Powering Uzbekistan’s new energy strategy

Uzbekistan Special Report Interview with Fayzulla Shaismatov, deputy chairman, Thermal Power Plant

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GlobalMarkets: What has the government’s new energy strategy meant for Thermal Power Plants?

Fayzulla Shaismatov: The biggest change in our company has been the attitude to efficiency. Uzbekenergo was a large and cumbersome vertically integrated company.

It was very difficult to identify bottlenecks because financing was centralised. The inefficient parts of the business were covered by the more efficient, mainly through income generated from the sale and export of electricity.

After unbundling, we know what our weak spots are and where we need to focus our efforts to minimise the costs of production and to improve the management efficiency of our power plants.

We are working to implement modern management principles in all our entities, and we are very focused on corporate governance and transparency. We are introducing supervisory boards with independent members in our power plants.

We want to do this and we have to do it, because we currently rely heavily on international financial institutions (IFIs) for financing, and their requirements on transparency and efficiency are very stringent. They also set high standards for us in terms of environmental impact.

GM: What has changed for the power plants?

FS: Every plant now has a power purchase agreement with National Electric Grid. The cashflow goes directly to the plant and the management can decide how to use the money.

This was done to create a sense of asset ownership and economic incentives. Previously nobody cared about efficiency because they received funding from the parent company on demand.

Now each power plant has started to make a more accurate assessment of their costs, look for bottlenecks and weak spots, and work on improving them.

There is still long way to go but we have already achieved a shift in attitudes. The managers of the power plants now know their income is dependent on how efficiently they work. They are the masters of their own businesses.

GM: How much investment do you need over the next 10 years?

FS: According to forecasts for demand growth, we need to at least double our existing capacity, which will require a considerable amount of investment.

Unfortunately around 80% our generating units are outdated and obsolete, with an average age of more than 30 years, so we also have to decommission most of the existing units.

This means the pace of renovation has to be very rapid, which is why the government wants to open the door to private investment. Attraction of private investment is set to be the primary goal because the government has realised that it is too heavy a burden for them to bear alone.

GM: What are the main challenges you face today?

FS: Our biggest challenge is to increase efficiency. Once private investors start building independent power producers (IPPs) it will become an existential matter for us, because we will have to compete in the open market against firms with the most advanced technology and management systems.

It will take two to three years for new investors to construct and commission their power plants, so that’s how long we have to structure our operation to become competitive enough to survive.

Another major challenge is changing the attitude of our staff. After many years working under the old management system it’s difficult to break the inertia in their minds and switch them to a “business oriented” mode.

Fortunately, we have very strong support from IFIs including the World Bank, European Bank for Reconstruction and Development (EBRD) and Asian Development Bank (ADB). They are helping a lot by running seminars and providing access to consultants in this sector.

We are trying to ensure that we meet the highest standards in corporate governance, and in parallel to educate our employees. We are running courses on topics including corporate governance and project finance in order to build capacity in our workforce.

We also want to bring more international managers into the company. With the help of the IFIs, we are currently looking outside Uzbekistan for a new deputy chairman, who will be responsible for adopting international standards of expertise, governance and management.

GM: How important is knowledge transfer?

FS: It is the number one priority for us at the moment. Most of our fleet of generation units are obsolete, and new units need experienced people who are educated to work on these units efficiently. It’s not enough to buy new equipment — you need people who can operate it.

We are also aware that green technologies are very much in focus at the moment and that we need to keep up with this trend. We are paying a lot of attention to energy-saving technologies.

GM: Would you consider raising funds through the capital markets?

FS: To develop further and expand our company we will need access to capital markets, but first we need to complete the process of becoming self-sustainable.

Cost-covering tariffs were only introduced in August. It will take a couple of years at least to get on a solid footing after that, because to access the capital markets you have to be strong enough to persuade your counterparts to lend you money.

At the moment we rely heavily on state support, but the government has made it clear that in future this will be reduced and we will have to take care of ourselves.

So first we need to achieve self-sufficiency, then in two or three years we will be ready to get an international credit rating and enter the capital markets.