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Kazakhstan: Lawsuit Highlights Problem Managing Energy

A legal battle between Kazakhstan and its Western-run power company has raised questions of profits and politics. It may also be a sign of one of the toughest challenges that the region faces is implementing reforms.

Boston, 31 January 2000 (RFE/RL) -- A lawsuit against Kazakhstan has highlighted the country's mixed record on foreign investment and the problems for the entire region in managing energy and economic reforms.

On Thursday, the Financial Times reported that the Belgian energy company Tractebel has started international legal proceedings against Kazakhstan, charging the government with failing to honor its pledges to raise electricity rates.

Tractebel has been running Almaty's electric company and power grid since 1996. It also won a 15-year concession to manage gas pipelines in the south and west of the country in 1997. But the relationship has been a stormy one, and the complaint about electricity tariffs may not be the only one that winds up in court.

Last month, the Reuters news agency and the Belgian newspaper Le Soir reported that Tractebel is being investigated in connection with alleged payments of $50 million to three Kazakh businessmen involved with the pipeline deal.

The company has confirmed the existence of Belgian and Swiss probes of possible money laundering by parties that dealt with Tractebel. It is not known whether the investigations are related to money laundering allegations by Kazakhstan authorities against former Prime Minister Akezhan Kazhegeldin last year.

But the reports suggest a dark side to the business of generating heat and light. Beyond that, there may be lessons about the difficulty of connecting eastern and western economic systems, particularly when the cost of energy is concerned.

In November 1997, during President Nursultan Nazarbaev's visit to Washington, a Tractebel official trumpeted the company's success at a meeting of regional specialists. After taking over the power system in the former capital city of Almaty, the company moved quickly to apply Western rules of rate-setting and collections for electricity, the official said.

To Tractebel, Kazakhstan's problems were simply a matter of supply and demand. After decades of Soviet assumptions that energy was a gift of the state, most consumers refused to pay their electricity bills. The system needed investment, but returns were too small to support it. Then, within days of taking over the city's electric company, Tractebel's power stations ran out of fuel.

Within months, according to Tractebel, the company turned the situation around by doubling rates and cutting off customers who refused to pay. Instead of collecting less than 30 percent of the bills in cash, Tractebel started getting over 90 percent. But the success appears to have been short-lived. Tractebel found that Kazakhstan's problems were intractable.

In February 1998, the company and the government blamed each other for new gas shortages after public demonstrations broke out. The disagreements were resolved, but not before the government froze Tractebel's accounts and temporarily halted privatization in the oil and gas sector. Last week, Tractebel said it has been losing money in Kazakhstan since 1998 and has made a $200-million accounting provision to cover its loss.

Tractebel's latest attempt to raise rates and the government's refusal to implement the hikes suggest a failure to grasp one of the reasons that Kazakhstan allowed privatization to take place. Unable to face the political consequences of imposing rational pricing on domestic power, the government hoped to shift the burden to a foreign investor, giving it both the potential for profit and the liability if things went wrong.

But even with the insulation that a foreign company provided, Nazarbaev was still unlikely to take the unpopular step of repeated rate increases, particularly in the winter. It was perhaps only a matter of time before the issues of economics and blame had to be faced again.

The problems are only a small sample of the region's problems with energy pricing in a country that has generally won praise for privatization and market reform. Kazakhstan has attracted more foreign investment than any other country in the entire region.

In Russia, for example, the gas monopoly Gazprom collected only about 20 percent of its bills in cash from domestic users last year. Other countries, such as Turkmenistan, play it safe by promising to provide gas and power to its citizens free of charge.

The problem is that cheap power and barter are the two biggest factors that mire these economies in the past. In Russia, the effects include falling investment and sagging tax collection, as well as profiteering in trade with the outside world. Recently, Russia has suffered fuel shortages while Russian heating oil has been sold to the higher-priced markets of the United States. Higher tariffs have not restrained exports, or the forces of supply and demand.

Most of the region has avoided the sudden pain that Eastern European countries felt in 1989 when former Soviet President Mikhail Gorbachev decided to impose world prices for oil on the East bloc. But the result has been less integration with Western economies and a more prolonged pain.