Economist Intelligence Unit: Lithuanian business:Dirty energy

The Lithuanian government has pressed through a controversial plan to consolidate the country’s energy sector, in order to create a “national champion” to undertake key projects aimed at safeguarding the country’s energy security. The project favours the interests of the private-sector partner at the expense of the Lithuanian taxpayer, and also goes against the European Commission’s push towards energy-sector unbundling. The lack of transparency surrounding the deal and the pressure put on its critics raise concerns about the government’s motives.

Energy issues

Lithuania’s plans to create a new energy holding company—Lietuvos Elektros Organizacija (Lithuanian Electricity Organisation, or Leo)—cleared the final hurdle at the beginning of February after the Seimas (parliament) passed crucial amendments to last June’s nuclear power law. However, the creation of Leo has proven highly controversial, and opposition continues to simmer: the prime minister, Gediminas Kirkilas, faces a no-confidence motion in parliament, which will probably take place in mid-April, with circumstances surrounding the creation of Leo a key item on the charge sheet.

Leo will consolidate Lithuania’s main energy company, Lithuanian Energy, and two regional distributors, Vakaru Skirstomieji Tinklai (VST) and Rytu Skirstomieji Tinklai (RST). It is intended to carry through three key projects to ensure the country’s energy security after the Chernobyl-type Ignalina nuclear power plant, which currently supplies the bulk of the country’s electricity needs, shuts down in 2009 as required by Lithuania’s EU accession treaty.

The three projects are to build a new nuclear power plant—in collaboration with Poland, Latvia and Estonia—and “power bridges” to link Lithuania to both the Swedish and Polish grids. Lithuania’s Soviet-designed electricity infrastructure is still tied into the Russian grid and there are fears that, without these projects, it will find itself even more dependent on Russia (which already supplies most of its oil and gas) over the longer term after Ignalina closes.

Controversial consolidation

The controversy over Leo centres on the role in the new company of NDX Energija, the Lithuanian owner of VST. Leo will be 61.7% owned by the state and 38.3% by NDX. The latter is in turn owned by VP Grupe, an influential Lithuanian company that has already carved out an unhealthy dominance of the country’s retail sector.

A key issue concerns the share structure of the new company. When NDX acquired VST in 2003, it accounted for 28% of the Lithuanian energy sector by assets, with the state-owned RST and Lithuanian Energy accounting for the other 72%. Leo, however, will be 61.7% owned by the state and 38.3% by NDX. Given that NDX has made no significant investment in VST in the interim, it is hard to explain how it has suddenly in effect acquired an extra 10% of the country’s energy sector.

One Lithuanian non-governmental organisation (NGO) calculated the resultant cost to the Lithuanian taxpayer as LTL1.5bn (US$680m; €430m)—and the government has not refuted this figure.

Further concerns are raised by the fact that there are no guarantees in the legislation establishing Leo that the company will actually complete the projects outlined for it. Nor is NDX committed to invest in the new company. In fact, it is tied into Leo for just two years, well short of when work is likely to begin on the new nuclear plant or the power bridges—after that it is free to sell its stake, cashing in on the windfall it has earned from the boost in its energy-sector stake. In response to the resultant criticism, the government has claimed verbal guarantees from NDX that the latter will not sell up—but that is hardly acceptable for a project of this magnitude. Therefore, although the government has invoked national interest as the key justification for establishing Leo, it actually does nothing to improve the chances of resolving Lithuania’s energy security problems.

Indeed, the whole rationale for the new company seems questionable. The trend in the EU at present is towards “ownership unbundling”—in late February Germany’s largest energy utility, E.ON, under pressure from the European Commission, announced the planned separation of its production and distribution businesses—which has been demonstrated to result in lower energy costs for the consumer. Instead, Lithuania is reversing the unbundling that it carried out in 2003.

The government has said that a large company (in effect a national champion) is needed to represent Lithuania’s interests in the negotiations on the new nuclear power plant with Poland, Latvia and Estonia, but this is highly debatable: Lithuanian Energy already had sufficient weight for that. The government has said that if forced to by the EU it will break up the new company—but NDX would presumably walk away with the extra 10% of the energy sector it has gained in the consolidation process.

Lack of transparency

Why, then, did the government push through the consolidation? And, if it really was convinced that a national champion was necessary, why did it not hold a tender to determine the private partner and secure a better deal for the consumer? The whole process has suffered from a lack of transparency, and remarkably little in the way of cost-benefit analysis has been carried out, either with regard to the creation of Leo or in terms of whether Lithuania really needs a new nuclear plant to replace Ignalina.

In fact, VP Grupe itself seems to have been the driving force behind the Leo proposal—the consolidation plan as presented to parliament by the Ministry of Economy was drawn up by NDX, and VP Grupe actively lobbied members of parliament to ensure that the legislation went through.

Even more worrying was the pressure placed on those who questioned the deal. Critics within the state administration were forced into silence, and other opponents were accused in the strongest terms of going against the national interest. Following the passage of the legislation in February, members of the governing coalition filed a motion for the state security services to investigate those MPs, NGOs and media who had spoken out against Leo for foreign links—a tactic reminiscent of the Soviet era.

The desire of the government and VP Grupe to suppress debate over the deal suggests that they are well aware it does not stand up to scrutiny. One possible reason for the government’s acquiescence in a process that clearly favours VP’s interests over those of the Lithuanian taxpayer relates to the approach of the parliamentary election in October. The main governing party, Mr Kirkilas’s Social Democratic Party (LSP), fears that it may perform poorly, given slowing economic growth and the absence from its slate of the long-serving but now retired giant of postindependence Lithuanian politics, Algirdas Brazauskas. The LSP may be hoping that an informal alliance with VP would give it the resources it needs to offset its weakness by spending heavily on the election campaign.

Overall, two conclusions can be drawn. The first is that the establishment of Leo is neither cost effective nor in the national interest more broadly. The second concerns the health of Lithuanian democracy: it now appears that Lithuanian politics is more vulnerable to “state-capture”—the excessive influence of certain private interests on the legislative process—than had previously been thought.