Page 5 - EBRD_newspaper_May2017

May 9, 2017
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EBRD warns Ukrainian leadership of looming collapse of energy sector reform
bne IntelliNews Daily 5
Achieving energy efficiency is possible at many levels. The EBRD, for instance, works with entities such as railways companies, airports, shopping malls and steel manufac- turers to reduce their energy consumption.
According to Carpenter, "clients rarely walk through the door with a well-developed idea of what type of projects they want". So when the EBRD works directly with private sector clients – and sometimes with munic- ipalities – on energy efficiency projects, the first step is to conduct a resource efficiency audit to show clients where the environmental investment opportunities are and what capital investments are necessary, Carpenter says.
However, the EBRD also works with lo- cal banks to make financing available for retrofits in residential buildings. "We want to mainstream energy efficiency in all these area by promoting the right products at the right time in the right sectors. The market penetration of technologies like high-per- forming insulation and condensing boilers is close to 0% in some of the countries where we work. And while the dollar invested in energy efficiency in an industrial plant is likely to be more profitable than the dollar invested in an apartment, the EBRD has been at the forefront of funnelling investments, structuring products and setting up financial schemes through local banks in all of these areas. At some point, we want to step back and let the market kick in and take respon- sibility for energy efficiency without the need for the financing, policy dialogue and tech- nical services we provide," Carpenter says.
To that end, the EBRD has invested €3.88bn, an amount larger than its total investments in renewable energy to date, to set up the so- called Sustainable Energy Financing Facilities (SEFF), which are credit lines for energy effi- ciency and renewable energy projects through local banks and other financial institutions.
According to McMallion, "through the SEFFs, we are essentially buying the dis- tribution capacity for small loans to finance energy efficiency residential investments. We work with 120 banks across the region and have active projects in Poland, Slovakia, Romania and Bulgaria, among others. We just launched residential energy efficiency financing in Poland, for instance".
The EBRD invests approximately €500mn per year in such credit lines. "Once you prove to local banks that this business model works, it is very powerful. Working with local banks is the key way to bring the private sec- tor in to finance energy efficiency projects," Carpenter says, adding that, through the SE- FFs, the EBRD reaches tens of thousands of housing associations in CEE.
Sergei Kuznetsov in Kyiv
The European Bank for Reconstruction and Development (EBRD) has warned Ukraine’s leadership that the potential collapse of the country’s energy sector reform could “shat- ter international confidence” in the current government in Kyiv.
According to a confidential letter sent by Sir Suma Chakrabarti to Prime Minister Vo- lodymyr Groysman and President Petro Poro- shenko, the chief of the multilateral lender un- derlined that “the reform of Naftogaz, which is just recognised as one of the most meaningful reforms undertaken under your leadership, is at risk of collapsing within the next few days”. This letter, seen by a bne IntelliNews corre- spondent in Kyiv, was dated April 7.
The EBRD head said that the implemen- tation of the corporate governance action plan for the state-owned gas utility signed earlier between the bank and the Ukrainian government is being “unduly delayed” by the lack of enactment of the required leg- islation. After months of consultations, the draft state ownership policy for Naftogaz still contains provisions that go against the spirit of the corporate governance reform, thus compromising the intended independence and insulation of the company from undue political interference, according to the letter.
“Naftogaz also need to become, as orig- inally agreed, an entity of private law,” Chakrabarti added. “I am asking you to do all that is necessary to have Naftogaz’s new charter and necessary enabling legislation in place before the end of this month [April].”
Chakrabarti also warned of negative ef- fects from the threatened resignation of the independent board members of Naftogaz. This move might not only “severely damage” the company at a time when its transformation is finally beginning to take hold, but could also “shatter the international confidence in your government’s commitment” to reform and restructure Naftogaz and other state-owned enterprises in Ukraine, according to the letter.
On April 6, four of the independent board members – Paul Warwick, Markus Richards, Charles Proctor and Yulia Kovaliv – sent a
letter to the Ukrainan government indicating their concerns over the situation in the com- pany. Without “material progress” it would be “inappropriate and untenable” for them to continue as supervisory members, they said in the letter.
Kovaliv, the head of the supervisory board, then submitted her resignation, the company said in a statement published on April 14.
Kovaliv without elaborating cited a “clash of opinions on further development of Naf- togaz and lack of consensus regarding the implementation of the corporate governance reform according to the initially envisaged plan”. Kovaliv will now focus on her job at the National Investment Council Office, the company added in the statement.
Specifically, the independent board mem- bers have demanded the “resolution of is- sues” related to the electronic declarations system of Ukrainian officials. According to recent amendments to Ukrainian legislation, financial disclosure obligations are extended to existing and potential members of super- visory boards of state-owned companies. “It is impossible for foreigners to complete necessary actions with such inaction leading to potential criminal claims against us,” the independent board members wrote.
Chakrabarti also said that the amend- ments will “seriously discourage worthy candidates” with international experience from applying for such
positions and hence deprive the country of much-needed ex- pertise for the trans- formation and proper governance of state- owned companies.
He also urged the Ukrainian government to take “immediate steps” in three main areas: opening of the country’s gas market, reform of the housing and utilities subsidies
schemes and reform of the public service obligation for the gas market.
According to the IMF, low tariffs for resi- dential gas and district heating have encour- aged excessive energy consumption and led to large quasi-fiscal losses, pushed up gas imports, and discouraged investment in do- mestic production in Ukraine until recently.
Gas and heating tariffs reached full cost recovery levels in July 2016. Naftogaz’s defi- cit has now almost been eliminated, the IMF wrote in comments published on April 4. “The large tariff increases to full cost recovery have provided incentives to conserve energy and supported an improvement in energy ef- ficiency and a dramatic decline in household gas consumption and corresponding reduc- tion in macro imbalances,” the IMF added. On April 11, Naftogaz posted UAH26.53bn (€930.3mn) net profit for 2016 against a net loss of UAH27.75bn in 2015 (audited data). According to another confidential letter sent by Chakrabarti to Groysman on April 10, also seen by bne IntelliNews, the country has made progress in public procurement, fi- nancial sector and monetary policy reforms. However, progress on oil and gas sector reform, the commercialisation and privati- sation of state-owned enterprises, and the reform of the judiciary and public adminis- tration “has not been so visible”. Chakrabarti urged the government “to per- severe in maintaining the reform momentum and accelerating the delivery of concrete re- sults” in order to unlock further donor sup- port, according to the letter.
The letter followed a new $1bn tranche re- leased by the International Monetary Fund (IMF) in April under its $17.5bn support pro- gramme for Ukraine, and a second €600mn tranche of macro-financial assistance from the EU. The IMF, Ukraine’s main creditor, also called upon the country to speed up the pace of reforms and step up the fight against corruption.