EPS has no time to lose, Ljubodrag Savic, Phd, professor at the Faculty of Economics, Belgrade

12. February 2013. / Uncategorized

If the state enabled electric power industry to operate under market principles and handed the company over to professional managers, EPS would soon become one of the most successful regional companies. – It would be feasible to introduce the policy of allocating some percentage of the price of kWh for funding the construction of new energy facilities.

Corporatization of EPS is necessary and highly important prerequisite for raising efficiency of the company, but it is not sufficient in itself. As owner of EPS, the state has to do at least three things. First, to determine its policy regarding the ownership structure, or namely, to clearly announce to public and prospective investors in which parts of EPS it will retain the majority stake, and which ones will eventually be subject to privatization. Second, to implement corporatization process fully and in an efficient manner. Third, to act at least as a private owner in terms of creating conditions for market pricing, in the same time providing the most vulnerable groups with appropriate social protection and to support technical and technological modernization and construction of new facilities, as well as to cut production costs significantly through reducing excess employees, improving account receivables collection, ensuring better organization of processes, rationalization of all business activities and functioning of professional management, and, finally, to forget about the practice of appointing political party members as executives, said Ljubodrag Savic, professor at the Faculty of Economics in Belgrade, answering to the question about the future steps that the state, as a current owner of EPS, would have to undertake in order to help the company to become stable and profitable, to independently manage its operation and invest in new opportunities.

Assessments of future prospects of EPS as a system usually point out that things could not improve as long as it stays state-owned company, because the state is a bad boss. Germany, France, Spain, and even the Czech Republic have one hundred percent ownership or majority stakes in their electric power industries, but those companies still have excellent economic performance. What is your opinion on this matter?

Serbia has long been a victim of an outdated neoliberal mantra that the private ownership is by its very nature always more efficient than the state ownership. My impression is that we have not understood that the notion of both private and state ownership has considerably changed in this century. Numerous practical examples and experiences speak in favor of this fact and even some Nobel Prize laureates in economics stress that in today’s globalized world the ownership form of a company is not crucial to its success, but the way in which it is managed. In developed countries, large companies such as EPS, no matter whether they are public or private, are managed by professional managers rather than by their owners. The role of one or several owners of the company is to set strategic goals while professional managers are accountable for their most efficient implementation. If the state could create conditions for EPS to operate on market principles and handed the company over to professional managers, it would soon become one of the most successful regional companies.

According to the statements of leading politicians of both the previous and current governments, the state has given up the idea of privatization of EPS and its partial sale to foreign investors. In your opinion, did they make a right decision?

If that is indeed the case, it will be one of very good decisions to be taken by the current government. A number of positive, but also bad experiences with the privatization of companies such as EPS have confirmed that it is a right step to take. The Czech energy company CEZ represents a striking example in this respect, as it has changed its owners three times only in one decade. That country hoped that all the problems of the so-called “socialist white elephant” would disappear through privatization, the belief which has been also promoted by many people in Serbia. It soon became obvious that such a belief didn’t hold true, so the Czech state has again regained the majority ownership, which along with more efficient organization and better management has contributed to CEZ’s leading position in a wider regional electricity market. The case of privatization of power plants in California in the 1990s, followed by a complete collapse of the system in 2002 explicitly demonstrates why it is necessary to be extremely cautious about undertaking privatization of large infrastructure systems such as EPS. Given the need for extensive investments and a prolonged period before they pay off and yield ROI, a private owner is more interested in exploration of the existing recourses than in investments in new capacities.

When it comes to a further transformation of EPS, there is always an issue of the price of kWh, which is currently the lowest in Europe. Price is an important economic parameter, but it is not the only indicator of a company’s success. Here it has also been a social shock absorber. How is it possible that company like EPS makes losses?

EPS has long been a company pursuing not only economic goals, but also social ones. Non-economic price of kWh has served as a guardian of a pretended social peace, so EPS have been helping people in need, in the same time subsidizing the richest, which had disastrous consequences for its bottom line. Paradoxically, the citizens with the lowest income have regularly paid their bills while the wealthiest individuals and state-owned companies have been among the biggest debtors. EPS has become the “best employer” for a numerous political party members and executive positions have been exclusively reserved for the most prominent party activists. Abuses of public procurement procedures in EPS are often cited as an example of drawing huge amounts of money from the company. Therefore, dissatisfaction with EPS expressed by the citizens is completely reasonable and expected. The key stakeholders, including owner (state), management and employees, must radically change their behavior in order to enable EPS to develop in profitable and sustainable manner in the long run. If that really happens, EPS may relatively quickly transform from loss maker to very profitable company.

Judging from the facts, EPS will end the fiscal year 2012 with losses and outstanding amount of uncollected receivables. Where do you see a way out from these problems?

It’s actually quite simple. EPS should act as market-oriented and profitable company, and leave social policy implementation to the Government and line Ministry. Owner naturally has the right to exert strategic control, but political parties in power should not in any manner interfere in making and implementing business decisions. Collection period shall be regulated by law, which ought to be applied fairly and equally to all.

When will be the right time for the shares of EPS to be listed on a stock exchange, not only a small portion of 15% free shares? Which conditions are to be met by EPS in that respect?

EPS should not go public until it fully implements intended changes in its organization and governance, or until it becomes a strong and profitable company with great prospects for sustaining stable development in the coming decades.

The issue of development still remains the Achilles’ heel of EPS. About 60% of generated electricity is consumed by households. What will happen if some industries recover in the medium run? Shall we sit in the dark?

In recent decades EPS has been a hostage of misguided development policy. All the difficulties and problems experienced by our country had very serious effects on the company’s current operations. The main beneficiaries from the practices such as policy of law prices, poor collection results, massive employment of party members, looting EPS through public procurement have been political parties in power. EPS pays dearly for its wrong pricing policy, huge robbery, negligence and inertia. As a result of the aforementioned the company hasn’t been able to provide funds for the development, which is why no new power plant has been built for decades. If, by any chance, the Serbian industry recovered faster and the growth rates were much higher, Serbia would certainly become a net importer of electricity. Increase in electricity prices is inevitable and it would certainly result in significant change in the structure of consumption, because most households would be forced to seek cheaper alternatives. Hence, EPS has no more time to lose and it has to formulate a realistic strategy of further development as soon as possible. This strategy should certainly take into account foreign investments, but it should also set up mechanism for allocation of funds aimed at construction of new facilities, which was already in force in Serbia in the 1970s. Today it is not possible any more to use government grants for the construction of energy facilities, but it would be feasible to introduce the policy of allocating some percentage of the price of kWh for funding construction of new energy facilities.

Imperative of saving energy

No wind farm with a substanial installed capacity has been put in operation in Serbia thus far, and we haven’t yet exploited the power of small water courses. How do you assess this issue from the standpoint of your academic and practical expertise?

In the last couple of decades, all political leaders governing Serbia lacked a long-term vision of development. In such setting and mindset, decisions were made from day to day, while long-term strategy seemed to drop off the radar. Serbia has some energy resources, but unfortunately, they are not abundant. Their more extensive exploitation would provide substantial energy independence and stability. But that certainly will not be enough. Serbia, as other much richer countries, must save electricity far more, as well as all other forms of energy.

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