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4. Reform of the energy sector
It was mainly under the pressure of IMF, World Bank and other international financial donors, that the government under Prime Minister Victor Yushchenko embarked upon a reform of the energy sector in early 2000. Surprisingly, it was Yulia Timoshenko, head of United Energy Systems of Ukraine during 1995-1997, who became the vice prime minister responsible for energy. While being Prime Minister, Pavel Lazarenko gave United Energy Systems in 1996 monopoly rights and a tax break for five years. This gave the company and Lazarenko, who is now prosecuted in the United States for money laundering, hundreds of millions of dollars profit.
The energy sector reform was aimed at boosting cash receipts for the energy producers and distributors by forbidding barter trade and forcing the settlement of energy deals through special, government controlled accounts in the Oshchad bank. All consumers must deposit electricity payments into special accounts at Oshchad bank. Subsequently the cash is distributed among oblenergos and energy generators.[xlii]
The impact of these reforms is difficult to assess given contradictory information from government sources. When Timoshenko presented before parliament figures about payments in the energy sector, in October 2000, she told parliament that cash payments of energy consumers increased considerably since the onset of reforms. She claimed that tax authorities received much more in 2000 compared to 1999. However, these claims were denied by the tax authorities and a commission investigating these conflicting claims came to the conclusion that Timoshenko misinformed parliament. It was stated that payments to the budget from the side of actors in the energy consumers did not increase in 2000. Debt for electricity deliveries rose in 2000, according to tax authorities. [xliii] The consumer debt to Naftogaz was up from 2.6 to 4.4 billion hryvnas in the first 9 months of 2000.[xliv] Electricity supplied by state owned generators was only half paid in cash
Conflicting figures were, among others, based on the fact that Timoshenko allowed oblenergos to offset debts owed to energy providers with tax debts of these energy providers. The Cabinet of Ministers permits mutual settlements of government financed entities' energy debts.[xlv] Also, government ordered Oshchad bank to provide government backed loans to oblenergos to allow them to pay for energy supplies. In this way, the payments record of oblenergos was artificially boosted. The World Bank expressed concern about this.[xlvi]
Moreover, Yevhen Marchuk, the director of the national security service, accused Yulya Timoshenko that she used credits of Oshchad bank to purchase expensive energy from offshore companies.[xlvii]
Oblenergos started to pay more to electricity providers, but do not collect any more from their customers.[xlviii] With Lvivoblenergo. the collection rate increased from 60 to 70 per cent from 1999 to 2000. However, there are cash flow problems because of increased payments to the energy providers. Therefore, there is less money for salaries and basic supplies. Formerly, energy providers were paid with goods and promisory notes.
The energy producers profited from the energy reforms and received initially more cash that was used to pay wage arrears. The financial situation of coal mines improved. Cash payments for electricity supplied by state generators was 50 per cent paid for in cash during the first nine months of 2000, while it was only 19 per cent during the same period in 1999.[xlix] Government figures show that, on paper at least, losses of coal mines gradually diminished over the first 10 months of 2000 and turned into profits in July and August. During the first three months approximately half of all payments was in cash, but this ratio declined subsequently to approximately 8 per cent in October 2000. The share of mutual settlement rose to 10-20 per cent during July-October 2000. The share of barter rose from approximately 50 per cent of all payments during the first three months of 2000 till approximately three quarters during August-October 2000.[l]
Also, it seems that households are paying more, The population paid 75 per cent of housing services in Jan-Sept 2000, while it was 48 per cent for the same period in 1999. However, in some oblasts, like Kharkiv, the collection rate went down.[li]
One part of the reform of the energy sector is the privatisation of oblenergos. Early 2000 six oblenergos have been privatised. However, the effect was that privatised oblenergos paid only 7 per cent of delivered electricity while state owned oblenergos paid 60 to 98 per cent (also with help of the government- see above).
Energorynok, that got the role of state owned electricity wholesaler and overseeer of the electricity market, profited from the new arrangement.
The ban on barter hit the energy traders who based their shadowy profitable deals on barter trade. Many members of parliament derived profits from energy trade and energy traders financed the re-election of president Leonid Kuchma. Therefore the energy reforms were under continuous attack and reform efforts were undermined by the state bureaucracy and parliament. Moreover, the judiciary failed to tackle corruption in the energy sector. Yulia Timoshenko complained that the general prosecutor failed to instigate criminal proceedings against embezzlement in the energy sector.[lii]
Generally, the situation in the energy sector continued to deteriorate, owing to insufficient liquidity and political disagreement. In autumn 2000, Ukrainian government had to resort to external borrowing to secure energy supplies. 100 million dollars was provided by the EBRD for the purchase of fossil fuels, while 300 million dollars was provided by the bank Credit Suisse First Boston. [liii] Total debts of the fuel and energy sector increased during the first 9 months of 2000 by 1.1 billion hryvnas and totalled 13.6 billion hryvnas in October 2000. [liv]
Power outages are occurring more frequently, often blamed on bad weather. Large part of customers in Ukraine is regularly disconnected from the energy supply.
Although Timoshenko urges for enhancement of payment discipline, she said that she would not allow electricity cut offs to the population.[lv] This may be related to the fact that households are not the worst offenders with respect to non-payments of energy. Nevertheless electricity cut offs occurred, for example in Kharkiv.
Also, 42 per cent of energy indebted enterprises continued to function.[lvi]
The position of the thermal power stations worsened as they were forced to pay more for coal deliveries. As a result, their payments for gas deliveries worsened. In September, Itera told that thermal power stations paid for only 27.4 per cent of the gas supplied.[lvii]
Nevertheless, Timoshenko claims that, due to more cash payments. 178 million dollars has been paid for fresh fuel for nuclear power stations, and half of the gas debt for Turkmenistan has been paid while the debt to Itera has been slashed by more than 40 per cent.[lviii]
Although the energy reform was half hearted and obstructed by many in the energy sector, oligarchs who made their fortunes with energy trade felt threatened and tried to undermine the position of the Yushchenko government and more in particular Yulia Timoshenko. Her husband has been arrested, being accused of embezzlement. Also, the Russian prosecutor opened a case against her involving bribes in dealing with Russian officials. This is noticeable as it happens so many years after the assumed bribing took place (1996). Some argue that Russia is not interested in energy reforms and market oriented reforms in Ukraine as this may allow Ukraine to turn to the West. The argument is that Russia can better deal with a non-reformed Ukraine.
The attempts to reform the energy sector show how deeply rooted vested interests are that profited from the non-reformed energy sector, based on barter trade.
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