Energy sectors set own agenda

Date: 21/11/1996

By Mark Turner

WHILE politicians remain deeply divided over when and how far the European Union should enlarge to the east, the energy industry at least is not waiting for them to make up their minds.

Although would-be EU member states are not expected to conform to internal market rules until they actually join, the energy sectors of many central and eastern European countries are already well on the road to achieving them.

That is due in no small part to the Energy Charter Treaty (ECT), whose 50 signatories are making huge inroads into protected markets.

Even though its participants include the US, Canada and Japan, the treaty's clear priority is to guarantee long-term energy security in Europe.

In simple terms, Russia has fuel but is poor, the EU wants it and is rich, and central Europe - caught in the middle - is desperate not to get embroiled in renewed hostilities.

As the West grows increasingly reliant on external sources of fuel and faces stiffening competition from Asian markets, the need for good relations with major external suppliers is becoming all the more acute.

It was because of this that the ECT - whose administrators see themselves in some ways as trail-blazers for EU enlargement eastwards - was born in 1991.

The original treaty guarantees the investments of foreigners once installed in a member country, with strong rules on fuel transit - traditionally a cause of violent disputes and even wars throughout the world.

Over the coming months, its signatories intend to forge new rules ensuring, as far as possible, equal entry conditions for foreign and domestic investors.

In preparation for these negotiations, the ECT secretariat, based in Brussels since early this year, is in the process of finalising detailed situation reports on each of its members.

The results so far paint an encouraging picture. “In terms of establishing investment regimes which treat foreign investors on the same terms as national investors, there have been substantial advances,” says Leif Ervik, an ECT specialist in eastern Europe.

But the question is: who gains most from formalising these improvements?

While the West finds new investment opportunities and Russia secures its enormous fuel trade and capital inflow, central Europe might in some ways appear to be a comparative loser.

But given that the CEECs intend to join the EU over the next ten years anyhow, to advance energy liberalisation by a few years seems a small price to pay for ready cash and new business opportunities.

Following the collapse of COMECON - the Warsaw Pact's economic system - CEEC energy enterprises lost a huge proportion of their business.

But they still have contacts, speak Russian and retain a wide 'brand' awareness. The chance to go back and ply their wares is proving hard to resist, even given the sobering prospect of Russian companies also returning to their old haunts.

However, the revitalisation of lost markets is only part of the equation. Next month, the ECT will take the first step towards a new electricity protocol to cope with growing interconnections between European grids.

And, as liberalisation in 'pure' energy products becomes a reality, the ECT countries are contemplating supplementary agreements on energy-related equipment. A draft list currently under consideration encompasses a surprisingly wide range of products.

Hopes are that, with energy as a base, free trade will naturally spread throughout associated sectors.

“This process is complementary to enlargement,” said a Brussels official. “A number of current EU aims, such as oil price liberalisation in Poland, are helped considerably as the market establishes itself anyhow through reforms.”

None of this is escaping the major financial institutions. During the past six years, more than 20&percent; of the European Investment Bank's eastern investment has gone to the energy sector, with about 900 million ecu being spent on financing modernisation and restructuring.

But the continuing abundance of monopolies continues to impose severe limits on investment opportunities.

“As to creating a liberal investment regime full stop, there are still a number of problems remaining,” says Ervik.

In coming months, the ECT hopes to conduct a large-scale transparency exercise, revealing where monopolies still exist but without imposing any legal obligations on countries to dismantle them.

Anything more would be unlikely to receive much support, given continued resistance to change in many EU member states.

Neither should that resistance be seen as all bad, suggest labour unions. Market changes are far from cost-free and some are asking if all this might not be going too fast. There is serious concern as huge job losses or salary cuts loom but, say critics, this is often overlooked by neo-liberal enthusiasts.

In fact, a number of CEECs outlaw or severely restrict worker dissent, according to the International Federation of Chemical, Energy, Mine and General Workers' Unions (ICEM). ICEM fears the only real winners are the multinationals.

“The European Energy Charter Treaty is another trump card played into the hands of global energy corporations,” said a recent ICEM study, adding: “No social aspects have been dealt with in the charter ... ICEM reiterates its call for a social protocol.”

It is unlikely to succeed though - the tide of market forces is simply proving too strong to resist.