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Concession became a stumbling stone for the Sverdlovsk authorities

Concession became a stumbling stone for the Sverdlovsk authorities

18.08.2011 — Analysis

By the end of 2011, the Ekaterinburg heat and water supply networks will be leased out under long-term agreements. The authorities of the Middle Urals expect that the concession will help to decrease expenses on utility maintenance and improve quality of services. Experts think that the public utilities sector will gain nothing from participation of private business without the adequate competitive environment. As the "RusBusinessNews" columnist has found it out, the main opposition to the fair competition is made up by government officials who make good money on the "unprofitable" utility business.

The authorities of the Sverdlovsk Region intend to grant a 30-year lease concession for the property of the municipal companies - Ekaterinburgenergo, Teplovye Seti (Heat Supply Networks) and Vodokanal.

In their opinion, the long-term lease will bring up to 35 billion rubles into the sector. The investors are going to redeem their costs with the help of special rates that are based on the RAB method and make it possible to plan long-term profitability.

Alexander Misharin, Governor of the Sverdlovsk Region, expects that the concession will allow the authorities to monitor the situation in the public utilities sector, on the one hand, and to upgrade the municipal infrastructure, taking into account that the wear and tear of utility systems exceeds 60%. The forecast of the experts is not as optimistic: the public and private partnership in the public utilities sector has not done any good for the budget, or for the sector as a whole, or for consumers of public services.

The attempts to lease concession utility systems have been made in Russia for about five years. Mass media about pilot projects being implemented in Rostov-on-Don, Volgograd, Kataisk and in a number of other Russian cities. However, nothing came of it. Tatiana Sushkova, the assistant to the general Director of the municipal unitary enterprise Volgograd Gorvodokanal, informed "RusBusinessNews" that the joint-stock company Utility Technologies of Volgograd failed to lease the municipal property, and the company is going through the bankruptcy process at the moment. The transaction failed mainly through the fault of the then city mayor Roman Grebennikov who did not support the idea of the utility systems being given into private hands. The Eurasian Water Partnership, which took water services on lease in Rostov, ran into shortage of about 500 million rubles. In Kataisk, according to Konstantin Mironov, General Director of Tobolenergo, CJSC, everything remained in the form of intentions.

In Ekaterinburg, the concession also came out as somewhat "distorted": Not long ago the Sverdlovsk Department of the RF Federal Antimonopoly Service initiated proceedings against the city administration, which granted a lease concession for the temporary storage areas for the snow removed from streets. According to Marina Yusupova, the press secretary of the Ural Department of the Federal Antimonopoly Service, the antimonopoly authorities received the request from the public prosecution office that was concerned about the actions of the city administration, not understanding the principle and the rates underlying the lease signed with the private business. The law-enforcement authorities think that this transaction evidences restriction of competition and interference with activities of business entities.

The officials explain their actions aimed at restriction of competition and leasing of the property to "their" companies in a very simple way: Participation of private companies in the public utilities sector does not decrease the accident rate and does not contribute to upgrading of networks. For example, at one of the meetings, the Ekaterinburg vice-mayor Alexander Vysokinsky announced that private companies have more breakdowns in heat supply systems as compared to the municipal business entities. According to him, private companies do not want to invest in public utility infrastructure; therefore, the latter must be supervised by the government.

Experts note that it is impossible to verify the statement of A. Vysokinsky: The actual situation in the sector is concealed from the public, as neither the authorities nor the entrepreneurs are interested in disclosing of the actual profitability of the utilities business. It is obvious that in this situation there cannot be any discussion of reduced expenses on utilities and improved quality of services. First of all, it should be figured out why officials and entrepreneurs do not need efficient operation of housing and public utilities.

The municipal unitary enterprise Vodokanal is among the companies that are announced inefficient. In one of the interviews, its director Alexander Kovalchik said that the profit of the municipal enterprise (1.2 billion rubles in 2010) exists only on paper: the law permits only investment from profit; therefore, it is created artificially, while the existing rates are not sufficient for upgrading of the utilities and for their maintenance. In 2010, according to the Vodokanal director, the operating losses amounted to 177 million rubles.

A. Kovalchik thinks that modernization of the obsolete networks needs heavy investment injected by the budget. The company prepared an investment program till 2020 for the amount of 68 billion rubles. In February 2011 it was approved by the Ekaterinburg City Duma, though the regional government authorities had found the investor who was ready to upgrade Vodokanal for 15 billion rubles - i.e. four times as cheap.

The estimates of the thrifty investor can be verified very easily. The cost of placement of water pipes is within the range from 120 thousand to 1.1 million rubles for one kilometer as of today. The total length of the Ekaterinburg pipelines is 1,500 kilometers. The rough estimates show that nearly all the water supply municipal pipelines can be replaced for 1.5 billion rubles. Thus, having invested 15 billion rubles, the investor will be able to return the funds invested in upgrading in 10-12 years, and, afterwards, for about another twenty years he will make money on operation of the new water supply systems. This is the most pessimistic scenario, as the cost of the cubic meter of water is constantly rising in Ekaterinburg, thus, resulting in increasing profits that will allow the investor to return the invested funds much sooner.

Today, no one is willing to explain to laymen how the cost estimation of 68 billion rubles appeared or where the losses of Vodokanal come from. The situation is highly curious, taking into account that the "loss-making" enterprise is able to build new office and residential buildings. The experts are sure that either Vodokanal is managed inefficiently, and, thus, should be re-engineered, or the funds are taken from the company to be distributed among the right people. One thing remains certain: The "losses" are covered through absurd investment programs that are extended for many years. In the meantime, the deterioration rate of the water supply systems is still at the level of 60%.

The concession, which is intended by the regional authorities acting in line with the policy of the RF Ministry for Regional Development, is most unlikely to change the situation. The experts emphasize that private companies, generally speaking, are not concerned about the legal form that would allow them to lease (buy) utility networks for operation. The most important thing is the aim that the government authorities are going to opt for. If the officials are interested only in disbursement of budget funds, then no wonder that the utility pipelines granted for lease concession remain worn-out: The private investor plays by the rules set by the official. However, if the government authorities make their mind to improve efficiency of the sector, the concession alone will not be enough to accomplish the objectives.

Firstly, it is necessary to have clear plans for upgrading of utilities systems as well as reference points, based on which the government authorities will monitor the performance. Without in-process supervision, the concessioner or the owner can imitate investment activity for many years, contributing to deterioration of utilities infrastructure.

Secondly, there should be regulations adopted to eliminate any voluntarism from the part of the government authorities. It calls for improvement of the system of electronic auctions where government and municipal contracts are distributed. The preference should be given to those who could offer the most advantageous scenario of project implementation, rather than those promising lower prices.

Thirdly, the authorities should clearly announce that the main objective of the utilities sector is to decrease rates for public services. Consequently, the social aspect should be the primary concern both when selecting the investor and assessing of the investor's performance. The experts say that if in ten years the rates set for public services do not go down, the whole endeavor regarding the concession of the property is going to be perceived as another shady business.

Executive managers of utility companies do not see so far that the government would make any serious attempts to solve the aforesaid issues. The main obstacle on the way of the sector development is the officials who impose unlawful requirements on entrepreneurs and do not guarantee fair conditions for doing business. The system that has been established in the utilities sector is unable to provide for efficient business operations. Those who may endanger the money-losing system are shipwrecked with the help of law-enforcement authorities or are pronounced swindlers. In this situation all talks about modernization of the public utilities sector through efforts of private investors have no sense.

Vladimir Terletsky

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