Where is the proof that South Stream is beneficial to Bulgaria?

Written by on August 20, 2014 in Perspectives - Comments Off
Photo: gazprom.ru

The South Stream gas pipeline is suffering from the “Belene syndrome” – despite uncertainty about the project’s progress, the “expenditure” is clearly on the rise. We are constantly being told that the project is beneficial for Bulgaria, but there is no proof – and if there is, it is locked behind the impenetrable “trade secret” clauses. We should instead believe the claims religiously.

This ode to joy has been recently joined by caretaker Economy Minister Vassil Shtonov, who went as far as to say that “we all support” South Stream. I am starting to believe that this is a quality required of anyone who wishes to become a minister, and it is not the first time that I have had to make allowances for people that are making their first forays into the complexities of the energy sector.

A sector that is in unprecedented crisis that is quickly approaching its end-game, which is why there is very little room for ambiguity and tolerance. For years now, the Bulgarian energy sector has been entrusted to people that are just starting to learn the ropes – by the time they do, the problems will have only become worse. And then the cycle is repeated, with new people starting as blank slates. This current caretaker government, given its life expectancy, can do nothing other than put the brakes on the energy sector’s inexorable slide into the abyss.

I believe that we are all interested in Bulgaria benefiting from each investment project, which is why we must collectively agree on the criteria used to measure the benefits from major investment projects – and then seek proof of such benefits by analysing the project documents. And if we do not find such proof or it is too conditional and uncertain, then there is no hurry to make statements of unconditional support in front of cameras.

Direct benefits
There are numerous indicators of economic benefits, the most obvious ones being new jobs, Budget revenue, the price of gas, contracts for Bulgarian companies, as well as the transfer of technology and business practices. I am intentionally glossing over return-on-investment, so as to avoid the inevitable disappointment, nor shall I focus much on the repercussions of transferring Russian business practices – if we were to apply the Russian know-how from public tenders for South Stream to the rest of the Bulgarian economy, we would have to end our membership of the European Union.

In terms of new jobs, various figures have been circulated, but let us accept the most optimistic one that 4000 people would be employed on the project. This “benefit” must be weighed against investment, namely the 625 million euro loan from Gazprom and, additionally, double that amount in guaranteed debt. I shall disregard the fact that most of these jobs will be temporary and that the benefit cannot be measured proportionally or in terms of regional employment – lest we forget, this is a key argument by South Stream’s supporters that the project will help the economy of north-western Bulgaria.

This is a quasi-religious innuendo not backed by any calculations, because the local labour pool cannot provide the kind of qualifications and experience required by the project. This is politicians speaking, not experts – there is no independent detailed analysis of the project’s impact on the Budget, local businesses and the region’s economy. Such talk is sheer propaganda from interested parties, which is why one day the figure is 2000 jobs and the next, tens of thousands.

The bottom line is that the employment of 4500 people would cost Bulgaria close to two billion euro in new equity and debt, or 450 000 euro for each new job, which is nearly 50 times the costs of creating and maintaining a new job in Bulgaria. If we look at the salary component, which would be the direct benefit to the project’s employees, the figure hovers at about seven to eight per cent of total investment, no matter how much self-induced optimism we indulge in.

The rest of the project cost will be distributed along the way through intermediaries, corruption schemes, suppliers and contractors. At the end of the day, the ordinary consumer and taxpayer – in whose name the project is being carried out and whose support is being asked for – will get only crumbs. In Bulgarian business practice, the amount of kickbacks that goes to various intermediaries is quoted at about 20-30 per cent.

You can draw your own conclusions about how much will go to local project companies and their “employees” as a share of total costs earmarked for intermediaries. So then, who are the parties most interested in such projects and whose interests are being touted as “national”?

These benefits have a life expectancy no longer than the time it will take to build South Stream, namely three years, while the costs will have to be paid off over at least two decades. The profits are privatised and the costs are nationalised through the relatively higher prices paid by gas consumers. Whatever the transit price, it is key to the project revenues and will have a decisive influence on the price paid by end-users, including those in Bulgaria.

It would be naive to believe that all Bulgarian experts and workers employed on South Stream will get tens of thousands of leva in salary, the same as the group of highly-qualified employees and top managers.

The Budget revenue is also disproportionately low, given the size of the investment and debt announced. It is enough to point out that more than 70 per cent of all project payments will be made to companies and entities outside Bulgaria – some of them in offshore areas – that will supply goods and services, including project management.

Cost-benefit analysis
The key question of the South Stream cost-benefit analysis should be whether this project is of top priority for Bulgaria and the optimal tool to ensure stable gas supply, with the most competitive price and maximum benefit for the Bulgarian economy.

In truth, the only thing that South Stream accomplishes is to ensure the future flow of Russian natural gas, paid for by Bulgaria and ensuring continued energy dependence on Russian gas supplies. South Stream does not solve the strategic issue of diversification and alternative sources of gas, which is the basis of the EU energy strategy and energy security.

The Bulgarian state has increasingly limited – because of the crisis in its energy sector – management and financial resources, which means that every effort made to build South Stream will inevitably lead to fewer opportunities in other areas, such as finding alternative sources of gas, local gas extraction and transit services.

There is a direct causal relationship between the impetus of several successive Bulgarian governments to push South Stream forward, agreeing ever-higher and fanciful final project costs, and the lack of action on inter-connector pipelines, the expansion of the Chiren gas storage facility, seeking alternative sources of gas or developing Bulgaria’s own oil and gas finds.

Perhaps we will receive cheaper gas? Let us not speculate and instead focus on the facts and the well-known tendency for history to repeat itself. In 2006, our strategic – according to some – partner forced the Bulgarian government to renegotiate the gas price formulas, not without the help of the same people who support South Stream today. As a result, Bulgaria paid in excess of $1 billion more for Russia gas for the duration of that contract.

Even today, the price at which Bulgaria buys gas from Russia is higher than the price paid by Greece – which is further downstream and receives its gas after it transits through Bulgaria – or central and western European countries. This means that the existing trend, which we can use to forecast future Gazprom prices, is for our Russian partners to treat Bulgaria as a country where they can impose high prices.

In exchange for the goodwill on the South Stream project, Bulgaria got direct political interference and the Plamen Oresharski administration, an arbitration claim of more than one billion euro from Atomstroyexport and high gas prices.

Even worse, all the efforts of the top managers of the Bulgarian Energy Holding and Bulgargaz are focused on South Stream – they have a personal interest in its implementation, and also serve as intermediaries for the political and business puppet-masters behind the scenes. They have no personal interest in seeking lower gas prices and putting pressure on Gazprom, so there is no reason to expect that they will work towards severing Bulgaria from the source of their personal gains.

This is one of the main avenues of the grand corruption scheme with far-reaching consequences and a damaging impact on public and corporate governance that is difficult to overestimate. Those very same companies, politicians and businessmen are transposing Russian business practices and standards that are pushing Bulgaria further away from the EU, perpetuating the vicious circle of poverty we all live in.

Bulgarians constantly seek the reason why, after all the sacrifices and efforts made over the past 25 years, the country is still at the bottom of Europe. The answer is simple – the redistribution model, which replicates itself through new appointments and new projects, restricts competition and kills the individual motivation of all Bulgarians, which dooms the country to remain dead last in the EU.

Independent studies
So I ask minister Shtonov, who supports South Stream, how is it that against a background of the crisis in the energy sector, the acute lack of liquidity and the need to reassess Bulgaria’s investment commitments – how did he reach the conclusion that South Stream is the project that will cure the ills of Bulgaria’s energy sector and stabilise the situation? What documents have led him to believe that the South Stream revenues are certain and its expenses reasonable?

In grand old Soviet tradition, the economic and financial feasibility study was carried out by Gazprom subsidiaries – companies adept in drafting engineering and technical paperwork and expenditure analyses (usually with a hefty premium for intermediaries), but have no experience or qualification (under international standards for corporate finance) to carry out financial and economic assessments of ventures that will seek project financing or Western banking services.

Yuzhniigiprogaz from Ukraine and Gaztek, owned by Bulgaria’s Overgas, cannot serve as benchmarks for passing judgment on the governmental level – the two companies are technical consultants rather than financial, and have no history of carrying out studies that have persuaded Western banks and governments to finance such projects. And that is before one considers the risk analysis and financial structuring of the project.

The Bulgarian government, and every Bulgarian economy and energy minister, should first publicly explain why we are in favour of a project before speaking how strongly we support it. And that can happen only on the basis of independent international analysis of legal, financial and project management risks of South Stream, which are currently non-existent but badly needed.

Trade secrets are only a fig leaf to cover up critical management and project deficits. One of the project’s proponents tried arguing, in a discussion with me, that he saw the studies and they were persuasive enough – but after several questions, chose to cite the confidentiality clauses. The trade secret argument is an excuse to cover the impotence and self-interest in governance.

The thesis that Bulgaria supports South Stream as long as it is in line with European criteria is insincere. None of its proponents has objected to the infringement of those very same European criteria for mandatory openness and transparency in tender proceedings, for observing EU internal market rules or the principles of project banking.

The same people find it acceptable to begin a project with no information or transparency, nor do they find it necessary to repeal the construction permit issued by former regional development minister Desislava Terzieva, granted while Bulgaria is subject to EU infringement proceedings and the prime minister was assuring everyone that he ordered a halt to the project.

Everything said about South Stream applies to the plans to build a new nuclear reactor at Kozloduy – there too, it is unacceptable to make investment decisions worth billions, based on studies carried out by the contractors themselves.

This is why one of the first and crucial tasks of the proposed energy sector stability board is to carry out independent studies of all major investment projects (in those instances where there are none), including an assessment of the impact on Bulgaria’s energy sector as a whole. We cannot fix the energy sector if, at the same time, we are diverting huge amounts of money into political projects that have no sound business logic. The national interest is not a question of quasi-religious belief, but clear criteria, balanced procedures and precise calculations.

(Photo: gazprom.ru)

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About the Author

Ilian Vassilev was Bulgaria's ambassador to Russia in 2000/06. He is also a former executive director of Bulgaria's foreign investment agency and the former chairman of Deloitte Bulgaria. His personal blog on economic matters can be found at idvassilev.blogspot.com (in Bulgarian).