A key element of Armenia's economic development strategy involves the privatization of the country's energy distribution networks (EDN). But privatization efforts have hit numerous snags during the past few years. Geopolitical issues associated with the sale are proving particular problematic for the government, as some critics say the tender, as currently conducted, could harm Armenia's close relationship with Russia. At the same time, delays have created uncertainty among potential foreign investors.
The outcome of the process, in which a 51 percent share in the country's four electric companies is being offered, remains uncertain. Following the latest postponement, the tender is scheduled to be completed by the end of 2001. The two leading contenders are the American corporation AES Silk Road and Spain's Union Fenosa. Recently, a Belgian company and a joint Russian-US consortium, which includes the Russian ITERA energy giant, have also expressed interest in getting involved.
The EDN privatization process is already two years old. The tender encountered political difficulties almost from the start slowed by the campaign leading up to Armenia's parliamentary elections in May 1999, and then by the government upheaval sparked by the October 1999 parliament assassinations.
Parliamentary opposition remains strong, as many left-wing MPs are reluctant to approve the sale of such a key strategic asset to foreign companies. Opposition to AES Silk Road's participation is especially robust, in part because it is an American company that already has a prominent position in neighboring Georgia's energy sector. Some worry that AES Silk Road's strong presence in the Caucasus would upset Russia.
A Russian Embassy official in Yerevan has already dropped hints that Moscow is displeased with privatization developments. Some pro-Russian politicians in Armenia have complained that Russian companies, including RAO ES, were prevented from participating in the final phase of the tender, reportedly because they did not submit acceptable financial documentation. Strong ties with Russia are widely viewed as important to Armenia's national security, given that the country borders two nations Azerbaijan and Turkey with which it has had hostile relations.
Popular attitudes towards privatization have become increasingly wary, as many fear the energy sector will follow the example of telecommunications. The monopoly ArmeTel recently announced that per-minute billing for telephone service would begin in September, a move that is widely expected to cause up to a three-fold rise in phone costs. The introduction of the new phone rate schedule was a condition of the 1998 privatization deal.
Anti-privatization resistance gained momentum in April, when the two tender favorites failed to file a formal bid. Some observers suggest that the missed deadline was a signal of waning foreign investor interest in Armenia. Prime Minister Andranik Margarian's government has tried to maintain interest in the tender, saying the Armenian energy sector has some of the most modern equipment in the region, and already operates at a profit. The Armenian sector offers a sharp contrast with that in Georgia, where AES Silk Road has already invested about $150 million to modernize the network, as well as billing procedures, but still operates at a loss.
The outcome of the tender process has important ramifications for Armenia. For example, the World Bank has made completion of the tender a condition for release of a $50 million Structural Adjustment Credit, which would be used to help cover an anticipated state budget deficit. The World Bank indicated recently that it might release the funds before the completion of the tender, provided the process was on track.
Government officials also hope a successful privatization effort will help curtail corruption and theft in the energy sector. Armenia has a collection rate of about 80 percent, among the best of any former Soviet state. Nevertheless, many Armenians still hook up to the electricity grid without paying. Corruption is also reportedly widespread in the system's administrative bureaucracy.
Ultimately, the government hopes that EDN privatization will pave the way for broader foreign investment, which would help fuel economic recovery. To date, however, the tender has succeeded mostly in raising questions about Armenia's openness to foreign investors.
Haroutiun Khachatrian is a Yerevan-based writer specializing in economic and political affairs.