Have you ever wondered why, after 18 years of independence, Ukraine’s public education system is a wreck, why practically no new roads have been built, why people seeking justice still have to bribe the courts, why the army struggles to feed its soldiers and why the national “free” medical system is still a joke?
Cultural and historical arguments aside, the biggest reason for the never-ending dysfunction of Ukraine’s public sector is the economic drag caused by energy subsidies. In Ukraine, the main role of government is not to provide for public safety, nor to maintain a national defense force, nor to protect the environment, nor to provide quality education to the nation’s young people, nor to guarantee healthcare services.
None of these priorities, which traditionally belong to government in developed countries, has been adequately funded in Ukraine during its 18 years of independence. This is because the overriding function of government in Ukraine, at both the local and national levels, is to provide highly subsidized, or even free, public utilities, with no questions asked. The success or failure of local and regional governments is judged, literally, by whether the lights and the heat are on.
The public is discouraged from asking what the true costs are of seemingly cheap heat, electricity and natural gas by non-transparent financing schemes of public utilities providers through local revenues and the national budget. Year after year, huge chunks of the national and local budgets are eaten up by these utilities subsidies, leaving critical areas of the public sector chronically and drastically under-funded.
With Russian gas prices for Ukraine long set well below world levels, the Ukrainian government was able to juggle the balls and keep the system afloat for more than 15 years. But with the agreements to move to world prices, the only way to keep paying the gas bills without implementing real reform is with billions in foreign borrowing each year, which is exactly what we have seen from the government of Prime Minister Yulia Tymoshenko in 2009.
This model is unsustainable and will ultimately lead to either a sovereign default or to the forced privatization of national strategic assets. Earlier this year, Tymoshenko pleaded with citizens to pay their gas bills, calling it a “civic duty.” This approach shows that the premier still simply hasn’t gotten it when it comes to utilities reform.
When a Ukrainian citizen goes to a store such as Foxmart or Metro Cash & Carry, and walks out with a new washing machine or refrigerator, is it his or her “civic duty” to pay for the item? Of course not. It’s the law. The same principle should apply to heating and electricity services.
In a civilized country, if you don’t pay for what you use, your services will be promptly cut off. Under the current system in Ukraine, individual users cannot be disconnected for non-payment for heating and gas. While users can, in theory, be cut off for electricity non-payment, this almost never happens. In Kyiv alone, annual non-payment for electricity services runs into the hundreds of millions of dollars.
Predictably, opposition leader Victor Yanukovych, President Victor Yushchenko and other presidential hopefuls, such as Arseniy Yatseniuk and Sergiy Tigipko, have not done any better than Tymoshenko on the utilities issue. While many of Tymoshenko’s political opponents have focused their criticism on her government’s massive foreign borrowing and accused her of financial irresponsibility, none of them has gotten to the heart of the matter.
No major political figure in the country has been honest with the citizens about how much gas, heating, and electricity will cost under a market-based system. In public discussion, the prime minister, members of her team and the other politicians are hiding behind the cubic-meter macro price that state gas holding Naftogaz Ukraine is supposed to pay to Russia under the current deal.
But this much-talked-about price is just an abstraction for Ukrainian citizens. The price that matters, and which the politicians are afraid to talk about, is how much Ukrainian citizens are going to have to pay for gas out of their own pockets in a market-based, civilized system.
Roughly speaking, it is two-and-a-half to three times what they currently pay – around Hr 200-250 ($25-30) per month for a standard two-room apartment in Kyiv, up from a current Hr 80 ($10) per month. The electricity price (currently set in Kyiv at 24 kopecks per kilowatt-hour) will have to rise by a similar or even higher multiple.
Naturally, there needs to be a mechanism to directly subsidize citizens who fall below a certain income level. It’s not rocket science, and other countries in Eastern Europe have been through the same process quite recently. Ukraine even has a built-in head start on such a direct subsidy program – the government could fund the targeted subsidy regime directly from its income from the transit of Russian gas.
There are entire regions of Ukraine which are years behind in the payments for gas and electricity they have consumed. If you are an industrial enterprise in one of these regions, how much you pay for energy largely depends on the clout of your local authorities, the quality of your relations with them, and the under-the-table deals you can negotiate with them to ensure your energy supply keeps flowing.
Ultimately, Naftogaz and the regional electricity distributors have no leverage to force public users to pay. However, the status quo suits them, because it means these companies can continue to demand and receive huge inflows from the national budget to cover their operating losses, even while cutting lucrative, private deals on the side with industrial enterprises.
You can be sure that if the top people at Naftogaz and the electricity distributors weren’t getting paid, we wouldn’t be seeing all those BMWs parked in front of their office buildings. The bottom line is, these companies don’t really care whether or not public customers pay, since that’s simply not the way the system is set up to work.
It’s a classic case of a distorted, non-market economic model. There are a million places for this system to bleed money, lining the pockets of corrupt local government officials, members of parliament, directors of state-controlled energy concerns, and the wealthy owners of industrial enterprises.
Such entities have an enormous stake in preventing decisive reform of the utilities sector. All the talking points from Tymoshenko and other top government officials about how they eliminated the RosUkrEnergo intermediary and how Naftogaz has paid its bills to Russia on time, is nothing but a smokescreen covering up the critical issue at stake – continued lack of reform in the energy sector.
Of course Ukraine had to print hryvnias and borrow from the International Monetary Fund to pay its gas bills – where else is the money going to come from? There is a multi-billion dollar shortfall every year.
Individual consumers of gas and electricity pay for energy on an essentially voluntary basis. Even for those who do pay their bills, there is no guarantee that these payments reach the intended destination, instead of bleeding out through one of the many cracks hiding in the non-transparent financial maze.
Cutting loose the dead weight of open-ended utilities subsidies in Ukraine will free up funds in the besieged national and local budgets to finally start dealing with some of the long-neglected tasks that governments in civilized countries are charged with overseeing – education, infrastructure, health care, the justice system, the environment.
In plain language, it’s time to start fixing the country. If Ukraine really wants to join Europe, there is no alternative.
Will Ritter is isa former managing editor of the Kyiv-based IntelNews information agency. He can be reached at [email protected].
