Debunking 3 myths on energy SOE reform in Central Asia, South Caucasus

Published on Thursday, 26 April 2018

Published by Rafayil Abbasov on Thursday, 26 April 2018

Uzbekistan is working to reform its state-owned energy sector.
Uzbekistan is working to reform its state-owned energy sector.

How to reform state-owned enterprises (SOEs) in the critical energy sector is one of the most important and difficult challenges for almost all governments in Central Asia and the South Caucasus.

The most common operational hurdles are inefficiency, below-cost recovery tariff settings, poor performance, and continuously increasing state subsidies and privileges such as underpriced fuel and capital.

While unexpectedly many challenges have been encountered in this area, I have seen some positive developments in Uzbekistan since late 2017. Despite the impact of the recent foreign currency liberalization, the government has made notable commitments to reducing the excess capacity of the national power utility Uzbekenergo, optimizing its balance sheets, and fixing its corporate governance structure. These are all very promising steps that can potentially help improve the company’s financial position.

Looking at Uzbekistan’s new vision, I would argue that governments need to break three major pervasive myths about energy SOEs in this part of the world that work against reforms.

Myth #1: SOEs are strategic state assets.

SOEs in the energy sector are an important instrument in the government’s toolbox. Given the utility’s definition of electricity and role of SOEs, governments tend to view SOEs as (virtually un-reformable) strategic state assets.

  Governments need to rethink current privileged status of energy SOEs

While one could argue about SOEs’ societal and public value creation capacity, a quick review of key performance indicators illustrates the enormous cost of maintaining this populist classification. Not surprisingly, government subsidies—including underpriced fuel—remains one of the largest cost items in public expenditure. While social protection for the vulnerable section of the population is important, based on the experience there are ways to address this concern while at the same time progressing on reforms.

I suggest for policymakers to compare the costs of protecting SOEs as strategic assets to alternative development priorities like investing more in education or health.

Applying the basics of accounting, one could conclude that SOEs often represent in fact rather unlimited liabilities and a financial burden. Governments need to rethink the current privileged status of SOEs, as quantifying their true and fair value would encourage more robust sector reforms that would target highly leveraged, loss-making and politically ring-fenced monopolies into a new generation of sustainable corporate utilities.

Myth #2: Electricity is the people’s right.

Back in the 1920s, Lenin defined communism as “Soviet government plus the electrification of the whole country,” heavily politicizing electricity as a foundation of any future socialist regime. Although the Soviet Union collapsed about 70 years later, most governments across post-Soviet Central Asia and the South Caucasus still consider electricity as a common good and a basic right of the population, instead of as a tradable commodity.

Creating a new institutional and legal framework that does away with this idea is urgently needed to depoliticize electricity and to introduce market rules and regulation in the energy sector. Financial discipline will never be achieved and payments for electricity sold cannot be fully recovered without reforms that go deeper than replacing distribution infrastructure and installing advanced meters.

  Electricity is a tradable commodity, not people’s right

In most of these countries, the percentage of electricity theft (ironically defined as “commercial losses” in statistics reports) has been in double digits for past 25 years. So, if governments commit to SOEs reforms, they should also be prepared to couple these efforts with legal reforms making electricity as a tradable commodity, in which case its theft would be a serious crime. Enforcing electricity contracts will greatly assist reform efforts by creating true financial discipline and improving revenue collection.

Myth #3: Energy reforms are “infinite and endless.”

Nearly three decades after the fall of the Soviet Union, SOE energy reforms still figure prominently on political agendas. Not surprisingly, SOEs reforms have been triggered by external economic shocks (oil price volatility, local currency devaluations) that have forced governments to cut subsidies and sparked sector-wide crises.

As soon as economies stabilize, though, SOE reforms become less important. The issue remains on the agenda, however, creating the misperception that energy reforms are infinite and endless. Hence, true reform momentum is limited and eventually lost over time.

On the upside, the case of Georgia illustrates how policymakers were able capitalize on the momentum of economic and political turbulence to restructure bankrupted utilities. This has helped to turn the country’s energy sector into a key driver of economic growth.

SOEs reforms will not succeed without targeted policies with clear timelines, aligned objectives, and sufficient actions and resources. Like any policy reform that competes for success, time-bound SOEs reforms in energy should be steered toward a focus on accountability and performance.