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Policy Briefing Series

  • 01.10.2007

    Breakthrough for Electricity Sector Privatization? The Proposal of the Ministry of Fuel and Energy

    (Code:W8)

    Ukraine's electricity sector is in urgent need for investments. To improve matters, the Ministry of Fuel and Energy (MinF&E) proposes attracting strategic investors by privatizing significant parts of state-owned generation and distribution companies and using the revenue to finance additional investments.

    Our evaluation of this proposal starts by characterizing the present situation of the electricity sector as a vicious circle where low profitability and competition levels have distracted investments so that assets have depleted and efficiency has declined for many years. As a result, investment needs have reached dramatically high levels. A proposal to develop the sector must be evaluated against its ability to attract urgently needed investment.

    In an assessment of previous privatization in the electricity sector, we find that the overall performance of privatized assets has been significantly improved, suggesting a clearly positive impact of privatization. Hence, the proposal of MinF&E could indeed mark a break through for future developments. Nevertheless, we find that several critical aspects still need to be improved. In particular, the proposal suggests overcoming the present lack of investments simply by increased public spending rather than by providing stronger incentives for investments in general. The proposal also lacks sufficient provisions to ensure an efficient allocation of available funding to investment projects. Finally, we note that it should be even more ambitious with respect to the number of assets offered for privatization, and it should be more explicitly embedded in the present reform process of the wholesale electricity market.

    Outline:

    1. Introduction
    2. Background of electricity sector privatization
    3. Review of previous privatization
    4. The MinF&E proposal
    5. Summary and recommendations
    Authors:  , ,
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