Resources 25
Electricity: guarantees and profits

Turow Power Station is a huge plant which provides 10% of Poland’s electricity. It needed $363m dollars investment to modernise it and improve its environmental standards. This improvement is being done by a consortium of two multinational engineering firms - Ahlstrom (USA) and ABB (Swiss-Swedish). But the contract involves guarantees from no less than three governments - the USA, Switzerland and Poland - and a guarantee that the Poles will buy sufficient electricity at prices that ensure a profit.

One-third of the finance was raised from western banks, such as Citibank, Swiss Bank Corp, and Nordic Investment Bank. An essential part of these loans were guarantees from the companies’ home governments - the Swiss and US export guarantee agencies.

The rest was raised from a consortium of Polish banks, who agreed to lend of $200m dollars as long as there was a guarantee from the Polish government. Even then, "the banks would not get involved until they felt revenues were predictable enough to ensure repayment. To accomplish that, Turow arranged a long-term contract with the state-owned distributor.., which agreed to buy power from the utility at guaranteed prices through the duration of the project" (Business Central Europe November 1995).

(extract from The Privatisation Network 1996)

There is continuing conflict over prices and profits of privatised utilities in Hungary. Hungarian gas and electricity prices rose about 50% between December 1996 and January 1998. No price rises were allowed in April 1998 - the devaluation trigger was not reached, and there was no costs justification.

Elmu (RWE) complains that its rate of return (RoR) still does not reach 8%. The company's profits have increased, however, thanks to price rises - revenue grew in 1997 by 18%, although the volume of electricity sold only grew by 1%. RWE also complain about the long grace period required for electricity cut-offs (90 days). Bayernwerk - which owns shares in four Hungarian energy companies - complains that its RoR has not reached 8% not reached, and costs are not adequately reflected in prices:

" German utility Bayernwerk said it was disappointed in the 1997 results of its four energy distribution companies in Hungary and called for energy pricing to be reviewed in order to generate the returns promised by the Hungarian government. 'We are far from satisfied with (the units') various profit rates,' Bayernwerk Hungaria's director Konrad Kreuzer told a news conference on Thursday. 'They are ..evidence of the weakness of a state-controlled system of regulating prices for electricity and gas, of an unsatisfactory price structure, and energy prices which do not begin to cover costs.' 'This situation must change in a country like Hungary which is aspiring to join the European Union. ' Bayernwerk is one of several Western utilities which bought into Hungary's energy generation and regional distribution sectors in late 1995. In an appendix to the privatisation contracts, the government promised investors an eight-percent return on investment by 1997. Bayernwerk, RWE, Tractebel an and Electricite de France have all complained that this has not been achieved, despite the introduction of a quarterly pricing mechanism system which was supposed to take reasonable costs into account. Bayernwerk currently holds a 47 percent stake in electricity distributor Dedasz (Reuter 14 May 1998)

But Demasz (EdF), Edasz (EdF/Bayernwerk) and Dedasz (Bayernwerk) all paid dividends - Edasz makes 7.9% RoR, and Dedasz pays all its profits as dividends: "Wednesday's AGM of South Hungarian Electricity Supply Company (Dedasz Rt) approved a decision to pay out all of last year's total after-tax profit of HUF 1.193bn as dividend. The dividend will be 4pc, or HUF 400, per share. Dedasz has registered capital of HUF 29.798bn and is majority owned by the German Bayernwerk" (MTI-ECONEWS 23 Apr 1998)

(extract from "Energy: developments in Central and Eastern Europe (CEE)" June 1998)