The Investment Climate Needs to be Warmer
Dinmukhamet Idrisov, President of Kazakh Utility Systems Joint-Stock Company answers questions from our magazine
Dinmukhamet A. Idrisov was born on 29 December 1964. He has completed postgraduate studies at the Construction Materials Research Studies Institute, the Kazakh State Academy of Management Sciences, and the Almaty Road Transport Institute. He is a Doctor of Engineering Science. Since 1997, he has been managing the Ordabasy Corporation, which is included in the listings of the Kazakhstan Stock Exchange. Since 2003, he has been President of Kazakh Utility Systems.
As we know, Kazakh Utility Systems was established a year ago with a view to governing the public utilities. Could you tell us about the present business of your company?
Yes, indeed. Our company has been working for a little more than one year since it was established. However, we control the production and supply of electricity and heat for 27 percent of the inhabitants of Kazakhstan. This is not a bad figure for such a short period, is it? We came into this sector in order to give financial and technical support to the enterprises governed by our company. Our main priorities include developing effective work practices, improving the quality of public service provided to customers, the renewal of capital funds, and the promotion of market competition.
At present, our company governs more than ten companies directly, including the enterprises of the Karaganda Energy Group, and also those in South Kazakhstan and Mangistau oblasts. In terms of generation, our total assets approach 632 megawatts. Meanwhile, the overall length of heating mains and district heating grid is approximately 1,000 kilometres, and the overall length of power transmission lines and electrical distribution mains exceeds 34,000 kilometres.
We inherited experience of energy project management from the Ordabasy Corporation, which began with trading operations in the wholesale electricity supply market to the southern regions of Kazakhstan, and then began to invest aggressively in energy distribution and transmission, also in heat and electricity generation.
Currently, the structure of property and management of Kazakh Utility Systems, a joint-stock company, consists of the following companies: Karaganda Zhylu, Energoortalyk-3, Karaganda Zharyk, Mangistau Regional Electricity Grid Company, Ontustik Zharyk, Karaganda Energotrading, Payments Service Centre, Transstroigroup, Tekhmetroservice, Energoservice.
Why did you choose public utilities, which are really rather a perilous business, as the core activity of your company?
To my mind, this sector is not sufficiently appreciated in economic terms. Yes, the public utilities sector is weakly structured and very problematic. Nevertheless, currently there are favourable conditions for investing in this sector and developing it. As public facilities are natural monopolies and enjoy steady demand, they will have guaranteed sales.
In addition, the existing economic growth trend ought to result in a significant increase in demand for energy resources within the country. So, according to experts, Kazakhstan's need for electric power in 2005 is estimated as 62-67 billion kilowatt-hours, and these figures will approach 86-95 billion kilowatt-hours by 2015. Therefore, it is expected that growth will mushroom in public services related to electric power, water, heat, and gas supply.
Certainly, efficiency enhancements in public facilities management, and a range of interrelated organisational, economic and technical actions will enable us to develop a stable and high performance business.
On the basis of your company's experience, can you tell us what challenges companies in the public utilities sector face?
One of the main challenges is the maintenance and renewal of capital assets. Today, real losses are greater than normal, which is in turn leading to poorer financial and economic indicators. Wear and tear to capital and service equipment at energy sources in Kazakhstan is approaching 50-60 percent, resulting in 20 percent power restrictions at Kazakhstani heat power plants, and a decrease in heat generation of 40 percent. Additionally, a major part of the equipment is outdated and does not meet modern requirements in terms of energy efficiency and environmental standards. In fact, in order to carry out large-scale modernisation promptly, the energy companies must have sufficient financing.
On the other hand, the primary consumers of these services in the regions where our company does business are citizens and state-financed organisations, which are not always able to pay on time for the electricity and heat supplied. There are also cases of unauthorised use of these services which increases the level of "business losses". If the public utility companies would collect all the payments, including from non-payers, the lack of money for public service recovery would not be such a vital issue for the whole industry. The situation looks like getting even worse, since according to the Tax Code VAT is added to the overall cost of services rendered without regard to business losses, which in our case are sunk. The present rating principles are a cause for concern, since they do not consider the real costs of thermal and electric power facilities. In particular, elements such as depreciation and profit rate, which could be directed into recovery of funds, are undervalued. In addition, the authorised bodies do not take into account all the cost items for the period under review.
What steps are being taken by your company to resolve these problems?
The list of problems is not limited to those outlined above, and even when we meet these challenges we will have completed only part of our large-scale plan to attain new quality standards for public services. We have made a plan of action to develop a chain of subsidiaries and other companies governed by Kazakh Utility Systems. First of all, in order to reduce rates, we must decrease the administrative costs and processing losses incurred by the enterprises. The introduction of advanced energy accounting systems for plants and consumers will reduce the business losses. We have already developed appropriate programmes for each region. As a result, we now have a chance to accumulate and raise funds to be directed into solving the problems currently facing the enterprises. Thus, the Karaganda Energy Group alone has received funds from our company to the amount of over 1.5 billion tenge per year. This has significantly improved its financial and economic indicators and service quality and slashed business losses. Sales of electric power to end consumers have increased by 5.3%, heat energy by 8%, and treated water by 10.2%.
Nevertheless, it is impossible to solve the global problem of technical re-equipment and reconstruction without involving long-term investment. Accordingly, we are also seeking opportunities for co-operation with Kazakhstani and foreign investors, as well as international financial institutions. And we already have business plans in place to launch the individual projects. The funding for one of the projects is in the 1.5-4.5 billion tenge range. The potential investors would help to modernise the capital assets and, as a result, reduce losses, and also increase the sales of products without additional investment in working capital.
As agreed with the European Bank for Reconstruction and Development, Kazakh Utility Systems gained the status of external management with regard to the Karagandy Zhylu company, an EBRD borrower with a credit line to the amount of $40 million. The ultimate maturity of this loan will expire on October 2009.
You have mentioned rating imperfections. However, a new medium-term rate policy was developed by the Agency for Regulation of Natural Monopolies in association with the EBRD last year. What, in your opinion, are its weaknesses and strengths?
This is not an easy question to answer… Undoubtedly, the medium-term rate, which would remain unchanged over three years, enables consumers to schedule their utility charges more effectively. However, the proposed accounting treatment does not protect energy enterprises from possible and inevitable price increases for items used in heat and electric power generation. We are currently seeing almost quarterly changes in the cost of fuel, petroleum, oil and lubricants, materials and equipment mainly manufactured abroad… The financial components of the investment projects (for instance, those for heat loss reduction or installation of automated systems for energy control and accountability) are quite significant, so a rate based on those costs may mean overcharging consumers. At present, energy companies view the medium-term rate as a strange kind of trap – someone tried to do their best, but ended up doing no good. The funds raised from cost savings could have been directed into modernisation of equipment and investment programmes. Instead, the existing instructions of the regulatory authorities require companies to pay fines and introduce compensatory rates. Thus, though the government is appealing to investors to put up the capital for energy system development, in practice it is not promoting this activity.
What role must the government play in order to improve the situation in and increase the capital flow into the public utilities sector?
All over the world the energy sector is considered to be an assets-creating industry. Therefore, today it is very important to determine the trends and paths of development, establishing a system of relationships among all the market players on the basis of global issues and real opportunities for society. In my opinion, the general objective of the government investment policy is to provide the conditions to attract, distribute effectively and use funds from various sources with a view to sustainable development and operation of the energy sector facilities. We must have legislative preferences, irrespective of value or form of ownership. I would point out once again that the energy sector involves strong capital capacity and long-term investment cycles, so investors need appropriate guarantees from the government. The government could contribute to this sector by establishing a company which concentrates all the generating capacity of the heat and electric power industries. This capacity is certainly a strategically important facility. Such a company would exercise tight control over the balance of generating capacity, thus preventing any violation of the integrity of the unified energy system within Kazakhstan. At the same time, the economic benefits caused by centralised control would become evident.
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