Middlemen sapping cash from energy sector

Inefficient as it is, the Ukrainian energy sector is a money-spinner for some.
The biggest money earners in the sector seem to be the various intermediary companies that have sprung up around the market’s main players. In contrast, the energy generators themselves constantly teeter on the edge of bankruptcy.
“[Creating] debts is the main way of making money [in the sector],” said Maksym Karizhsky, an analyst at the Agency for Humanitarian Technology, an independent think tank.
Energoatom, the state nuclear energy monopoly that produces 45 percent of Ukraine’s total energy, illustrates the problems faced by the sector as a whole.
In a recent speech, President Leonid Kuchma said that the state loses around $2 billion every year as a result of Energoatom’s inefficiency.
But where did that money go?
Since being set up four years ago, Energoatom has become the center of a web of companies that provide it with services, such as supplying nuclear fuel, removing nuclear waste for reprocessing, and collecting money from Energoatom’s direct customers on the company’s behalf.
According to a report on Energoatom’s operations issued in August 1999 by the Finance Ministry’s control and auditing department, middlemen who supply nuclear fuel to Energoatom sometimes charge more than 50 percent of the cost of the imported fuel for their services.
Energoatom itself employs a Byzantine system of promissory notes or veksels as a means of settlement with intermediary companies, which are believed to be controlled by a tightly knit group of energy sector entrepreneurs.
According to the Finance Ministry report, the circulation of the promissory notes causes Energoatom to make huge losses, but allows the intermediary companies to make tidy profits.
Energoatom’s management defends the schemes, saying that circumstances force it to use promissory notes and other payment schemes because, quite simply, it has no cash. Less than 6 percent of the energy it sells to Energorynok, the wholesale energy market, is paid for in cash.
“When there’s no money, you have to replace it with something,” said Serhy Parashyn, a former director of the infamous Chernobyl nuclear power plant and now an adviser to Energoatom’s director. “But unfortunately, all these schemes are of very little benefit to Energoatom.”
“These [intermediary] companies and schemes have to be dealt with, of course. But you not only have to get rid of these [intermediaries], but make some serious changes in the economy as a whole.”
Unlike Ukraine’s other electricity generators, Energoatom has a license to sell its electricity directly to consumers, which allows it to collect at least some cash for the energy it supplies. But having the right to bill customers directly and actually collecting cash from them are two different things: Only 40 percent of Energoatom’s customers are solvent, according to Parashyn.
The oblenergos, the regional energy distributors, are another weak link in the energy chain – a link also exploited by intermediaries to siphon money out of the system.
These 27 companies have a near-monopoly on energy distribution in every region, and are in charge of collecting money from consumers and passing it over to the common bank account of Energorynok.
The money is then distributed between the electricity generators and other market participants.
However, market analysts say that the seven privately run oblenergos are much better at collecting debts from consumers for energy supplies than their state-owned counterparts.
According to Karizhsky, privately run Poltavaoblenergo, for example, manages to collect up to 95 percent of money owed to it by non-state businesses in its region.
However, before sending the collected money to Energorynok, the privately run oblenergos use some of it to pay their workers salaries and maintain equipment.
Analysts also claim that the oblenergos also fail to declare some of the money in order to avoid paying tax on it. The cash saved is squirreled away into so-called “future privatization funds.”
According to the weekly newspaper Zerkalo Nedeli, an audit of the books of one of the private oblenergos – Kirovohradenergo – for the month of January by the Finance Ministry’s control and auditing department uncovered Hr 2.7 billion in money collected from consumers that should have been sent to Energorynok.
Energoatom’s Parashyn said that according to his estimates, the 27 onblenergos are together hiding up to $50 million in cash from Energorynok.
Energy experts say that although the private oblenergos are breaking the law, their actions simply amount to prudent business practice.
“The state is effectively demanding that the private oblenergos subsidize the inefficient state oblenergos, and that’s why [the private oblenergos] refuse to pay more money to Energorynok than their state-owned [counterparts],” Karizhsky said.
“All the companies dump the money into a single bank account, where all receive an equal portion of it, regardless of their performance.”
State officials in charge of the sector, who are well aware of what the private oblenergos are up to, are starting to apply sanctions to the worst offenders.
On April 26, the National Electricity Regulation Commission (NERC) announced that it had suspended the license of Luhanskoblenergo, a partially privatized distributor, until May 10 because of the company’s failure to transfer money to Energorynok.
According to the terms of electricity-supply licenses, a regional power supply company whose license is suspended must continue supplying electricity at a tariff set by NERC until a new supplier is selected to replace it. However, during that period, the Tax Administration will confiscate the company’s profits.
NERC has ordered Luhanskobolenergo to increase the amount of cash it transfers to Energorynok by May 10. If it fails to do so, NERC will either extend the license suspension period or revoke the license altogether.
However, experts say this type of sanction could not be widely used – since the oblenergos are monopoly power distributors in their regions there simply is nobody else to deliver power and collect payments in their place.
“There are lots of ways for companies to avoid paying money to the state, but right now the state is not ready to implement drastic reforms in the energy sector, and that’s why it’s giving its tacit consent to what’s going on,” Karizhsky said.
However, there are some ideas on how to reform the energy sector currently being kicked around the corridors of power.
Deputy Prime Minister for the Energy Sector Yulia Tymoshenko has repeatedly suggested that the oblenergos be relieved of their responsibility to collect cash from consumers. In their place, private companies would collect the money, leaving the oblenergos solely responsible for distributing electricity in their region. The private electricity bill collection companies would be chosen via tenders held in each region every year.
However, strong opposition to this scheme has already come from Oleksandr Bondar, the head of the State Property Fund, the state’s privatization arm. According to Bondar, the implementation of Tymoshenko’s scheme would render the oblenergos worthless as privatization objects – no investor would put money into a business that was not allowed to make money directly.
The uncertain future status of the oblenergos is to be resolved once and for all by mid-July when the government is due to submit to parliament for approval its program to reform the energy sector.