Банкеръ Weekly



I don't understand why you buy eggs at seven cents a piece in Malta and sell them for five cents.
I do it to make a profit.
But how can you make a profit? You lose two cents an egg.
But I make a profit of three and a quarter cents an egg by selling them at four and a quarter cents an egg to the people in Malta I buy them from for seven cents an egg. Of course, I don't make the profit. The syndicate makes the profit. And everybody has a share.

Joseph Heller's admirers would certainly face no problem identifying the dialogue between Yossarian and Milo in his Catch-22 novel. Neither would they find it difficult to answer the economic problem cited above. However, for those who haven't read the novel we are going to explain that the key to the seemingly absurd puzzle is quite simple. In fact, each egg costs just one cent, but nobody knows that as it has been imported illegally and its real cost has been hidden through a series of underhand dealings.
Unfortunately, the Catch-22 plot appears quite similar to what's going on in the pending privatisation of the Sofia Central Heating Utility. After the meeting in Hissar, Prime Minister Sergey Stanishev announced that the ruling coalition supported the sale of the company in which the state is a minority shareholder and the Metropolitan Municipality is the controlling one. Last week an announcement came from 33 Moskovska street (the headquarters of the Metropolitan Municipality) that the Sofia Central Heating Utility was among the seven companies put in the annual privatisation plan presented for discussion to the local parliament. The same issue has also been discussed at a meeting between the Minister of Economy and Energy, Peter Dimitrov, and the Independent Trade Union Federation of Workers in Energy in Bulgaria, the BANKER weekly learned.
Putting together the small bits of the puzzle, it turns out that very soon the Sofia heat supplier
will change its owners
The procedure is likely to begin after a decision of the municipal council on February 28 that will be followed by a period for merely juridical specification, the economic ministry informed. The privatisation itself should be completed by early next year. The problem is that the sale will probably be completed at a price much lower than the real one, and what is more - to a buyer known in advance.
A campaign is going on secretly that implies the Sofia heat supplier mainly consists of old pipes and unsettled liabilities. And the purpose of all this is to let Gazprom buy the company. I used to be one of the company managers before Valentin Dimitrov and I can tell you that it has enormous potential to grow independently and make a profit. Indeed, more work needs to be done, but the main heat pipes have been rehabilitated, losses have been cut to the European levels of 12 to 15%, and the replacement of the substations is in a final stage, Bojidar Mitev, Chairman of the federation, told the BANKER weekly.
The suspicions of the trade union leader are not groundless. A brief inquiry into the assets of the company reveals that
it is not so miserable at all
and has a considerable potential to grow. Future investors will undoubtedly find the two thermal electric plants allowing combined production of electricity and heat most attractive. And according to the law, power generated through co-generation is to be bought by the National Electricity Company (NEC). Starting from August 1, 2007, the State Commission for Energy and Water Regulation fixed the price of each megawatt hour generated at BGN107.27. But this is not the end of the story. Both Sofia and Sofia-Iztok thermal electric plants have large grounds and one more plant may be built easily on each of them. The same is valid for the ground of the Zemlyane heating plant. We should remind that these plants already provoked great interest. First, the US Horizon company wanted to install additional capacity on the ground of the Sofia thermal power plant, but following several years of fruitless efforts to reach an agreement with NEC on the electricity price the project was forgotten. In turn, at the end of its mandate the former municipal council tried to make the Bulgarian New Energy Vision a co-generation contractor on the ground of the Zemlyane plant. But it wanted to do so without an open tender, as required by the acting Bulgarian legislation. Still, the state interfered and these plans failed. Both cases lead to one clear conclusion - despite all statements about the company's tragic financial condition, the appetite of foreign investors is huge.
The combined production is really the best of all
a representative of a foreign company interested in the Sofia heating utility commented for the BANKER. But if someone hopes a western investor would pour a huge amount in it for no particular reason, he is gravely mistaken. The company needs optimization of the staff as well as more money for improvement of the equipment, the same source added.
One should not forget that the heat supplier is now completing a EUR114MN project for rehabilitation and modernisation of the transmission system, of which EUR30MN has been granted from the Kozlodoui International Fund. The rest of the money came from state-guaranteed loans from the EBRD and the World Bank. But it is not clear whether or not the absorbed money will be taken into account in the future sale, or valuers will focus (as it is usually done in Bulgaria) on the uncollected receivables, the obsolete heat transmission system, and the millions stolen by Valentin Dimitrov and company.
It's still to be seen who will be right and who will be wrong in this situation. Before that, however, we'll admire one more episode concerning the Sofia Central Heating Utility - what will its owners agree on about the way its stocks should be sold. At first glance both the State and the municipality have reached an agreement to sell 100% of the company through the Sofia Municipal Privatisation Agency. But according to excellently informed sources,
an unofficial argument is going on
if the institution which is subordinate to the local power has the necessary capacity and legal sanction to sell the State's share in a certain enterprise. The Ministry of Economy and Energy has quite a strong trump-card - the Sofia Central Heating Utility's debts to Bulgargas Holding for delivered blue fuel, exceeding BGN200MN.
At a meeting with Economy and Energy Minister Peter Dimitrov the Independent Trade Union of Workers in Energy suggested that the issue should be solved by a merger between the company and Bulgargas, establishing in that way a JV utility after the western model. However, such an option is not very likely, at least because that means that the majority package of shares in the central heating company should go into the State's hands, and that would hardly be to the liking of the Sofia Municipality.
It's another question if the company is to be sold at all. Private central heating utilities exist almost nowhere in Europe. Most of them are municipal property. Of course, there are also other ways to ensure finances to the company, for instance by offering its shares for trade on the stock exchange. If the Central Heating Utility is sold out, it would be a crime against Sofia's citizens. Its receivables from subscribers exceed BGN230MN and the State should finally find a way to help it collect at least some of that money. Otherwise, one more time we'll bring into the energy sector a strategic investor whose sole purpose would be to secure quick profits, Mr. Mitev believes.
It would be nice if both the municipality's and the State's representatives think seriously over all the circumstances instead of competing about the commissions from the sale. Otherwise, the Sofia Central Heating Utility might very well go into the long list of enterprises, sold to friends against a token price of BGN1. And against big, but unfulfilled promises.


*Sofia Central Heating Utility is a joint-stock company, registered under the Commercial Code, with its ownership distributed between the Sofia Municipality - 58% and the Ministry of Economy and Energy - 42 per cent.
*It is the third biggest energy complex in this country after Maritsa-Iztok 2 and Kozlodoui N-plant.
*The company holds three licences, issued by the State Energy and Water Regulatory Commission: for production of heating energy, for production of electricity and heating energy in a combined method, and for transportation of heating energy.
*Almost 1/3 of the natural gas delivered to Bulgaria burns in the Sofia Central Heating Utility's stations.
*Two thermoelectric power stations - Sofia and Sofia-Iztok - operate on Sofia's territory where a combined cycle for production of electricity and heating energy is used. The two big heating stations of Zemlyane and Lyulin produce only heating energy, as well as the seven temporary heating stations - Ovcha Koupel 1 and 2, Suha reka, Levsky-G, Hadji Dimiter, Orlandovtzi, and Injstroy.
*Sofia's heat transportation system is over 900 km long and has 15,100 sub-stations.
*Some 2,600 people work at the Sofia Central Heating Utility.
*The company provides heating to more than 375,000 households and more than 22,500 firms and budget organizations.
*More than 63% of Bulgaria's citizens using central heating are customers of the Sofia utility.
*An overall plan for rehabilitation of the heating system was approved in 1997. It was drafted by the consulting company Econo Energy and is financed by the World Bank.
*The implementation of the project for rehabilitation and modernisation of the Sofia Central Heating Utility began in 2002 with attracted capital of EUR114MN. It projects replacement of sections of the heat transportation network, compensators and fixtures, heating insulation of open heating mains, replacement of sub-stations, introduction of a pump control system. In 2003 some 36 km of the most outdated heating mains in Sofia and 2,000 sub-stations were replaced. Another 38 km of heating mains and more than 2,500 sub-stations were replaced in 2004.
*With the money released by the World Bank under the loan for rehabilitation of the Sofia Central Heating Utility 333 compensators and 92 pieces of fixture were replaced in 2005. The company reconstructed 2.5 km of the heating mains with its own money.
*362 compensators and 165 pcs. of fixtures were replaced in 2006 with attracted funds. The company reconstructed 1 km of its heating mains with its own funds.

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