Serbia exclusive: Crossroad for Energy company of Serbia, privatization and harsh decisions ahead

9. December 2014. / News Serbia Energy

Serbian power utility company Elektroprivreda Srbije (EPS) can survive on the competitive market if they introduce market principles into their business operations. The EPS needs a strategic partner, who could help in the company restructuring, the management improvement, the attraction of funds for investments and the construction of new production capacities conclude the analyst of Serbia Energy in their latest report.

The state of the Serbian economy imposes the need for radical reforms in all public enterprises, аnd particularly in the largest ones, that have the highest turnover and that operate in the sectors of strategic importance for the country. The process of fiscal consolidation also implies a serious reduction of losses in public enterprises, which, according to the official data, incurred the losses higher than 50 billion RSD in the last year only. This is simply unsustainable in the long run. The need is also imposed for reducing the subsidies allocated from the budget for public enterprises and the companies undergoing restructuring. This is a budgetary cost amounting to 750 tо 800 million euros per year. And this is also unsustainable from the aspect of our budget. And this is why an organisational, managerial, expenditure and personnel reform of public enterprises represent a necessity, primarily in the economic sense. This is a condition which is also imposed by the international financial institutions, such as the IMF, but it is also a prerequisite of European Integrations.

The price of electricity significantly affects the business results of the “Electric Power Industry of Serbia“, but it also has a great socio-economic importance. This fact has been governing the formation of electricity price for many years. Therefore, it is impossible to make any kind of one-shot adjustment of the electricity price to economic parameters. This has to be a gradual and long-term process, so as to make the impact on the citizens’ standard acceptable and more easily alleviated. However, it is certain that, in the long run, the electricity price must be brought into compliance with the key economic parameters affecting its amount. For various reasons, аnd primarily because of the planned minority privatization and because of the requirements of the international financial institutions and due to the European Integrations. But this is not possible to “decide overnight”, but systematically and gradually.

The electricity price is undoubtedly an important factor affecting the EPS’s business results. However, it is far from being the only important factor. We should not forget the way that the business results are affected by the electricity collection rate, the public procurements costs, the issue of surplus manpower, the manner and conditions of landing and borrowing, the electricity trade management… Generally, a high-quality company management on all levels. And the public enterprises reform and corporatisation should precisely contribute to more efficient and more profitable business operations of these companies, to their restructuring, which should lead to the improvement in operation, the reduction of expenditures and the increase in revenue. Considering the clear situation that the pricing policy cannot be changed overnight, it is certainly necessary to find the ways for achieving maximum savings in other segments and for making cost optimization.

It is a fact that the market will be open as from the next year, but for now, on this market, we have a small number of customers with market experience and these are mainly foreign companies. Around 70 suppliers have been registered on our market, but only a small number of them are active and competitive with respect to the EPS. The EPS’s advantage with respect to other traders is that they are the producers at the same time. Essentially, the EPS may survive on the competitive market if they introduce market principles in their business operations.

The issue of public enterprises privatization is also linked to the preservation of national interest in certain strategic branches of the economy. It is in this sense that the possible privatization of the „Electric Power Industry“ should be considered. The experiences of many EU countries show that a large number of countries have preserved the state ownership in the electric power companies and that the state management in them can be successful. As it has also been pointed out by the Prime Minister Aleksandar Vučić, when it comes to the EPS, we can consider a minority privatization there, in which the Serbian state would retain the majority package of shares and the right to make decisions. The EPS needs a strategic partner, who could help in the company restructuring, the management improvement, the attraction of funds for investments and the construction of new production capacities. A serious and respectable partner could help the EPS to become a very successful electric power company and a significant electricity exporter. Considering the fact that Serbia has not built any new electric power production capacity for more than 30 years, precisely a minority privatization of the EPS would represent a model for finding a partner in this manner who would participate in financing the construction of new production capacities. However, in addition to the entry of a foreign company through a joint investment in new power plants, the EPS would also need the help of a strategic partner in the restructuring and corporatisation, as well as in creating the model of a modern electric power company by imitating precisely some of the successful companies from this sector, for example, from the developed EU countries.

The emergence of a company such as the EPS into the stock exchange would imply a successful conclusion of the corporatisation process. It is necessary not only to fulfil formal conditions but also to substantially strengthen the EPS. The current economic position of the EPS and the low electricity price are not good baselines for good positioning on the stock exchange. Therefore, it is necessary to implement a radical reform of the “Electric Power Industry of Serbia“ before emerging into the stock exchange.

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