An company with political ties has been awarded a lucrative 49-year lease of Odessa's municipal water utility for Hr 1 per year and the promise of a multimillion dollar investment program.
An influential Ukrainian company with ties to the Social Democratic Party of Ukraine (united) has been awarded a lucrative 49 year lease of Odessa’s municipal water utility, Odessavodokanal.
On Nov. 18, Odessa’s city council approved a long-term lease of Odessavodokanal to Infox, Ltd. for Hr 1 per year. As part of the agreement, Infox is required to invest about $100 million to modernize the water system over a seven-year period.
Infox, a petroleum trading firm with turnover of about $170 million last year, is authorized to retain profits generated by Odessavodokanal during the lease’s 49-year life, but it will not be permitted to dramatically raise water rates during the first seven years, a city spokesperson said. Infox officials and the city are expected to sign the lease soon.
Mykola Lisin, president of Infox between 1991 and 2002, is a high-ranking member of the SDPU(u), a political party headed by Presidential Administration chief Viktor Medvedchuk. Lisin headed Infox until spring 2002, when he was elected to parliament. Company representatives were not available for comment.
Interfax-Ukraine reported on Nov. 19 that 150 Odessa residents protested the lease agreement on the day it was approved by the city council. The protestors called the agreement a shadow privatization scheme designed to transfer valuable state assets into the hands of an influential political-business group.
Oleksy Zarychansky, a spokesperson for the city’s mayor, defended the lease. He said that Odessa’s water system, like systems in other Ukrainian cities including Lviv and Dnipropetrovsk, is old and in desperate need of modernization. The city lacks the funds to make needed upgrades, he said.
“The water pipes and system are 130 years old in most parts of the city,” Zarychansky said.
As a result, city residents don’t have water 24 hours a day, he added.
Zarychansky said efforts by the city to secure a loan have proved fruitless.
“The Ukrainian government would not provide a state guarantee, and our city has nothing valuable enough to put up as collateral through a mortgage,” he said. “This is not a problem that pertains only to Odessa. Similar problems exist in Lviv and Dnipropetrovsk.”
Infox, Zarychansky said, approached the city with an offer to invest in the water system.
A French company was interested but ultimately backed out after the city refused to raise rates significantly, he said.
Zarychansky said that Odessa-vodokanal is set to generate a Hr 20 million profit this year, its first surplus in years. The financial improvements are a step in the right direction, but the company still will not be able to fund the extensive modernization efforts that are needed.
Tetyana Yevdokimova, deputy head of Odessavodokanal, attributed the profits to rate increases. The water rates paid by businesses increased last January from about Hr 1.67 per cubic meter to Hr 3.69 per cubic meter. Rates for households remained unchanged at 67 kopeks per cubic meter, she said.
Rates will not change much for the first seven years of the Infox lease, but could be raised substantially afterward, allowing Infox to recoup its investment, Zarychansky said.
Yevdokimova said that Odessavodo-kanal made some improvements this year, improving water availability, but warned that the company would not be able to fund the large-scale modernization needed to ensure an uninterrupted water supply for all city residents.
Yevdokimova said that an investor with deep pockets was essential.
“The choice of investor is up to the city,” she said. “What is clear, though, is that any rate increase within an acceptable range that could be implemented in the near future would not generate enough profits for the company to fund the massive modernization that is needed. An investor of significant resources is needed.”
Lvivodokanal spokesperson Natalia Bondarenko said the problems facing Odessavodokanal are common in other Ukrainian cities. In Lviv, where water still runs through pipes installed more than a century ago, the majority of residents have water service only a few hours per day, she said.
“The root of the problem lies in the fact that rates are kept low as a result of protests by residents who don’t want to pay the full cost of services,” she said. “The result is that water companies aren’t profitable, and don’t have the funds to renovate or upgrade their systems.”
Bondarenko said that Lviv’s water company is not likely to look for a private investor, as Odessa did.
The company was recently awarded a $24 million credit line from the World Bank and received a $6 million grant from the Swedish government.
