Although the main strategic objective of creating a regulatory framework of “green tariffs” in the renewables sector in Ukraine was to attract direct foreign investment and to encourage foreign participation in developing new energy technologies, it has fallen short in the establishment of a free, fair and competitive market.
Although the renewables sector accounts for one of the leading sectors in foreign investment, one of the sad results of this process is that this emerging new sector is largely dominated by unscrupulous and corrupt domestic players.
True, a “green sector” has been established in Ukraine, however, the process has led to a concentration of ownership and influence by oligarchs, who not only attained a subsidized and guaranteed revenue stream but are attempting to monopolize the emerging green sector through corrupt political influence and abuses of the regulatory and legislative process.
So, rather than taking the opportunity to establish a new and potentially thriving sector based on free-market principles, Ukraine’s green energy sector has become a symbolic microcosm of Ukraine’s challenge to attempt to transition to a free market system and finally breaking the tradition of monopolistic behavior in Ukraine’s economy.
In a revealing piece of investigative journalism done by “Ekonomichna Pravda,” it showed the extent of corrupt practices.
The report showed in precise detail the extent of “conflicts of interest” and abuse of insider knowledge and power in the development and formation of policy in this sector and the extent of manipulation by domestic players in the political and regulatory process.
Abuses included: elected politicians forming companies to take advantage of their positions to obtain “green tariffs”, working in ‘partnership’ with business to ensure that legislation would be written to benefit their interests, taking advantage of local political contacts, hiding their financial interest through the use of family members, allowing access to ‘volunteers’ on their staffs that represent private business interests, often employing them to write legislation.
In a recent speech to the Economic Club of Canada in Toronto to foreign investors, President Zelensky honestly acknowledged the main problem within Ukraine’s economy is corruption. Though some criticized this forthright admission, others praised him for his honesty, saying that acknowledging this problem and not denying its reality, is the basis for beginning a forthright and determined effort to transform economic practice in the country.
Nonetheless, saying this to a largely sympathetic audience does not immediately translate to investment. Speeches are only a start. He can create investor confidence by stating his intention to create an investment environment that would ease doing business in Ukraine, and even by proposing and enacting “conflict of interest” legislation and increasing transparency in politics, especially amongst lobbying efforts within an archaic political and economic model.
There is no doubt that foreign investors see the opportunities to invest in an emerging market like Ukraine, but the savvy investor must also have evidence that Ukraine’s policymakers are committed to establishing a market context that is fair, transparent, law-abiding, competitive and not rigged against them. Ukraine can no longer afford to be perceived as an economic jurisdiction where foreign money is invested without the expectation of a fair rate of return.
There is no doubt that as Ukraine attempts to transition to a market economy, especially as it relates to investment in new technologies within the green sector, the economic culture is still burdened by the residual tradition of corrupt business practices, which, it now seems, have successfully penetrated the new economy. This trend must be reversed.
On January 1, 2020, an auction system will be introduced on all solar projects over 1 MW. However, the introduction of an auction system is no guarantee that the process will provide a comprehensive market-orientated answer to the establishment of a competitive driven sector.
These auctions must be conducted with an eye on ensuring that monopolies and other corrupt domestic players are not allowed to dominate the process to be surreptitiously manipulated through deceptive ownership structures or personalities that would have aligned themselves to corruptively impede the process. If this is not done, then the auction process should be deemed a failure.
There can be no doubt that domestic monopolies want to ensure a closed and restricted market that remains within their providence and minimize the presence and influence of foreign investors as a way to restrict competitive forces. There can be no doubt that any moves towards market-orientated practices and increased transparency will be attacked by ‘conflicted’ politicians under the guided control of their corrupt partners.
The debate around a new future legal and regulatory framework should be focused on establishing a competitive market in this sector that would eventually drive down the cost of electricity to the consumer while providing energy independence and stability, while at the same time, assuring the elimination of monopolistic practices. The monopolistic players within this sector will employ any tactic to prevent this from happening.
Policymakers should also consider new rules that would include rules on the concentration of ownership in the green sector and even consider designating the green energy sector as a ‘national security issue’ thereby regulating and controlling which business entities can own “green” companies or how much they can own. They should also consider to what extent foreign ownership in the green sector will affect Ukraine’s geopolitical security.
Politicians and policymakers must ask themselves: to what extent will Ukraine’s’ energy and national security be guaranteed if the new energy sector is dominated by oligarch Rinat Akhmetov’s control of DTEK and the Chinese ownership of CNBM International Corporation?
To attract sustained foreign investment, Ukraine’s policymakers must understand that unrestrained oligarchic participation in any economic sector is an anathema to both the establishment of a free market system and to market competition.
At the same time, they must understand that corrupt oligarchic practice and goals are always tailored to ensure sustained revenue for the few and not in establishing competitive forces that would benefit the national economy, its consumers while ensuring energy independence.
