Sale of Armenia’s Power Utilities Upsets Intl. Donors

YEREVAN (RFE/RL)–The Armenian government promptly sealed Monday the $37.15 million sale of its troubled power utilities to a little known offshore firm despite strong objections from Western donors that say it lacks the expertise to end the sector’s huge losses.

The controversial deal has already left a big question mark over the fate of some $40 million in additional loans promised to Armenia by the World Bank–a key driving force behind the energy sector privatization. It could also complicate Yerevan’s relations with the International Monetary Fund which also questioned the choice of a new utility owner.

An agreement on the transfer of a 80.1 percent stake in the power distribution network to Midland Resources Holding was signed in Yerevan by four Armenian ministers and the director of the company’s Moscow office–Andrey Zavrazhnov. The signing followed an emergency meeting of Prime Minister Andranik Markarian’s cabinet which formally endorsed the results of an international tender for the state-run Armenian Electricity Network (AET).

The company–registered on the tax-free British Channel Islands–was declared the winner of the bidding despite having little or no experience with energy business. No other foreign investor submitted a bid.

"The donor community is not happy with that deal because the way it was handled was fishy," a Western diplomat told RFE/RL.

Other informed sources revealed that the World Bank–Armenia’s main international lender–is likely to again delay the release of a $20 million budgetary loan pegged to the successful privatization of the Armenian power grids. It is the third–final installment of the bank’s $50 million Structural Adjustment Credit (SAC-4) that was due to cover about half of the country’s 2001 budget deficit. The SAC allocation for this year was cut to $20 million. But even its disbursement is now in doubt.

The spokesman for the World Bank’s Yerevan office–Vigen Sargsian–said the fate of the loans will be clarified "in the coming days."We can not explicitly approve the victory of a company that has no experience with the energy sector," he said. "I hope that even if release of the SAC-4 tranche is delayed or frozen–the agreemen’s on the SAC-5 loan previously reached with the government will remain in force."

Sargsian added that the government has written to the World Bank–promising to have Midland Resources hire a team of experienced energy managers to run the loss-making Armenian grids. But he said only the time will tell whether the foreign investor can turn them into profitable businesses.

According to one diplomat from a Western donor state–"the deal may not be a disaster" if the government fulfills its pledge.

Finance and Economy Minister Vartan Khachatrian–who also put his signature on the takeover agreement–said Midland Resources has pledged to conclude a management contract with an experienced Western energy company "in two or three months." He expressed confidence in the company’s ability to stamp out widespread fraud and mismanagement in the power distribution sector. Its overall losses exceeded $60 million last year.

Meanwhile–the IMF similarly voiced "reservations" about the wisdom of choosing Midland Resources as the new owner of the local electricity network. "Our concerns stem from the lack of information about that company," said an IMF official in Yerevan. "As far as we know–Midland Resources does not have the necessary experience or international standing."

Sources said the London-based European Bank for Reconstruction and Development (EBRD) will likely abandon its earlier intention to purchase the remaining 20 percent of the AET. "Forget about the EBRD–they will not deal with an offshore firm," one official familiar with the privatization process told RFE/RL.

The official also confirmed that the sell-off enjoys the strong backing of President Robert Kocharian. He said Kocharian himself pushed for its quick signing–taking the donors by surprise. One of the president’s most trusted lawyers–Justice Minister David Harutiunian–was closely involved in the takeover negotiations with Midland Resources.

After two unsuccessful attempts to privatize the power utilities the government and the World Bank agreed late last year to try to place them under foreign management–as opposed to the more risky ownership. Preparations were underway as recently as last May for an international tender for a management contract that was expected to be called this autumn.

The World Bank’s Sargsian said: "Early this summer–the government informed us that it is holding negotiations with the Midland Resources company. So I wouldn’t say this outcome was unexpected to us."

The Armenian authorities’ unexpected change of heart raised questions about the ownership and activities of the obscure offshore company. According to documen’s obtained by RFE/RL–Midland Resources’ board of directors is composed of four persons. One of them–identified as Y. S. Sukiyasov–appears to be of Armenian origin. Two others–J. Sakhnovski and A. Sokolovski–carry Slavic names.

The company’s principal activity is trading in ferrous metals and other raw materials used in their manufacturing. Midland Resources owns two steel factories in England and Ukraine and has offices in 14 cities–including London–Kiev–Moscow and Istanbul. The group posted almost $11 million in net profits last year.

Earlier this year–it bought a 50 percent stake in the Max Fruit Armenian company involved in agribusiness. The other 50 percent belongs to Harutiun Pambukian–a local wealthy businessman and parliament deputy.

The price offered by the British-registered firm includes the AET’s $25 million debt to electricity producers–meaning that it will pay only $12.15 million for the 80 percent stake. The Armenian energy ministry had originally estimated the distribution network’s value at $250 million.

Officials argue that demanding a higher takeover price from foreign investors would not be realistic given the current state of the Armenian energy sector. They also say that the modest takeover price would enable the government to block any increase in electricity fees in the next three years.

Khachatrian said the government expects the new AET owner to invest at least $100 million in the sector in the next "seven to eight years."


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