Infrastructure monitoring - the instrument for reform promotion

Українська

On December 12, 2001 the Institute of Economic Research and Policy Consulting (IER) together with the German Advisory Group (GAG) and the Ministry of Economy held a Round Table dedicated to recent developments and reform prospects in major infrastructure sectors. The Representatives of infrastructure sectors as well as policy makers from the Ministry of Economy, Ministry of Finance, the National Electricity Regulation Commission, the State Committee of Ukraine on Construction, Architecture and Housing Policy, the Ministry of Fuel and Energy, the State Administration of Railways Transportations, the Antimonopoly Committee, the JSK Ukrtelecom and the EBRD took part in the round table devoted to the discussion of the methodology and results of infrastructure sectors evaluation. The Presentation of methodology of infrastructure reforms estimation was followed by presentations of evaluation of different infrastructure sectors and discussions.

Dr. Opitz (the member of the GAG) highlighted the role of the Infrastructure Monitoring of Ukraine (IMU) in assessing the progress of infrastructure industries restructuring and its implications in the policy making.

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Dr. von Hirschhausen (the member of the GAG) introduced the methodology behind the IMU estimations and explained the difference between the IER and the EBRD qualitative indicators. In contrast to the EBRD indicators the IMU presents a detailed evaluation of commercialisation, tariff reform and regulatory reform in every sector.

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Telecommunications

The presentation "Restructuring of the telecommunications sector - the path for further reforms" by Alexander Shcherbakov stressed general problems as well as outlined recent changes within the sector. Absence of an independent regulator and strategic policymaking as well as operational management concentration at the SCCI and improper regulation of interconnection were mentioned among major regulatory policy shortfalls. The cross-subsidization and below cost pricing along with continuing political interference into the process of investments decision-making testifies for the lack of a coherent strategy of the sector reforming. The most recent negative changes were attributed to the integration of Ukrtelecom and Utel, leading to an increase in monopolistic power of the incumbent operator, as well as to the transfer of the state corporate rights in Ukrtelecom to the management by the SCCI, which is a strong violation of the internationally accepted regulatory practice. Suggested recommendations were straightforward: (1) establishment of an independent regulator, (2) separation of the regulatory and business activity, (3) enhancement of the interconnection regulation, (4) implementation of the tariffs rebalancing policy, (5) consideration of possibilities to separate Utel from Ukrtelecom and the further concession tender for Ukrtelecom.

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Discussion

The representatives of Ukrtelecom mainly shared the concerns. However, they emphasized that the recent developments of Ukrainian telecommunication sector were unavoidable. The fruitful participation of foreign investors in the joint stock companies contributed to a significant progress in the development of the market for international telephone calls in Ukraine. The profitability and quick growth of major telecommunication operators supports this view. But as it was said now it was needed to consolidate the sector to improve its development prospects. At the same time it was stressed that the Utel shares buy-out was a mutually beneficial transaction for both Ukrtelecom and the former Utel investors.

Gas

The presentation "Gas sector restructuring - the path of further reforms" by B. Dodonov (the Research Associate in the IER) highlighted the most urgent problems in the sector and impediments in the market reform implementation, as well as their consequences on the gas sector performance. The proposed policy measures are the following: 1) to achieve 100% cash payments for the consumed natural gas; 2) to increase independence of the NERC; 3) to design and to implement new legislation to regulate the third party access (TPA) to the transportation and distribution nets along with a new transparent methodology for setting fees for access and usage of the nets; 4) to abolish the cross-subsidisation and to adjust the tariff policy to the efficiency criteria in order to provide an optimal allocation of resources.

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Power

The overview of the current structure and regulation of the power sector made by Valeriy Tsaplin (the Deputy Head of the NERC department) has revealed current progress in sector restructuring according to the market requirements as well as inefficiencies of the current tariff policy and the lack of competition in the industry. The competition in the industry might be increased by the provision to regional distribution companies (oblenergo) the right to work as independent suppliers in all other Ukrainian regions. The tariff policy should also be substantially redesigned to reflect fixed costs in the final tariff and opportunity costs in the process of developing and choosing the cheapest type of power generation (hydro, nuclear or fossil fuel).

Discussion

The EBRD qualitative indicators overestimate the pace of reforms in the power sector since they are based on the adopted legislation while its implementation and real sector performance are neglected to a large extent. According to the participants' opinion, the enumerated measures of the gas sector restructuring could be achieved only in case of the "National joint-stock company "Naftogas of Ukraine" (NAK) unbundling. The current organizational structure of NAK is close to the branch ministry and it even has the right to adopt legislation regulating activity within the industry. Moreover, its structure allows NAK to successfully prevent measures aimed at its restructuring, enhancing the competition and/or the transparency within the sector.

Railways

The presentation "Railways sector restructuring - the path of the further reforms" by P. Sugolov (the Research Associate in the IER) reviewed the major progress achieved with the railways sector restructuring as well as the major problems of the sector. The progress is observed in improvement of payments discipline and rolling stock management in the sector, which allowed financing of several investments projects by Ukrzaliznytsia in 2001. Among major problems of the sector are slow adjustments of transport capacities and continuing cross-subsidization of passengers transportation by freight transportation, which undermines sector's efficiency. Ancillary businesses commercialisation was welcomed, but simultaneously it was noted that the railways infrastructure and transportation should start separation and commercialisation.

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Discussion

In his comments V. Sirakov (the First Deputy Head of the Department of Development and Investments, Ukrzaliznytsia) noted that a slow progress of reform was due to absence of legislation in the sector, creation of which took about five years. Simultaneously Ukrzaliznytsia has undertaken comprehensive internal restructuring efforts, which resulted in separation of some transportation services as well as separation and commercialisation of most ancillary businesses (e.g. complete corporatization of building industry). Ukrzaliznytsia it its restructuring closely follows the model underlying the Directives of the EU. It was concluded, and supported by a representatives of the Antimonopoly Committee of Ukraine, that the major impediment to reforms in the sector at this stage is the absence of separation between government regulation and day-to-day management of Ukrzaliznytsia. The first step towards possible solution of the problem could be creation of a Committee on Railways Regulation.

Water and Waste Water

Svitlana Leskovska (Deputy Head of Water and Waste Water Department of Derzhbud) highlighted the current performance of the sector. The sector is characterised by severe indebtedness of enterprises, which often leads to disconnections from power supply and which in turn lead to the quality deterioration of the provided services. Non-payments of the final customers also led to a substantial depreciation of the equipment which has been substantially outmoded for the last ten years and an extremely high number of leakages in the system. The level of meter installation is very low and the current tariff policy envisages the "cost plus regulation", which is based on the estimated norms of consumption. The corporate governance is expected to be improved in the cities where international financial organisations financed several rehabilitation projects and the natural monopolies will be transferred to the management of the private companies. A new methodology of tariff setting defines consumption norms in a more precise way and also provides incentives for energy saving, which, therefore, altogether should improve economic situation in the sector.

Discussion

An inappropriate metering system results in the lack of incentives for efficient water usage and allows water supply companies to cover their losses through exaggerating the real water consumption of final customers. The acceleration of the number of meters installed will substantially speed up the process of water supply sector restructuring. Then the water supply and wastewater companies will no more be able to compensate for their huge losses and other inefficiencies by unjustified estimated consumption norms, and thus, there will be an incentive to minimise costs. Simultaneously consumers will be responsible for their consumption and also obtain incentives for consumption minimisation. At the same time the regulator should refuse from inefficient "cost-plus" regulation and choose the type of tariff-setting which provides the strongest incentives for the cost minimisation simultaneously with the attractiveness of the sector for private participants (e.g. the price cap regulation). The legislative framework should be also substantially developed to speed up the sector restructuring.

Major tasks for the future

The restructuring of the infrastructure industries requires comprehensive and balanced in time policy measures. Their implementation might require unpopular political steps, but efficient infrastructure supply might be an important complement or even precondition for economic recovery and sustainable growth.

The tariff policy ought to play a crucial role in solving the problem of financial sustainability of most infrastructure industries and Ukraine has to substantially change its principles. The policy of commercialisation and cost reflective tariffs should be pursued. The measures of tariffs adjustment to cost-covering levels should be accompanied by the provision of the incentives for cost reduction. These should be supported with reduction of the amount of government subsidies, improvement of budget payments discipline and elimination of the cross-subsidies.

Introduction of private sector into infrastructure industries should substantially increase the quality of the provided services. The first stage of infrastructure industry unbundling ought to be the divestiture of natural monopoly, potentially competitive businesses and ancillary business into independent companies that will not be subordinated to incumbent in the industry. By splitting infrastructure industries into different and substantially more manageable subgroups Ukraine would be able to improve attractiveness of the sectors for foreign investors that could buy the assets of their particular interest.

Establishing of effective regulatory institutions must be carried out simultaneously with commercialisation and tariff reform. Independence of the regulator should be increased, while incentives for new entrants should be created. A new legislation, which regulates third party access to the transportation and distribution nets along with a new transparent methodology of determining fees for access and usage of nets must be designed and implemented. It will allow increasing competition within the industry and defending new entrants from the incumbent's monopoly power.

As mentioned above the common feature for all infrastructure industries is inefficient tariff policy, which in turn causes an inefficient resource allocation. Though the choice of an optimal tariff-setting model for natural monopolies is not an easy task and the participants of the round table "Infrastructure monitoring - the instrument for reform promotion" agreed to organize the next round table in the IER devoted to the tariff setting and regulation in the natural monopoly industries.

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