Montenegro exclusive: A2A privatization of Power utility company EPCG, exit or new strategy?

, SEE Energy News

Government is arranging to grant A2A new contract for EPCG for additional five years, with the possibility of joint management.A2A interest is to stay on board and attract new foreign partner or to sell its share to new owner.

Management board of Italian company A2A that operates Electric Power Industry of Montenegro (EPCG), announced its arrival in Podgorica on the 6th of October in order to continue negotiations with Government representatives on terms of cooperation for EPCG.
Five-year contract on management with Italian partner in majority state-owned EPCG, expires at the end of this year.

The Government and A2A are now negotiating the terms for Italians to be granted an additional five-year contract for Electric power industry, with a possible joint management, compared to previous when the partners had the final say.

A2A has more chance to attract the partner if it gives him the right to manage EPCG as well

Montenegro government is considering the option for directors of both owners to participate in management.They claim that Italian officials recently conveyed that now A2A is not thinking about leaving the investment in Montenegro. Answering the question, on what basis A2A deserved new chance, considering that the actual contract had not been fulfilled regarding the development of EPCG, from gov team it was said that they have been analyzing A2A’s work over the Board of Directors of EPCG, where the State has four out of seven members, and they still analyze it.

It is estimated that it’s better to have foreign management with actual partner, because the situation is somewhat better compared to the period of domestic managers’ domination when EPCG was making enormous losses.

Government never explained to public whether or not the Government has analyzed previous performance of A2A in EPCG, and what are the conclusions of that analysis.

It wasn’t explained either what obligations from the contract A2A fulfilled so it could recommend them for continuation of cooperation.
It was speculated that A2A is searching for the partner in order to sell its minority share in EPCG, in case the Government isn’t interested in buying it. According to the contract from 2009, the Government would have to declare on such decisions of Italians.

The Government is expecting as well the position of A2A’s new management board whether the EPCG will supply electricity to KAP.
Former General Manager and negotiator for Montenegro, Renato Ravanelli didn’t hide the fact that A2A is preparing exit strategy, and he talked several times about reassessing their stay in EPCG.

He informed Italian shareholders that investment profitability depends on construction of undersea cable between two countries, reminding about the option from the contract that Montenegrin Government could buy their share.

It was speculated that they intended selling their shares to Chinese investors and allegedly Russian companies were interested too, but it’s abandoned for now because Italians couldn’t get 430 million EUR, what they paid for share in EPCG. That’s why A2A wants to ensure itself through new five-year contract, because the greater is the chance for them to attract a partner for buying of minority share, if they give him the right to manage in Montenegrin company.

Montenegro owns 57% of shares in Electric power industry, while A2A owns 41, 7% of shares. Their package was reduced for 2 percentage points, and state’s share increased accordingly, after transforming EPCG’s tax debt into shares.

The Government also expects the position of A2A’s new management board whether the EPCG will supply electricity to KAP, which was overtaken by Uniprom, ownership of Veselin Pejovic, without paying 28 million for the assets, but it is not certain whether KAP’s production will survive.

Future energy projects were also the subject of negotiations, like investing in construction of the second unit in TPP Pljevlja, and possibly in hydropower plants on rivers Moraca and Komarnica.

Majority of recapitalization money was left to be handled by Prva banka, whose shareholder is EPCG, and which is controlled by Prime Minister’s brother Aco Djukanovic.

A2A claimed that it is more profitable than investing, evaluating that the return on investment is insufficient through electricity prices.
Duties concerning supply improvement and decrease of network losses weren’t fulfilled, and citizens keep on paying high prices for that, as well as duties concerning increasing profit for each year of managing, that was supposed to reach 300 million in total. In the first year of managing in EPCG, A2A made 16, 5 million EUR of profit, and the contract predicted 20 million, which they justified with price drop that happened after they overtook the company.

Electric power industry ended 2011 with a major loss of 66, 5 million EUR, declaring as main culprits – difficulties in business because of KAP, expensive imports and prices.

Electricity prices have risen afterwards, reaching 10 EUR cents per kilowatt-hour for households, VAT included. In 2012 the company was 5,5 million EUR in loss, finishing 2013 with 25 million EUR of profit.

Arbitration because of KAP as an asset

The sources from the Government responded that the Italians haven’t excluded the arbitration for KAP, but they always indicated that possibility yet so far. The question is how the Government will ensure for that not to occur during negotiations.

Former management of A2A, to which its shareholders declared the investment in Montenegro as wasted, announced also arbitration against Montenegro for the damage in EPCG’s business because of 45 million EUR of KAP’s debt for the electricity, while it was under management of Russian CEAC, ownership of Oleg Deripaska. That debt can’t be collected through insolvency proceedings of bankrupted KAP.

President of the Board of Directors of EPCG Srdjan Kovacevic, said in March 2013 that Italian partner announced the possibility of arbitration opening for the damage EPCG suffered because of KAP.

Does A2A deserve to stay or SDP will demand termination of the contract again

President of the Assembly and of SDP, which is member of the Government, Ranko Krivokapic, said in the middle of 2011 that A2A didn’t fulfill conditions for the first year of operating the company, and that they are not good for the long term cooperation, on the basis of what they showed at the beginning, stating that they need to be given time in order to do more.

Krivokapic said back then that SDP has nothing against foreign management in EPCG, and sent the word that new partner should be invited, in case A2A can’t execute the contract on recapitalization of EPCG, which he praised pointing out that it was signed by the Deputy Prime Minister from SDP.

“After checking the indicators, it should be decided whether they can continue operating, and whether they show better quality than domestic management. If not, even though we don’t hope for the better, we should then cancel the contract after three years”, said Krivokapic, pointing that it would be good to find domestic staff to manage EPCG, but “it turned out they are too sensitive to political pressures”.

The contract wasn’t cancelled at the end of 2012, after three years have expired, and the Government didn’t say whether the parameters for management of EPCG were fulfilled.

The opposition and the part of NGO sector consider the contract as bad because it doesn’t determine how much A2A should invest in company’s modernization, which would bring benefit to all citizens.