuel van der Mensbruk opposed this position and says that state should create favorable atmosphere for important Western investors. A very strange understanding of favorability! Apparently the favorable atmosphere should have been created exclusively for the Western investors, to the prejudice of domestic ones as these latest have to pay all taxes! IMF strangely abstained from giving the same recommendations to the state owned Georgian International Oil Company when it asked for tax exemptions. Another example of the continuing favoritism is EBRD s request to the Government of Georgia to allow AES to buy about 700 MW electricity directly from Enguri Hydropower station for 1,4 Tetri per kwh (about 0,75 cent). In reward, EBRD funded 38 mln USD for reconstruction of Enguri Hydroelectropower Station. In March 1999 the World Bank International Development Agency co-financed the Project Georgia Electricity Market Support Project, allocated 20 mln USD for this purpose. The main objectives of the project was to establish an efficient electricity market in Georgia to facilitate commercialization and privatization of distribution and generation companies, improve reliability and power supply, reduce losses, and strengthen regulatory activities. All commercial interactions were supposed to be conducted through market and all power companies were obliged to become electricity market members. Logically, AES should have been the heaviest supporter of Electricity Market that facilitated transparency in the sector. In reality AES Telasi became member of 9

10 electricity market only after adopting of the amendments in its charter in the April of 2000 which gave possibility to AES during the year to purchase directly the electricity at the price of 1,8 Tetri (0,95 cents) per kwh, while the price defined by the electricity market was 3,5 Tetri (1,8 cents). This creates a problem for the state budget and breaks the law according to which distributor that is not a member of electricity market has not any right for the electricity distribution. But it seems that when AES is concerned with neither state interests nor National laws are important. Another step of AES Telasi was a request to the State Minister, to make an amendment to the Anti-monopoly law not to consider power sector as a subject of above-mentioned law. What has changed? The WB Energy program coordinator in Georgia considers that the main problem in Georgian Energy Sector is still corruption and at the same time argues that privatization process in power sector of Georgia in whole was accomplished properly. However, he worries that if AES could not establish the proper electricity supply system of Tbilisi or somebody will create obstacles to company the Electricity Sector Privatization would be compromised. What he does not say is that the failure of electricity sector privatization will not be just only the government s or the company s fault. The lion s share of responsibility is up to the World Bank and EBRD. At the first place it were their recommendations that created this monopoly system. After the break up of the Soviet Empire, the Georgia Energy Sector has provided a fertile ground for the world-wide expanding corruption, from which only the ordinary people suffer. For citizens the situation remains the same only the frontward have changed. References: I.Tokhadze - Powerenginering Sector Bulletin 34, 1999 Strategic Research and development Center of Georgia Georgia Energy Profile FOE Georgia, 1999 Developing the Energy Sector in the transition Economies of CEE and the Former Soviet Union ECSEG,World Bank EBRD Country Investment Profile 1998 World Bank, Report No 17152GE, December 16, 1997 Review of Legal document of Ministry of State Property Documents of Georgian Wholesale Electricity Market Interviews published in newspapers ALIA, DILIS GAZETI, AKHALI TAOBA Interview with WB Energy Program Coordinator in Georgia Mr. J.Walters, 25 July, 2000 Dilis Gazeti During the research was done number of video interviews by report authors. 10