Lessons For Eastern Europe, Russia And FSU Republics


Lessons For Eastern Europe, Russia And FSU Republics Introduction 1. During the last few years, many developing countries have initiated a reform process of deregulating and opening up their petroleum sector to private investments. The objective of such a reform was to attract capital investments, introduce a competitive environment and reduce government role in production activities so as to benefit the economy and energy users particularly. 2. In most cases, national oil companies in these countries dominated petroleum activities and markets and handled a wide array of tasks that, in more developed countries, are managed by several agencies. For example national oil companies may enforce safety, technical and environmental regulations, mobilize taxes on behalf of the state and manage strategic storage for security reasons. 

Once the national oil companies are privatized and competition introduced, as is the case in many countries of Eastern Europe, Russia and the FSU Republics, the various important functions of the State previously managed by the national oil companies disappear and a vacuum is created. This situation is clearly not conducive to the healthy development of the sector. In addition wherever the petroleum market is deregulated and competition is established there would also be a need of new enforcement agencies such as an antitrust/competition agency. 3. The proposed study will focus on the petroleum downstream market (PDM) refomdprivatization experiences in various countries and the tasks left to the governments to manage afterwards. The study would extract the lessons learned and recommend preferred options and guidelines. Audience 4. The undertaking of the study is strongly supported by the Oil & Gas Division, the regional management and staff involved in Eastern Europe, Russia and the FSU Republics. This study would greatly benefit countries in Eastern Europe, Russia and the FSU Republics. Yet, the significance of the study goes beyond those regions, as many other countries are in the process of restructuring and orlprivatizing their downstream markets. Bank staff would also benefit from the study as they will have a solid and concrete basis when providing advice to member countries. Lastly, the petroleum industry will certainly show an interest in the strategic ramifications of the study. Study Objectives 5. The objectives of the study would be to educate government officials and Bank staff through the relevant experiences of various countries, on: Lessons for Eastern Europe, Russia and FSU Republics Introduction 6. During the last few years, many developing countries have initiated a reform the articulation of fiscal policies in the PDM and their enforcement; strategic storage policy and its implementation; and private sector participation. 7. The study will particularly focus on how different governments have organized themselves to manage the above aspects of the PDM both during the transition period and the long term and examine the role of the private sector in two respects: (one) the process of restructuring and privatization of government companies taking into account the concerns above as well as other political and economic considerations (such as refinery protection, personnel reductions, etc.); and (two) the incentives provided to private sector entry. The study will assess how the governments are organized to formulate policies in each area above, the tools they use to implement and enforce them and how these services are paid for. The study will finally examine with the help of policy makers their long term vision for the PDM such as timing and degree of open competition to be allowed, restructuring, private sector participation and identification of constraints. 8. The study would address issues of border prices, their definition and implementation in the model countries, differential taxation, price distortions and the need to separate upstream from downstream fiscal takes. The merits and efficiency of price controls for social objectives would be examined. Price controls procedures and successes will be assessed. Suggested Model Countries 9. The suggested model countries with relevant range of experiences in the above and covering small and large markets are as follows: Argentina, Austria, Bolivia, Canada, Chile, East Germany, European Union, Hungary, Japan, Morocco, Norway, Pakistan, Peru, Poland, Portugal, Spain, Turkey and the USA. The choice of these countries is explained in Annex 1. Work Process 10. There is some accumulated experience in the Bank in the different areas of the study and several studies and project related work have been carried on the PDM sector. There are also some non-Bank related studies that are publicly available (IEA, European Community, Donor Agencies, etc.). It is recommended that the first phase of the effort should be to do an inventory of useful reports and information that exist that is relevant in light of the identified issues and pinpoint areas that need further data gathering. The initial effort will also spell out in details how the main project should be undertaken. 11. ESMAP staff includes staff from several regions would manage the consultants work. A peer review team will be assigned to this task to review progress periodically. About three outside experts in different areas will be required to cover pricing and fiscal policies, competition and other regulations and private sector participation. Output 12. For the selected model countries, the final report will spell out the experiences and the vision of the governments in the five areas outlined under para. 3 (Study Objectives) as well as an analysis of the pros and cons of the approach pursued in each model country, in terms of achieving efficiency and attracting investments. The report will recommend the preferred practice the Bank may recommend for certain country situations and the implications for Bank policy if, in particular, no privatization is being contemplated. Budget 13. As shown in Annex 2, the study requires US$359,000 funding and will take three months to complete. Annex 1 Model Countries 1. Argentina As an exporting country, Argentina boasts of a large group of private companies involved in all phases of the petroleum market with three major refineries owned by YPF, Shell and Exxon. Prices are deregulated and importlexports are freed. Argentina is an interesting case since the Bank has experience in the sector before and after the liberalization and privatization of YPF. Argentina is a Federal Republic with Provinces given a large autonomy in many matters. 2. Austria As an oil importing country, Austria has a State controlled company operating the refining sector while the distribution is managed by private operators. Austria is a sample for landlocked countries. 3. Canada Canada is an interesting case as it had both a large State enterprise and private companies as operators in a large country. The sector is quite deregulated and subject to government regulations on safety and environment. Unlike the USA, the difference between the Federal and provincial regulations is large. 4. Bolivia While Bolivia is a country self sufficient in oil, the petroleum sector plays a crucial role in the economy as the country is landlocked. The country is going through an interesting process of capitalization requiring reforms and privatization of the PDM sector and the set up of new government institutions to regulate prices, protect the consumers and ensure compliance with safety and environmental regulations. 5. Chile As a small importing country, Chile still has a large national oil company ENAP involved in refining and distribution, an anomaly in a country that boasts of the most liberalized economy in Latin America. But it has also an important involvement of majors and other private companies in imports and distribution of products. It is particular because it also has a stabilization fund. Otherwise prices appear to be deregulated. Government institutions of interest are Energy and Anti-Trust Commissions which play a active role. 6. East Germany An importing country, which unified with West Germany and in the process all the state organization functions and state enterprises in the sector had to be disbanded or reformed and privatized. The experience of Elf s purchase of refining and retail distribution is an interesting example for others. 7. European Union Countries in Europe has deregulated but it is interesting because it has the highest fiscal take which has created certain distortions in the PDM. Some countries have quasi state companies operating in free enterprise system. Model eastern European countries need to adapt to this type of framework if they want to join the European Community. 8. Hungary As an importing country in eastern Europe, Hungary has gone through reforms and privatization of the PDM sector. Hungary is case of a country in transition. 9. Japan As a large importing country, Japan has special regulations through import tariff and non tariff controls. Japan has a mix of private and State enterprises and protects its refining sector. 10. Morocco A small petroleum importing country with two large refineries passed by a phase where the State controlled the market but it is now deregulating and privatizing the industry. Bank has accumulated large experience in this area and be able to provide information

. 11. Norway As a major exporting country where the sector is dominated by the State but where private investors are allowed to thrive, Norway is a good case for showing the experience with state control but where competition and free imports and exports are allowed. A role model for oil and gas rich countries? 13. Pakistan A large importer of products that has State enterprises and a thriving private sector and a long history of state regulations. The country is in the process of reforming and privatizing the sector. A pilot scheme is being implemented for joint venture between state and private companies under Bank lending operations. 14. Peru As a marginal oil importer, Peru has liberalized prices and streamlined taxation. It also has privatized retail marketing and is planning to privatize refining and wholesale distribution. 15. Poland As on the earliest reformers in Eastern Europe, Poland is an interesting case. The reform process has to accommodate different interests including the coal sector. 16. Portugal A small importing country until recently the petroleum sector was state controlled and regulated. Portugal has privatized the PDM through sales of shares to foreign companies. 17. Spain As an importing country, Spain used to have a completely state controlled and regulated market. A few years back, it has liberalized, privatized and introduced competition to meet the requirements of integrating the European Community. 18. Turkey As a large importing country which previously regulated all aspects of the petroleum market sector, Turkey represents a case study of reforms and privatization and where the Bank has accumulated a large experience. 19. USA While the USA is an open deregulated market now, it has not been so in the past. USA has uniform taxation. Many regulations were tried and there are lessons to be learned. A good example that a deregulated market still takes a lot of government controls, more than meets the eyes.

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