Банкеръ Weekly

Briefs

MINISTER AND MAYOR OUTWIT EACH OTHER FOR THE SOFIA HEATING UTILITY

May 31 is the new extended deadline by which subscribers of the Sofia Central Heating Utility are allowed to pay at least part of their bills and thus declare their willingness to pay off the entire debt. According to Emil Antonov, Deputy Executive Director of the company, signing an agreement protocol with customers owing money will prevent further actions in accordance with the Energy Act (collection of the debts by bailiffs, through bank account distraints, or sale of property).

The tension between the Minister of Economy and Energy Roumen Ovcharov and the Sofia Mayor Boyko Borissov is about to grow into a straightforward conflict. The problem is always the same - the Sofia Central Heating Utility. However, it is not just the replacement of the management in play, but the company itself. More precisely, the problem refers to its privatisation. Rumours even circulate that the two men had already chosen the future owner - Ovcharov is said to prefer Gazprom, while Borissov is believed to approve the German giant E.ON. Among the other applicants are CEZ, France's Dalkia, and Italy's Enel.
Whatever the intentions of the minister and the mayor, the conflict between them will probably bring to light lots of the affairs of the Sofia-based utility managers and the related firms (both the large ones such as Bulgargas and the National Electricity Company and the small ones used for small extraneous services). This is what the numerous inspections in the company are giving promise for. The last inspection ordered by Boyko Borissov started on May 16, while in the same time in Moscow Minister Ovcharov was taking part in the operations of the Bulgarian-Russian interdepartmental commission for scientific, technical and economic collaboration. On the same day, the press centre of the Sofia Municipality informed that a commission of municipal officials and representatives of the Sofia Inspectorate, led by the head of its General Control Department, Kiril Nikolov, would inspect the activities of the heating utility in the last five years. It also explained that the commission would inspect the available financial and accounting documents and all company agreements signed with extraneous companies (including the fuel delivery contracts).
It turned out that the action was based on warnings received in the municipality about violations in the accounting, financial and economic operation of the Sofia Central Heating Utility. And also that the inspectors found out there were a solar studio, a pearl bath-tube and a number of other luxuries in the administrative building. Kiril Nikolov defined what they saw as unnecessary luxuries planned to be used by the former boss of the company, Valentin Dimitrov.
On occasion of the inspection, Deputy Mayor Tsvetan Tsvetanov said: The aim is to start from the very beginning, because even though the municipal board appoints its own people in the boards due to political quotas, all negatives fall on the mayor and the municipal authorities. However, Tsvetanov refused to clarify whether the inspection had been coordinated with the Minister of Economy and Energy. He simply said that as a mayor Boyko Borissov was allowed to choose when to make inspections.
In fact, another financial inspection in the Sofia Central Heating Utility was completed slightly more than a month ago. It was ordered by Roumen Ovcharov. The occasion was a new 12.9% increase of the heat price asked by the company, plus an increase of the power fee. According to Ovcharov, these requests were unduly high, so a working group including six representatives of his subordinate ministry and the Sofia municipality was authorized to prepare a comparative analysis of the cost price of heat and electricity produced by the company compared to the 2004-2005 prices fixed by the State Commission for Energy and Water Regulation.
On March 31, the Ministry of Economy and Energy announced that the Sofia heat supplying company has the potential to seriously cut its costs. Particularly it meant that a cut is possible for the money paid for motor transport, current maintenance, water and electricity supply, and management. It was also written in the final report that the money paid for service trips could be limited. Still, as the gravest problem the ministry defined the collection of receivables due to heat supply sold to the population. This is why ministry officials underlined that a radical change was needed regarding consumers, improvement of the management and the media policy.
Last week the Sofia Municipal Council approved an increase of the heat price by 8.75% rather than the 13.6% increase requested by the company. The proposal will be put forward for consideration in the State Commission for Energy and Water Regulation and if approved, heat supply price will grow by almost BGN5 - from the current BGN55.84 per megawatthour to BGN60.16 per megawatthour, VAT included. The power fee is planned to be raised from BGN12.63 per kilowatthour a year to BGN13.68. As to the electricity produced, the company insists that the price be increased to BGN104.40 per megawatthour, VAT included, up from the current BGN96.
The requested increase of the heat supply prices is provoked by the grown debts of the company which reached BGN17.637MN, the Deputy Mayor in charge of investments, Irina Savina, wrote in her report to the Sofia Municipal Council. According to the plans of the municipal experts, if prices are increased and internal reserves are used, the obligations may melt down to BGN6.457MN by the end of 2006. However, the document fails to comment on the way the company is going to collect its receivables from subscribers which go beyond BGN210MN.
The Sofia Municipal Council Chairman Vladimir Kissyov defined the increase approved by the Sofia parliament as logical, considering the losses of the company. He also said he would insist that the company be privatized.
In practice, it turns out that both the municipality and the state will try to sell the Sofia Central Heating Utility independently. At present, it seems that the mayor has stronger positions. The municipality is the majority shareholder of the Sofia-based company which enables it to directly control its management. With the state-owned stake amounting to 41.80%, Minister Ovcharov is now playing a secondary role, but the situation might change quite soon. The minister is expected to request that the state-owned stake be increased in a few days. His reasons will be based on the results from the extraordinary auditing carried out by the financial ministry which had to analyse the company's obligations and receivables as of March 31, 2006. According to this report, the company owes more than BGN158MN to Bulgargas EAD which is 100% owned by the state. Respectively, Minister Ovcharov may request that the obligations be paid or transformed into equity. Then the municipal stake will become a minority one and the minister will appear the single seller of the utility.
There is also a possibility that Sofia Central Heating Utility's debts to Bulgargas be purchased by the Russian Gazprom in return to a stake in the utility. The Russian gas giant may also commit itself to supply its then-owned company with blue fuel at preferential prices. This would reduce the heat supply tariffs. How much Bulgaria's dependence on Gazprom will grow and how much both Sofia and the entire state will have to pay in the future is another question.

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