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FOURTH POVERTY REDUCTION STRATEGIES FORUM POWER SECTOR AND FISCAL ISSUES KESH sh.a., Albania Case Athens, June 26 - 27, 2007 Prepared by: Ilir ZEQO Director of Economic Department KESH sh.a., Albania Ilir ZEQO Director of Economic Department KESH sh.a., Albania Slide 2 OVERALL PROGRAM OF ECONOMIC REFORMS OF ALBANIAN GOVERNMENT MARKET LIBERALIZATION; PRIVATIZATION OF STRATEGIC SECTORS PRIVATIZATION OF ENERGY SECTOR AMBITIOUS TOWARDS STRENGTHENING, RESTRUCTURING AND BETTER FUNNCTIONING OF ENERGY SECTOR MARKET LIBERALIZATION; PRIVATIZATION OF STRATEGIC SECTORS PRIVATIZATION OF ENERGY SECTOR AMBITIOUS TOWARDS STRENGTHENING, RESTRUCTURING AND BETTER FUNNCTIONING OF ENERGY SECTOR ARE A CRUCIAL MOMENT IN THE CREATION OF THE MARKET ECONOMY Slide 3 IMPROVEMENT OF THE STRATEGY IN ENERGY MARKET AND REFORMS IN ENERGETIC SECTOR STATE OWNED COMPANIES DETERMINED BY: THE PRESENCE OF THE QUALIFIED EXPERTISE OF INTERNATIONAL FINANCIAL INSTITUTIONS and A GREAT SUPPORT TOWARDS: REFORMS IMPLEMENTATION MARKET LIBERALIZATION AND DE-MONOPOLIZATION PROGRAMS STRENGTHENING AND INCREASING THE FREE REGULATION ENTITIES ROLE PROGRAMS OF COMERCIALIZATION RESTRUCTURING AND PRIVATIZATION OF ECONOMIC UNITS PROGRAMS COORDINATED WITH DEVELOPMENTS OF REGIONAL AND EUROPEAN MARKETS A GREAT SUPPORT TOWARDS: REFORMS IMPLEMENTATION MARKET LIBERALIZATION AND DE-MONOPOLIZATION PROGRAMS STRENGTHENING AND INCREASING THE FREE REGULATION ENTITIES ROLE PROGRAMS OF COMERCIALIZATION RESTRUCTURING AND PRIVATIZATION OF ECONOMIC UNITS PROGRAMS COORDINATED WITH DEVELOPMENTS OF REGIONAL AND EUROPEAN MARKETS Slide 4 RECOMANDATION THE POSSIBILITIES OF EFFICIENT USE OF ENERGY DURING THE IMPLEMENTATION OF PROJECTS INTERNATIONAL FINANCIAL INSTITUTIONS ASSISTANCE TO OUR COUNTRIES TO ACHIEVE THE TARGETS OF KYOTO PROTOCOL THE INCREASE OF THE ENVIRONMENTAL PERFORMANCE OF THE PROJECTS AND ZONES IN WHICH IT HAS TO BE IMPROVED THE SUPPORT FOR THE COUNTRIES TO EXPAND STRATEGIES OF ENERGY GROWTH IN ACCORDANCE WITH THE PRINCIPALS OF DEVELOPMENT SUPPORT THE NATIONAL DECISIONS OF OPTIMIZATION OF THE STRUCTURE OF ENERGY SOURCES THE POSSIBILITIES OF EFFICIENT USE OF ENERGY DURING THE IMPLEMENTATION OF PROJECTS INTERNATIONAL FINANCIAL INSTITUTIONS ASSISTANCE TO OUR COUNTRIES TO ACHIEVE THE TARGETS OF KYOTO PROTOCOL THE INCREASE OF THE ENVIRONMENTAL PERFORMANCE OF THE PROJECTS AND ZONES IN WHICH IT HAS TO BE IMPROVED THE SUPPORT FOR THE COUNTRIES TO EXPAND STRATEGIES OF ENERGY GROWTH IN ACCORDANCE WITH THE PRINCIPALS OF DEVELOPMENT SUPPORT THE NATIONAL DECISIONS OF OPTIMIZATION OF THE STRUCTURE OF ENERGY SOURCES Slide 5 THE SITUATION AND MAIN INDICATORS OF THE ALBANIAN POWER CORPORATION (KESH sh.a.) Slide 6 PREFACE Referring to the statement of IMF mission (25 April 8 May 2007) related to the Preliminary Agreements with the Albanian authorities on Third Review Under the Program, Albania has reached a pivotal stage in its economic development. Increasing foreign direct investments and rapid financial sector development, supported by macroeconomic stability, point to a faster pace of convergence to emerging market standards. However, risks primarily to price stability, but also to - growth have increased reflecting as well as the deterioration of financial position of the KESH. This is consider as a major obstacle to progress of country development. The main risk - the weakened financial position of our public electricity utility, KESH poor collection performance sharp increase in the import price of electricity the result reduced cash flow and net worth Referring to the statement of IMF mission (25 April 8 May 2007) related to the Preliminary Agreements with the Albanian authorities on Third Review Under the Program, Albania has reached a pivotal stage in its economic development. Increasing foreign direct investments and rapid financial sector development, supported by macroeconomic stability, point to a faster pace of convergence to emerging market standards. However, risks primarily to price stability, but also to - growth have increased reflecting as well as the deterioration of financial position of the KESH. This is consider as a major obstacle to progress of country development. The main risk - the weakened financial position of our public electricity utility, KESH poor collection performance sharp increase in the import price of electricity the result reduced cash flow and net worth ECONOMIC DEVELOPMENTS Slide 7 ENSURING THAT MACROECONOMIC OBJECTIVES REMAIN ON TRACK REQUIRES AN INCREASINGLY CAUTIONS AND PRUDENT APPROACH TO POLICY FORMULATION THE ISSUES: THE IMMEDIATE GOAL OF OUR POLICIES IN THE FISCAL AREAS IS TO ENSURE THAT THE FISCAL TARGETS ARE PRESERVED IN THE FACE OF PREVIOSLY UNFORESSEN RISKS. THE PROJECTIONS AND CONTIGENCIES BUILD INTO THE BUDGET WERE ADEQUATE AT THE TIME OF THE 2007 APPROVAL WERE NO SUFFICENT TO LOWER PREVIOSLY UNPROGRAMMED FISCAL COSTS THAT AROSE FROM THE DETERIORATION OF KESH THE IMMEDIATE GOAL OF OUR POLICIES IN THE FISCAL AREAS IS TO ENSURE THAT THE FISCAL TARGETS ARE PRESERVED IN THE FACE OF PREVIOSLY UNFORESSEN RISKS. THE PROJECTIONS AND CONTIGENCIES BUILD INTO THE BUDGET WERE ADEQUATE AT THE TIME OF THE 2007 APPROVAL WERE NO SUFFICENT TO LOWER PREVIOSLY UNPROGRAMMED FISCAL COSTS THAT AROSE FROM THE DETERIORATION OF KESH STABILIZING THE FINANCIAL POSITION OF KESH KEY TO CONTAINING RISKS TO THE BUDGET AND MAINTAINING MACROECONOMIC STABILITY Slide 8 The financial position of the KESH by end 2006 and forecast in the beginning of the 2007 How has to be expeditiously and comprehensively addressed the situation? The Seventh Energy Sector Action Plan 2007-2009 The Performance of the KESH for the period January-May 2007 Slide 9 1 The financial position of the KESH by end 2006 and forecast in the beginning of the 2007 Slide 10 Energy sector weaknesses reflect a combination of factors: Poor hydrological conditions are expected to reduce domestic power generation by about 30% this year compared to the 2006. LAKE LEVEL (m) Slide 11 DESPITE ALLOWING FOR LIMITED AND WELL PLANNED LOAD SHEDDING OF POWER TO PARTLY OFFSET THE SHORTFALL IN PRODUCTION, THE AMOUNT OF NECESSARY ELECTRICITY IMPORT WILL BE INCREASED IN 2007. 2007 1,800 GWh 1 GDP Slide 12 The regional import prices for the electricity have increased sharply and are well above the domestic retail prices which have remained fixed since the last year.. Slide 13 There are problems with the debtors arrears. Slide 14 2 How has to be expeditiously and comprehensively addressed the situation? Slide 15 Temporarily the companys financial position stabilization. New management Foreign (Italian) management consultancy Seventh Power Sector Action Plan Incentive package for the key employees in sale and collection to achieve performance targets Eliminating the financial gaps of the power utility in 2008 and beyond including through higher tariffs, if necessary Financing from the foreign donors (WB) for the technical improvements needed to reduce losses and theft. New investments for the increasing the power generation and supply (TEC Vlora, etc.) KESH reduction cost and improving performance (revenue collection increased equal to 0.6 percent of GDP. Budgetary support of leke 5 Billion (about 40.6 million EURO) or 0.5 percent of GDP And the last but not the least strong political support and determined efforts, KESHs financial performance could be improved relatively quickly New management Foreign (Italian) management consultancy Seventh Power Sector Action Plan Incentive package for the key employees in sale and collection to achieve performance targets Eliminating the financial gaps of the power utility in 2008 and beyond including through higher tariffs, if necessary Financing from the foreign donors (WB) for the technical improvements needed to reduce losses and theft. New investments for the increasing the power generation and supply (TEC Vlora, etc.) KESH reduction cost and improving performance (revenue collection increased equal to 0.6 percent of GDP. Budgetary support of leke 5 Billion (about 40.6 million EURO) or 0.5 percent of GDP And the last but not the least strong political support and determined efforts, KESHs financial performance could be improved relatively quickly OUR AIM IS TO MAKE THE POWER UTILITY SELF RELIANT AND TO ENSURE A STABLE SUPPLY OF ELECTRICITY IN ALBANIA Slide 16 The interim package of financial situation summary - 15,957 +5,000 +4,413 +1,514 +890 +4,070 Slide 17 The privatization of the KESH (Distribution System Operator) Important objective of the Government Preliminary decisions already are taken. Already is selected IFC as adviser. Important objective of the Government Preliminary decisions already are taken. Already is selected IFC as adviser. Elimination the financial gaps of power utility in 2008 and beyond, including through higher tariffs if necessary Eliminating the need for budget support for KESH in 2008 and setting it on more sustainable path essential to safeguard the budget Elimination the financial gaps of power utility in 2008 and beyond, including through higher tariffs if necessary Eliminating the need for budget support for KESH in 2008 and setting it on more sustainable path essential to safeguard the budget Slide 18 3 The Seventh Energy Sector Action Plan 2007-2009 Slide 19 Agreement with the Government authorities and no objection from the IMF and WB Optimistic scenario, very ambitious targets, minimum limited impact budget affect Main factors affecting the scenario: Agreement with the Government authorities and no objection from the IMF and WB Optimistic scenario, very ambitious targets, minimum limited impact budget affect Main factors affecting the scenario: Power Generation based on hydrogical conditions Quantity Import reduces in minimum that indicates the reducing the import cost Load shedding increased Local Cost of investment decreased Operational cost decreased KESH domestic borrowing increased Budget support Power Generation based on hydrogical conditions Quantity Import reduces in minimum that indicates the reducing the import cost Load shedding increased Local Cost of investment decreased Operational cost decreased KESH domestic borrowing increased Budget support Slide 20 Summary of Last Action Plan (Energy Balance) Net Production Net KESH Import Demand Eligible Import Load Shedding Slide 21 Summary of Last Action Plan (Losses & Collections) Slide 22 4 The Performance of the KESH for the period January- May 2007 Slide 23 Cumulative 2007 (GWh) Energy Balance Up to May 2007 6.5% 3% - 3% Slide 24 Cumulative 2007 (GWh) Losses Up to May 2007 - 0.2% - 0.3% - 0.5% Slide 25 Collections Up to May 2007 +1% -0.8% +0.1% Slide 26 Profit & Loss Statement Up to April 2007 Slide 27 Thank You for your attention Thank You for your attention and remaining and remaining