Guarding the сompetition

9 January 2019, 09:22

For several decades, one of the most painful areas for reforms in Ukraine has been solving the problem of state monopolies and putting a stop to the ongoing degradation of infrastructure in the sectors of the national economy that they control. As in the case of land reform, the stakes are extremely high. The system of state monopolies remains, in essence, the backbone of the Ukrainian economy and its decades spent in an unreformed, transient state have given rise to numerous corrupt schemes. Financial resources are siphoned through both official channels, like state budgets at various levels, and shell companies associated with management or "supervisors" from the government. In addition, they make it possible for private business, often linked to oligarchs, to take advantage of natural monopoly resources without proper compensation.

Control over state monopolies and the opportunities they bring remains one of the key motivators for participation in the political struggle and at the same time the main tool for monetising votes received during election campaigns. Although the latter are expensive, they pay off in a big way in case of success. State and municipal enterprises, which are divided up according to political quotas, are the main source of corrupt incomes. Companies officially owned by the state that are formally loss-making or close to breaking even actually bring hundreds of billions of hryvnias in profit to those who manage them on behalf of the people of Ukraine.

Consequently, throughout all the years of independence, sectors monopolised by the state have clearly demonstrated their two faces: on the one hand, large cash cows that attracted enormous financial resources and, on the other hand, rapid ageing of fixed assets and the lack of necessary funds to keep up with progress and invest in modernisation. Politicians both in power and in opposition have blocked real changes to state-monopolised sectors, in the hope of gaining quotas for managing profitable assets in the future. Meanwhile, there were efforts to convince society that the system as a whole could remain unchanged and that only issues with corrupt managers and the monitoring system needed to be resolved. Although it was never mentioned that it is not even worth thinking about this while the people supposed to solve these problems are interested in maintaining the status quo.

Supernatural Monopolies

Most existing state monopolies are either of the "natural" variety or have such elements in their structure. The special law On Natural Monopolies, adopted in spring 2000, is devoted to the principles of their regulation and reform. It defines them as the state of a certain market when it is more effective to satisfy demand in the absence of competition due to the technological features of production, and the goods (services) produced can not be replaced by consuming others. It should be said that this law, adopted almost two decades ago, records a list of natural monopolies in various components of strategic infrastructure that it really makes sense to keep in state ownership. But only in order to guarantee national security by maintaining it at an appropriate quality level and ensuring, in the interests of the country and society, equal access by operators of all forms of ownership on the basis of lively competition.

In particular, under the above-mentioned law, natural monopolies primarily include the framework of the national energy and transport infrastructure: a) transportation pipelines for gas, oil and petroleum products etc., b) gas storage in underground storage facilities, c) transmission and distribution of gas and electricity to consumers, d) the use of railways, dispatching services, railway stations and other railway infrastructure that provides for public-use rail traffic; e) air traffic control and specialised services at ports and airports. In addition to a number of housing and communal services at the local level: from centralised water supply and drainage to the transportation of thermal energy and disposal of household waste.

RELATED ARTICLE: System recovered. Now back it up

The problem is that in practice, as in a number of other still unreformed sectors, things are still where they were 20 years ago. Alongside the preservation of a truly natural monopoly on the infrastructure of the industries concerned, monopolistic operators, mainly state-owned or municipal, that use this infrastructure without competition have also been preserved for the most part. As a result, it is on the verge of dilapidation, while the efficiency and quality of service delivery are increasingly lagging behind current requirements. The abuses of monopoly operators are still offset not by the introduction of competition, but by savings on the long-overdue modernisation of fixed assets under the guise of populist slogans about the "acceptable" level of prices and tariffs for society or the economy according to the principle of "it belongs to the state, not me, so what do I care?".

Current legislation provides an arsenal of measures intended to limit the abuse of natural monopolies. However, in practice it turns out that they are rarely applied in Ukraine. State monitoring of the observance of legislation on the protection of economic competition within natural monopolies is carried out by the Anti-Monopoly Committee and there is also a "consumer association" to represent the public. National commissions formed and liquidated by the president that act on the basis of guidelines approved by him are supposed to regulate natural monopolies. They are subject to the president and accountable to parliament. As many years of experience have shown, in Ukrainian circumstances these are both factors that cannot provide the same effect given by normal competition, even in such a specific market as the Ukrainian one. In particular, the aforementioned commissions, one of which is the National Energy and Utilities Regulatory Commission, are responsible for creating conditions that will ensure the emergence of a commodity market from a natural monopoly through the development of competition, in particular on adjacent markets.

Therefore, the only truly effective way to regulate state monopolies is to eliminate them completely wherever possible, as well as limiting the number of those that will have to remain as infrastructure alone. While preserving state monopoly ownership, access should be provided on a competitive basis to a wide variety of companies on equal terms for their operations in various fields. At the same time, it is important that the payment for accessing such infrastructure is determined by general, understandable and common principles that will make it possible not only for its maintenance in good condition, but also for modernisation and expansion. In other words, the tracks, dispatching stations and railway stations should remain in state monopoly ownership, while rolling stock and the transportation of both cargo and passengers should become a highly competitive market. Pipelines and gas storage facilities should also be left in state ownership, but access to them should be provided on an equal footing to all traders who will pay the tariff for the transportation and distribution of gas that is necessary for their successful development.

Change or Lose

However, first of all, the many state monopolies in the energy sector that are abusing cross-subsidisation and artificial price controls should be eliminated. Even now, all produced and imported electricity is procured a single wholesale buyer, the state-owned Energorynok, which is accordingly the only wholesale seller. Moreover, this artificial state monopoly is just a tool for subsidising both the production and transportation of electricity and heat – where the private monopoly of Rinat Akhmetov's DTEK retains a dominating position – at the expense of state monopolies. Similarly, the state monopoly on the transmission and transportation of power has now been transformed into a cash cow for the artificial private monopolists that distribute and supply electricity and gas to consumers (regional power and gas companies).

It is necessary, while maintaining the state monopoly on power transmission lines in their entirety, to set an equal tariff for their use that is sufficient for modernisation and development, as well as transforming retail sales into a realm of free and unrestricted competition. Instead, the state often lacks understanding of the status and quality of distribution networks used by regional and city monopolists to supply power. Nevertheless, in the event of a critical situation the state of these networks, it is the state itself that will have to resolve the issue in view of its social importance. Moreover, it is unclear when the law On the Electricity Market, adopted in April 2017, will be able to come into force, due to massive failures in the implementation of its preparatory steps and the introduction of regulations for launching an electricity market. Not to mention that provisions on the practical subordination of the Ukrainian energy market to the interests of the private monopolist in thermal power – Rinat Akhmetov's DTEK – found their way into the document.

The distribution of natural gas is a similar situation. Around 50 companies produce it in Ukraine. The share of non-state enterprises in the import of the fuel is steadily increasing. In particular, according to an Anti-Monopoly Committee report, in 2017 the share of Naftogaz decreased to 61.9% from 73.7% in 2016, while other traders, on the contrary, increased theirs by almost one and a half times, from 26.3% to 38.1%. However, there is no similar competition on the retail gas supply market, in particular for household consumers. On the basis of licences issued by the National Energy and Utilities Regulatory Commission, 42 artificial monopolists, the so-called city and regional gas companies, sell gas to the population in their respective areas. They are very loosely responsible for the state of distribution networks and other infrastructure for the distribution of natural gas, but at the same time essentially block the access of competitors to consumers in the territories that they control.

It is difficult to provide free access to the population for all willing gas traders due to the natural state monopoly on distribution networks at all levels. The hindrance here is a mixture of populism, which continues to keep the price of gas for household consumers "below sea level", i.e. what is determined by the market, and lobbying for the interests of oligarchic monopolies and regional gas company owners. These factors are linked. In addition, the oligarchs that own regional gas companies make active use of speculation on "lower prices for the population" to maintain their monopolistic positions in supplying often diluted gas to citizens, fraudulently saving gas intended for their needs.

The infrastructure of providing utilities and communal services like a centralised water supply, drainage and district heating is also closely linked to the power industry. So far, there have been great efforts to make savings on the networks that provide these services and are in state or communal ownership. But it should be completely different. Anyone capable of providing consumers with a suitable product should be given the opportunity to produce and trade water and heat. However, the networks themselves should remain in state or communal ownership and their modernisation should be a priority thanks to a single price for all suppliers. After all, without networks of the proper quality, it will not matter who is willing to sell water and heat and at which price.

RELATED ARTICLE: Price controls: The masochism mechanism

A division into a natural state monopoly (i.e. railway tracks, stations and traffic control systems) and dynamic competition between different companies for the remaining cargo and passenger transportation functions remains the only chance to save Ukrainian rail transport from collapse. After all, throughout the entire period of independence state-owned railways have been and remain a donor to private, mostly oligarchic business that prefer to save on tariffs under the pretence that any increase would lead to them suffering losses and that cargo transportation is supposedly highly profitable if it operates without proper investment in the development of lines and rolling stock. A radical increase in contributions towards the development, modernisation and electrification of railways and other railway infrastructure is required at the expense of companies that would like to work on an equal footing with the state operator. This will put an stop to profiteering on the abuse of Ukrainian Railways’ monopoly position by its management and at the same time will end the destructive policy of "skimming off" profits without any spending on the long-term development of transport potential.

Investment in the railways for 2017-2018 casts doubt on the implementation of even the very modest plans to spend 150 billion hryvnias (€4.8bn) on its development during the five-year period that will end in 2021. This is less than half of annual capital investment by Deutsche Bahn, which exceeds €10 billion per year. Moreover, this investment program of 150 billion hryvnias foresees just €0.9 billion for the purchase of new locomotives, €300 million for upgrades and repairs to current rolling stock and even less for new passenger cars – there are only plans to purchase 400. This rate of replenishing rolling stock is not even close to compensating the planned decommissioning of outdated transport over this period, so the deficit will deepen further.

Finding the fastest possible solution to the problems that have built up over the preceding decades with state monopolies, on which the maintenance and development of vital infrastructure for the whole economy depends, should remain the focus of society's attention. Otherwise, we will face the threat of a transport or energy meltdown in our country. After all, if the opportunity to receive the services we are so accustomed to is one day called into question by the physical state of infrastructure, the problem of prices will be put on the back burner and it will cost much more to make up for further neglect at this time than to take timely action now.

Translated by Lidia Wolanskyj

Follow us at @OfficeWeek on Twitter and The Ukrainian Week on Facebook

This is Articte sidebar