Ukraine's aging electricity system is in dire need of an overhaul, and no one in the country is more keenly aware of it than the stoic residents of Proletarskoye, a run-down eastern mining town
ye, a run-down eastern mining town.
'Sometimes when the wind blows hard you see sparks fly out of the power lines as you're walking down the street,' said Lyuda, selling cigarettes on one street corner with a view onto a distant mountain of slag.
Power outages are common here, as in practically every region of the country except the capital, due to worn-out infrastructure and a lack of cash to buy fuel and equipment.
'Pretty much every evening you'll be watching a film on television or eating dinner or something and, boom! Suddenly the electricity goes out,' said Lyosha, a new resident in the area with two young children.
The problems intensify every winter as those lucky enough to be able to afford extra heaters to supplement the centralized Soviet-era heating system plug them in en masse and blizzards fell power lines to plunge thousands into the cold and dark.
'I don't think it's ever been as bad as this year, though,' said Lyuda.
The national grid this past winter came the closest to total collapse since the end of the Soviet Union in 1991 as the frequency fell below the level considered the minimum safe frequency for Ukraine's system.
Even during the summer, residents of suburban towns only a few kilometers from the capital Kiev, which has the country's only constant electricity supply, are regularly plunged into darkness early in the evening.
Non-payment
At the heart of the sector's woes is a chronic lack of cash – recent official data show electricity generators are owed about Hr 6 billion ($1.1 billion).
As a result, the generators have little cash to upgrade aging and inefficient equipment and find it next to impossible to attract foreign investors.
Regional generating company Donbasenergo, one of the leading players in the country's electricity sector, says about one third of the power it had 'sold' in 1999 was still not paid for.
Currently, the company's finance director Viktor Larionov told Reuters, Donbasenergo simply increased its costs the more electricity it produced. 'If it's not paid for, then neither we nor anyone else can work,' he added.
But Donbasenergo, which supplies its power to the national electricity pool, does not have the authority to cut off non-paying customers and is dependent for payment on the distribution firms responsible for collecting it from consumers.
The distribution companies, or oblenergos, which buy the power from the wholesale market, for their part complain rules requiring them to transfer all the money to the market's state-controlled central transit account are disastrous.
'You're working in a shop. No matter how many goods you sell or how much money you earn, all your money will be taken away from you,' said Kostyantyn Hryhoryshin, who represents the interests of a holding firm for stakes in six oblenergos.
'Do you have an interest in working? You might as well sit and snooze on the counter.'
Reform Imperative
Foreign creditors and donors, among them the International Monetary Fund, are also pushing the government to lower its profile in the sector, in particular by transferring control of the market from the Energy Ministry to market members.
'The donors are not aware of any audit ever of the central transit account,' said one Western consultant.
'There's a lot of reluctance to deposit money into this account. If eventually the control of this account went to the market itself, it would have greater credibility.'
The government says it is in the process of spinning off the market, an entity called Energorynok, and its payments account. It remains a state entity for now but officials promise to make it independent within months.
The head of the state regulatory agency Oleksandr Hridasov said other remedial measures included allowing oblenergos to take their cut of money collected immediately rather than after it had all been collected in the central account.
He said the government was also working to close another legal loophole by allowing claims on the property of oblenergos who failed to meet payment obligations to other market members.
'Without fines and advance payment the market cannot function normally,' he said. 'Bankruptcy procedures must be strengthened.'
Privatization
The reforms are also critical for attracting heavyweight foreign strategic investors with deep pockets to the mostly state-controlled sector. The government plans to sell stakes in seven oblenergos in 2001 as well as minority stakes in Donbasenergo and another producer, Zahidenergo.
Privatization has so far been hindered by politics amid pervasive suspicion of selling 'strategic' companies. But both officials and consultants agree privatization and the battle against non-payments must go hand in hand.
'Only privatized companies can get down to the business of really cutting off clients who can't pay,' Hridasov said.
The Western consultant noted that having more private sector representatives involved in management of the payments account and wholesale market was also bound to hasten change.
But it remains unclear whether wary foreign investors will bite on anything less than a controlling stake in a firm on Ukraine's risky market environment, where key tax and civil codes have also been stalled for years.
'What it needs is the final surge at the end of that long run to cross the finish line,' said Victor Pergat, the head of Canadian firm Northland Power in Ukraine, a potential investor.
'This is a good time to do it because there are still quite a few months of preparation before bids for oblenergos come in.'
