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Armenia: Bidders Quit Energy Privatization Race

The success of long-time government efforts to privatize Armenia's power distribution networks is today in doubt. With two weeks left before the expected selection of a winner of the international tender for state-owned utilities, only one of the short-listed bidders looks certain to stay in the race. RFE/RL correspondent Emil Danielyan reports from Yerevan.

Yerevan, 6 April 2001 (RFE/RL) -- Foreign interest in one of the few functioning sectors of the Armenian economy has rapidly declined over the past two years. Analysts say that repeated delays, coupled with an unprecedented politicization of the privatization issue, are now taking their toll on Armenia's chances to attract badly needed investment in its aging energy infrastructure.

What the Armenian government hoped would become a showcase for a transparent and effective privatization -- following a series of similar deals mired in scandal -- has turned into a torturous, prolonged process whose outcome is uncertain.

A state commission handling the tender is scheduled to disclose bids for a 51 percent controlling stake in Armenia's four electricity companies in two weeks (20 April). But the very idea of competitive bidding was called into question last week when one of the finalists, the Swiss-Swedish engineering concern ABB, pulled out of the contest without giving any reasons for the move.

Another bidder, Spain's Union Fenosa, is now said to be having second thoughts about its further participation. If Union Fenosa withdraws, that would leave only one contender -- the U.S. company AES Silk Road.

Government officials admit in that case the sell-off could be simply cancelled. On Wednesday (4 April), Vartan Movsesian, the head of the state Regulatory Commission on Energy, addressed the possible annulment of the privatization plan:

"No possibility should be ruled out, including the possibility that nothing will be privatized at all."

Movsesian says that things got even more complicated after the issue was again debated in the Armenian parliament 2 April. Left-wing factions lacked only some 25 votes to scuttle the sell-off. Movsesian says the foreign bidders have not failed to take notice of the anti-privatization rhetoric that is so abundant in Armenian public life these days.

"This will once again force the potential competitors to reconsider their participation and the risks involved."

The World Bank's spokesman in Yerevan, Vigen Sargsian, used even stronger language. He asked:

"How serious can a country be [in the eyes of foreign companies] when it debates a privatization deal only three weeks before the end of the [bidding] process -- a process that has been going on for two years?"

Sargsian says that foreign investors who entered the bidding for Armenia's utilities almost two years ago (summer 1999) have since been scared off by the uproar that has surrounded the process. He told our correspondent that what he regards as continual government dithering over the issue only reinforced bidders' fears. And their interest in Armenia, he said, further decreased as other former Soviet republics also put their energy sectors up for sale.

The first alarming signal came late last year when the fourth short-listed company, Electricite de France, withdrew from the tender. That prompted World Bank officials to urge Yerevan to be "more responsive" to the other bidders. But the warning does not seem to have been taken seriously by the authorities.

One factor that made opponents of the sell-off particularly unhappy was the exclusion a year ago of two Russian consortia from the final phase of the tender.

The government made the decision at the insistence of Western aid donors, which argued that Gazprom and other Russian energy monopolies lacked the experience and resources to run the energy networks. But for local pro-Moscow groups, this was another sign of what they call their country's "colonization" by the West -- a sentiment shared by many impoverished Armenians.

Support for the privatization is far stronger among energy officials and specialists. The Armenian energy sector underwent substantial reform in the mid-1990s, allowing the country not only to end crippling power shortages but also to begin exporting electricity to Georgia and Iran.

Armenian energy exports now boast one of the highest rates of bill collection in the former Soviet Union -- but they remain a loss-making business. Movsesian estimates the annual losses in tens of millions of dollars. Other experts put the figure at $50 million, or one-tenth of the state budget. Much of the losses are attributed to rampant corruption and fraud in the energy sector.

Experts warn that without massive capital investments in the Soviet-era power networks within the next few years, Armenia may again be faced with a severe energy crisis.

Armenia's energy-privatization woes also raise the broader question of the country's openness to greater foreign investment, which economists see as the shortest way to economic recovery. The experience of a handful of large Western companies currently doing business in Armenia is hardly encouraging to other potential investors.

The Hellenic Telecommunications Organization, for instance, has been locked in a bitter dispute with the government ever since it paid more than $140 million to buy the ArmenTel telephone operation three years ago. The French Pernod Ricard group last year had a hard time battling with the government over exclusive cognac brands to which it was entitled under the terms of its $30 million takeover of the Yerevan Brandy Factory in 1998.

One official (unnamed) involved in the process says: "Nobody cares what huge damage the failure of this [Pernod Ricard] deal would inflict on Armenia."

The damage could be felt next month in New York at an international forum on investment opportunities in Armenia, which the government has organized jointly with the World Bank. Energy is one of the main areas where Armenian officials would like to see more Western investment. But with the privatization process all but in tatters, there seems little chance they will be able to showcase it in New York.