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Armenia: Government Revamps Power Grids After 2001 Privatization

Armenia's state-run power utilities are undergoing a major shake-up aimed at making them more attractive to foreign investors, who showed little interest in buying them last year. Having twice failed to privatize the linchpin of the Armenian energy sector last year, the government in Yerevan is now pursuing a safer, and apparently more realistic, option: that is, to find a private operator capable of ending its huge losses and improving its management. Western lenders and donors say the government stands a better chance of success this time around.

Yerevan, 6 May 2002 (RFE/RL) -- Preparations are now under way for leasing Armenia's loss-making electricity distribution companies to a foreign company. Officials say international bidding for five-year management rights to one of the most reformed but still inefficient sectors of the Armenian economy is likely to take place this autumn.

Speaking to reporters last week, Energy Minister Armen Movsisian said: "According to the timetable approved by the government, by the middle of the year we should have a draft agreement on the transfer of the distribution networks to a foreign company. We will be able to call an international tender by the end of the year."

The Armenian government, in the meantime, is trying to restructure the power grids in a bid to make them more attractive to foreign companies. The four utilities, which have notoriously bloated staffs, were merged into a single company in March. Some 3,200 jobs have been slashed as a result, and more layoffs are expected later this year. The government also has announced a crackdown on the widespread corruption and mismanagement which were a huge drain on the country's scarce resources.

Armenia's nuclear, thermal, and hydroelectric power plants produced $180 million worth of electricity last year. Only two-thirds of that actually reached consumers, meaning that as much as $60 million was lost in the power distribution process. Half of the losses are considered "unjustified" -- the official euphemism for the theft of electricity. The large scale of the fraud, widely practiced by energy officials, makes the sector one of the main sources of government corruption in Armenia.

Movsisian claims the restructuring will enable the government to reduce the losses by up to threefold this year.

The World Bank and other Western donors that have for years pushed for the privatization of the energy sector in Armenia welcome the effort. Gevorg Sarkisian coordinates the World Bank's infrastructure projects in Armenia: "That would certainly make the power distribution networks more attractive. Reducing the losses, increasing bill collection and proper restructuring would definitely have positive effects."

The government decided to lease them to a foreign operator late last year after the failure of two attempts to privatize them. Several Western and Russian companies took an interest in buying a majority stake in the Armenian utilities, but none of them eventually submitted a bid.

Officials have blamed the fiasco mainly on external factors, notably the worsened global economic outlook following the 11 September terrorist attacks in the United States. But they do admit that chronic problems crippling the sector also played a role.

Salman Zaheer, a senior World Bank official, said in December that the donors see the lease option as a "credible, even though a second-best, way of achieving what was intended to be achieved through the privatization."

According to Sarkisian, the government will have a better chance of success this time not only because of the power grid overhaul. Foreign energy firms, he said, will likely view the management of the electricity companies as a less risky business than their ownership.

Minister Movsisian also sounded optimistic, saying that the government is drawing appropriate lessons from the privatization flop: "For us, past failures are a certain experience which allows us to assess the situation more correctly. They also allowed prospective investors to have a closer look at our distribution networks."

Armenia's power distribution network was already reformed extensively in the mid-1990s. That allowed the country to not only end several years of severe power shortages but also become an energy exporter. The creation of a strict, and at times ruthless, mechanism for the collection of electricity bills was central to the success of the reform. Despite widespread poverty, Armenia now boasts the highest rate of electricity bill collection in the Commonwealth of Independent States.

According to government data, Armenian consumers paid for 90 percent of supplied electricity in the first quarter of this year -- a very high indicator by CIS standards. Fee evasion is virtually nonexistent among individual Armenian consumers.

Movsisian described this fact as the main trump card in Armenia's drive to lure foreign investors into its energy sector, which is in need of substantial capital investments.

Foreign investment will be critical for the realization of Armenia's long-term energy strategy unveiled by Deputy Energy Minister Areg Galstian in March. Under that strategy, at least $1.5 billion in investments will be needed to ensure the energy sector's sustainable development in the next two decades. The lion's share of the money is to come from the private sector.

The power grids alone will need at least $100 million in the next three years in order to modernize their aging Soviet-era equipment. The Western donors have pledged to provide part of the sum if their future operator succeeds in turning them into a viable business.