Energy sector is a magnet for investors, interview with Energy Minister Zorana Mihajlovic

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Serbia has to yield benefits from its geostrategic position and, in addition to meeting its own needs, once again become a country that exports electricity. I’m not talking about a dream, but about a very realistic possibility. In the next ten years, the Serbian energy sector could conclude agreements on investments in energy amounting to over EUR 10 billion.

This year will be marked by investment in the energy sector – has recently announced Zorana Mihajlovic, Minister of Energy, Development and Environmental Protection. In recent the Minister further explains her statement, provides more details on the projects and value of investments, but also tackles the issues such as the South Stream pipeline, recruitment practices in public enterprises, relationships within the Government, EPS and “Srbijagas”.

What do you consider as a top priority for the energy sector in Serbia?

The energy sector in Serbia was devastated, although there were no true or objective reasons for such an outcome. Instead of being a trigger, the energy sector became an impediment to the development of Serbia, and possible obstacle to the development of the entire region. Therefore, at the very beginning of my mandate I insisted on making the plan of priority investment projects in the Serbian energy sector, which was done for the first time in the history of this sector in Serbia. The plan of priority investment projects was presented not only to bankers and representatives of embassies, but also to potential investors.

What projects were on the table?

– There are several objectives that are of a substantial importance for this sector in Serbia, such as increasing the energy efficiency of the household sector and electric utilities, exploiting the potential of renewable energy sources, and constructing large infrastructure facilities. It is estimated that in the next ten years the Serbian energy sector could attract investments amounting to over EUR 10 billion. A lot of efforts have been made in the previous and this year to improve legislation, cut red tape and streamline procedures, as well as to promote investments in the renewable energy and projects including the construction of Unit TENT B3, open-pit mine Radljevo, TPP Stavalj, and large-capacity HPP Djerdap 3. The Energy Agreement with Italy on the construction of small hydropower plants was ratified. Serbia also signed a long-term agreement on gas supply, thereby ensuring the stability of gas supply in the next decade.

How can the energy sector contribute to GDP growth?

– The energy sector is at top of the list of sectors that can boost economic growth. Moreover, Serbia is located in the Southeast Europe, the region which hasn’t had enough energy since 2001. It is obvious that demand for additional energy is growing. Serbia has to yield benefits from its geostrategic position and, in addition to meeting its own needs and, accordingly, raising energy security, to once again become a country that exports electricity. I’m not talking about a dream, but about a very realistic possibility. Serbia would be able to meet its needs for electric power if it fulfilled the following prerequisites: to exploit the potential of renewable energy sources, increase the efficiency and modernize heating plants enabling them to produce both heat and electricity. Also, as soon as large infrastructure facilities have been built, Serbia will be in position to export electric power.

Anyway, at the moment we are importing electricity…

– We allocate near EUR 3 billion annually for the imports of energy and energy products. Bearing this fact in mind, it becomes evident that every step towards increasing energy security of Serbia directly lowers indebtedness of the country and, consequently, leads to economic growth and better living standard of the citizens. Improving quality of life and elimination of any sort of dependence are the priority tasks of the Government and this Ministry.

The first thing that comes in mind when we think about the energy sector is EPS – the largest system for production and distribution of electricity. What can be done to prevent EPS from making losses and creating affaires like the one of “Kene’s castle”, to determine a realistic price of electricity and to ensure that all consumers regularly pay their bills?

– EPS is ruined public enterprise and the same holds true for other public enterprises and especially refers to the period of last ten years. Those who are responsible for this situation, regardless of whether they were politicians, ministers or directors should be brought to account. At the same time, this Government is doing everything possible to initiate the changes in EPS so that in a year or two it can become an engine of development. I want to change the management system in EPS. Therefore, several months ago the Government of Serbia made the Decision on starting points for reorganization of EPS, with the aim of enabling EPS to become more profitable and more efficient (both economically and environmentally) energy company, but also to prepare it for the liberalization of electricity market. The goal is to encourage EPS to take a full use of its potential, to stand out from other regional companies and become a leader. Despite the problems that are currently burdening EPS, from the uncollected receivables to the consequences of bad decisions of the previous management, negligence, and corruption, we have envisaged some measures that could help EPS including rescheduling of public revenues, tax release for the electricity transactions on the territory AP Kosovo and Metohija, improving account receivables collection from public enterprises, as well as from other enterprises and households. In addition, EPS will have to implement a serious investment program, as well as to reduce distribution losses which have been constantly increasing and are currently the highest in Europe.

Given the all irrational practices in EPS, we may come to the conclusion that we are actually paying for the most expensive electricity?

– It is not possible to make all necessary changes at once, or in a few months. EPS has been destroyed for years and things could not change overnight, but what is the most important is that we now have a clear picture of goals and measures that must be implemented. I’ve already addressed the issues which I considered as most urgent at the beginning of my mandate. EPS has provided the electricity for 2013 by purchasing the surplus of electricity from the Republic of Srpska at public tender. There will no longer be emergency imports, wasted money or instability in supply, which we experienced last year in February. Now it is up to us to examine how it is possible that any one, in any of the previous years, didn’t want to deal with electricity purchase plans of EPS, as well as with the issue of electricity imports, since the deficit is evident.

Why is the celebration of the official start of construction works on the South Stream in Serbia postponed and when they are expected to begin? Will some of high Russian officials attend the celebration?

I think that the official celebration is peripheral issue in comparison to the fact that the South Stream will actually be built. The Law on South Stream Project, which is to streamline procedures relative to the start of construction, is currently passing under parliamentary procedure. The Ministry and the Government have not thus far announced the specific date of the start of construction works. Our responsibility is to provide conditions necessary for the beginning of works, which will be fulfilled with the enactment of this Law. The company South Stream makes decisions about the construction, but it is realistic to expect works to begin in this construction season. I am pretty convinced that the representatives of the Russian partner will attend this celebration.

To what extent will you be able to strengthen the position of Serbia in relations with the Russian partners, given the fact that we somehow always end up with a “minority stake” in the final agreements?

– The relationship with the Russian Federation has always been friendly, and that is exactly one of the reasons why I insist on further negotiations on lower price of gas and on possibilities of attracting more Russian investments in Serbia. The Energy Agreement with the Russian Federation signed in 2008 shall not be modified, which especially applies to its part related to the sale of NIS, but I believe that it could be a good starting point for establishing even stronger long-term relationships between our countries in the field of gas and gas policy, ranging from the South Stream pipeline to the construction of gas-fired power stations.

At the end of the last year you presented the program of measures stimulating the use of renewable sources of energy by 2020. It is very ambitious and envisages the share of RES accounting for 27% of final consumption.

– In the past few months since I has been appointed the Minister, my associates and I have devoted a particular attention to improving the conditions for better use of the potential of renewable energy sources. It is unbelievable that despite the Serbia’s great potential for the construction of 900 small HPPs, only six small hydropower plants have been built in the past ten years. This fact colorfully demonstrates the extent of resistance and the lack of willingness to support independent producers of electricity. I think it was a huge mistake that we are now correcting. Not only did we amend the section of the Energy Law related to energy licensing and annul the Minister’s discretionary right, but we also introduced new regulations on incentives and privileged producers. Moreover, in 2013 we intend to open the Quick Response Office responsible for the energy sector, which will be the very beginning of the implementation of the plan to minimize number of procedures. Serbia does not have time to waste on lengthy procedures in public companies and ministries that used to depend on greedy clerks seeking bribes for their services. Investors want to invest in the Serbian energy sector, and Serbia needs both investment and electricity. Our task is to make all that possible.

You affirmed that the public call for small power plants would be announced by the end of last year, but that has not happened. As we know, you have already met with local authorities and defined locations. So, what is the problem?

– The public call for obtaining energy permits for 317 locations will be announced by the end of February and I proudly emphasize that this happens for the first time in the history of the Ministry and the Government. Previously, there were no order in issuing energy permits, and no exact criteria for giving approvals, which often led to the adverse selection of investors that did not have the strength to carry out the investment. They held and extended license for years whereas they didn’t make any progress in situ. The latest amendments to the Energy Law are to prevent such an outcome. Public announcement will be published in the local and international media and the criteria for evaluation of investor’s capacity will include not only the excerpt from the Business Registers Agency, the balance sheets and P&L statements for the past two years, the bank’s opinion on the creditworthiness of a potential investor and references, but also the use of state-of-the-art technologies, the impact of investments on human capital and economic development of a municipality, i.e. a city.

What is your view of the fact that public enterprises, “by default” divided among the parties of the ruling coalition, are loss makers (with a few honorable exceptions)? Does the problem lie in mismanagement, irrational spending or the habit of parties to take endless “donations” from these enterprises?

– I have to say that apart from the problem of bad management, there were a lot of immaturity in the perception of public companies and the lack of awareness of the significance of their profitability. Unfortunately, PEs often served for taking out the large amounts of money for financing political parties and the like. The current problems of PEs call for the implementation of serious fundamental changes. It is obvious that the status of PEs could no longer alternate between state company and independent business solely depending on someone’s will. The state has to preserve its assets in PEs, since their key purpose is to serve the public interest. Moreover, the state should enable them to successfully deal with the liberalized market, according to European standards. These companies need to be prepared for the level playing field and competition on the market, striving to preserve the state capital instead of to maintain a monopoly. This implies the ability to make full use of all internal reserves.

Do you believe in the so-called “departisation” of public companies?

– In my opinion, the most important thing is that those who are supposed to lead PEs know their job, have specific plan and program of their actions and that their effectiveness reflects on results. I don’t see any problem in the fact that a party member runs PE. The main criteria should be knowledge, expertise, strategy, not a political affiliation. We should not go from one extreme to the other. Previously only the party members were appointed, and now we prohibit the directors from being party members. I think that’s wrong.

Before joining the Government, you were known as an expert in a field of energy. What is the difference between acting as an expert and as a politician?

– The previous government, as well as other governments, left us a legacy of bad moves, which I openly criticized. Therefore, I’ve tried to make the things right, but sometimes I just couldn’t do that, which, truth to be told, conflicts with my professional opinion. However, some obligations are inherited and of international scope, and as such they are not subject to change. However, all new initiatives that I have thus far implemented are in line with my initial priorities. Politics is allowing us to do the right things for Serbia. There are still a lot of things that need to be done and plenty of opportunities in both this sector and the sector of environmental protection.

Do you have some obstacles within the Government?

– If we consider the number of decisions related to the energy sector that the Government has adopted so far – from the Memorandum on the construction of TENT B3 that we signed with the German company RWE, the Energy Agreement with Italy, to the Decision according to which PEs are to create feasibility studies of the projects which will be presented to large investors – than it becomes evident that there are no obstacles. Some degree of resistance is present and it is associated with the rest of those groups pretending that they can prevent changes and reforms, reduction of red tape or fight against corruption from happening in PEs. I have to say to them that such a behavior will not be tolerated. Corruption is a major barrier to investment, which leads to higher level of unemployment. Energy sector could employ the large number of people. Only one thermal power plant that is expected to be built may employ, directly and indirectly, up to 5,000 people.

What is your opinion about the prospects for the Serbian economy in 2013?

– I expect to see some progress in the economy, especially thanks to the energy sector and agriculture which I consider as the main triggers of the development. The United Arab Emirates has shown interest in our agriculture, which could represent the initial and highly important step towards reindustrialization and better export performances of agriculture. As for the energy sector, I expect that some agreements on the construction of new energy facilities will be signed. Serbia has the potential, an excellent geostrategic position, and hard working people which deserve to be employed – said Minister Zorana Mihajlovic in an interview for “Magazin Biznis”.

Corporatization of EPS

– The announced corporatization of EPS envisages a clear legal, organizational and financial separation between the activities of general public interest and energy market activities, in accordance with the Law. In this respect, it will be established one company for the distribution of electricity and management of the distribution system, and the other company which will be entrusted with the supply, gaining the status of the public supplier.


What do think about the project Danube – Morava – Vardar – Thessaloniki considering that this long-term project has caused so much controversy?

– I am not sure that is possible to say more about this project without a clear assessment of economic, energy and environmental feasibility of its implementation. Many memoranda were concluded in Serbia in recent years in spite of the fact that no serious study, or at least a feasibility study, was made even for the projects worth several billion euros. I expect the studies to be completed and only than the available data will provide us with necessary information.


You have announced restructuring plan of Srbijagas. How does it advance? Does this company have to be a loss maker? Where do you see a way out of its problems?

– Like EPS, Srbijagas is faced with severe financial problems. Its debts are amounting to over EUR 1.1 billion, which is unacceptable, while unconfirmed debts are around EUR 700 million. Besides, there are many practices in this enterprise that I could characterize as a pure negligence, including the lack of priority goals, merging with non-core companies which directly burden cubic meter of gas, thereby impacting the bills of households and industry, or, for instance, using the state guarantee for obtaining the loan from EBRD, which has not been realized. All these facts reveal the inconsistency of the management policy in this PE. If the way of doing things in Srbijagas doesn’t change, Serbia will lose this enterprise. My goal is to enable Srbijagas to become well-organized system, freed from all activities which are not connected with its core business, i.e. trade and gasification in Serbia. At the initiative of this Ministry, the Government of Serbia will adopt the restructuring plan. This is the only way to prevent financial collapse of Srbijagas and further indebtedness of the state, to ensure the stability of natural gas market and more optimal gas prices and, of course, to optimally comply with the requirements of the Energy Law and EU directive. Only if these conditions were met, Srbijagas would be able to continue the gasification of the country, construction of cogeneration plants and implementation of other projects.

I’m not thinking about the election

Do you expect early parliamentary elections this year? To what extent could they, if such a scenario happened, disrupt announced investment plans?

– I’m not thinking about the election. The Serbian Progressive Party is not afraid of elections, since we will certainly enhance our position after those elections. However, we place the interest of our country and citizens above party’s interests. But, if the fight against corruption and crime was somehow interrupted, the elections would be inevitable. I have already stressed that the success of that fight is a precondition for further investments.

Source Biznis magazine/Serbia Energy