Kazakhstan is swimming in power and fuel. But after the collapse of the Former Soviet Union, by mid 1990s much of the population was without power. A payment crisis had caused two crucial power stations (in Kokchetav and Temirtow) to shut down completely during the winters of 1996 and 1997 ? a potentially life-threatening scenario.

But the disaster spurred the government into action. Four years later and Kazakhstan has one of the most market-orientated utilities sectors in the Former Soviet Union. Reform of the sector is far from over, but all the basic elements are now in place.

The government solved the problem in two ways. At the institutional level, the government broke up the state-owned monopoly Kazakhstanenergo into a federally owned grid operator ? the Kazakhstan Electricity Grid Operating Company (KEGOC) ? in July 1997 and passed a raft of legislation to underpin the workings of power wholesale market. Amongst the most important laws was the redefinition of power as a commodity rather than service ? non-payment became a criminal offence. At the same time tariffs have been hiked and are amongst the highest in the CIS (Commonwealth of Independent States), although still less than the international norms.

Second, the government sold off privatised power stations and associated transmission and distribution assets to strategic investors for little more than promises to invest. In all Kazakhstan can boast 54 thermal, five hydro and one nuclear power plant that generate 18,000MW of power; since the process started in 1997 85% of Kazakhstan's power is now generated by privately-owned utilities.

Access Energo

One of the first in was Access Industries. It arrived in 1997 taking over the Bogatyr and, later, Severnie coal mines in the north of the republic (which together account for a quarter of the country's coal output), the seed crystal of Kazakhstan's heavy industry.

Despite the huge amounts of coal in the region, the power sector all but collapsed in the '90s because utilities did not have enough working capital to pay for fuel supplies. For Access, the problem was how to persuade customers to pay their bills.

Access Industries took over the Petropavlovsk power station in 1998, pledging $20 million in investments, and later bought the regional distribution and district heating companies in north-western Kazakhstan in 1999 to form Access Energo (AE).

AE, a management company that coordinates the activities of the group, has an installed capacity of 380MW and produces up to 318MWh as well as an installed heat capacity of 662.8 Gcal/hr.

The $20 million was spent within the first nine months and working capital injected into the company. The management followed up by instituting tough financial controls on both the operations side and began the long slog of educating their customers that their power bills had to be paid, and paid on time.

Investment

Ensuring the supply of fuel instantly put the Petropavlovsk power station back on its feet, but the next stage was to do basic repairs. The facilities are typical of many of the power stations in the Former Soviet Union

The main power station went into operation in November 1961 and has had little in the way of investment since then. More than half of Kazakhstan's steam turbines and a third of steam boilers have been in use for more than 20 years or more. Transmission is also plagued by losses of 15%. Decaying equipment had been causing a gradual decline in total power output for most of the last decade.

Rather than replacing old equipment, Access focused on cutting down the waste. Given the economic realities of a transition country, such as very low labour costs, the company found it was more cost effective to simply fix an old machine rather than buy everything new. ?When considering the cost of buying new equipment against repairing the existing ? albeit not very efficient ? machines, we found that it is almost always more cost effective to repair,? says Val Vaninov, the Vice President of Access Industries. ?It is a question of mixing advantages of western technology with the Kazak realities.?

Between 1999 and 2002, actual power production increased by 43MWh, or 3%, to 1510MWh, but over this same period the loses were reduced by 129MWh, or 60%, to 211MWh.

Buying new equipment is prohibitively expensive while the energos are still getting back on their feet. As Kazakhstan does not produce heavy equipment, what is imported mostly comes from Russia. In general the Russian turbines are about as good as any made in Germany or America, but cost a third of the price.

The real problems lie with the control systems. As most of Kazakhstan's energos were built up in the 60s controls are still manual and have changed little over the last few decades. When AE first arrived at the Petropavlovsk power station there were only a handful of computers and their biggest challenge was to design and install a new computer-driven control system. ?Computers are expensive, but an even bigger problem has been to find people that can work them,? says Val.

Financial management

Once the basic technical problems were in hand AE began imposing financial discipline. Widespread mismanagement and graft were the root causes for the collapse of the system in the first place The first management team Access sent to AE ?didn't handle the finances well,? says Vaninov euphemistically, and had to be replaced. A second team was dispatched in 1999, tasked with imposing financial discipline says Vaninov, ?The old management are skilled in the technical problems, but they struggle to explain these problems in financial terms. As a result they tend to shoot from the hip.?

At the same time the management turned to the thorny problem of bill collection. Vaninov refers to it as the sandwich dilemma: ?It is biggest problem we have had to face ? the government is on one side, the utilities on the other and everyone else in between.?

As so much of Kazakhstan's industry is still in state hands, building a strong relationship with the government ? both at local and federal level ? is an essential first step to making utilities profitable. ?Authorities that don't support utilities are taking great risks. Energy is absolutely the lifeblood of the population and industry in the CIS,? says Vaninov. ?But many of the politicians have not realised this yet, especially in Russia. They need to understand that unlike Soviet times, energy is not free and act when people don't pay for it.?

Heavy industry throughout the CIS is plagued by barter. The lack of money in barter transactions making it easy to mis-price or divert goods and money into their own pockets. When the new team took over, AE was collecting a mere 15% of payments in cash. ?The first thing we did was to stop the offsets. They are like a cancer,? says Vaninov. ?There are three ways to steal from a business: at the point of sale, at the point of purchase and from the shop floor. Barter is the worst possible situation as you combine the point of sale with the point of purchase.?

While heat sales between 2000 and 2001 have grown a modest 0.5% and power sales a more robust 10.3%, within three years the new team had increased the proportion of cash collections to 92% of receivables. Between 1999 and 2001 cash collections rose from Tenge1680 million (current exchange rate is about Tenge150:$1) to Tenge4218 million or an impressive 150%

Energos have several different customer segments, each of which requires a separate approach to collections. Utility bills remain relatively low, but after 70 years of receiving free power, the hardest part has been to re-educate customers to the need to pay. AE's first step was to divide collections operation up by customer type rather than geographical area, as was previously the case.

Residential bill collecting

?In Soviet times power was like air: everyone had a universal right to it and it was very cheap. One of the most impressive achievements of the Kazak government has been to make power a commodity, like bread, that has to be paid for,? says Vaninov. ?This means that the legal status of electricity bills has changed, as if you steal electricity it is covered by the criminal, not civil, code.?

AE supplies power and heat to more than 270,000 residents in the city and another 500,000 in the region; residential power consumption accounts for which account for 10% of the energo's electricity consumption but 60% of its heat during the winter. The problem an energo faces is that it is socially and politically difficult to cut off retail consumers' heat during the winter, which can be an effective death sentence for some.

It is difficult to disconnect power but it is impossible to disconnect heat; the answer was to link the power and heat payments together into a universal bill. This way if customers didn't pay their heating bill during the winter, they would find themselves sitting in the dark within a month.

In Russia cutting residents off in the regions is complicated by the fact that the regional governor's is an elected office. In Kazakhstan the regional bosses are appointed by the president and thanks to the disasters of the 1996 and 1997 winters they are much more receptive to the need for utilities reform.

Tariffs are still regulated by the Ministry of Energy and although rising, there is running battle between the energos and the authorities over how fast this process should go. Vaninov says the key is lots of little hikes as if the increases are put off they become increasingly painful and so difficult to push through

Business bill collecting

The first move to improve payment discipline with businesses was to ban all barter, then AE tried to encourage them to prepay their bills. The complicating factor was the largest companies usually had close ties with the government, which would interfere if AE threatened to cut them off. AE quickly learned to differentiate between the old dinosaurs and the young small companies. ?If you are dealing with a large enterprises with strong ties to the government then you are effectively competing for what ever cash they have in their pocket,? says Vaninov. ?If they don't pay you then the company will spend it on something else. These companies needed to be convinced to start planning to pay their utility bills, otherwise they will be disconnected?

The local enterprises that are funded by the regional administration proved relatively easy to retrain as AE had developed good relations with the regional authorities, which were generally sympathetic to AE's needs. The federally funded companies were more difficult.

The first phase of creating a viable power sector is all but completed with most of the stations back in profit and able to meet demand. In the next stage the grid operator has to be put on a pure market basis and the grid itself rationalised and brought inside the republic, before the obsolete infrastructure can be replaced, which will take time.

?Access Industries invested into the Kazak power sector as a pilot project on a relatively small scale, because we wanted to learn how to do it right,? says Vaninov. ?We wanted to create a platform before we moved to much larger projects in the Russian power market.?