Prof. Ljubomir Madžar, PhD, speaks on the current problems of Serbian Electric Power destructive policy of low electricity prices

18. May 2013. / Uncategorized

A radical shift in the electricity price policy and a significant step towards improving professionalism of the management structure are the first in the hierarchy of desirable interventions in the “Electric Power Industry of Serbia”. – The cheap electricity policy is one of the worst in already rich palette of economic and political failures of this country. – Whether EPS is most valuable state-owned company will be revealed to those in the position to audit its business books.

Every single economic organization inherited from the previous self-government period needs a fundamental re-organization. But, it is doubtful that even such radical structural intervention could be of any help. But “Electric Power Industry of Serbia” is a company that must survive, or otherwise there would be no life for us either. The reorganization is important and cannot be avoided in the long run, but it is far from being the most important. However, I don’t find it a particularly urgent problem to solve – says for our paper prof. Ljubomir Madžar, answering the question – how deep reorganization is needed to EPS and why? What all of this suggests? Is EPS ripe for a thorough reorganization, not only the internal one, but also in a property sense?

Is there a priority in this important and indispensable work?

What I see as the priorities are the following two actions. In the first instance, EPS should be released from the political party traps and freed from the group of organizations representing the party’s electoral spoils before it undergoes consistent professionalization. The persons appointed through the politics, if a thorough scrutiny conducted proves that there are any, should be replaced by highly competent professionals. The second one being even more important than the first – the price of electricity should be substantially increased. Both the media and professional publications are full of information about the special low price of electricity in Serbia. The policy of cheap electricity is one of the worst in already rich palette of economic and political failures of this country. It subsidizes households, which instead should be relinquished to a scope of a particular social policy, if needed. Injudiciously cheap electricity is subsidized for everyone, including the best-off citizens. Moreover, the richer ones are taking more advantage of non-economically set electricity prices, as they are much bigger consumers. A radical shift in the electricity price policy and a significant improvement of the management structure professionalism are the utmost and the first in the hierarchy of the measures advisable for this sector.

Does this imply a change in the ownership structure of the company?

As for the change in ownership structure through privatization or recapitalization, the things are quite different and could hardly be changed in the near future. The reason is that the current opportunistic policy of subsidizing the population at the expense of EPS has financially undermined the company and a big question now is what its true economic value is – if there is one at all. The “Srbijagas” is known to have been so much recapitalized again through non-economic selling prices that it might already be insolvent, and that its net capital is likely negative. EPS is worth far less than what is believed by the general public, even in some professional circles.

Would the company remodeling to a closed joint stock company or switching to some form of privatization be a better solution?

The privatization of EPS would, as it was the case with “Sartid” ten years ago, probably require that the state takes over considerable amount of accumulated losses, so it could be sold as “cleaned.” Knowing, however, that the tension created by the state of our budget is on the verge of cracking, the big additional burden must not (could not) be taken.

The price of electricity is one of the key factors affecting the business, but there are qualitative factors as well. Can, therefore, all the problems of EPS be solved through increase in the price by 10 or 12 percent, or something known as productivity, efficiency, rationality and savings has to be considered for that matter?

A certain price would help in making EPS profitable on an ongoing basis, but the question remains whether the government will find the will and courage to make such a painful and unpopular move. But, except for ensuring ongoing profitability, no price could provide for covering the old accumulated debt. This should be solved through very big, drastic moves that need to be made outside EPS, since those are “the fruits of the old sins” (burden of losses that has been dragged through the business book for decades) that resulted from political decisions made outside of the company earlier on. There is always some room for productivity and other performance indicators, but there’s no much to hope for in this regard, as any significant gain based on this would have likely happened so far. These valuable improvements would have not had to wait for a recommendation from an analyst, as if without such “recommendations” it was unknown that the raising efficiency was a desirable thing.

Can EPS alone manage to commit all the changes, given the experience of similar companies, or it will require more support from the state that doesn’t know at the moment what to do with its most valuable company?

Whether EPS is most valuable public company will be known to those in the position to audit its business books. The review, however, can bring some very unpleasant surprises. Whatever the outcome of such an analysis, it is certain that the problems of EPS are huge and EPS alone will not be able to consolidate its balance sheets and cover the losses that the State ruthlessly kept loading upon it for decades. It won’t be able to consolidate by itself and according to the current state budget and frightening tendency to aggravation, it is hard to see what radical measure the state could take to help the cause. And there’s no the third, “tertium non datur”. However the forecast may look grim, it’s not “the end of the world”. The solution will be found one or the other way, but from this perspective it is hard to discern how.

What sequence of steps would be, in your opinion, needed to bring EPS in line with other respectable companies like, say, the Czech CEZ? Can solution be sought in some sort of corporatization, which option is even somewhat lesser known about?

It is premature to speak on some concrete steps along the course of reorganization and changes of legal status. Until the pricing policy is changed and the basis for normal operations of the organization is created there will be no possibility or a need to consider some technical and less far-reaching implications for issues such as this.

In this context, reference is often made to the introduction of professional managers in public enterprises, and therefore EPS. Is it realistic for us when the government, as the main boss, does not know what to do and in which direction to embark on the consolidation of EPS and other public enterprises?

Professionalization of the management structure is desirable and necessary, but for now it is unlikely. The reason, however, is not that the government does not know what to do in this area. Quite the opposite, it does know what works. The government uses EPS for their own benefit, but what is good for the government, at the same time is not good for EPS and for society as a whole.

The plan is to make major investments in opening new mines and power plants. How to attract foreign capital at the time of such crisis in the world and in the country of Serbia which is ranked the 95th in the world in terms of attractiveness for foreign investment? Along the way, what else the state must do to help its power industry to stand on their feet and become a major regional player in the ever more liberalized electricity market?

Foreign direct investments are rather thin. The main reasons for that should be sought both abroad and within our country. There is a vast need to improve the investment climate and business environment in the broadest sense. It should be done not only for EPS but also for the whole economy in the both public and private sector – but is not much likely. But in addition to that general distress, EPS suffers from its specific predicament: unprofitable operations and losses. It seems that foreigners will very seldom turn to invest in our country, not to mention to the losses-burdened EPS. The first step in achieving some kind of improvement is a realistic diagnosis of the situation.

There is no development without energy

People are talking too much about sustainable development. Can EPS become an important part of that program and/or how, at least as an infrastructure factor?

Sustainable development is impossible without regular and reliable supply of electricity. But for EPS to play a crucial and anticipated role in the process, it should be made sustainable itself, which, unfortunately, is not the case for now, nor will it probably be in the foreseeable future. As it often happens, one hand of the government will be taking from it profusely, but the other hand will have to give it more and more in order to keep it alive.

Source; Kwh

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