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Perspective

Social and political attitudes toward cheap power were a major obstacle to electricity liberalization in Poland; they also may be one in Russia.
Fortnightly Magazine - June 15 2003

waiting eagerly to pick up power generation assets.

Despite the large potential revenues from privatization, progress was slow from the start. Social and political resistance pressed on the government from every direction. The reasons are very instructive as to what to expect in Russia as Unified Energy Systems (UES) tries to restructure itself in the coming two or three years.

Consumers were having a hard time keeping up with rising prices in Poland. Inflation in 1989 was more than 200 percent. By the mid-1990s it had dropped into the range of 30 percent or more per annum. Prices were generally set based on political considerations with little or no reference to economic costs. This was especially true of electricity, and remained true through much of the 1990s. Under the post-Communist governments of the early 1990s, electricity prices were set by the Finance Ministry, but the power plants were given overall management direction by the Ministry of Industry and Trade. Thus, the inflationary pressures were a process of coming to terms with what things really cost, and putting those costs where they properly belonged.

The result was that the consumer got badly squeezed. The Ministry of Finance fought hard to retain the rights to set those prices for social reasons. Government policy specifically dictated that electricity prices, at the consumer level, could only grow at a rate somewhat less than inflation.

All the while, the government was repeatedly announcing plans to change that. The power industry was slated to become open to "free market prices." An electricity trading floor was established, but little electricity traded. Invitations to bid on power plants were announced, and some transactions occurred, but many did not. The public was not happy. The perception was that any private buyer of power generation facilities would immediately seek to raise prices.

In short, social and political attitudes managed to block a number of privatizations and delay many others.

Workers Resist

Under the Communist system, full employment was mandated. Anyone who wanted a job could have it. The power industry absorbed a lot of employees that were not needed. The workers knew that any buyer of a power facility in privatization would reduce staff in large numbers. The unions are very powerful in Poland, and they succeeded in distorting the process.

One of the requirements in any privatization bidding process was, at a point prior to final negotiations with the Treasury over purchase prices and terms, the necessity to negotiate "the social package" with the unions. Typically, the social package guaranteed no reduction in the labor force for a period of time, offers of severance pay for voluntary reductions, and a bonus to be paid to all workers on financial closing with the Ministry of the State Treasury upon privatization of the company. These packages tended to escalate in cost as the process went forward. No union wanted to settle for less than a previous one had.

Since the law was silent on the matter, and there was no recent history of protecting the rights of capital in Poland, it took the