Private Companies Move to Utility Sector
At its autumn session, the State Duma is going to consider two draft laws relating to public utilities, the first one is about investment agreements and the other one deals with tariff regulation principles, which have to expedite private investments into the communal services sector. Up to now businessmen and local authorities have actually boycotted long-term projects in the utility sector. Utility services market participants state that it is not their fault: the problem is the lack of investment return guarantees.
Leaders cannot act
In Russia, over 25 thousand municipal formations own water channels, gas, heat and power supply networks. In most cases wear and tear of this infrastructure is over 70 per cent. "We are facing the threat of a real technological disaster: the population and the public sector cannot afford an inefficient and resource-intensive system of the municipal housing economy," representatives of the Federal Agency for Construction, Housing and Utilities said. The annual turnover of the public utilities sector is 877 billion rubles or 5.9 per cent of the GDP of the Russian Federation (in 2003), but private companies are not in a hurry to invest in this huge market.
One cannot say that private businesses ignore utility services. Among 52 thousand organizations (they employ 4.2 million people) working in the utility market, private companies occupy over 10 per cent – it amounts to 25 per cent in the power supply sector and 30 per cent in heat supply.
Besides, subsidiaries of power holding companies, such as Russian Communal Systems (25 per cent owned by RAO UES of Russia) and Mezhregionteplo (Gazprom), the largest industrial groups work in the market of public utility services at present: Regional Utility Investments (Basic Element), IES - Multienergetika (Renova), Novogor (Interros), Alfa-Eco (Alfa). The specific feature of the last six months was the entry by Russian banks in the utility services market in the person of Moscow Municipal Bank – Bank of Moscow, Vneshtorgbank, Agropromcredit Bank, and Interregional Utility Company belonging to businessman Sergey Veremeenko, who used to work for Mezhprombank.
During the last year, about two dozens of nationwide commercial entities penetrated into the market; each of them can be the national operator of the housing and communal services sector. However, really large companies, which could be called the national operator of the public services sector, do not exist now. Respondent market participants found it difficult to define the market share that such a player should capture: 3 or 5 per cent of the market.
"The government does not understand the place of private business in the utility services sector," this is the common opinion of most businessmen polled by the Kommersant. "In Russia, there are no institutions for quick development in the national scale", ex-Chairman of the Board of Directors of Russian Utility Systems (RKS) Sergey Yashechkin stated at a press conference after he quitted RKS. Nikolay Stepanov, active Deputy Chairman of the Board of Directors of RKS, also notes that, in fact, the state policy did not stimulate the development of commercial initiatives in this field. According to him, technical and economical problems exist, which eventually boil down to the lack of any mechanism regulating the registration of property that belongs to the utility sector; municipalities do not have money to do that, general urban area development plans are missing, there are no profitable investment projects.
Today, in the opinion of RKS management, we are facing a real "tariff genocide" with regard to utility companies, which has made them work with prearranged loss-making tariffs over the last ten years and has not allowed utility services to become profitable. "It is impossible to count on serious financial institutions without investment return guarantee", General Director of IES -Multienergetika Sergey Chikurov supports him. "Due to the unpredictable tariff policy, a potential investor is not willing to make risk investments," he emphasized.
At the autumn session, the State Duma is to review the laws "On Investment Agreements in the Utility Service" and "On Common Principles of Tariff Regulation for Utility Companies". After they become effective, commercial utility companies forecast expansive growth of investments in the public utilities sector. The first of the laws regulates establishing of a concession in the utility services sector and helps to form long-term relationships with investment obligations between business and power.
Masses do not want to act
Local authorities, which have to be interested in the improvement of the public utilities infrastructure, create a number of obstacles for private companies in the utility services sector, because of the lack of a clear legal base. "We are ready to invest in this sector over $100 million, but it is not clear with whom we have to negotiate", co-owner of the Utility Company of the Moscow Region Dmitry Levitin says (the major shareholder of this company is Agropromcredit Bank).
The political situation is such that many businessmen may lose contracts if regional authorities change. In Vladivostok, a subsidiary of RKS had to discontinue functioning for some time because, before the expiration of the 11-month agreement with local authorities, the city mayor changed and the new administration started everything from zero. A similar situation was in Orel. The new head of the city administration, Nickolay Stepanov, explained that work had to be resumed, but the new administration just needed time to study out everything. And at that RKS carries out corresponding policy and forms rules of the game on the market as long as the situation allows.
In many regions, local authorities believe that private companies are a source of income for local budgets and refuse access of businessmen to the region if the latter do not understand social problems. Thus, the City Duma of Blagoveshchensk, Amursk Region, has refused to approve a municipal contract with Amursk Utility Systems (AKS) for six months; meanwhile, the company promises investments in the city's utility sector in the amount of about 900 million rubles on security of the city communal property. Oppositional deputies of the City Duma called the suggested contractual terms as "predatory", saying that local authorities "will not be able to return money to the utility company and the pledged property will pass into the ownership of AKS".
And even such a large potential investor as Gazprom cannot insure private companies against failures in the housing and communal services sector. The gas saving program of Mezhregionteploenergo for heat power utility companies envisages investment of 135 million rubles in 2004 and 900 million rubles in 2005. But this company also could not avoid closing its subsidiary in the Kaluga Region because of the debts that local authorities did not agree to redeem under the scheme suggested by the company.
In most regions, compensations for preferential tariffs are not paid from local budgets. As representatives of Mosenergo said to the Kommersant, in December 2003 the Financial Department of the Moscow Government decided not to allocate VAT from the city budget to compensations for heat tariffs in 2004. However, the federal budget still charges VAT from this type of income of Moscow heat utility companies. According to estimates of Mosenergo specialists, as a result of such inconsistence between local and federal budgets balance sheets of Moscow heat utility companies have a deficiency at the amount of 2 billion rubles. The Federal Tax Service of Russia promised to exempt Moscow heat generating companies from VAT. However, there is still no offsetting with the city budget and no tax relief. A similar situation is in other Russian regions. The lack of budget compensation impedes profitable work of private companies.
Certain achievements
The acting structures such as Directorates of the Single Customer and municipal unitary companies are not interested in giving way to transfer their property to new owners. "The main problem of the utility sector is the lack of the efficient owner. They do not earn but steal in the utility sector. They steal by all means: using fuel supplies, repair works", Dmitry Levitin explains.
He gages his colleagues explicitly: "I believe that the most popular mistake of private companies in the utility sector is the desire to start making money without investing anything". An RKS top manager does not agree with his colleague and says that the company invested 600 million rubles in regional projects. Failures of private companies in the utility sector are also due to their desire to pay for renewal of the infrastructure by jump of tariffs. Thus, as soon as a top manager of an RKS subsidiary stated that it was necessary to increase the heat tariff from 1 up to 3.86 rubles/Gcal, the city administration refused to discuss any other projects with the company in the field of heat power supply.
Only separate projects are implemented successfully: those dealing with one of the utility segments but not with the whole public utility complex of a city. For example, Novogor set work of a water supply company in Perm. In the market, rumors are that the water supply company in Perm will be sold to a foreign investor. A most likely buyer is French Veolia. Director of Veolia Water CIS Andrey Kapustin answered the question about a possible purchase: "We are interested in water supply companies. We are going to work where we are offered favorable terms of work". There are other certain successful projects when businessmen find mutual understanding with the local administration and form efficient management. As competitors say, all those projects are for profiteers who want to make a short-run profit during two-three years.
Consumers are absolutely indifferent about which company serves them: a nationwide or a local company, a national operator or a company established for profiteer purposes. It is important that the company employs nondrinking plumbers and technicians and its administration does not increase tariffs for utility services too much. One conclusion can be drawn from the above: private business has already arrived at public utilities but authorities are not ready to have a national operator in this field. That is why, during the last year, just a few projects were successful: those ones with real investments and a changed working pattern of utility services.
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