My attitude toward state corporations is that the normal position of the gate is closed. But that doesn’t mean there are no other cases.
Photo: Dmitry Dukhanin
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Chubais: Don’t Privatize Everything
// Anatoly Chubais, head of RAO UES of Russia, talks about electricity reform and his attitude toward the state corporations
“I can afford the luxury of not doing what I consider wrong.”
July 1 is the last day in the existence of RAO UES of Russia. Tomorrow it will cease to exist and the state will no long control any of the generating plants in the country. Taking electricity out of state hands is the result of an almost ten-year-long reform of the state monopoly. Author of that reform and chairman of the board of RAO Anatoly Chubais told Kommersant about the preliminary results of privatization and the potential risks of the free market becoming regulated again.
In the 1990s, you privatized industry and in the 2000s you privatized electricity. How will you follow that up?
An acquaintance said to me, “First you told me you’re not a politician, but in the 1990s you were a politician. Then you said you’re not a businessman, but lately you are a businessman, so what haven’t you been yet?” I really don’t know what I will do. But it’s true: I am not a politician or a businessman.
You still say you want to rest up well. The first time you said that was in 1996.
And they didn’t let me! Here’s where the rub it. In 1996, they succeeded in chasing me out of the government in January. I was just getting ready to relax, when I ended up by chance at Davos. They were beginning to put together Yeltsin’s campaign staff. Then they appointed me to the presidential executive staff, where I had no interest in going. From there into the government, from the government to RAO UES without a break. Let me have some break, at least a year.
Have you had meetings with Prime Minister Putin or President Medvedev where you talked about your possible future employment?
Do you seriously want me to retell the contents of conversations with the president?
Our job is to ask the questions.
There's your answer.
You answered a question with a question.
It’s the most accurate answer in this case.
Do you see yourself in the existing system at all? There is a deprivatization process going on in the economy, and you always worked on privatization.
There are various processes going on in the economy. It’s just that are accompanied by big informational campaigns, and others less so. Did you hear that RAO UES conducted a reform?
We heard. But that’s an exception. You managed to slip by.
“What does “slip by” mean? We spent ten years doing it. It’s not the sort of thing you do in your free time. The picture is not black and white. It’s multicolored. For me, the basic set of values was formed long ago, and it won’t change, no matter what I do. I certainly won’t deprivatize what shouldn’t be deprivatized. And I won’t privatize what I consider wrong to privatize. Strange as it may seem, there are spheres that I consider unnecessary to privatize. I can afford the luxury of not doing what I consider wrong.
How do you feel about the process of forming state companies?
You know, there are crossing gates at railroad crossings. Sometimes the gates have “This gate is normally closed” written on them, and sometimes they say “This gate is normally open.” In the first case, it (the gate) is always closed, but if you drive up, it will open. And vice versa. My attitude toward state corporations is the same. The normal position of the gate is closed. But that doesn’t mean there are no other cases. There are situations where they make sense. I imagine they make sense in project topics. In tasks that they start to fulfill and then finish sometime. Therefore, I think state corporations are possible but you have to start with the presumption that they probably aren’t necessary. And if you think they’re really needed, prove it.
In your prognosis, how will the situation develop?
What prognosis? Both Dmitry Medvedev and Igor Shuvalov have both indicated their positions. The creation of new corporations is possible, but they will be closed as they fulfill their tasks. It’s another question how we understand that. It’s not hard to create a project, but then it’s very hard to stop it. A large number of people prove how needed and important it is, that flow. Then closing it is a difficult task.
Are you satisfied with the reform at RAO UES?
To be honest, I cannot say I am absolutely satisfied. The intention was carried out in the main part, but there are “buts.” Those buts can be grouped in various ways. Let’s begin with the simplest one. The plan was to complete the reform in 2003. Now it’s 2008. Second, there is a set of [generating] blocks that were not completely reformed. Although they are not central to the system, there is a risk until they are settled. Third, the scale of the project was such that it will be possible to judge its outcome seriously and responsible no sooner than in three years.
Speaking of risks, I would identify two groups. One group is called risks of revenge and return. The other group is unfinished bits. Among the latter is the chain of cross-subsidization, which leads to disarrayed retail markets, which in turn leads to conflict between sales networks. It takes a long time to describe a cross-subsidization scheme but, in short, industry subsidizes electricity for the public. It costs 120 billion rubles per year. An unresolved situation has potentially been set up today in the tariff for the distribution network. That fact localized the entire problem in the retail market. What does that mean? It would seem the wholesale and retail markets are synchronized. And changes in price in wholesale should translate into changes of price in retail, but there is real competition in wholesale today and it will automatically increase every year. In retail there is no real competition. There is a guaranteed supplier and no competing sales. That is a big problem.
Why hasn’t a retail market been formed?
It can’t be reformed now. We have not forgotten and have not lost that bit of the reform, but we are consciously drawing it out. There are large-scale new solutions needed in retail, because it is impossible to liberalize the market when there is cross-subsidization. Obviously, that problem will lead to a distortion of the consumption structure. That means that our networks will break directly into consumption in retail, bypassing sales. The guaranteed supplier will run up against independent sales companies without giving them access to the consumers. Conflicts may arise among distributors. And a firm solution is needed from the government on future subsidization. That might take three or four years, but the problem has to be solved. And you have to understand that I can recall more than ten government decisions that have been made on that topic and not one of them has been implemented.
You said there is a risk of return. Do you think the reform can be rejected? Or something can stop it?
It can’t be ruled out, although the likelihood of that development of events is extremely low. Most of all, schedules for liberalization. And the capacity market and the electricity market. We hope that it all goes synchronically. The postponement of the launch of the capacity market was a nightmare for investors. But new Minister of Energy Sergey Shmatko has already assured them that the market will be launched on July 1. There is another schedule for the liberalization of the electricity market. In essence, we have received investment because the buyers believed in that schedule. Now we have official numbers: 25 percent of electricity is being sold at prices unregulated by the state. After July 1, it will be 30 percent. Refusing to do that would be about like digging the foundation out from under a house after it’s built. To maintain the pace of liberalization, serious mechanisms have been included for the protection of investors from non-fulfillment of obligations by the state. There are three types of them. The first is a government resolution and law on electricity in which it is written that after January 1, 2011, the state is prohibited from setting prices on the wholesale market. The second mechanism is an agreement on capacity that investors are required to build. In it, there are a set of forces majeures, one of which is the reconsideration of the schedule of liberalization by the state. If you want, please, reconsider, but then the implementation of the investment program will be an absolutely facultative obligation for the new owners of the generating companies with all the consequences that implies. And I still believe that there is a third mechanism. That is the government’s reputation. So, taking those three mechanisms into account, the “risk of return,” as you called it, is extremely small.
Now there is a new energy minister and Igor Sechin manages the sector as deputy prime minister. Do you expect any process to slow down in connection with the change in leadership? That is, after all, what happened before, when the reform was postponed from 2003 to 2008.
I think it would be incorrect for me to evaluate appointments in the government. The nature of the cooperation that has been established is, in my opinion, constructive. Previously, the government made decisions with difficulty, to put it mildly. With few exceptions, the decision of officials on various levels not to make decisions was insurmountable. The mastery of indecisiveness reached such heights that it could be described separately. Now we see an example of exactly the opposite. I really have no criticism. Igor Ivanovich Sechin and I, of course, have differing political views, but that does not interfere with work.
Why have you refused to join the boards of directors of electric companies?
It’s not right. Where should I go in generating? I can’t join 20 companies!
The Federal Network Company?
Join a state company? Why? The state will set the course of a state company, and it will be responsible for that course. And I am not a representative of the state. I have independent views that no one will ever take away from me under any circumstances. And the position. I am a little in the Federal Network Co. and at the same time I am an independent director. It’s very strange.
But Alexander Voloshin, who was on the boards of the Federal Network Co. and Inter RAO, will have a position like that.
I think it will be like that during the transition period, but I don’t think that will be long. He understands the logic and intricacies, and that makes him more independent, more objective and stronger in that capacity. I think it would be correct if he was convinced to take the position of independent director. All the more, since our government has said that it plans to appoint independent experts as government representatives.
Why is the sale of OGK-1 (Regional Generating Co. 1) so difficult?
The thing is that a minor revolution called the crisis on the financial markets took place in the project entitled “the sale of assets to investors.” We started with an IPO of OGK-5. Then the brilliant IPO of OGK-3. Then, at full swing, we entered into the crisis on the markets. What a horror. Financial investors completely disappeared. At some point, I thought it was almost a catastrophe that would cause the delay the IPOs, and the launch investment programs, a year and a half or two and might change the strategy completely. But there was demand among strategic investors and its scale is significantly greater than our pessimistic estimates. We had competition for the majority of the companies that were sold. Buyers thinned out, but that was unavoidable. The Koreans didn’t buy anything, CEZ was lost, it didn’t work out with the French. But even then, the number of those remaining was larger than we expected, although not twice or three times as many. When you sell three, four or five companies with competition, then one or two without competition, and one is left, the wind is already gone from the sails.
But Viktor Vekselberg, Roman Abramovich and Valery Abramov took it.
Yes, but cheaply.
The impression is that it is some sort of RAO UES parting accord that OGK-1 has to sell for $5 billion.
That’s the market. I didn’t think it up. Market relations and sale prices are a source of particular pride for us. The price was $525 per 1 kW of total capacity. They offered $420. But the market price was $525. Then, after all negotiating resources had been exhausted, I started and mde the compromise offer of $500. They raised their offer only to $430. I didn’t take it.
What buyers are contending for OGK-1 now?
The newspapers say that Roskommunenergo is.
Can we expect a deal?
We can. There are complications with OGK-1. There is a truly serious and difficult investment program there for 3700 mW. It is the largest investment program of all the generating companies. So it’s not easy to sell it.
What happened between you and Rosneft? It has filed five suits against TGK-11 (Territorial Generating Co. -11) and TGK-8 shareholders.
My position is clear. That is an example of antigovernmental activity on the part of a state company.
Can a settlement be made out of court?
That is no longer our decision. We didn’t start it. We had hundreds of similar situations in the energy companies with oligarchs, politicians, minority shareholders, old ladies, regional officials, bandits, and all of those problems were settled. There is only one unsettled conflict left. Seriously, the situation is difficult – the investment program, the obligations. They are very important projects. Neighborhoods are supposed to be built around those projects.
What is an adequate price for the public for a kW/h? We aren’t used to paying a lot for electricity.
That is a tricky question because of your observation. In that sense, we can’t say that the right price is the same as they pay in Finland or France. But I am certain that the government made the right decision, raising electricity prices for the public by 25 percent three years in a row. It was most likely not an easy decision for the government.
Can you say that your electricity reform is your most successful project?
I consider my economic projects the creation of private property, financial stabilization in 1995, the default of 1998 and the reform of RAO UES. The goals were reached in the first two. Then there was a complete collapse. In the autumn of 1997 and even in the spring of 1998, I thought we would be able to avoid default. In the reform of RAO UES, the goal set was reached. It was the most labor-intensive project. Not the most significant, but my favorite, because it was the fullest in the professional and intellectual senses. The volume of intellectual resources developed by the team at RAO headquarters was just ecstatic, with some exhaustion mixed in. The accomplishment, the heights of thought reached. It was pure pleasure.
Interviewed by Ekaterina Grishkovets and Ilya Bulavinov
All the Article in Russian as of June 30, 2008
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