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Armenia: Energy Privatization Upsets Western Donors

Despite objections from Western donors, the Armenian government yesterday sealed a $37 million sale of its low-voltage power grids to an obscure offshore firm. Midland Resources Holding, a company registered in Britain's tax-free Channel Islands, was declared the winner this weekend of an international bid for a controlling stake in the Armenian power-distribution network, despite having little experience with energy business. Donors say the company lacks the expertise to reverse the sector's huge losses.

Yerevan, 27 August 2002 (RFE/RL) -- The controversial deal has cast doubt on the fate of some tens of millions of dollars in additional loans promised to Armenia by the World Bank. It could also complicate Yerevan's relations with the International Monetary Fund, which has questioned the selection of Midland Resources as the new utility owner.

The agreement on the sale of a commanding 80 percent stake in the state-run Armenian Electricity Network (AET) was signed in Yerevan on 26 August by four Armenian ministers and a top executive from Midland Resources. It came immediately after an emergency meeting of Prime Minister Andranik Markarian's cabinet formally endorsed the results of the international tender, in which the British-registered firm was alone in submitting a bid.

The Armenian Energy Ministry had originally estimated the distribution network's value at $250 million, but ultimately the sale was made for just $37 million.

Armenian officials hailed the privatization as an opportunity to reform the power grids, which are operating at a huge loss. Finance and Economy Minister Vartan Khachatrian says Midland Resources is up to the task: "If they don't fulfil their commitments we can reconsider the agreement within a month or so. The agreement is very strict. So it looks like we are not taking any risks."

But Western donors, who themselves pushed for the sector's privatization, say this is not quite so. One Western diplomat told RFE/RL, "The donor community is not happy with the deal because the way it was handled was fishy."

The spokesman for the World Bank's Yerevan office, Vigen Sargsian, agreed: "It should be clear that you cannot explicitly approve the victory of a company that has no experience with the energy sector."

The International Monetary Fund (IMF) office in the Armenian capital also voiced serious misgivings about the wisdom of choosing Midland Resources as the new owner of the local electricity network.

One official familiar with the privatization process told RFE/RL the World Bank is likely to again delay the release of a $20 million budgetary loan to Armenia pegged to the successful privatization of the power grids. The money is the third and final installment of the bank's $50 million Structural Adjustment Credit (SAC) that was due to cover about half of the country's 2001 budget deficit.

In a bid to dispel donor concerns, the Armenian government has written to the World Bank, promising to have Midland Resources hire a team of experienced energy managers from the West to run the electricity company. According to one diplomat from a Western donor state, "the deal may not be a disaster" if the government fulfils its pledge.

The donors' strong interest in the Armenian energy sector results from the fact that the sector is one of the biggest drains on the Caucasus nation's scarce public resources. The sector already underwent substantial reform and restructuring in the mid-1990s. That helped Armenia to end severe power shortages and begin exporting electricity to neighboring Georgia and Iran.

Still, the state-owned Armenian power-generation and -distribution companies remain plagued by widespread corruption and mismanagement that cost the impoverished country more than $60 million in damages each year. Government efforts to stamp out those practices have failed, reinforcing the belief that privatization is the only realistic way of tackling the losses.

The government twice attempted to privatize the power distribution network last year but found no foreign company interested in buying them. It subsequently decided to try to place them under foreign management. Preparations, overseen by the World Bank, were under way as recently as last May for an international tender for a management contract. The bidding was expected to be called this autumn.

However, as Sargsian of the World Bank explains, the authorities then abruptly changed their plans. "Early this summer, the government informed us that it was holding negotiations with the Midland Resources company registered in the English offshore zone. So I wouldn't say this outcome was unexpected to us."

Midland Resources' principal activity is trading in ferrous metals and other raw materials used in manufacturing. The company owns two steel factories in England and Ukraine. It also has other holdings in Ukraine.

According to documents obtained by RFE/RL, Midland Resources' board of directors is composed of four persons. However, it is not clear who owns the company. Nor is it clear what the company plans to do with the Armenian electricity distributor. The senior executive from Midland Resources who signed the takeover agreement yesterday declined to comment.

Finance Minister Khachatrian said the Armenian government expects Midland Resources to invest at least $100 million in modernizing the sector in the next seven to eight years.