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Energy regulator the key to future sell-offs

Six months after its original deadline, Slovak cabinet approved the draft project for transformation and partial privatisation of the Slovak energy sector at its regular session on September 27. However, both government officials as well as analysts have said that approval will mean nothing without the smooth creation and working of an independent regulatory body to oversee the utilities market, something that investors consider the 'alpha and omega' of the upcoming energy sector privatisation process.
The privatisation project proposes selling 49% stakes in all power and heat distribution companies over the next 12 to 18 months, followed by a gradual full liberalisation of the market after that.

Six months after its original deadline, Slovak cabinet approved the draft project for transformation and partial privatisation of the Slovak energy sector at its regular session on September 27. However, both government officials as well as analysts have said that approval will mean nothing without the smooth creation and working of an independent regulatory body to oversee the utilities market, something that investors consider the 'alpha and omega' of the upcoming energy sector privatisation process.

The privatisation project proposes selling 49% stakes in all power and heat distribution companies over the next 12 to 18 months, followed by a gradual full liberalisation of the market after that. But while the government is expecting to rake in the cash, for example over 100 billion crowns [$2 billion] for the sale of gas distributor SPP, analysts say that the privatisation process will be a failure unless an apolitical and independent regulatory body is involved.

According to the area manager of one of the world's largest energy sector investors, who spoke on condition of anonymity, an independent regulatory body would give investors a clear picture of the country's market. "It is like a referee in a football game. He enforces the rules and doesn't discriminate against anybody," the source said.

Michal Benák, a partner with Bratislava-based mergers and acquisitions firm Navigator, which specialises in business in the energy sector, said that without a properly working independent regulatory body, there would be chaos and disorder on the market. "This body is the backbone of everything," he said.

The government appears to be listening. "From the government's point of view this institution [regulatory body] is absolutely key, and we [the government] realise that it is the same from the point of view of future investors," said Vladimír Tvaroška, an advisor to Deputy Prime Minister for the Economy Ivan Mikloš.

The sector's regulatory body is expected to be established on January 1, 2001 and will oversee the energy market as of April 1, 2001; it will be given the job of supervising other economic sectors as they are liberalised. The main role of the body will be to establish a price-setting mechanism that protects energy prices from political manipulation, and thus ensures investors a predictable return on their investments, as well as to guarantee that all participants of the market have the same access to the transmission network. The body is to be the first regulatory body in Slovakia fully independent of the state budget.

The Economy Ministry, which drew up the plans for creation of the regulatory body, said that the cabinet-agreed legislation was likely to fly through parliament with the support of all political parties. "[The legislation] was supported by the committee of ministers as well as by the KOZ [the union umbrella group]," said Branislav Ďurajka, deputy director at the section for business support, strategy and legislation at the ministry.

Both Tvaroška and Benák insisted that the regulatory body would only gain the trust of investors and build its reputation if it was financially independent of the state budget and apolitical. "The body has to have credibility and key rules have to be set. The voting system to appoint members of this institution must be complex and very transparent, so that coming investors would trust it and no one, really no one, can doubt its independence," Benák said.

The trust built with investors, all agree, will be repaid in the form of bigger bids for stakes in state firms. "Under the current situation, when no regulatory body has yet been set up," Benák said, "investors would have very little interest in the Slovak energy sector, and would be willing to pay only a very small price to enter the Slovak market."

The energy investor source agreed: "Big multinational companies like us view a regulatory body as a guarantor of the future on a given market. Moreover, if there is a guarantee of this picture and an investor sees that his risks are minimised and nobody but a regulatory body can control his business, then he is always willing to pay much more than if there wasn't any regulatory body active."

Corruption worries

Slovakia's energy sector has been the source of many accusations of clientelism aimed at the Dzurinda government - accusations the regulatory body may now help refute.

Ďurajka explained that the draft conception of the regulatory body would ensure its employees would be paid from future fees levied on utilities for the existence of such a body, "so there will be little space for corruption".

Tvaroška added: "I think that the salaries of future employees of the regulatory body have to be higher than salaries of other state employees, so that they cannot be manipulated."

Benák added the final seal of approval for the government's policy: "For those who question the issue of corruption in the coming privatisation, I say that corruption can be killed only by an independent institution like the regulatory body."

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