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Crisis in the Armenian Energy Sector

VIEWS: 5 PAGES: 10

									From Crisis to Stability in the Armenian Power
                    Sector
            Denzel Hankinson, Castalia Strategic Advisors
     Gevorg Sargsyan, Senior Infrastructure Specialist, ECA Region
           Ani Balabanyan, Operations Analyst, ECA Region


                        Funded by PPIAF




                      March 6, 2006
Crisis in the Armenian Energy Sector: 1993-1995

    Crisis triggered by physical supply interruptions:
       -   Embargo by Azerbaijan and Turkey
       -   Sabotage of new gas pipeline through Georgia and
           Northern Caucasus
       -   Absence of Medzamor Nuclear Unit
       -   Disintegration from former Soviet Union Power Grid

   - But underlying, long-term problems were
     administrative and structural:
       -   Low tariffs: 10% of cost-recovery level in 1992-1993
       -   Low collections: 40% of billed amount
       -   High losses: over 40% of which more than 25% theft




                                           1
Crisis in the Armenian Energy Sector: 1993-1995

    Resulted in:
     -   Fiscal and quasi-fiscal subsidies reached
         to roughly 11% of GDP (over $140
         million) by 1995
     -   Electricity supplied for as low as 2 hours
         per day
     -   Collapse of gas and heat supply
     -   Deforestation
     -   Depletion of lake Sevan
     -   Increased number of accidents (e.g. fire)
     -   Economic recession



                                           2
Early Reforms: 1994-2001



 Technical and operational reform
   -   Efforts to combat commercial
       losses and improve collections
   -   Re-location of existing meters to
       common areas
   -   Installation of new meters where
       necessary
   -   Installation of AMDAS




                                           3
Early Reforms: 1994-2001

 Structural reform
   -   Transition to cost-          Electricity
                                    Generation
                                                       Medzamor
                                                         NPP
                                                                                Thermal
                                                                                 Plants
                                                                                                     Hydro Plants

       based tariffs
   -   Unbundling of
       Armenergo
                                     Electricity       Settlement           High Voltage       National                Public Services
   -   Imposition of new            Transmission         Center                Grid            Dispatch
                                                                                                Center
                                                                                                                         Regulatory
                                                                                                                        Commission
       regulatory framework
                                                                                                                          (Tariffs,
                                                                                                                       Service Quality
                                                                                                                       and Licensing)

 “Psychological” reform                                            Electricity Network of Armenia
                                     Electricity
   -   Electricity is a commodity   Distribution
                                                                               (ENA)


   -   Measures to link service
       quality and price in minds
       of consumers
                                                                                                                    Key:

   -   Realization that PSP was      End-Users
                                                                             Customers
                                                                                                                           Cash flow
                                                                                                                           Power flow
       the only option; hired                                                                                              Regulatory
                                                                                                                           Oversight
       transaction advisors in
       1998


                                                   4
The Road to Privatization
  First attempt in 2000-2001:
    -   Faced considerable political resistance
    -   Suffered from flaws within regulatory & legal framework, and tender documents
    -   Government quickly rectified these flaws:
        - Removed any requirement that bidders commit to fixed investment amount
        - Bundled 2 distribution companies into 1
        - Limited risk of bidders on contingent liabilities of distribution entities
   Second attempt in Autumn 2001, amidst a “perfect storm” for international energy
  investors
                                                   AES Share Prices during Armenian Privatization
                                                                                       1st of state-wide rolling
                     California ISO issues first of alerts.                            blackouts in California.
                     Blackouts in San Francisco follow.
                                      80
                                      70                                          Prequalification documents
                                                                                  submitted.
                                      60
                                      50
                      USD




                                                                                                                   2nd tender.
                                      40                         1st tender.

                                      30           Sept 11 attacks.                                                              MRH expresses interest.
                                      20
                                      10                         Enron declares bankruptcy.                                                    3rd tender.

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                                                                                              5
The Road to Privatization
  Third tender launched in summer 2002 after Midland Resources Holdings (MRH) a dark
   horse bidder expresses interest
    -   All previously prequalified firms also invited to bid
    -   MRH:
        - Trading company; mostly a financial investor
        - Had no substantive power sector operating experience
        - Is an offshore company, based in UK Channel Islands
        - But, had influential and knowledgeable local partner

  MRH wins the bid and Government imposes additional safeguards in tender documents
    -   Prohibition of >25% of shares of distribution company without government approval
    -   Requirement that a management contractor be hired with power sector operational
        experience
    -   Creation of reserve account and bank guarantee to ensure that generators are paid first and
        in full, before revenues become available for other uses




                                                      6
Results of the Reforms

 Fiscal and quasi-fiscal subsidies are completely eliminated


                175

                125
  Million US$




                 75

                 25

                -25
                   1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
                      Tariff Losses   Collection Losses   Commercial Losses



                                                    7
Generalizing the Lessons Learned
 1. Political will is paramount and

 2. Personalities matter

 3. Donors can enable champions of reform through early and substantive contact

 4. Government should do as much work as possible before privatization

 5. Standard bidding procedures needed to accommodate a new kind of strategic investor




                                                  8
THANK YOU



    9

								
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