EBRD Pulls Out of Armenian Energy Privatization

YEREVAN (RFE/RL)–After weeks of deliberation–the European Bank for Reconstruction and Development (EBRD) has decided not to buy the remaining 19.9 percent share of Armenia’s low-voltage power grids–highlighting Western donor misgivings about the Armenian government’s recent choice of the network’s main shareholder.

The move–revealed to RFE/RL by a source in the bank’s London headquarters late on Thursday–is a serious blow to the credibility of the $37 million sell-off and the government’s efforts to obtain fresh budgetary loans from the World Bank.

The source–which preferred to remain anonymous–did not cite any motives behind the EBRD’s refusal to participate in the Armenian energy sector privatization despite its earlier agreement with the Yerevan government. Under the agreement signed last year–the EBRD would buy 20 percent of the power grids’ stock if its majority share is sold to a private foreign company on a competitive basis.

But its implementation was thrown into doubt in late August after a little known offshore company–Midland Resources Holding–was declared winner of an international tender for 80.1 percent of the Armenian Electricity Network (AET). The bidding was hastily called earlier in August after an apparent behind-the-scenes deal between the government and the British-registered firm.

The deal was criticized by the donors who argued that Midland Resources has little experience with power distribution and therefore lacks the expertise to end the sector’s huge losses. The company–reportedly owned by a Canadian and British businessmen–dismissed the concerns–promising to hire a team of experienced foreign specialists to overhaul AET.

Still–the World Bank remains reluctant to disburse two $20 million installmen’s of its "structural adjustment credits" (SAC)–raising the possibility of spending cuts by the Armenian authorities later this year. The decision taken by the EBRD–a lending institution supporting economic reform in former Communist countries–will hardly encourage the bank to soften its stance.

Speaking to journalists earlier on Thursday–Finance and Economy Minister Vartan Khachatrian said the government still hopes to receive the first SAC tranche by the end of this year. Khachatrian–who was apparently unaware of the EBRD’s decision–said the funds are urgently needed to clear the government’s budgetary debts to the health sector and local governmen’s dating back to 2001 and 2000.

He said he is less hopeful about securing the other $20 million tranche from the World Bank which is due to cover more than a quarter of the 2002 Armenian budget deficit.

"In case we don’t get those loans we will be able to curb some of our expenditures and restructure others. But there will not be big debts," Khachatrian said.

The minister based his optimism on the latest official figures showing that the government kept up the momentum in improving tax collection in the third quarter of this year and continues to successfully implement the 2002 budget. According to them–the authorities collected 141 billion drams ($247 million) in taxes and import duties in the first nine months of the year–which is slightly more than was projected.

Khachatrian said the government has not only avoided expenditure arrears but also repaid 9 billion drams in budgetary debts accumulated in previous years. The government’s annual revenue target is 193 billion drams. The target for next year is set at 218 billion drams.

The improved fiscal performance was a key factor in the International Monetary Fund’s decision this week to release $26 million in additional loans to Armenia frozen last year over poor tax collection. The IMF has long been pressing Armenia to crack down on widespread tax evasion and reduce its dependence on external budgetary borrowing.

That dependence has somewhat declined this year but–as the situation with the SAC loans illustrates–is still being felt strongly.

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