Optimism in the Face of Change

Economic News

22 Jul 2010
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Brushing off concerns over the accelerated pace of energy reform, the Bulgarian energy minister told OBG last week that the changes the government was making were vital if the country was to maintain its international competitiveness. He also said that the new Energy Act would be a major step forward in energy market liberalisation.



Minister of Energy and Energy Resources Milko Kovachev made his comments in an exclusive interview with OBG on September 25. Speeding up energy reform was, he said, "necessary if Bulgaria is to remain competitive in the overall region".



Meanwhile, with the current government's approval rating hovering close to the single-digit level and with municipal elections set to take place at the end of October, promises made during the 2001 presidential campaign to privatise the energy sector by the end of this year are being called into question.



Local analysts are sceptical that the government of Prime Minister Simeon Saxe-Coburg will be able to achieve this goal in time. Many suggest that if past experience is to serve as a framework, the government has bitten off more than it can chew. Despite promising to privatise the Bulgarian Telecommunications Company (BTC) and state tobacco entity Bulgartabac during its first two years in office, both enterprises continue to operate as state-monopolies.



However, Kovachev brushed off these concerns by stressing his overall satisfaction with the progress his ministry has achieved so far.



He described the privatisation programme as "moving along in a very professional manner" and drew attention to the fact that many foreign investors had expressed an interest in the impending sale of the 67% majority stakes in each of the country's seven regionally-based electricity distribution companies. By the end of 2002, these seven had accumulated gross annual profits totalling USD22m.



This, he said, was a vote of "continued confidence in the government's handling of this ambitious project... several reputable energy companies are already in the running to assist us in the privatisation process."



In order to qualify for the bidding process, strategic investors must have a minimum of EUR1bln of their own available capital and annual sales of over 8-12bn kWh.



The host of "reputable energy companies" interested in claiming a stake in the distribution companies referred to by the minister includes a number of important energy firms from around the world. In a whirlwind five-day tour of Germany back in late April, Kovachev met with a number of officials from 15 of Germany's leading energy firms - Siemens, Alstom, Wintershall, MAN TAKRAF, Wattenfall HV, BEA TDL GmbH, DSD Dilingen, Ruhrgas AG, RWE Rhainbraun, MTV Energie AG, and ABB.



The following month, Turkey's Bilgi Group, an affiliate of the Istanbul-based Bilgi Dis Ticaret A.S., announced its intention to invest in the privatisation of the Bulgarian electricity generation and distribution sector.



Bilgi has already invested over USD 20m in Bulgaria and is planning to invest another USD30m in the construction of new shipping terminals on Bulgaria's northern Black Sea coast.



Japan's Electric Power Development Company (EPDC) has also expressed an interest. In addition, earlier this week the French Ambassador to Bulgaria, Jean-Loup Kuhn-Delforge, said during a visit to Varna that officials from the Bulgarian ministry of energy had been participating in talks with their French counterparts, concerning the possibility of French companies getting involved with the privatisation process. Many market watchers believe that Electricité de France (EDF) is interested, but at this point their has been no official confirmation.



Kovachev also outlined for OBG the objectives of the new energy law that he is actively trying to pushed through parliament.



"The new law will lay down the basis for liberalising the energy market and ensuring that the players involved in the process agree to more than simple trade relationships," he said. "[The law] will also go far in the creation of an appropriate business environment for the new private owners which is of fundamental importance if the privatisation is to achieve success."



The Ministry of Energy is planning to liberalise the energy market by 2004, in line with both European Union Accession requirements and recommendations made by the IMF. The previous energy law, passed in 1999, adhered to the French-inspired Single Buyer Model (SBM) in which the national power corporation, in this case the National Electric Company (NEK), buys up power from producers and then re-sells it to entities on the basis of consumption.



This model has since been replaced by a more market-oriented approach. As stipulated under the terms of the Energy Act, the first stage in helping create a more balanced and competitive market requires the State Energy Regulatory Commission (SERC) to set quotas specifically designed to meet the interests of each power plant by determining the amount of output they are allowed to offer on the free market. The next stage of the proposed Energy Act allows for smaller energy consumers to negotiate directly the terms outlined in their power contracts.



The minister's hopes in creating a "more appropriate business environment" for potential investors were incorporated into a provision of the Energy Act which provides investors with direct control over the construction of greenfield power plant projects.



This would avoid the bureaucratic nightmare often associated with Bulgaria's politically toxic and time-consuming tender process. It will also hopefully usher in a new era of long-term bilateral agreements in which both parties benefit greatly from their involvement in a market with an estimated annual turnover of roughly USD3bn.



Finally, the minister highlighted for OBG the fact that his ministry's Energy Proficiency Law was in line with the Kyoto Agreement, and that implementation of the law "will provide real instruments to help boost and support customers' efforts in using energy more efficiently".



It appears that the international community has given credence to Bulgaria's oft-stated intentions in adopting a more environmentally-friendly energy strategy. Just last week the World Bank, in collaboration with the Global Environment Fund, agreed to provide Bulgaria with a US10m loan to help fund projects designed to increase public awareness of the long-term benefits of energy efficiency. No doubt an important first step, in a country where domestic gas consumption currently rests at a minuscule 1%.

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