My article
about Ukraine’s new electricity tariffs aroused quite a few interesting
comments, which deserve responses. Since these comments are private and
many from people in high positions, I shall not mention their names.
The arguments circle around pricing, ownership, privatization,
investment, and taxation.
The natural start is ownership. No one
favors state enterprises. They generate worse results than private ones
and involve greater corruption risks. The state owns minority shares in
many of the regional distribution companies. Since each of these
companies is effectively controlled by one or two big businessmen, the
government should just sell its minority shares at a minimum price set
by the state to the only interested buyer. This was partly done last
year, and the government has put up ten minority stakes for sale in its
recent privatization law.
These stakes will hardly rise in value
and have no positive effect of any kind. Corporate governance in Ukraine
is poor and will remain so for some time. While trying to improve it,
concentrated ownership of enterprises is the best means to avoid
fruitless owner conflicts.
Ukraine has also a national security
problem in its grid. It is unfathomable that eleven of Ukraine’s 24
regional electric distributors are to a large extent owned by a Russian
group led by the Russian nationalist Aleksandr Babakov, who is sanctioned
by all relevant countries for his role in Russia’s occupation and
annexation of Crimea as vice speaker of the Russian State Duma. Babkov
also figures in the Panama Papers.
According
to US and European sanctions, Babakov’s properties should be subject to
asset freezing. The Ukrainian government should seize his assets as a
matter of national security. Here we worry about Russian cyberattacks on
the Ukrainian grid, when a large part of it is owned, controlled, and
operated by the enemy. Another major owner, Konstantin Grigorishin, by
contrast, was a Russian citizen but he has received Ukrainian
citizenship.
Some argue that the state should wait to sell until
tariffs have risen, but that makes little sense. The only interested
buyer will be the same, and he (because they are all men) will not pay
more, only get a greater windfall profit. Then, the argument goes that
the government could impose a windfall tax as was the case in the United
Kingdom after privatization that was too cheap and high tariff
increases, but that makes no sense.
Windfall taxes are generally
undesirable as arbitrary once-for-all taxes, and Ukraine needs a minimum
of arbitrariness. Such taxes are also unpredictable, undermining the
business environment, which is already poor. Finally, Ukraine already
gives half the population cash subsidies for higher tariffs. Thus it is
better to keep tariffs low to the benefit of the population as long as
they cover costs and offer incentives to invest.
Electricity and
gas tariffs are set and regulated, but out of long experience Ukrainians
are convinced that all tariffs are manipulated. The simple answer is to
introduce markets for gas and electricity. Ukraine has already adopted a
law for gas markets, but it has not been implemented. That should
become a matter of urgency.
A draft law on electricity markets
was adopted by the Rada in June 2017, and although it entered into force
immediately, a majority of its provisions have not been implemented. If
Ukraine got functioning markets for gas and electricity, the patent
problems of these two sectors would dwindle. In particular, the
corrupting discrepancies between different prices for the same good
would disappear.
The most difficult problem is how to create
prices for the grid services. So far these are natural monopolies, which
require regulation. The national regulator has wanted to introduce a
new type of tariff, the so-called RAB tariff, based on the regulatory
asset base. The basic argument is that it is the sophisticated system
widely used in the West. I have been corrected that the valuations have
been made by the four big auditing companies and not by the State
Property Fund, which has only reviewed them.
Yet Ukraine needs
simple and robust systems that are difficult to manipulate. One idea of
the RAB tariff is that half of the gain of the owners of the regional
distributors is to be devoted to modernization and investment, but does
anybody think that any Ukrainian agency has the ability to impose that
on people like Babakov?
Then it would make more sense to keep the
old, lower tariffs, though they should cover costs, on the old grids,
while those owners who modernize their parts of the grid would receive
the right to charge a higher tariff.
Anders Åslund is a senior fellow at the Atlantic Council.
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