Law of the Republic of Moldova On Concept of Electricity Sector Enterprises Privatization

No. 63-XIV of June 25, 1998

Pursuant to the Law "On Privatization Program Throughout 1997-1998", the Parliament adopts this ordinary law.
Article 1. - To approve the Concept of Privatization of Electricity Sector Enterprises, drafted by the Government, and which is integral part of this law.
Article 2. - By October 1, 1998 the Government shall present individual privatization projects for electricity sector enterprises. The projects shall include sources and ways of debt repayment.

Chairman of the Parliament                                                                                 Dumitru DIACOV

      Concept of Electricity Sector Enterprises Privatization

This Concept envisages privatization of eight electricity sector joint-stock companies, according to the Law on Privatization Program for 1997-1998:
•"Electricity Distribution Networks," Chisinau municipality;
•"Electricity Distribution Networks - Center";
•"Electricity Distribution Networks - North";
•"Electricity Distribution Networks - North-West";
•"Electricity Distribution Networks - South".

The Concept proves the necessity of restructuring and privatization of the mentioned enterprises, sets the goals, strategy and methods of privatization.

I. Current Status and Need to Privatize

The crisis in the electricity sector was entailed by the following factors:
a)low level of collection of payments for consumed electric power, generating consequent growth of accounts receivable, mostly belonging to the budgetary organizations and institutions, agricultural sector enterprises, housing and utility services;
b)excessive accounts payable of the former state-owned company "Moldenergo" (exceeding one-third of the country annual budget), especially for gas (80% of company's accounts payable);
c)the majority of payments for electric power are done through barter transactions and offsets (60-65% of total amount of transactions), that significantly reduces the actual value of payment collections;
d)the tariffs for electric and thermal energy, both for the residential and business consumers, not covering the costs, necessary for ensuring economic viability of the electricity sector. This factor, along with the low level of payment collection, technical losses and electricity thefts, have led to the situation, when the debts, not covered by accounts receivable, are exceeding two-thirds of the total
e)the actual electricity tariff is much lower than the established one, due to the numerous social benefits, provided to various consumer categories;
f)technical losses and electricity thefts from the network (accounting for Vi of total supplied energy), because of the use of obsolete equipment (60% of equipment is in operation for more than
22 years), because of failure to take the measures for continuous maintenance of the equipment, and due to the insufficient level of monitoring and control over the electricity consumption;
g)lack of transparent financial management and accounting systems, making possible hidden losses;
h)frequent changes of the electricity tariffs due to social and political considerations;
i)political decisions, limiting the possibility of electricity sector enterprises to cut off the non- payers, and consequently putting obstacles for implementation of normal commercial practices;
j) inactivity of the State Company "Moldenergo" management in terms of reducing expenses and costs of electric and thermal energy.

The solution of the problems related to the electricity sector efficiency is only possible in conditions of its complete restructuring and transparency for the competition, attracting investments and providing incentives for them. These goals can be reached by means of restructuring and privatization of the respective enterprises, already started in 1997.

During 1997 the electricity sector was decentralized and corporatized.

The State Company "Moldenergo" was subdivided, using the functional principle, into the following enterprises:
•3 enterprises - joint-stock companies, whose main line of business is electric and thermal energy generation ("CHP-1", "CHP-2", and "CHP-Nord");
•5 enterprises - joint-stock companies, specializing in electricity distribution and sales ("Electricity Distribution Networks", Chisinau municipality, "Electricity Distribution Networks Center", "Electricity Distribution Networks North", "Electricity Distribution Networks North-West", and "Electricity Distribution Networks South");
•State Company "Moldtranselectro", comprising high-voltage networks, dispatch center, and Costesti Hydroelectric Power Station, is responsible for establishing and maintaining the balance of electric energy and capacity in electricity system, transportation of electric energy to the distribution companies and to consumers; and military state enterprise "Scutul Energetic", Chisinau municipality;
•6 enterprises - joint-stock companies, providing auxiliary services. Privatization of these enterprises is carried out based upon the standard projects, in accordance with the procedure established for the enterprises included in Annex 1 to the Law on Privatization Program for

Corporatization of the former State Company "Moldenergo" subdivisions envisages the new commercial relations between the agents of the energy market. The relations shall be regulated by the National Agency for Energy Regulations in accordance with the existing legislation.

II. Privatization Goals and Methods

Privatization provides for the possibility for faster renovation of the electricity sector. It also guarantees a reliable and efficient electricity supply to the consumers at reasonable prices determined by competition.
The main goals of electricity sector enterprises privatization shall be:
a)obtaining the maximum funds necessary for the state;
b)ensuring the energy security of the country, increasing the reliability and quality of the energy products and services;
c)attraction of foreign and local investments for rehabilitation and growth of the enterprises;
d)increasing the efficiency of energy sector operations and management by implementing
management practices and opening sector for the competition.

Privatization strategy for the electricity sector enterprises shall be determined by the final goals and based on international experience in this area.

Privatization shall ensure long-run economic efficiency of the electricity sector and shall guarantee rendering high-quality service. At the same time it will enable attraction of necessary resources and management experience, that will result in increase of the country energy security.

Privatization of the electricity sector enterprises shall be conducted through the open one-stage international investment tender. All enterprises shall be offered simultaneously in groups or separately. Such organization of the tender is dictated by the following factors:
a)limited time for privatization (prolongation of the privatization process shall incur reduction of the enterprises price because of continued aggravation of their financial situation);
b)minimum organization costs of the tender (organization of a multi-stage tender shall require considerable costs, which will reduce the financial outcome from privatization).

The strategic investors shall be offered packages of shares with the voting right with the size exceeding 50% + 1 share. Given the financial and technical condition of the enterprise, strategic investors shall be offered various degrees of participation in the statutory capital according to the individual privatization projects.

In the individual privatization projects, developed by the Department of Privatization and State Property Administration, as well as in the draft licenses for operations in the electricity sector, there shall be indicated the strategic investor's experience in this area, his liabilities in terms of the size of the investment during future years, diversification of energy resources, ecology, etc. The requirements shall be equal for all tender participants, bidding for an enterprise share purchase.

The Department of Privatization and State Property Administration shall ensure the procedure of share ownership conveyance under the existing procedure.

The reasoning for privatization in given proportions shall be:
a)increase of interest among foreign investors, by offering them the rights of financial and managerial control over the enterprise;
b)offering local investors the possibility to purchase shares of the enterprise by means of public offer;
c)increase of confidence in the enterprise, and as a result - increase of its shares value due to the attraction of foreign investment;
d)    assignment of risk to strategic investors.
Shares of electric power sector enterprises, offered for sale at least once before, but not sold out, can be sold upon decision of the tender committee through direct negotiations.

[last paragraph modified by Law No. 1046-XV as of 8.05.2002]

III. Main Types of Privatization Activities
Main types of privatization activities shall be conducted by the Government or by its authorized institutions using the international technical assistance.

1.Preparation of Enterprises for Privatization

As to increase viability of the electricity sector and improve the efficiency of privatization, the joint-stock companies shall be restructured in terms of management, human resources, marketing, payment collection systems, and information systems. Restructuring shall be conducted by the Department of Energy and Fuel and Energy Resources.

As to receive maximum revenue from privatization the Government shall restructure the debts of the enterprises, whose shares will be offered for privatization.

Such restructuring shall be conducted prior to assets evaluation of enterprises.

2.Regulatory Framework

The electricity sector enterprises shall not be of interest to strategic investors until the regulatory framework is established, including tariff policy principles.

The National Agency for Energy Regulation is the regulating body in the electricity sector. The electricity sector enterprises shall operate on the basis of licenses, issued by the Agency, and stipulating main conditions of their activity.

Tariff policy is pursued by the National Agency for Energy Regulation and is based upon the methods of calculating the costs of electric and thermal energy and calculating the tariffs for these types of energy, approved by the Agency for a three-year period.

The fixed tariff level shall allow the electricity sector enterprises cover their production costs, ensure sufficient profit rate, and to make provisions for debt payments. The tariff structure for various consumers categories shall consider the evaluation of marginal costs for a long-term period (proportionality principle).

Regulatory documents, constituting the regulating basis, including the tariff policy principles, shall come into force prior to completion of enterprises' assets evaluation.

3.Tender Committee

The tender committee shall be created by the Government, in accordance with the existing procedures, not later than August 15, 1998. The tender committee shall comprise:

•1 Representative of the Parliament;
•2 Representative of the Government;
•1 Representative of the Ministry of Finance;
•1 Representative of the Ministry of Economy;
•2 Representatives of the Department of Privatization;
•1 Representative of the Department of Energy.

[item 3 modified by Law No. 379-XV as of 19.07.2001]

4.Enterprise Assets Evaluation

The evaluation of assets of joint-stock companies subject to privatization shall be conducted by the Department of Privatization and State Property Administration. The assets market value shall be determined by applying the method of discounted cash-flow and also by at least two of the following methods: ratios, cash multiplier, comparative transactions, net value of the assets, replacement costs, salvage value, book value. The evaluation methods for each enterprise shall be specified in the individual privatization projects.

5.Preparation of Tender Documents

The Department of Privatization and State Property Administration shall draft the tender documents and information memorandum within one month starting from the date of approval of individual privatization projects.

The information memorandum shall incorporate the information regarding the enterprise development strategy, including capital investment, necessary for its re-equipment, modernization and expansion, on main objectives of the enterprise, existing contracts, on the spheres requiring improvement and other information.

Draft licenses for operation in the energy industry shall be also included into the tender documents package.

6.Marketing Activity

Concurrently with the documents preparation the Department of Privatization and State Property Administration shall carry out marketing activities to determine the potential investors and establish contacts with them. At the same time, the Department shall provide investors with the information on the privatization processes, organizational structure, regulatory framework and other data, relevant to the functioning of the electricity sector and respective joint-stock companies.

Along with the marketing activity the draft contracts for sale/purchase of the shares shall be prepared.

Marketing activities shall start from the date of this Concept approval and will last until tender announcement.


The open international invitation shall be distributed to potential bidders, followed by the selection of investors on the basis of some specific criteria. The selection criteria shall be clearly stipulated in the invitation and shall include financial capabilities and work experience in this domain.

8.Clarifications (Information)

Strategic investors shall have the right to visit enterprises, whose shares are offered for sale, to verify the existing data and information. Rules of inspection shall be approved by the Government or by the body, authorized by the Government.

9.    Bids Evaluation and Negotiations

The term for submission of bids is three months from the date the tender is announced.
Bids compliance with the tender terms and conditions shall be checked by the tender committee.
Selection of bids shall be based upon the price for the package of shares offered for sale.
Evaluation of bids and negotiations shall conducted within two months after the bids submission deadline.

Payment for shares shall be done pursuant to the procedures set forth by Article 17, item (5) of the Law on 1997-1998 Privatization Program.

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