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Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 40623-01 (TA 4908) September 2009

Republic of Tajikistan: Strengthening Corporate Management of Barki Tojik

Prepared by Eric Harrison

Corporate Solutions

For The Ministry of Energy and Industry

Republic of Tajikistan

| ADB TA NO: 4908-TAJ|

FINANCED BY: ADB

BARKI TOJIK

FINAL REPORTSTRENGTHENING THE CORPORATE MANAGEMENT OF BARKI TOJIK

SEPTEMBER 2009

• SUBMITTED BY:

VERSION CONTROL

ADB TA 4908-TAJ - Final Report

PROJECT TITLE: STRENGTHENING THE CORPORATE MANAGEMENT OF BARKI TOJIK

Contract Number: Grant No: 4908-TAJ

Documents Title: Final Report

Prepared By: Eric Harrison

Reviewed by: Ebby Adhami

Version: 1.0

Date: September 2009


ABBREVIATIONS

ADB Asian Development Bank

BOD Board of Directors

BOT Build-Operate-Transfer

BT Barki Tojik

CEO Chief Executive Officer

C/M Chairman

DAMPDC Department of Antimonopoly Policy and Development of Competition

ECA European Community Area

EHV (VHV) Extra High Voltage (Above 11KV)

GBAO Gorno Badakhshan Autonomous Region

GDP Gross Domestic Product

GWh 1,000,000 KWh

HPP Hydro Power Plant

HV High Voltage (Above 1KV)

IF! International Financial Institutions

IFRS International Financial Reporting Standards

IND Independent Board Member

IT Information Technology

JSC Joint Stock Company

KPIs Key Performance Indicators

KV 1000 Volts

KWh 1 unit of electricity or 1000 watt hours

MOE&I Ministry of Energy and Industry

MOED&T Ministry of Economic Development and Trade

MOF Ministry of Finance

MOJ Ministry of Justice

MOLSP Ministry of Labour and Social Protection

OJSHC Open Joint Stock Holding Company

PM Prime Minister

PMTO Materials and Equipment Supply Company

SPC State committee on investments and management of state property

TA Technical Assistance

Talco Tajik Aluminium Company Formally TadAZ

VHV Very High Voltage (above 100kV)

WB World Bank


CONTENTS

1 EXECUTIVE SUMMARY 1

1.1 Introduction 1

1.2 Goals and Objectives 1

1.3 Scope of the Final Phase of the Project 2

1.4 Overview of Activities and Outputs 3

1.5 Conclusions 4

2 METHODOLOGY 6

3 THE WORKING GROUP 9

4 RESTRUCTURING PLAN 11

4.1 Background 11

4.2 Overview of the 2009 Restructuring Plan 11

4.3 Process of Revising the Restructuring Plan 12

4.4 The Way Forward 14

5 CORPORATE GOVERNANCE 16

5.1 Overview of Findings and Recommendations 16


6 CORPORATE STRUCTURE 20



7 BENCHMARKING AND KEY PERFORMANCE INDICATORS 22



8 METHODOLOGY FOR ELECTRICITY TARIFF SUBSIDIES 27



9 CONCLUSIONS 30


CONTENTS CONTINUED

Appendix 1 – Terms of Reference April 2009 Appendix 2 – The Restructuring Plan for Barki Tojik Appendix 3 – Corporate Governance of Barki Tojik Appendix 4 – Review of the Corporate Structure of Barki Tojik Appendix 5 – Benchmarking and Key Performance Indicators Appendix 6 – Methodology for Electricity Tariff Subsidies


EXECUTIVE SUMMARY 1

1 Executive Summary 1.1 Introduction

This report documents the process and the achievements of the final phase of the Technical Assistance (TA) delivered to the Ministry of Energy and Industry (MOE&I) under the ADB TA 4908-TAJ “The Strengthening of the Corporate Management of Barki Tojik” during the last period from March to September 2009. The Terms of Reference (ToR) for this final phase defined and agreed in April 20091 (Appendix 1).

The report presents the findings and recommendations under each of the five components of the final phase of the project: as defined in the ToR:

1. The Restructuring Plan for Barki Tojik;

2. Report on the Corporate Governance of Barki Tojik;

3. Review of the Corporate Structure of Barki Tojik;

4. Benchmarking and Key Performance Indicators for Barki Tojik;

5. Methodology for Tariff Subsidies.

Each of the above components is summarised in this report together with recommendations for the next steps and actions. Separate reports for each component of the project have been prepared and are attached as appendices to this report.

It is proposed that the consultant make a presentation of its findings and recommendations for each of the above areas to the Working Group, established under this project by the Government of Tajikistan and to the Asian Development Bank (ADB). The proposed date for this presentation was the middle of September 2009 and the objectives are to facilitate discussion, improve the understanding of the issues by the representatives of the Government, Barki Tojik (BT) and the ADB and allow comment to be received before completing the final report at the end of September 2009.

1.2 Goals and Objectives

The financial performance of Barki Tojik (BT) has been deteriorating in the recent years and the company is experiencing difficulties in meeting the growing electricity needs of the country.

In recent years the ADB has provided BT and the MOE&I with a number of TA projects to improve its financial management and reporting systems and draw up plans for restructuring the electricity sub-sector. However these efforts have failed to bring about sufficient improvements to substantially upgrade the management and performance of the sector. This is evidenced by the management letter issued by BDO Unicon in 20082 which highlights a number of serious weaknesses in BT. Amongst these are the following:

• The Company has no development strategy and a long-term development plan

• Organisational structure of the company is inconsistent with the scale of its operations

• The company has failed to implement recommendations issued by previous auditors

1 Terms of Reference TA4908-TAJ The Strengthening of the Corporate Management of Barki Tojik April 2009 2 BDO Unicon, Management Letter, OSHPC “Barki Tojik”, issued in June 2008 for the year ending 2007 accounting period.


EXECUTIVE SUMMARY - CONTINUED

• There are serious weaknesses in the company’s accounting procedures and systems

• There is a lack of control over the financial and business operations of the company

• Level of automation of accounting operations is inconsistent with the size of the company

• There is no Internal Audit Department to oversee the financial operation of the company

The combination of the above weaknesses and the present international financial crisis are acting as major deterrents to any further investment in the electricity sub-sector of Tajikistan either by International Financial Institutions (IFI) or the private sector.

The Government has in principle agreed to a restructuring process3 to be introduced in three phases. The implementation of the restructuring plan4 would improve the ability of the Government to attract international investment.

Since it was presumed that previous TA projects had not brought about the scale of changes required, the ADB considered that the appointment of an international Management Contractor would be a more effective way of restructuring BT. A new project5 was launched in September 2007 to help the MOE&I explore this option and if deemed suitable by the Government, to help define the terms of a Management Contract and appoint a contractor through an international competitive tender.

As part of the project, a Working Group (WG) was established by the Government which examined the experience of Management Contracts in the electricity sector in the region, particularly Georgia, and met with a number of potential management contractors. The WG concluded that although the restructuring of BT was urgent, it was unlikely to be achieved through a management contract. It instead recommended that the restructuring of BT be managed by the MOE&I and implemented by BT. The WG also recommended that the Terms of Reference (ToR) for the ADB project be revised to offer assistance to the MOE&I in restructuring BT. Subsequently, a letter6 was submitted by the Government to the ADB supporting the conclusion of the WG and requesting help with restructuring BT. A revised ToR was developed by all parties and approved by the ADB in March 20097. This was confirmed in a letter to Mr Gul Sherali8. A work plan9 was developed by Corporate Solutions that identified the actions, timescales, deliverables and resources necessary to deliver the revised ToR and provided additional information to the ADB to allow it to complete the approval of changes. The ToR is attached as Appendix 1.

1.3 Scope of the Final Phase of the Project

The main thrust of the final phase of the TA was to provide help to the Government of Tajikistan and BT with the restructuring of BT and to address weaknesses in the sector, including those documented in auditor’s report, within an acceptable timescale.

The overall goal was to help “update the restructuring plan and obtain the approval of the Government”. This will allow a presidential order to be issued to BT to commence the

3 A restructuring plan was submitted to the Government in April 2006 which although approved by all stakeholders is yet to be formally

endorsed by the Government 4 A timescale of 9 years has been proposed but is yet to be agreed 5 TA No. 4908-TAJ - Strengthening Corporate Management of Barki Tojik 6 Letter of Mr Gulomov (Deputy Prime Minister) to Mr. Hong Vang (Head of the Infrastructure Division of ADB) - 14/3-45, 12 September

2008 7 Terms of Reference TA4908-TAJ The Strengthening of the Corporate Management of Barki Tojik April 2009 8 Letter from ADB to Mr Gul Sherali Minister of Energy and Industry 30th March 2009 approving the revised ToR 9 Revised Project Work Plan May 2009 for ADB TA-4908-TAJ 1



implementation of the first phase of the restructuring which is largely concerned with improving BT’s financial and operational performance and its corporate governance, including transparent financial reporting. Following which an implementation plan and guidance materials will be prepared to facilitate the implementation of the first phase. Specifically, these will include:

• Conducting a review of the organisational structure of BT with a particular emphasis on its Financial, Human Resources, and Corporate Planning departments leading to the preparation of job descriptions for heads of departments, recommendations for policies and procedures10, and proposals for staffing levels for the three departments;

• Proposing a structure to the Government regarding the corporate governance of BT including the formation of a Board of Directors (BOD) for BT and the preparation of BOD's code of conduct, terms of reference, fiduciary duties, and related functions and rules;

• Benchmarking against similar utilities around the world, defining the most appropriate performance criteria that best suits the objectives of the Government and the local environment in Tajikistan to be compared to utilities worldwide; and,

• Preparing a methodology for the use of loan repayments from BT for Government tariff subsidies for poor and vulnerable electricity consumers11.

The above goals and objectives were to be achieved by the end of September 2009 which coincides with the completion data of the TA contract. Although this was an ambitious deadline, the ADB has declared that is not able to extend it under its present rules and standards.

1.4 Overview of Activities and Outputs

The final phase started with a number of preparatory activities including: i) meetings were held with the MOE&I to agree the scope of the work, the work plan and timetable, ii) a subsequent meeting took place between the ADB, the MOE&I and Corporate Solutions on the 6th May 2009, where an agreement was reached between all parties on the scope of the final phase and the work plan, iii) following this the MOE&I prepared a letter to the government to establish a working group for the project, iv) Government’s approval for the scope of the work and the establishment of the Working Group was given in the letter of the Deputy Prime Minister to the MOE&I dated 15th May 2009.

The five activities under the ToR, defined in the work plan for the project, were progressed in parallel up to the end of August 2009.

From the outset, the collection and analysis of detailed data and information was deemed essential to the successful implementation of the final phase of the project. In this respect difficulties were encountered with free access to data and the senior staff of BT which introduced risk to the project in terms of meeting the deadline and being able to prepare more comprehensive recommendations. For example, the BT staff and managers were reluctant to provide information on the performance of the company against key performance indicators to progress the benchmarking study. The project also has limited access to staff and information on the Finance, Human Resources and Planning functions. The interventions of the Ministry in early July helped to improve the situation although the team continued to meet resistance and in some cases information was withheld from the team. The situation is understandable given the absence of clear mandate from the Government for BT to restructure and the absence of an approved

10 It is unlikely that policies and procedures can be developed within the timescale dictated by the ADB 11 Although this is not directly related to the restructuring of BT, its inclusion has been requested by the ADB. Please refer to the Report

and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Republic of Tajikistan: Nurek 500kV Switchyard Reconstruction Project, Project Number: 42189, paragraph 84.October 2008; Asian Development Bank.



Restructuring Plan. The risk was highlighted by Corporate Solutions early during the discussion on the ToR for the final phase of the project.

A significant part of resources was focused on the revision and approval of the Restructuring Plan. The Plan has been submitted to the Government and we understand from the MOE&I that approval is expected in October 2009.

The reports from each of the five areas details findings and recommendations offering the Ministry and the Government of Tajikistan the tools and methodologies necessary for the implementation of the first phase of the restructuring (i.e. commercialisation of BT through the introduction of a more commercial structure and business practices). These papers identify actions that must be undertaken to resolve current problems, improve performance and introduce appropriate controls early in the restructuring process. The paper on KPIs and benchmarking identifies specific areas where investigation and analysis is urgently needed to facilitate early improvements in performance.

Once an order is issued by the Governmental for the restructuring of BT, the MOE&I and BT will need to draw up and agree a detailed work plan covering the first phase of the restructuring up to the end of 2012. The specific actions to be taken are detailed in each of the five reports and can be summarised as follows:

• Producing an implementation plan for the commercialisation phase of the restructuring

• Revising the corporate governance arrangement for BT

• Making changes to the corporate and organisational structure of BT

• Developing the systems needed to allow performance monitoring and benchmarking

• Conducting detailed analysis of the present performance of BT

The team has also prepared a methodology for tariff subsidies to poor and vulnerable electricity consumers. It is recommended that revisions are made to the existing government subsidy scheme including replacing cash payments with direct payments to BT. This will reduce scope for fraud and the misuse of funds and is pre-requisite ahead of the use the BT loan repayments for subsidising tariffs. It is recommended that a life line tariff be introduced for the poor and vulnerable customers, as defined by the government scheme, which will be subsidised by the repaid loan.

1.5 Conclusions

Overall this TA has been instrumental in promoting the restructuring of the BT high up in the Government’s agenda. The efforts dedicated during the final phase of the project to preparing a revised Restructuring Plan, in consultations with the key stakeholders, has helped to generate momentum and consensus on the nature of restructuring required and its urgency.

The reorganisation implied by the first phase of the Restructuring Plan will present BT and the Government with significant challenges in change management at a scale that has no precedence in Tajikistan. Considerable investment will be required in information systems, including an integrated financial and management reporting system, and in recruitment and training.

The critical barriers to successful restructuring will be the lack of sufficiently qualified and experienced managers in Tajikistan to oversee the restructuring process and raising the investment required to retrain existing staff and remunerate them sufficiently to retain them. It was for these reasons that this TA was originally designed by the ADB to help the Government appoint



an international company, under a management contract, to help implement the commercialisation phase (Phase I) of the restructuring plan.

Given the reluctance of the Government and BT to trust the restructuring of BT to a third party, an alternative implementation strategy has to be defined in consultation with IFIs. Otherwise it is highly doubtful whether the first phase of restructuring will be implemented successfully. This may require the establishment of a dedicated unit by the Government, resourced by highly qualified national and international experts, to manage the first phase of the restructuring. IFIs on their part must be willing to provide the financial support required to establish such a unit and to finance the retraining of managers and staff of BT.


METHODOLOGY 2

2 Methodology The objective of the project was to provide assistance and support to the Government to updating and approving the Restructuring Plan as well as preparing materials to guide the management of BT in making improvements to BT’s corporate governance, organisational structure and operational and financial performance.

The activities of the final phase were due to start in February 2009 and be completed by the end of September 2009 when the TA contract expires. However the revised ToR took longer to approve hence making the target delivery dates more ambitious to achieve. However, the team has made all efforts to deliver the required outputs within the agreed timescale although delays were experienced due to the lack of ready access to information and people at BT.

The structure of activities and tasks undertaken are shown in the table below:

Activities Ref Task

1.1 Establish a Working Group representing the relevant ministries and BT (stakeholders)

1.2 Conduct an opening seminar to present the background to the restructuring of BT, distribute the 2006 plan and describe the goals and objectives of the present exercise

1.3 Meet with individual stakeholders to answer their questions, understand their concerns and recommendations for revision of the 2006 plan

1.4 Review restructuring measures undertaken or underway since 2006

1.5 Update the 2006 restructuring plan taking into account the output of task 1.3.

1.6 Distribute the revised plan to the stakeholders for review

1.7 Hold a round table to finalise and approve the updated plan by the stakeholders

1.8 Approve the updated plan by the MOEI and submit to the Government for its approval

1. Restructuring Plan

1.9 Provide assistance to the Government to facilitate the approval of the plan and issuance of a presidential order

2.1 Request and obtain a current organisational structure for BT and staff numbers categorised by divisions and departments

2.2 Conduct a detailed analysis of the structure, polices and staffing numbers of the finance, human resources and corporate planning departments

2.3

Generate recommendations for improvements including job descriptions for heads of departments, changes to policies and procedures and staffing numbers of the finance, human resources and corporate planning departments

2. Corporate Structure

2.4 Present findings to the WG at a workshop and finalise the output based on their comments

3. Corporate 3.1 Document the present corporate governance arrangements for


METHODOLOGY - CONTINUED

Activities Ref Task the electricity sector

3.2 Appraise the present governance arrangements against models for the electricity sector in other countries

3.3

Generate recommendations for improving corporate governance of BT including the formation of a Board of Directors (BOD) for BT and the preparation of BOD's code of conduct, terms of reference, fiduciary duties, and related functions and rules

Governance

3.4 Present findings to the WG at a workshop and finalise the output based on their comments

4.1 Prepare and agree a realistic set of KPIs as the basis for benchmarking

4.2 Define an inventory of data and information to be collected and provided by the BT and MOEI

4.3 Oversee the collection of data and information and test its integrity

4.4 Prepare the present performance of BT against the agreed KPIs and finalise in consultation with BT and MOEI

4.5 Collect to the extent possible comparative performance data for similar operations elsewhere

4. Benchmarking

4.6 Complete the benchmarking exercise and present findings to the WG at a workshop and finalise the output based on their comments

5.1 Determine the objectives of tariff support programme and identify the specific loans affected

5.2 Review the current tariff methodology and evaluate its appropriateness

5. Tariff Study12

5.3 Prepare a paper recommending a methodology for the consideration of Ministry of Finance and the ADB

5.4 Finalise a report and present to MOF, MOLSP and the ADB

Progress of the implementation work was monitored on a regular basis and reported to the ADB and MOE&I. Despite the problems faced in obtaining data and getting access to staff at BT, the project has produced the five reports defined in the ToR. This was largely due to the excellent support received from the Ministry which has worked hard to remove barriers to progress.

12 This activity is not directly related to the restructuring of BT and is undertaken at the request of the ADB and will involve MOF and MOLSP


METHODOLOGY - CONTINUED

The drafting of the revised Restructuring Plan required the establishment of a Working Group (see next section) in order to find consensus and ensure that a fully supported Plan could be submitted to the Government. The draft order for BT to commence restructuring has been presented to the Government’s Restructuring Commission and awaits their approval. Once this is obtained, it can be formally endorsed by the Government and become the mandate for restructuring of BT.


THE WORKING GROUP 3

3 The Working Group A Working Group was to be established to facilitate the preparation of the Restructuring Plan, review the supporting material, and help with the process of obtaining the Governments approval. The establishment of the Working Group was agreed by the Deputy Minister of Energy and Industry, on the 4th May comprising representatives from ministries and government departments with a governance responsibility for BT.

Through the efforts of the MOE&I, members of the Working Group were identified and a paper was submitted to the Deputy Prime Minister Mr Gulomov seeking his approval for the establishment of the Working Group and support for the restructuring of BT13

The response of the Deputy Prime Minister of 15th May 2009 to MOE&I confirmed the establishment of the Working Group requesting that they continue to study in detail the issues related to the of unbundling of JSC “Barki Tojik and determining the procedures to achieve it by August 200914.

The working group members approved by the Deputy Prime Minister are:

Name Position Mr. A.R. Suleimonov Deputy Minister of Energy and Industry - Head of the Working Group

Mr. M.N. Narzulloev Head of the Economic and Forecasting Department of the Ministry of Energy and Industry - Deputy Head of the Working Group

Mr. A. Naimi Deputy Head of the main department of State Budget of the Ministry of Finance

Mr. A. Khakimov Head of the department of Legal Support of the International Investment projects of the Ministry of Justice

Mr. A. Yunusov Senior specialist of Industrial-innovation Department of the Ministry of Economic Development and Trade

Mr. Z. Mirzoev Head of expert analytical department of investments of the State Committee on Investments and Management of State Property

Mr. A. Tokhirov Head of the division of the department of economy and Forecasting of the Ministry of Energy and Industry

Mr. R.R. Gulov Deputy Chief Engineer of BT

Mr. S.R. Rakhimov Head of the department of economy and forecasting of BT

Mr. D.D. Isokov Member of the executive office of the President of RT, senior specialist of the industry and energy department

13 Letter to Government of the Republic of Tajikistan No. 6/356 8 May 2009. 14 Letter from Mr Gulomov to Mr Eurov, Executive office of the President of RT, Head of Industry and Energy Department. No. 41536 (14-6) 15th May 2009.


WORKING GROUP - CONTINUED

A number of the members of the group had been members of the previous working group established in December 2007 for the purpose of reviewing the suitability of management contracts. As a consequence the group had some knowledge and understanding of the issues.

The working group met for the first time on 26th May 2009with the following agenda:

1. Gain an understanding of the background to the TA 4908-TAJ;

2. Review progress of the TA since September 2007;

3. Review the revised ToR and work plan for the final phase;

4. Review the restructuring plan prepared in May 2006 and the revised plan of May 2009;

5. Agree arrangement for the procedures for obtaining the input of the stakeholders;

6. Discuss the data required from all the stakeholders related to BT;T

7. Discuss the scope of the Tariff study exercise.

A second meeting of the Working Group was held on the 22nd of July 2009offsite and was attended by all stakeholders with the exception of the Ministry of Economic Development and Trade.

The agenda for this meeting was:

1. Review and comment on the second draft of the restructuring plan

2. Consider amendments to the corporate structure of BT

3. Discuss issues related to the key performance Indicators for BT

4. Review progress of other elements of the project.

Discussions were held on key performance indicators which served to further emphasise the need to introduce changes to BT. The full set of KPIs and the benchmarking results will be presented at the next working group meeting which was planned for September.

A draft corporate governance model was presented to the Working Group including a recommendation for the Supervisory Board to become a Board of Directors and include some independent board members. A new management structure was also presented and discussed.

Discussions revolved around the need to ensure that the proposed arrangements and structures were in line with the legal framework in Tajikistan and propose changes that may be necessary.


RESTRUCTURING PLAN 4

4 Restructuring Plan 4.1 Background

The Government of Tajikistan is committed to restructuring Barki Tojik15 and strengthening the legal and regulatory framework governing the power sector. This is thought necessary in order to make the power sector more attractive to private investors and to prepare the electricity sector for future liberalisation. The ultimate goal is to create an environment that can help shift the burden of financing the development of the country’s hydroelectric resources from the government to the private sector, particularly the construction of new generation capacity.

A previous ADB TA considered the Government’s strategic objectives and produced a Restructuring Plan in May 200616 It was concluded that unbundling BT should be implemented in phases to improve the financial performance of the company, hence making it more attractive to the private sector.

The proposed restructuring programme consisted of three phases:

− Phase 1 - Commercialisation − Phase 2 - Competition − Phase 3 - Divestment

The commercialisation phase, which is estimated to take 3 years, will concentrate on improving the financial performance of BT through institution of more effective business practices, financial management systems, transparent financial disclosures and increased management capacity.

The Restructuring Plan was given ministerial approval in May 2006 but did not receive full governmental approval at that time due to changes in the government structure and other non technical reasons. In his letter of 12 September 2008 to the ADB, the Deputy Prime Minister expressed his support for the Restructuring Plan of 2006, requesting that the timescale for the implementation of the three phases be revised in consultation with the Working Group and resubmitted for the Government’s approval.

4.2 Overview of the 2009 Restructuring Plan

The power sector17 plays a dominant role in the economy of Tajikistan. The country possesses vast amounts of hydroelectric resources estimated to be around 527TWh of which around 3% is exploited and the sector currently accounts for 4.7% of GDP. Electricity is also a key input for the production of the two most exported commodities – aluminium and cotton. Furthermore, the sector has the confirmed potential of contributing to an export led growth, through electricity exports to countries within Central Asia and beyond. However, significant resources are needed to exploit this potential and without investment from institutional banks and private investors the full potential is unlikely to be realised.

In order to make the power sector more attractive to private investors and to prepare the electricity sector for future liberalisation, the Government of Tajikistan has committed to restructure Barki

15 Letter dated March18th 2005 from Prime Minister to the Director of World Bank Regional Office for Central Asia 16 ADB TA 1817-TAJ – Power Sector Restructuring Plan May 2006 Final 17 The principal organisation to be restructured is Barki Tojik and its subsidiary companies that are wholly owned by the Government of

the Republic of Tajikistan. However, the legal and regulatory framework for the whole electricity sector will be reviewed and modified accordingly as will the rules and requirements for accessing the transmission network by third parties for the delivery or transit of power across the transmission network.


RESTRUCTURING PLAN - CONTINUED

Tojik18 and strengthen the legal and regulatory framework governing the power sector. The ultimate goal is to create an environment that can help shift the burden of financing the development of the country’s hydroelectric resources from the government to the private sector, particularly the construction of new generation capacity.

The Government proposes to manage the restructuring of Barki Tojik in three phases as follows:

1. Phase 1 (2009-2012) of the restructuring programme will introduce more effective commercial practices at Barki Tojik and improve corporate governance. This will include the development of an organisational structure based on three main divisions (i.e. generation, transmission and distribution), improving financial reporting and transparency and designing and implementing a Financial and Operational Performance Improvement Programme. This phase is referred to as the “commercialisation” phase. During this phase, tariff, legal and regulatory reforms will also be defined to facilitate private sector participation in the second phase. A detailed implementation plan will be developed by the MOE&I, other ministries and Barki Tojik for phase 1 which will be approved by the government.

2. Phase 2 (2013 -2015) of the restructuring programme, which is referred to as the “competition” phase, Barki Tojik will be organised, if deemed appropriate, into a number of legally independent enterprises owned fully by the state. The links between these legally independent enterprises will be controlled via supply contracts and a regulatory system. In this phase independent power generation companies will be allowed to enter the market and be given access to the state-owned transmission network subject to clearly defined agreements. . A detailed implementation plan will be developed by the MOE&I, other ministries and Barki Tojik for phase 2 which will be approved by the government.

3. In Phase 3 (2016-2018) of the restructuring programme, the Government will evaluate the results of the first two phases and consider the benefits of privatising the state-owned generation and distribution facilities. Transmission business will stay in the ownership of the state and equal access will be offered to all players. This phase is referred to as the “divestment” phase. A detailed implementation plan will be developed by the MOE&I, other ministries and Barki Tojik for phase 3 which will be approved by the government.

A governmental order will be issued to Barki Tojik to implement the first phase of the restructuring programme. A Steering Committee will be established with overall responsibility for directing, supporting and monitoring the restructuring of Barki Tojik.

During the first phase of the restructuring programme (Commercialisation), BT will remain as a single legal entity but necessary steps will be taken to commercialise the operation of the company and to improve its operational and financial performance. This will include establishment of three business units (Generation, Transmission and Distribution), introduction of commercial practices and separation of accounting for the business units. In parallel, legislative changes will be introduced and a regulatory body established to create an enabling environment for private sector participation in the second and third phases of the restructuring.

4.3 Process of Revising the Restructuring Plan

The objective of this activity was to assist the MOE&I obtain approval for a revised restructuring plan across government departments and ministries as well as the President’s Office, resulting in issuance of a Government order to BT to commence restructuring. In order to achieve this, it was

18 Letter dated March18th 2005 from Prime Minister to the Director of World Bank Regional Office for Central Asia



necessary for the restructuring plan, written in May 2006, to be updated to take account of changes that have taken place in the electricity industry, the legislative environment and in BT since 2006. Additionally, since three years had passed since the drafting of the original Plan, the timetable envisaged for the implementation of the plan needed updating.

A first draft of the updated restructuring plan was drafted and presented to the Working Group on 26th May 2009. The Working Group played a central role in the development of the Plan by taking responsibility for consulting with BT, ministries and government departments to gain their support for the Plan, the underlying strategy and the timescales.

The Working Group was asked at the meeting on 26th May 2009 to review the restructuring plan, discuss within their ministries and return written comments signed by a Deputy Minister to Mr Narzulloev of the MOE&I. The target date for this was 7th June.

Furthermore, a list of specific questions was issued to the Working Group members designed to help clarify progress and developments in the electricity sector and BT over the previous three years. Mr Narzulloev of the MOE&I was put in charge of co-ordinating replies from the various members of the Working Group.

The process, agreed with the Working Group, was that once comments had been received, they would be incorporated into the Plan if considered appropriate. Any contentious issue would be discussed with the Working Group member for resolution before being incorporated in the Plan.

A meeting protocol was written and a letter19 based on the protocol was sent to Government on 1st June 2009 stating the decision of the Working Group to prepare a paper on restructuring and a draft order to be presented to the Government by the end of July 2009.

The next version of the restructuring plan was prepared and presented to the second meeting of the Working Group on 22nd July 2009. This meeting was held offsite and was attended by all ministries and departments with the exception of the Ministry of Economic Development and Trade.

The main part of the meeting focussed on the Restructuring Plan and a paper written by the project team summarising the comments received from the WG members on the first draft of the Plan. Each comment was reviewed individually with the Group members and discussed in detail. It was noted that the legal separation and privatisation of BT would be subject to Government decisions at the end of phases 1 and 2 respectively. It was unanimously agreed that there is sufficient flexibility in the draft Plan to allow the Government to assess the achievements of each phase before embarking on subsequent phases.

There was significant debate about comments received from BT which essentially implied delaying the restructuring, retaining the current corporate governance arrangements, and keeping intact the present monolithic corporate structure. The Working Group members rejected BT proposals and reiterated that BT’s present poor financial performance could only be improved through restructuring and measures proposed in the draft Plan. The BT’s representative accepted the Working Group’s comments and agreed to the three-phase plan with slight amendments in the wording. This final wording of the Plan was agreed by the WG.

It was also recognised that commercialisation of BT was a complex undertaking and may take longer than initially anticipated. However it was unanimously agreed that improvements in the performance of BT were imperative. It was also recognised that the successful implementation of a financial and operational performance improvement programme would need the full resources of MOE&I and BT and the backing of the Government. For this reason, it was recommended that it would be more prudent for a detailed implementation plan for phase 1 be drawn up by the MOE&I

19 Letter from Mr Gul Sherali to Government dated 1st June 2009



and BT following the Government’s approval of the Plan. The wording of the Plan was an amended to reflect this proposal.

The Working Group was requested to review the revised Plan and provide final comments to the MOE&I. The Plan was amended based on comments received and a new draft was submitted. The Plan was translated to Tajik language and a draft order prepared by the MOE&I to formally seek the approval of the Government for restructuring the BT in line with the proposed Restructuring Plan.

A paper was prepared by the MOE&I together with the draft order and the approved Restructuring Plan were presented to the Restructuring Commission on 14th September 2009. The Commission comprises the ministers who have already approved the Plan. Once the Plan is approved by the Commission a Governmental Order will be issued.

4.4 The Way Forward

Following the issuance of a Governmental order the next step will be to draw up a detailed implementation plan for phase 1 of restructuring for the period 2009 to 2012. This activity is the responsibility of the State Committee on Investments and State Property Management, MOE&I and BT which will need expert assistance from external advisors.

The plan will include the organisational and structural aspects, the financial consequences, the legal, regulatory and tariff aspects as well as financial and operational performance improvement programme. The implementation plan is critical to the commercialisation of BT and will identify what will be done, when it will be done, who is responsible, what financial and other resources are needed.

The preparation of the implementation plan is urgent in order to sustain momentum created by the ADB project and the MOE&I wish to undertake this task as soon as possible and before the end of 2009

The successful implementation of the restructuring plan, within the proposed timescale, will require personnel with strong management, commercial and technical skills who are not currently available in sufficient numbers at BT. In the short to medium-term this gap will have to be filled through the provision of technical assistance by the international partners and donors. However the overall management of the restructuring programme will remain fully the responsibility of MOE&I and BT. It is therefore proposed that a joint Restructuring Group be established by MOE&I and BT to manage the implementation of the restructuring programme and coordinate the input of international technical assistance projects. The Group shall comprise of highly qualified specialists with in-depth knowledge of the Tajikistan Power Sector and include experts with experience in generation, transmission and distribution and skills in economics, accounting, engineering, and operations. The members of the Group shall be appointed on a fulltime basis and sufficient salaries and other incentives shall be offered to attract qualified experts. They shall be given the necessary authority to conduct their work and to call on other experts in the power sector to assist them. The selection and appointment of the members of the Restructuring Group should be done with the approval of the Steering Committee. The Head of the Restructuring Group should report directly to the Chairman of BT and the Steering Committee. The Group will need sufficient financing to attract qualified experts and to support its activities. This financing should ideally come from funding agencies and not BT to ensure the objectivity of the Group and reduce uncertainties about its financing.

The “commercialisation” of BT is a major challenge and will represent a fundamental change in the way the sector will be managed. Considerable preparatory work will be necessary which will require careful planning and coordination across a number of functions and authorities. The



management capacity and systems of BT must also be significantly upgraded to operate the power sector in line with commercial principles. Undertaking the preparatory work satisfactorily and building the capacity of BT are critical to the successful implementation of the first phase and will determine when the second phase of the restructuring programme can be embarked upon.

Support will be needed by the government in the form of technical assistance estimated at some US$ 3.0 million for the implementation of the first phase of the Restructuring Plan. This will mainly cover the cost of external advisors and other forms of capacity building such as training of BT and the MOE&I staff. There will also be a need for additional investment such as the introduction of IT systems to strengthen financial reporting, billing, and human resources. Some of these such as the development of billing in Dushanbe City are the subject of a World Bank initiative. Additionally the operating cost of the Restructuring Group will be around USD$ 300,000 per annum if the Group is to function effectively and attract qualified experts. It would be advisable for funding for the Group to be provided from outside BT to ensure its independent operation. Overall the cost of implementing the 1st phase of the Restructuring Plan is likely to be around 4-5m USD which is comparable to the cost of a management contract that was originally envisaged by the ADB.


CORPORATE GOVERNANCE 5

5 Corporate Governance 5.1 Overview of Findings and Recommendations

The financial and operational performance of BT is recognised to be weak as a result of a number of fundamental problems that have existed at the company for a number of years. The auditors of BT, BDO Unicon, in their management letter of 200720 identified a number of concerns and weaknesses which have significant impact on the performance of BT. These include:

• The organisational structure is inconsistent with the scale of operations

• There is no development strategy or long term plan


• No adequate control is exercised over branch operations

• There is no treasury and risk management function

• Management judgements not addressed effectively

Corporate governance arrangements for clearly need to be strengthened to address the above weaknesses and as well raise investors confidence. The current arrangements have been in place for many years and must be changed in line with best industry practices to protect what is one of the largest state owned companies in Tajikistan with significant public interest. The company is managed by a Chairman appointed by the President who reports to the President’s Office. There is no Board of Directors but a Supervisory Board comprising senior government ministers and chaired by the Prime Minister, represents the shareholder (i.e. the government).

The Current structure of BT comprises a chairman, and four deputy chairmen who hold portfolios comprising a mixture of generation, distribution, transmission, sales, finance and other activities. These portfolios have a geographical focus rather than a focus based on activities that have a common bond or theme. This leads to a loss of accountability and makes the management of the business activity more difficult.

It is recommended that an executive structure be established focussed on business activities and comprise an Operations Director, a Commercial Director, a Chief Financial Officer and a Director of Administration as well as a Chief Executive who together will form the Management Board of BT. The Operations Director should have three directors reporting to him; one each for the generation, transmission, and distribution activities. The Commercial Director will be responsible for the sales and purchasing of electricity, pricing and tariffs for electricity and the corporate planning function. The Chief Financial Officer will be responsible for accounting, financial and management reporting and the treasury function, etc. The Director of Administration will be responsible for IT, human resources, legal affairs, procurement and facilities management. To assist these directors in fulfilling their respective mandates, it is recommended that managers be appointed to undertake specific tasks. Together, these managers and the four directors would constitute the executive structure of BT. The report on the Corporate Structure of BT addresses these issues in detail21.

20 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008 21 Review of the Corporate Structure of Barki Tojik September 2009


CORPORATE GOVERNANCE - CONTINUED

A company of the size and importance of BT needs a Board of Directors (BOD) to provide an appropriate level of governance. Consideration was given to developing the Supervisory Board into a BOD but a number of problems were identified:

• The members of the Supervisory Board are very senior people with major responsibilities in running the country and would have little time to sit at board meetings and take on the responsibilities of a board director which are quite onerous.

• The Supervisory Board is in reality a committee representing the shareholders and is therefore a useful body that can meet and undertake the responsibilities as defined in the company’s charter but not to act as a BOD.

It is usual for the company executive to form the BOD. It is recommended, therefore, that the Chief Executive, the Operations Director, the Commercial Director and the Chief Financial Officer form the board of directors representing the company. In this way the main business activities, company strategy, and the financial aspects are all represented. The Director of Administration will provide support to the BOD from a legal and organisational perspective.

In modern corporate governance arrangements and as recommended in the many codes covering corporate governance, it is necessary that additional capacity and focus is added to companies through the inclusion of independent directors on the BOD. Advantages for the company and the shareholder from appointing independent directors are that they bring knowledge and experience from other fields to the decision making process and provide a balance to the executive members of the board.

The BOD will also need a Chairman. It is recommended that the Chairman be appointed by the shareholder and not also be the Chief Executive of the company. The two roles have a completely different focus with the Chairman responsible to the shareholder and the operation of the board and the Chief Executive for running the company and implementing the company strategy.

It is recommended therefore that a BOD be established comprising the four executives of BT, four independent Directors and an independent Chairman.

It is recommended that a search agency be used for the selection of the independent Directors and Chairman as this will bring the most objectivity to the process and be likely to identify the most experienced and suitable candidates. All members will need to have the skills necessary to operate effectively as board members and capacity building and training may be required. The possibility of appointing individuals from outside Tajikistan should not be dismissed

The Supervisory Board would remain and represent the “superior body of management” which under Tajik law is the shareholder. This structure together with the proposed executive and management board will bring BT in line with best international governance practice.

The corporate governance arrangements will be complete with the addition of an Internal Audit team of appropriate capacity reporting directly to the BOD and with the establishment of a regulatory commission to monitor, review, and control the electricity market and BT.

Amendments to the legislation, governing open joint stock holding companies and BT specifically, will be necessary to allow the establishment of a BOD and a regulatory commission.

The recommended corporate governance structure is shown in figure 1 below.



Shareholder

MOJ MOF MOE&I SPC MOED&T

Supervisory Board

PMChairman

Generation Director

TransmissionDirector

DistributionDirector

Chief FinancialOfficer

AdministrationDirector

Chief Executive

Exec DirectorCommercial

Exec DirectorOperations

Board of Directors

IndependentDirector

IndependentDirector

IndependentDirector

BT C/M

Internal Audit

IndependentDirector

Regulatory Commission

Figure 1: The Recommended Corporate Governance Structure

5.2 The Way Forward

Although the proposals and recommendations contained in this report are not revolutionary, they will be seen as significant changes by the shareholder and managers of BT. The introduction of a BOD with independent members in itself will need to be carried out with great care by demonstrating the benefits to both the company and the shareholder.

Similarly the development of an executive structure within BT with a modern business focus rather than a traditional geographical focus will need to be linked to the implementation of the restructuring plan. For example:

• The creation of a finance function that addresses all the existing concerns and one that can deliver appropriate information to allow the management of the business to identify and manage risk will require the appointment of a Chief Financial Officer;

• The creation of three business units to manage generation, transmission and distribution respectively will require close management requiring the appointment of an Operations Director;

• The need to introduce more commercial business practices, to concentrate on the collection of revenues, the implementation of cost reflective electricity charges and the need to develop a corporate strategy will require the appointment of a Commercial Director.

To carry out the executive responsibilities listed above will need considerable training of existing managers or most likely the appointment of new people to establish appropriate capability within BT including a Chief Executive.

The proposals for improving corporate governance will also require changes to the legal framework to allow, for example, for the establishment of a BOD as the executive body and the introduction of independent directors.



The next steps to be taken to improve corporate governance of BT include:

• Develop a code of corporate governance for the company;

• Define the specific roles and responsibilities of the BOD to include both the executive and independent members and consider what committees will be needed;

• Make the changes needed in the company’s charter and articles of association. to allow the code of governance to be implemented plus the operation of the BOD and the executive to include the powers of delegation and levels of authority;

• Prepare detailed terms of reference for the executive and section heads (refer to the report on corporate structure developed as part of this project22);

• Conduct a skills and training needs assessment for the executive and independent board members and identify recruitment and selection arrangements.

22 Review of the Corporate Structure of Barki Tojik September 2009. See section 6 below.


CORPORATE STRUCTURE 6

6 Corporate Structure 6.1 Overview of Findings and Recommendations

As discussed previously in Section 5, the financial and operational performance of Barki Tojik has deteriorated considerable in the recent years. The cause of some of the weaknesses, highlighted in the auditors’ management letter of 200723is the suboptimal corporate structure of BT which does not allow sufficient control over the company’s operation and accountability of senior managers.

The separate report produced on the Corporate Structure of BT, the lack of business focus in the current structure as a problem. The current structure which is based on a geographic split without any common theme seriously detracts from the ability of the management to identify appropriate objectives and goals for the business and deliver them. .

The report on Corporate Governance, as discussed in Section 5, addresses some of these issues at a board and executive level while the report on Corporate Structure seeks to determine the detailed organisational structure with a definition of roles, and responsibilities etc for the next management level. The report also looks in some detail into the finance and the human resource functions and the need for the establishment of a corporate planning process in the company.

Understanding the present structure of BT has proved difficult as frequent changes are made to the organisational structures that are not documented. This combined with the reluctance of BT’s management to release information delayed this component of the work Notwithstanding, the consultant has been able to put together a report which highlights the issues and recommends a revised structure that will overcome the present weaknesses..

The recommended organisational structure is shown in the chart below.

Generation Director



Chief Financial Officer


ChiefExecutive



Purchasing & SalesDirector

Corporate PlanningDirector

DirectorTariffs &

Charges

Chief Accountant

DirectorPlanning

& AnalysisTreasurer

HR Director

Facilities Management

DirectorPurchasing

Director Lawyer

BT Management

Board

IT Director

Figure 2: The Recommended Organisational Structure

23 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008

t Page 21


CORPORATE STRUCTURE - CONTINUED

The management positions shown in the above chart, except for the Chief Executive’ role which is discussed in the Corporate Governance Report, are discussed in the Corporate Structure Report. The roles of Chief Financial Officer, Human Resources Director and Corporate Planning Director are discussed in detail in sections five, six and seven of that report.

The proposed structure will allow the management of BT to determine appropriate business goals and objectives, introduce performance improvements, implement effective financial and management reporting and controls and ensure that its staff is properly motivated and rewarded for their efforts.

6.2 The Way Forward

The Corporate Structure Report highlights some serious shortcomings in the existing organisational structure of BT and makes recommendations to address these. In particular the proposed structure strengthens the finance, corporate planning and human resources functions hence the weaknesses identified in auditors management letter of the 2007 accounts.

The proposals and recommendations contained in the Corporate Structure Report, if implemented, will contribute to the reform of BT into a company with a business centric management structure, high level of accountability and effective financial control. A serious barrier to reforms is the limited human capacity within BT making the strengthening of the Human Resources Function critical. A comprehensive retraining and recruitment programme, combined with an appropriate remuneration system to retain staff, are required if the reforms are to succeed

The Restructuring Plan covers the changes for the company as a whole and recognises that a phased approach to implementation is the correct approach to reforming BT. During the first phase the changes identified in Corporate Structure Report can be introduced. However, should the restructuring be delayed the recommendations for changes in Finance, HR and Corporate Planning can and should be implemented as a matter of urgency.

The next step is to develop an implementation plan concentrating on:

• Establishing a Corporate Planning Function and developing a long term and medium term corporate plan with a mission statement, goals and objectives and the development of a strategy for their achievement;

• Appointing a board level Chief Financial Officer with the appropriate competencies to develop and create a Finance Function which separates accountancy from treasury and develops the reporting and planning and forecasting processes;

• Overhaul the Human Resources Function, combining it with the labour department and producing procedures for staff retention, development and a modern reward system.

Considerable investment will be needed to find and appoint the right people to the key functions and in this respect the appointment of international experts in the short-term to act as advisors to the senior management should be seriously considered. This will offer the benefits that a management contract would have provided, while allowing the management of BT to retain full control over the operation of the company.


BENCHMARKING AND KPIS 7

7 Benchmarking and Key Performance Indicators 7.1 Overview of Findings and Recommendations

As discussed earlier in this report the financial performance of BT has deteriorated in the recent years and the company is experiencing difficulties in meeting the growing electricity needs of the country. Consideration is being given to the restructuring of BT to improve the financial and operational performance of the company.

The restructuring of BT will required a new framework for managing the relationships between the company and its stakeholders including investors, the Government, the regulator. The Government objective will always be to safe guard a reliable supply of electricity to the population and industry at the lowest cost to the country. The role of the regulator will be to ensure that tariffs are appropriate and that the system provides sufficient incentives for private sector participation. The private sector will need assurance that parts of the system that are retained under the direct control of the state (e.g. transmission) are managed cost effectively and tariffs levied for those services are fair and transparent. Therefore, an effective system for measuring and reporting the performance of the electricity sub-sector will be central for managing the restructured sub-sector and the relationship with the stakeholders.

Measuring the performance of the sub-sector must cover: operation, maintenance and development, all of which generate expenses. The revenues balancing these costs come from the billing of energy and the use of the infrastructure. They are collected through metering, invoicing and collection of the customer’s bills. As a result, the Key Performance Indicators (KPIs) to be monitored regularly by the Government and BT must illustrate the progresses made in the accomplishment of these activities at least cost for the benefit of consumers. .

In order to run efficiently and improve its performances, BT;s management needs to set regular performance targets covering costs and the quality and availability of services and monitor these through benchmarking and the evaluation of KPIs.

The electricity network business in Tajikistan is a natural monopoly: and as such its efficiency cannot come from competition with other companies but from actions taken by the:

• The regulator or the regulatory authority,

• Shareholders ;The management of the company

Benchmarking is the usual method to determine the efficiency and productivity levels. However, care must be taken as no power company is the same and differences exits which may distort the results of benchmarking. . Benchmarking must attempt to iron out these differences and provide measures of performance comparable with other companies operating in the same field. Thus, the comparison of certain performance ratios can help understand if the problems met in one company are confirmed by the experience of similar companies and if not what are the causes of the differences. Also the efficiency of different solutions to a problem can be compared and improved.

As part of the TA it was agreed to undertake a benchmarking exercise as a starting point for identifying and selecting KPIs for BT that would help the management of BT to design a financial and operational performance improvement programme.

In undertaking the benchmarking exercise a number of problems and constraints were experienced with respect to identifying and collecting data to measure performance against a number of KPIs. This stems largely from the lack of intergraded management information systems at BT and partly the reluctance of staff to provide what is considered sensitive financial and operation information to third parties. These issues have been highlighted elsewhere in this report.


BENCHMARKING AND KPIS - CONTINUED

The KPIs selected relate to operational efficiency and ratios which cover what is believed to be the problematic areas of the company’s activities, including revenue collection and accounts receivable. The KPIs can be used for both comparative analysis (benchmarking) and for the assessment and monitoring of the performance of the company and its subsidiaries leading to remedial action being taken and focussing on performance improvement programmes. All the indicators can be calculated on a quarterly and annual basis simultaneously with the preparation of financial and management reports.

In the Benchmarking Report the KPIs for BT for the period 2006 to 2008 have been calculated on the basis of information and data provided by BT’s accounting, sales, planning and economy, and technical departments. A description of the results of each KPI is provided. In spite of some shortcomings in the accounting information, inaccuracy in some of the numbers and contradictions in some of the data provided, on the whole we believe that the selected KPIs reliably measures the performance of the company’s activities in sales, revenue collection and accounts receivable. For some other indicators, where the initial data cannot be considered as reliable (e.g. electricity losses) we have provide additional commentary.

The performance measurement against all indicators relevant to BT to allow a comprehensive evaluation and analysis of the company’s performance has been prevented by:

• the current organisational structure of the company where transmission and distribution functions are integrated and cannot be accounted for separately;

• problems and shortcomings in the accounting procedures which does not allow to record information on different aspects of the business in a segregated fashion;;

• a lack of regularly prepared and unified financial and technical information; which stems from the weaknesses of existing management reporting systems.

However, the benchmarks and KPIs described in the Benchmarking Report provide useful information for BT’s managers and other stakeholders and can be used in the evaluation, analysis and decision making processes

The present problems preventing effective performance measurement and benchmarking will be overcome once the Restructuring Plan is approved and the implementation of 1st Phase commences. This will include the creation of three internal business units for generation, transmission and distribution which will allow the performance of the key units to be measured. The introduction of mechanisms for transfer pricing and segmental reporting will provide information for a comprehensive evaluation of performance for each function. In addition the implementation of initiatives aimed at the improvement of performance in the finance, planning and accounting departments and the introduction of improved reporting according to IFRS will allow more detailed benchmarking and comparisons of financial indicators for BT with those of similar international electricity companies.

As an example, an indicator that shows the performance of BT compares the cost of operating the business, (as extracted from BT’s financial data), to the average simulated cost of operating the same electrical system by the average Transmission System Operator in an optimised manner.

Where the « Simulated Cost » is the cost the Reference Utility would have if it was operating Utility X’s grid

Real Operating Expenses of Utility “X” – Simulated Operating Expenses of Utility “X”

Sum of Simulated Costs of Utility “X”



This indicator suppresses the differences between the utilities that result from such variables as company size, business activities, geographic and demographic variables (e.g. mountainous or plain, climate, population densities,…etc).

In the benchmarking process the model determines the average operator taking into account the variables mentioned above. In the above case the average or reference utility is SEPS in Slovakia. The chart shows this by giving a performance measure of zero to SEPS for running its own electrical network. The chart also shows an indicator of the performance which SEPS would achieve if they operated the other company networks. As SEPS is the average utility in the above benchmarking model the costs of operation in some cases will be higher if SEPS were running the company and some will be lower.

In the above case as there are quite large extremes of performance between the companies, SEPS would perform worse in all companies except BT, that is their simulated costs would be greater for these companies than the company themselves except BT. In the case of BT, however the simulated cost of SEPS operating BT’s optimised network is significantly less than BT’s own costs hence the above graph shows a large negative value. More detailed analysis of BTs operation would be needed before it is possible to examine the reasons behind the poor performance of BT.

7.2 The Way Forward

The analysis detailed in the Benchmarking Report shows that BT could improve its overall performance considerably. The main recommendations to achieve this in the short term are:

• Improve the internal data collection (financial and technical) to allow a pertinent view of the performance of each business activity. This will be possible after internal restructuring and the unbundling of the accounting system. It should be regarded as a first step towards the improvement of the performance through an action plan based on measurement of performance against the agreed KPIs;

-0.500

-0.400

-0.300

-0.200

-0.100

0.000

0.100

0.200

0.300

0.400

BT (TJ) REN (PT)

NEK (BG)

EMS (CS)

SEPS (SK)

HEP-OPS (HR)

Performance

Perfor



• Adopt international standards in analysing performance and ensure the performance of separate parts of the business can be measured by setting up three business units. This will allow the comparisons of the KPIs with similar entities abroad which are unbundled and provide guidelines for setting performance targets for BT;

• Implement a business structure which includes an Independent System Operator which will sit between the generation and distribution businesses. This will allow the monitoring of the quality of service, the arbitration of risk management, an optimised use of existing capacities, and measuring the adequacy of future transmission and generation capacities;

• Make improvements in the recovery of revenue from consumers. The consumption segments and categories could be simplified and the analysis of the distribution flows clarified. The senior managers of the company should immediately and comprehensively address the problem by developing special measures and programmes to improve the accounting of electricity sold and revenue collected by each type of customer category;

• Introduce a common system for defining data and procedures for collection and analysis across the company for energy sales, revenue collection and accounts receivable to increase data reliability, comparability and analysis;

• Introduce an effective system of internal control for the sales function and particularly in recording and billing of amounts, and the value of electricity supplied (both in kWh and somoni) and paid by the customers. Some of the proposed indicators, such as the actual average tariff can be used as important control mechanism and a tool for the evaluation of the correctness of the energy sales procedure. This indicator has to be calculated for all categories of consumer and for each of BT’s regional distribution centres for additional comparisons with the official tariffs. The indicator will determine the accuracy of recording the billing amounts, the value of electricity distributed and the application of the tariffs;

• Conduct a detailed evaluation of all existing metering systems and electricity measuring procedures (starting from the generators through the transmission network to the distribution network and to the ultimate consumers) to identify all shortcomings and weaknesses;

• Develop and implement an effective program and action plan directed at decreasing all types of electricity losses. This can be achieved with the implementation of a four stage program/project to improve the situation:

1. Carry out a detailed assessment of the current procedures for measuring and reporting electricity losses in all levels of the company and identify weaknesses and discrepancies;

2. Develop a detailed action plan for creating the necessary conditions for the proper measurement, identification and reporting of losses;

3. Develop a detailed action plan for the reduction of electricity losses in each activity (ie generation, transmission, distribution and sales to customers);

4. Implement the action plans to introduce systems for the measurement and reporting of losses across the business and in each region, reduce losses and establish an effective external control mechanism of these procedures.

• Identify the reasons for the reductions in available generation capacity and develop a plan for implementing the necessary measures to rehabilitate and increase available generating capacity of the stations;



• Assess and analyse actual generation capacity usage, develop the optimal and efficient regimes for station operation (especially taking into account seasonal needs in energy) and for resource usage, particularly water resources;

• Implement a special study and thorough technical and financial evaluation of the state and performance of Dushanbe thermal power station. Prepare an expert’s report with sound recommendations and actions required for improving the effectiveness of the station.

The above recommendations are not intended to be exhaustive but provide valuable input to the design of a financial and operational performance improvement programme during the implementation of the 1st Phase of the Restructuring Plan.


METHODOLOGY FOR ELECTRICITY TARIFF SUBSIDIES 8

8 Methodology for Electricity Tariff Subsidies 8.1 Overview of Findings and Recommendations

Under an agreement between the ADB and the Government of Tajikistan the loan repayments from BT to the Government, using the grant made by the ADB to the Government for the rehabilitation of the 500 kV switchyard at Nurek hydro power station, shall be used for tariff subsidies for the poor and vulnerable electricity consumers. The 25-year loan valued at US$ 54.77 mln will start after a five year grace period, at an interest rate of 5% per year.

The objective of this component of the project was to develop a methodology for a loan repayment scheme that will be satisfactory to the ADB and provide assurance that the funds are used exclusively for tariff subsidies for poor and vulnerable electricity consumers.

This study reviewed the existing compensation scheme, which proved to be a good starting point and developed two options that may be considered for the loan repayment methodology and generated recommendations for their implementation.

• The first option is based on the existing support program and continues compensation to qualified household for all of the electricity used up to a certain level depending on the time of year and availability of other energy services.

• The second option also stems from the existing assistance program. Its implementation though is based on the introduction of a life-line tariff which requires the participating households to partially contribute to the costs of their basic electricity usage while still benefiting from the assistance program.

While both options will meet the objectives preference is given to the second option as it offers future possibilities for the redesign of the overall system of electricity tariffs. It also provides a pricing signal to the consumers that may be essential in the successful implementation of energy conservation programs in Tajikistan in the future.

There is no specific constraint that dictates the timing for the implementation of either option as the preferred methodology. Both options can be implemented without any delay within the framework of the existing assistance program and be available when the loan payment disbursements become due. On the other hand an early implementation of the selected option would allow testing and modification if necessary and is therefore preferred.

The Tariff Report also provides recommendations for improving the present assistance program to increase its effectiveness and eliminate possible abuse. These improvements are critical regardless whether or not any of the recommended options are implemented.

Should one of the options be chosen for the loan repayment methodology further research has to follow to better understand the energy usage pattern amongst the residential consumers so as to properly structure the sizes of basic consumption blocks. Additionally, amendments will be needed to the legal framework to accommodate some of the recommended changes.

8.2 The Way Forward

Both of the proposed options will adequately achieve the objectives of the tariff support programme and are very similar in nature. They are based to a large extent on the existing utility payment assistance program which should contribute to the ultimate ease of their implementation.


METHODOLOGY FOR ELECTRICITY TARRIF SUBSIDIES- CONTINUED

Option 1 is consistent and in line with the existing targeted payment assistance program and after the implementation of the suggested improvements will continue to serve the needs of low-income households.

Option 2 uses a life-line tariff approach which is also based on the structures of the existing assistance program especially with respect to household selection but uses a pricing signal as a tool in affecting households’ energy use.

Therefore, it is the consultant’s opinion that while Option 1 may be more immediately applicable and easily implementable Option 2 offers a forward looking approach and is thus preferable.

It is recommended that the features of the existing program be modified as soon as possible to improve its efficiency of delivery. This needs to be done regardless of if and when any of the above options are chosen and implemented.

The Figure below illustrates the arrangement including the financial and information flows.


METHODOLOGY FOR ELECTRICITY TARRIF SUBSIDIES- CONTINUED

Figure 4 : Information and financial resource flows in the proposed assistance program


CONCLUSIONS 9

9 Conclusions In recent years the ADB has provided BT and the MOE&I with a number of TA projects to improve its financial management and reporting systems and draw up plans for restructuring the electricity sub-sector. However these efforts have failed to bring about the degree of improvements required to substantially upgrade the management and performance of the sector. This is evidenced by the management letter issued company’s auditors in 2008 covering the accounts of 2007 which highlight a number of serious weaknesses, including:

− The Company has no development strategy and a long-term development plan − Organisational structure of the company is inconsistent with the scale of its

operations − The company has failed to implement recommendations issued by previous

auditors − There are serious weaknesses in the company’s accounting procedures and

systems − There is a lack of control over the financial and business operations of the

company − Level of automation of accounting operations is inconsistent with the size of the

company − There is no Internal Audit Department to oversee the financial operation of the

company

The combination of the above weaknesses and present international financial crisis will act as a major deterrent to any further investment in the electricity sub-sector of Tajikistan either by International Financial Institutions or the private sector.

Since previous ADB Technical Assistance has not brought about the scale of changes required, the ADB considered the appointment of an international Management Contractor as an alternative way to restructure the BT. A new project24 was launched in September 2007 to help MOEI to explore this option and if deemed suitable by the Government, to help define the terms of a Management Contract and appoint a contractor through an international competitive tender.

In the early stages of the project extensive discussions took place between the consultants, ADB, the Ministry and BT on pros and cons of allowing a third party to manage and control the company. These discussions were followed by a study tour to meet companies in the electricity sub-sector in the region with experience of management contracts. It was concluded that the restructuring of BT must be directed and controlled by the Government and MOE&I and the ADB was requested to focus the final phase of the present TA on assisting the Government with drafting a revised Restructuring Plan.

This report and its associated annexes, along with the Restructuring Plan offer the MOE&I and BT with a clear road map for taking the steps necessary to improve the performance of BT.

Good progress has been made against a demanding timetable demonstrating the commitment of the Ministry to push forward with the restructuring of BT. This has included:

Preparation of a revised Restructuring Plan that has been approved by all stakeholders and is being considered by the Government’s Restructuring Commission before being formally endorsed through a Governmental Order;

24 TA No. 4908-TAJ - Strengthening Corporate Management Of Barki Tajik


CONCLUSIONS - CONTINUED

The report on Corporate Governance lays out an approach to increasing transparency and accountability hence increasing the attractiveness of the electricity sub-sector to private investors;

The report on Corporate Structure offers a revised organisational structure that, if implemented, will address the present weaknesses identified by auditors and introduces commercial practices;

The report on Benchmarking and KPIs highlights the present difficulties in measuring the performance of BT and provides a foundation upon which effective management information systems can be designed and implemented to help in target setting and performance monitoring;

The report on Tariff Subsidies offers recommendations for improving the present scheme by ensuring that not only current requirements are met but also provisions are made for future improvements.

In addition to the outputs of the present project, the previous TA “Implementation of Energy Law/Unbundling of Barki Tajik- Loan No: 1817-TAJ (SF)” that was concluded in 2007, offers a number of important deliverables that will facilitate the implementation of the 1st phase of the Restructuring Plan. These include:

Restructuring Implementation Plans for unbundling and amendments to the energy Law which will provide valuable input to the planning the implementation of 1st phase of the revised Restructuring Plan;

Comprehensive studies conducted at three pilot sites (i.e. generation, transmission and distribution) which identify issues and offer solutions to facilitate restructuring and unbundling;

A large communication event, organised in Isfara to disseminate the goals and objectives of the restructuring programme to the personnel of BT and other stakeholders, provides a model for a national communication programme to avert the fears of staff and the populations related to restructuring;

A comprehensive manual for accounting separation and unbundling, developed to facilitate the separation of accounting of head office, generation, transmission and distribution, provides a detailed road map for the reorganisation of the finance and accounting function.

Overall this TA, as well as the previous TAs, has been instrumental in promoting the restructuring of BT high up in the Government’s agenda. The efforts dedicated during the final phase of the project to preparing a revised Restructuring Plan, in consultations with the key stakeholders, has helped to generate momentum and consensus on the nature of restructuring required and its urgency.

The reorganisation implied by the first phase of the Restructuring Plan will present BT and the Government with significant challenges in change management at a scale that has no precedence in Tajikistan. Considerable investment will be required in information systems, including an integrated financial and management reporting system, and in recruitment and training.

The critical barriers to successful restructuring will be the lack of sufficiently qualified and experienced managers in Tajikistan to oversee the restructuring process and raising the investment required to retrain existing staff and remunerate them sufficiently to retain them. It was for these reasons that this TA was originally designed by the ADB to help the Government appoint an international company, under a management contract, to help implement the commercialisation phase (Phase I) of the restructuring plan.


CONCLUSIONS - CONTINUED

Given the reluctance of the Government and BT to trust the restructuring of BT to a third party, an alternative implementation strategy has to be defined in consultation with IFIs. Otherwise it is highly doubtful whether the first phase of restructuring will be implemented successfully. This may require the establishment of a dedicated unit by the Government, resourced by highly qualified national and international experts, to manage the first phase of the restructuring. IFIs on their part must be willing to provide the financial support required to establish such a unit and to finance the retraining of managers and staff of BT.

Support will be needed by the government in the form of technical assistance, estimated at some US$ 3.0 million for the implementation of the first phase of the Restructuring Plan. This will mainly cover the cost of external advisors and other forms of capacity building such as training of BT and the MOE&I staff. There will also be a need for additional investment such as the introduction of IT systems to strengthen financial reporting, billing, and human resources. Some of these, such as the development of a billing in Dushanbe, are the subject of a World Bank initiative. Additionally, the operating cost of the Restructuring Group will be around USD$ 300,000 per annum if the Group is to function effectively and attract qualified experts. It would be advisable for funding of the Group to be provided from outside BT to ensure its independent operation. Overall the cost of implementing the 1st phase of the Restructuring Plan is likely to be around 4-5m USD which is comparable to the cost of a management contract that was originally envisaged by the ADB.


APPENDIX 1 PROJECT TERMS OF REFERENCE APRIL 2009

TA4908-TAJ

The Strengthening of the Corporate Management of Barki Tajik

A. Objectives

1. The technical assistance (TA) is designed to strengthen and improve internal management and customer responsiveness and reliability of Barki Tajik (BT), a publicly owned power company in Tajikistan.

2. The Government has planned to restructure the company and unbundle starting in 2008 in accordance to a Restructuring Plan developed in 2006 (the Restructuring Plan) designed under the previous ADB loan 1817-TAJ(SF), due to delays in approving the restructuring plan the Government has not been able to implement such plan.

3. The Restructuring Plan needs to be updated. While there are several options that the Government is considering in the mid to long term including unbundling, the short term need of BT is to establish an efficient management and rational institutional structure to effectively design and control the planning, budgeting, revenue management and corporate accounting system. The TA shall guide the Government and BT in updating the restructuring plan, particularly in the short term aspects, and focus on key areas that need to be improved within BT.

B. Scope

1. The consultant will, but not be limited to:

I. Support the Government in updating and getting the Restructuring Plan approved. Hold workshops for the members of Government to review and agree to an updated plan; support the Government in obtaining the necessary approvals to the level of issuance of a presidential order to the management of BT for the restructuring of the company.

II. Support BT in reorganization, not limited to the following:

• Overview of the Corporate Structure of BT

A detailed review of the Organizational Structure of BT with a particular emphasis of their Financial, Human Resources, and Corporate Planning Departments. Preparation of terms of reference of the Directors, recommendations in policy and procedures, staffing levels for these three departments shall be required;

____________________________________________________ ADB TA 4908-TAJ - Final Report

APPENDIX 1 PROJECT TERMS OF REFERENCE APRIL 2009 - CONTINUED

• Corporate Governance

Propose a structure to the government regarding the corporate governance of BT including the formation of a Board of Directors (BOD) for BT and the preparation of BOD's code of conduct, terms of reference, fiduciary duties, and related functions and rules;

• Benchmarking

Benchmarking against similar utilities around the world, define the most appropriate performance criteria that best suits the objectives of the Government and the local environment in Tajikistan to be compared to utilities worldwide; and,

(iii) Tariff Study

Propose a methodology for the use of loan repayments from BT for Government tariff subsidies for poor and vulnerable electricity consumers1.

C. Outputs

1. The TA will help improve the overall management capacity and financial and strategic efficiency of BT by providing institutional and corporate governance support though specific guidelines set forth in their scope. The expected results from both the Government and the consultants are:

I. Presidential Decree (by July 2009)

The consultant will support the Ministry in getting all necessary approvals in order to get the Presidential Decree, however, the ultimate responsibility lies with the Government.

II. Interim Report (by June 2009)

The interim report will consist of progress made to date in regards to the approval process of the Presidential Decree, methodologies in tariff studies and benchmarking, initial review of the three departments.

III. Draft Final Report (by August 2009)

Final recommendation on the benchmarks to be used, financial and accounting systems, mid to long term strategic planning methodologies, human resource policies, organizational changes, terms of references for key officers and procedures of the

1 Please refer to Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Republic of Tajikistan: Nurek 500kV Switchyard Reconstruction Project, Project Number:42189, paragraph 84. October 2008; Asian Development Bank.


APPENDIX 1 – PROJECT TERMS OF REFERENCE APRIL 2009 - CONTINUED

three departments mentioned above, governance, board of directors and its terms of reference.

IV. Final Report (by September 2009)

Incorporate comments made by the ADB.

D. Required Expertise 1. The consultants will provide the following experts

I. A team leader with experience with the knowledge of Government of Tajikistan and its internal approval process

II. A power utility planning expert III. A financial and economic expert

GOVERNMENT OF THE REPUBLIC OF TAJIKISTAN

MINISTRY OF ENERGY Restructuring Plan for Barki Tojik

DRAFT

July 2009

RESTRUCTURING PLAN FOR BARKI TOJIK

DOCUMENT TITLE: RESTRUCTURING PLAN FOR BARKI TOJIK

Contract Number: ADB TA 4908-TAJ

Prepared By: Eric Harrison - Corporate Solutions Consulting Limited

Reviewed by: Ministry of Energy and Industry

Version: 0.5

Date: July 2009


ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank

BT Barki Tojik

BOT Build Operate and Transfer

CAPS Central Asian Power System

DAMPDC Department of Anti-Monopoly Policy and Development of Competition within the structure of the Ministry of Economic Development and Trade

DSO Distribution System Operator

ECA European and Central Asia

GENCO Generating Company


IPP Independent Power Producer

KW 1000 Watts

KWh Kilowatt hour (1 Unit of electricity)

MCM Million Cubic Metres

MOE Ministry of Energy (pre 2007)


MW 1000 KW

SO System Operator

TSO Transmission System Operator

TWh Terawatt hour (1000 Gigawatt hour)


CONTENTS 1 EXECUTIVE SUMMARY ................................................................................................................. 1

2 THE NEED FOR RESTRUCTURING.............................................................................................. 3 2.1 TAJIKISTAN’S POWER SECTOR ........................................................................................................... 3 2.2 THE STRUCTURE OF BARKI TOJIK ...................................................................................................... 4 2.3 PERFORMANCE OF THE POWER SECTOR ............................................................................................. 4 2.4 GOVERNMENTS’ SECTOR STRATEGY AND POLICIES........................................................................... 5 2.5 DIRECT INWARD INVESTMENT IN THE POWER SECTOR ...................................................................... 9

3 INTERNATIONAL PERSPECTIVE AND EXPERIENCE.......................................................... 10

4 PROPOSED RESTRUCTURING SCHEME ................................................................................. 13 4.1 STRATEGIC OBJECTIVES AND SECTOR CONSTRAINTS....................................................................... 13 4.2 GETTING THE CONDITIONS RIGHT.................................................................................................... 13 4.3 PROPOSED APPROACH TO RESTRUCTURING...................................................................................... 14

4.3.1 Reorganisation of Barki Tojik ............................................................................................... 15 4.3.2 Implementing a tariff reform programme.............................................................................. 16 4.3.3 Implementing a legal reform programme.............................................................................. 16 4.3.4 Establishing a regulatory framework .................................................................................... 17

5 IMPLEMENTATION OF THE RESTRUCTURING PLAN........................................................ 18


RESTRUCTURING PLAN – DRAFT VERSION 0.5 1

1 Executive Summary The power sector1 plays a dominant role in the economy of Tajikistan. The country possesses vast amounts of hydroelectric resources estimated to be around 527TWh of which around 3% is exploited and the sector currently accounts for 4.7% of GDP. Electricity is also a key input for the production of the two most exported commodities – aluminium and cotton. Furthermore, the sector has the confirmed potential of contributing to an export led growth, through electricity exports to countries within Central Asia and beyond. However, significant resources are needed to exploit this potential and without investment from institutional banks and private investors the full potential is unlikely to be realised.

In order to make the power sector more attractive to private investors and to prepare the electricity sector for future liberalisation, the Government of Tajikistan has committed to restructure Barki Tojik2 and strengthen the legal and regulatory framework governing the power sector. The ultimate goal is to create an environment that can help shift the burden of financing the development of the country’s hydroelectric resources from the government to the private sector, particularly the construction of new generation capacity.

The Government proposes to manage the restructuring of Barki Tojik in three phases as follows:


2. Phase 2 (2013 -2015) of the restructuring programme, which is referred to as the “competition” phase, Barki Tojik will be organised, if deemed appropriate, into a number of legally independent enterprises owned fully by the state. The links between these legally independent enterprises will be controlled via supply contracts and a regulatory system. In this phase independent power generation companies will be allowed to enter the market and be given access to the state-owned transmission network subject to clearly defined agreements. . A detailed implementation plan will be developed by the MOE&I, other ministries and Barki Tojik for phase 2 which will be approved by the government.


1 The principal organisation to be restructured is Barki Tojik and its subsidiary companies that are wholly owned by the

Government of the Republic of Tajikistan. However, the legal and regulatory framework for the whole electricity sector will be reviewed and modified accordingly as will the rules and requirements for accessing the transmission network by third parties for the delivery or transit of power across the transmission network.

2 Letter dated March18th 2005 from Prime Minister to the Director of World Bank Regional Office for Central Asia



A governmental order will be issued to Barki Tojik to implement the first phase of the restructuring programme. A Steering Committee will be established with overall responsibility for directing, supporting and monitoring the restructuring of Barki Tojik.

The successful implementation of the restructuring plan, within the proposed timescale, will require personnel with strong management, commercial and technical skills who are not currently available in sufficient numbers at Barki Tojik. In the short to medium-term this gap will have to be filled through the provision of technical assistance by the international partners and donors. However the overall management of the restructuring programme will remain fully the responsibility of MOE&I and Barki Tojik. It is therefore proposed that a joint Restructuring Group be established by MOE&I and Barki Tojik to manage the implementation of the restructuring programme and coordinate the input of international technical assistance projects. The Group shall comprise of highly qualified specialists with in-depth knowledge of the Tajikistan Power Sector and include experts with experience in generation, transmission and distribution and skills in economics, accounting, engineering, and operations. The members of the Group shall be appointed on a fulltime basis and sufficient salaries and other incentives shall be offered to attract qualified experts. They shall be given the necessary authority to conduct their work and to call on other experts in the power sector to assist them. The selection and appointment of the members of the Restructuring Group should be done with the approval of the Steering Committee. The Head of the Restructuring Group should report directly to the Chairman of Barki Tojik and Steering Committee. The Group will need sufficient financing to attract qualified experts and to support its activities. This financing should ideally come from funding agencies and not Barki Tojik to ensure the objectivity of the Group and reduce uncertainties about its financing.

During the first phase of the restructuring programme (Commercialisation), Barki Tojik will remain as a single legal entity but necessary steps will be taken to commercialise the operation of the company and to improve its operational and financial performance. This will include establishment of three business units (Generation, Transmission and Distribution), introduction of commercial practices and separation of accounting for the business units. In parallel, legislative changes will be introduced and a regulatory body established to create an enabling environment for private sector participation in the second and third phases of the restructuring.

The “commercialisation” of Barki Tojik is a major challenge and will represent a fundamental change in the way the sector will be managed. Considerable preparatory work will be necessary which will require careful planning and coordination across a number of functions and authorities. The management capacity and systems of Barki Tojik must also be significantly upgraded to operate the power sector in line with commercial principles. Undertaking the preparatory work satisfactorily and building the capacity of Barki Tojik are critical to the successful implementation of the first phase and will determine when the second phase of the restructuring programme can be embarked upon.



2 The need for restructuring

2.1 Tajikistan’s Power Sector

Tajikistan has vast hydro resources, of which it is estimated that only 5 per cent has been exploited to date. There is, therefore, great potential for export-led growth by developing new hydroelectric stations and exporting electricity to other countries in the region. The country has an extensive electricity system that provides access to close to 100% of the population. Almost all of the electricity system was developed during the Soviet times. Tajikistan operates a power system with a nominal installed capacity of 5,055 MW consisting of eight large and a few small hydroelectric stations (4.737 MW) and two fossil fuel fired combined heat and power (CHP) stations (318 MW). The Vakhsh hydropower cascade, comprising the Nurek reservoir and power houses at Nurek and Baipaza, with a combined installed capacity of 3,600 MW and generation capability of 15 billion kWh is the most important generation asset. Sangtuda 1 HPP with a capacity of 670MW recently came on stream and is owned 25% by the Tajikistan government.

Barki Tojik which is an open Joint Stock Company is a vertically integrated power utility responsible for the generation, transmission and distribution of electricity in Tajikistan. It serves a customer base of 1,074,118 and employed 10,660 staff at the end of 2008. Its biggest customer is Talco, which accounts for approximately 40 per cent of the electricity in the country.

The main transmission lines in the Republic are lines of voltage between 110 and 220KV. Overhead transmission lines with a voltage of 500 KV serve the power output of Nurek hydroelectric power plant and for connecting to the national energy system of Tajikistan with united energy system of Central Asia. The capacity of the 500 KV transmission lines is insufficient to carry all the potential export from Tajikistan in the summer period. It is therefore necessary to create an interconnected energy system within Tajikistan. At present the industrially developed north of the country has no transmission lines which connect it with the south, while the main energy resources are in the South. . The construction of a high-tension transmission line of 500 KV between the “South and the North” is now underway and is due to be completed by the end of 2009. It will include the construction of two new 500KV substations at “Dushanbe” and “Khujand” and the modernisation of the 500 KV “Regar” substation. The transmission line capacity will be 8.6 billion KWh a year The transmission line of 220 KV “Lolazor-Khatlon” is now in operation and it includes two 220KV substations. According to ADB the schedule of construction of a double-circuit 220KV transmission line between “Sangtuda (Tajikistan) and Puli Khumri (Afghanistan)” is to start soon. Transmission line capacity will be about 4 billion KWh a year, which will provide transmission line capacity of 300 MW which has been requested by Afghanistan for the summer period. Tajikistan as well as Afghanistan, Pakistan and Kyrgyzstan participate in the Central Asian and South Asian Regional Energy market. The development of a feasibility study for a transmission line “Kyrgyzstan-Tajikistan-Afghanistan-Pakistan” “CASA-1000” is soon to be completed. This will provide a direct connection between the energy systems of Tajikistan and Kyrgyzstan. In the North region of the Republic intensive design and survey works are being performed in order to develop water power resources of Zeravshan River (6 hydroelectric power plants, total installed capacity 640 MW). Talks are underway to establish whether representatives of Russia will participate in these projects.



The development of a feasibility study on Nurobad-1 and -2 hydroelectric power plants (installed capacity 350 MW and 200 MW) with Chinese company TBEA and Cinohydro and the feasibility study of Dushanbe-2 thermal plant (installed capacity 200 MW) are now completed.

2.2 The Structure of Barki Tojik

Up to 2004 Barki Tojik operated as a Joint Stock Company with its own management board. On 31 March 2004 Barki Tojik was fully integrated into the structure of Ministry of Energy (MOE) in accordance with the Government Decree (№119) and President’s Edict (№ 1249) dated January 19, 2004 and became a Joint Stock Company within the MOE.

Most technical functions were retained under the structure of Barki Tojik while administrative and other functions moved under the direct control of MOE.

In order to pave the way for restructuring of Barki Tojik, a presidential decree (№1718) was issued on March 28, 2006 to separate Barki Tojik from the MOE.

The separation of Barki Tojik from the MOE was undertaken successfully in 2006 with Barki Tojik operating as a JSC and the stock owned 100% by the Government. A Chairman was appointed who reports directly to the government. Five Deputy Chairmen were also appointed who report to the Chairman who have specific areas of responsibility covering various functions and activities.

In 2007 the MOE was merged with the Ministry of Industry and became the Ministry of Energy and Industry (MOE&I) which is responsible for energy and industry policy for Tajikistan

A revised charter for Barki Tojik was passed into law on the 31st October 2008 which included the creation of a supervisory board comprising the Prime Minister (or Deputy) as the chairman and the Ministers of Finance, Justice, Energy and Industry, Economic Development and Trade plus the chairman of the State Committee on Investments and Management of State Property and the Chairman of Barki Tojik as members. The board was given specific powers to determine the business of Barki Tojik and to review BTs business and financial plans

In January 2009 following a governmental order, a new management team was appointed at Barki Tojik comprising a chairman and four deputy chairmen.

2.3 Performance of the Power Sector

The need for additional power development in Tajikistan is driven by the fundamental energy generation constraints in the existing system3. Without new generation, there will be continuing and worsening electricity shortages in Tajikistan, which will mean that new industries will not be established, the economic growth of Tajikistan will be held back, and unemployment will remain high.

Since 1990, both the production and consumption of electricity has declined significantly4. Generation has declined due to operational difficulties in the Vakhsh hydro power cascade and lack of resources for repair and rehabilitation. Consumption has declined by a third, primarily as a consequence of non-availability of electricity, but also due to a reduction in economic activity, especially industrial. Despite the dramatic economic recession and related decline in energy consumption, the share of electricity in the overall consumption of energy has increased considerably. This situation reflects over-dependence on electricity, encouraged by relatively low tariffs for electricity compared to other forms of energy, its wide 3 Hydropower Development Strategy (TA 3956-TAJ), ADB, September 2004 4 Energy Utility Reform Review, A Strategic Approach to Sector Development, World Bank, May 2004



access, and its easy-to-consume nature. As a result, there is a significant deficit, especially in the winter. There is no reliable electricity supply, especially to remote areas where power supply in winter is delivered for a few hours a day and lower-than-rated voltage in the electricity network causes equipment failures. In recent years systematic power cuts have become more frequent even in large cities.

A second problem facing the electricity sector is the high level of losses half of which are attributable to technical losses in the distribution network. Distribution network losses have increased in the last decade due to: (a) the shift of consumption structure (much more is consumed in lower voltage networks than in the past); (b) use of electricity for space heating, thus overloading the networks; and (c) limited maintenance of the network.

The remainder of the losses are due to non-technical causes such as theft, defective metering, and use of norms for billing.

A third major problem that needs to be addressed is electricity pricing. Current electricity tariffs are below the level required to ensure financial viability of the sector. The consequences of low pricing is that over-consumption is encouraged and limited resources are available to maintain the system and for capital expenditures.

It is apparent that Barki Tojik’s ability to satisfactorily discharge its responsibilities, as the national supplier of electricity to the population, is hindered by a number of factors. Barki Tojik also lacks some essential systems which are required to support management operations and decision making. For example it does not have a computerised customer billing system to support management control of the critical function of revenue collection.

Furthermore, although Barki Tojik’s financial reporting systems were considerably upgraded5 to comply with international standards, they are not designed to support a structure centred on business units. Equally important while Barki Tojik’s staff have good expertise in technical functions, they lack sufficient commercial and financial management skills.

In spite of these inadequacies, Barki Tojik continues to make good progress in refurbishing the physical infrastructure and in adding new generation capacity6 which will enable it to meet demand for electricity in Tajikistan and also to export to neighbouring countries. It considers that it can best fulfil its objectives (i.e. making Tajikistan self sufficient in electricity and offering a high standard of service to the whole population at affordable prices) by continuing to work as an integrated power company, while making the necessary provisions for new generators to enter the market and have fair and transparent access to its transmission networks.

2.4 Governments’ Sector Strategy and Policies

The Government has approved a strategic plan to improve the overall situation in the electricity sector, as part of an overall plan to rationalise the availability and utilisation of energy in Tajikistan, including gas and heating.

It is taking a two-track approach to energy sector development as follows:

The first track focuses on the domestic energy sector, taking a sector-wide approach by covering the electricity, gas and heating sectors. The main aim of this track is the recovery of the domestic energy sector, for which purpose it is intended to take a series of policy and investment measures.

5 ADB Technical Assistance “TA 3601 TAJ - Introducing International Accounting Standards at Barki Tajik ” and “TA 4232

TAJ - Accounting and Financial Management System of Barki Tajik Subsidiaries” 6 Sangtuda 1 has been added to the generation capacity during the last year adding some 670 MW of capacity



The second track of the development strategy is oriented towards the exports markets. This strategy calls for realising the sector’s significant potential to contribute to meeting the country’s economic growth through electricity exports. There are at present electricity surpluses in the summer which are already being exported to neighbouring Afghanistan, Kazakhstan, Uzbekistan and Russia. It is intended to intensify these exports and secure more long-term contracts for existing surpluses. Realisation of additional export potential will entail the development and building of Ragun and Sangtuda Hydroelectric schemes, which are now underway.

This two-track approach is a determined effort to rehabilitate the existing electricity infrastructure and systems which have been neglected in the years since independence, and to develop new hydroelectric power which can become a major export for Tajikistan. If successfully implemented this plan will transform the operational efficiency of the electricity industry and significantly improve the country’s economy. The implicit subsidies which are being applied through lower than economic prices, and by low collection rates, will hopefully diminish and export earnings will be a real contributor to the overall economy. These efforts will pave the way for restructuring and private participation by making the power sector financially viable and hence attractive to private investors.

A number of policy measures are also being pursued by the Government to support the implementation of its strategy for the energy sector. These include:

− Revised Energy Pricing Policy

In the power sector, despite tariff increases in the past few years, the current tariffs are quite low, compared to the financial viability level of 2.1 US cents/kWh in constant terms, and therefore it is recognised that further tariff increases are much needed. However, the magnitude of the increase needed dictates a gradual approach, one that takes into account the need for improving the quality of service as well as addressing the affordability issues. Under this approach, tariff increases would reach financial viability levels by 2010. However, a short term measure, introduced to alleviate the impact of financial crisis which was approved on 29 April 2009 (Government order No. 2031 sub-section 2.1.9), provides for a delay in increasing tariffs by all national monopolies. The effect will be to introduce gradual increases to above 2.0 US cents per kWh over the period 2010 to 2013. The Government will also take measures to force large consumers to pay their arrears and make advance payments for electricity consumption in the future. These efforts, if successful, will pave the way for restructuring and private participation by making the power sector financially viable and profitable.

− Loss reduction and improve revenue collection programme

An energy loss reduction project funded by the World Bank was established in 2007. The project consists of the following items:

• The procurement and installation of electronic meters,

• The procurement and installation of a Billing System for Dushanbe Electrical city network (Gorelectroset)

• The provision of Technical Assistance to Barki Tojik to:

a) Help with technical issues, management and control

b) Introduce the Finance Improvement Programme7 and independent audit

c) Prepare a draft contract for energy export

7 This programme is a subset of the WB energy loss reduction programme described in this section



d) Provide financial and legal services to new projects related to energy export.

The aim of the Project is the reduction of commercial losses and improvements in accounting system of the city of Dushanbe. This is an important precursor for the financial viability of the new business unites to be created as part of the restructuring.

In September 2007 a contract was signed for the acquisition of 159,476 electronic meters with “Jeychang Chint Instrument Meters Ko” Ltd and meters had all been purchased by June 2009.

Agreements for the installation and replacement of meters were signed with four contractors. They are:

- OOO Sohtmoni Barki Dushanbe,

- TADES

- Tojikgidroelectromontazh

- Promservice - Export” (Russian Federation) for the procurement of 220 km of cable cable

According to the order of the Chairman of Barki Tojik, 134 specialists from the different enterprises are involved in the installation of meters in the city of Dushanbe. The installation of meters began in April 2008 and 44,522 electronic meters had been installed by June, 2009. The installation programme is due to be completed by the end of 2009.

On April, 8 2009 Barki Tojik and company “Asemgroup” signed a contract for the installation of equipment for billing software.

In May 2009 a programme aimed at the improvement of the financial management of Barki Tojik was introduced. The programme will cover 4 areas of activity:

− Accounting Policy;

− Revenue Management;

− Fixed Asset Management;

− Introduce IAS and IFRS.

An objective of the project is the computerisation of accounting functions and it is planned to use international consultants and 4 local firms to undertake the work over a period of 16 months

− Increasing Energy Supply Rehabilitation projects will increase the power of hydroelectric generators by up to 10%, which means that installed capacity will increase by 350-400 MW. Priorities for rehabilitations will be the Vakhsh cascade of hydroelectric power plants, the Kairakkum hydroelectric power plant, the Varzob cascade of hydroelectric power plants, the Dushanbe thermal plant and the Yavan thermal plant.

− The main unfinished power project is Rogun hydroelectric power plant on the Vakhsh River which has a planned installed capacity of 3600 MW and an annual power output of 13.3 billion kWh. The completion of this hydroelectric power plant is a high priority which is being financed by the government with 532 mln somoni allocated to the construction of the first stage. It is planned to build a dam at the Vakhsh River by October 2009 which will offer a potential extra power output of 0.45 billion KWh from the operational power plants in the Vakhsh cascade. It is then planned to add additional height to the dam to 1,180m which will allow 2 new generating units to be installed at Rogun with a total power output of 800 MW.



Rogun will then be able to generate 5.6 billion KWh per year. This will also allow the cascade of power plants below Rogun to generate an extra 0.7 billion KWh of energy per year. The start of this work is planned for 2012.

− Also talks are underway on the construction of Shurob hydroelectric power plant (between Nurek and Rogun) with a planned installed capacity of 850 MW.

− Furthermore, Kairakkum hydroelectric power plant (126 MW) is situated on Sirdariya River in the North of the Republic. The reservoir of this hydroelectric power plant is used for irrigation and is also used for regulating water supplies to Uzbekistan and Kazakhstan in summer. A feasibility study on the rehabilitation of this hydroelectric power plant has been developed.

− The cascade of Varzob hydroelectric power plants (25.43 MW) is located near Dushanbe. It is planned that the rehabilitation of the hydroelectric power plant Varzob-1 will be undertaken by an Indian company.

− Tajikistan has 2 thermal plants - the Dushanbe thermal plant (198 MW) and the Yavan thermal plant (120 MW). The rehabilitation of these two plants is planned to be undertaken from Government’s resources. Also a feasibility study has been completed on the construction of the thermal plant Dushanbe-2 with an installed capacity 200 MW.

− The construction of the hydroelectric power plant Sangtuda-1 with an installed capacity of 670 MW and an annual output of 2.7 billion kWh, is due to be completed and start its operations on July, 31 2009. The operation of Sangtuda-1 will make it possible to provide consumers with cheap electricity and to export to neighbouring countries in summer time.

− Preparatory works are completed for Sangtuda-2 power plant and its construction is underway. It is planned to have an installed capacity 220 MW. The construction is being co-financed by the Government of Iran. Sangtuda-2 is the bottom step of Sangtuda energy junction and it will operate with Sangtuda-1 from the discharge of Nurek reservoir which will help to perform daily stream-flow regulation and partly assist with the most intense winter period.

− More than 169 small and micro hydroelectric power stations are in operation supplying mountainous hard-to-reach area with power. The potential of small rivers for the construction of small hydroelectric power stations is more than 30MW with annual power output of about 100 million KWh. A long-term programme has been developed for the construction of 189 small hydroelectric power stations between 2009 and 2020, and the European Bank for Reconstruction and Development and other investors are considering financing.

Taking into account all the above projects Tajikistan will be able to generate 29 billion KWh by 2013.

After the completion of the construction of the 2nd stage of Rogun hydroelectric power plant, Shurob hydroelectric power plant on Vakhsh River, Dashtijum hydroelectric power plant on the Pyanj River and development of the basin of the Zeravshan River, which is due in 2015, the output of energy in 2020 is planned to be 57-60 billion KWh.

Through the above policies and investment commitments, the Government is pursuing those priority opportunities which can return most benefit. Revenue is the lifeblood of Barki Tojik, and must therefore always be a focus for attention both in pricing and in collection practices. In a country where such a high percentage of people live below the poverty line the Government is understandably sensitive about prices and collection policy. However, particularly in a situation where privatisation of distribution companies is being considered,



and where Barki Tojik finances are in poor condition because of low prices, losses and low collection rates, concerted and sustained action will be taken to collect due revenue under a clear policy which has the full baking of the Government.

Overall the sound strategy and policies adopted by the Government, once implemented, will pave the way for private participation. In parallel, it is paramount that the power sector is restructured to allow private sector participation and that the organisational capacity of Barki Tojik is significantly enhanced. This will not be a simple undertaking and significant technical assistance will be required to facilitate the restructuring of Barki Tojik.

2.5 Direct Inward Investment in the Power Sector

There is already precedence of inward investment in the power sector in Tajikistan.

Sangtuda 1 and 2 hydroelectric power plants had $120 million spent on them but they had not been completed by 2006. The Russian power utility RAO”UES” participated in completing the construction of Sangtuda 1. The Russian Federation will contribute $250 million and will have a 75% stake in a new Joint Stock Company, with the Tajik Government holding the remaining 25 %.

Other inward investments include:

The Iranian Government has agreed to provide a credit of $180 million for the completion of Sangtuda 2 on a Build Own and Transfer (BOT) basis;

The Islamic Development Bank is providing credits of $9.2 million to fund completion of 8 small hydroelectric power stations;

A 25 year concession has been given to “Pamir Energy” company (of the Aga Khan Foundation) to provide an integrated electricity service in the Gorno Badakshan Autonomous Region.

The progress already made in attracting investment demonstrates the attractiveness of the under-developed hydro resources of Tajikistan to foreign investors. It is notable however that these direct inward investments are from other states or state-owned companies which may have a strategic political interest in supporting Tajikistan’s development.

Ideally the electricity sector should strive through restructuring to be in the position where it can attract direct inward investment from international capital markets on a competitive basis. Such investments could be in the form of participation in new joint stock companies, or on a concession basis or on a BOT basis to develop new hydro capability intended for the export market. A pre-condition for such a situation would be an unbundled sector operating on an “arm’s length” basis from the Government and regulated by an independent Power Industry Regulator.



3 International Perspective and Experience In well-managed vertically integrated electricity companies there is every opportunity to maximise efficiency and focus considerable industry-specific expertise to deliver high standards of customer service. With high quality metering, billing and revenue collection systems in place, optimal areas for investment to achieve further efficiencies can be readily identified and addressed. Performance standards can be applied to all key functions and measured against international benchmarks. In all countries the price of electricity is of significant importance for economic development. Electricity is a cost element in the provision of all goods and services, and is one determinant of their overall competitiveness in international markets. It is therefore important that the power sector can operate cost efficiently so that electricity can be offered at affordable prices.

Throughout the world, during the last two decades, there has been a movement away from the traditional vertically integrated model of a power utility. In developed economies this move towards restructuring and unbundling is mainly for the purpose of introducing competition into what has been a monopoly industry. In developing countries there is the additional benefit of facilitating the entry of private investors into this capital intensive industry, thus relieving the Government of a major financing burden and enabling it to improve the funding of social welfare, health and education? Unbundling and attracting private investors requires8 that there is total transparency in the way that costs and revenues are accounted for, and each main function (i.e. generation, transmission and distribution) is treated as separate entities with their own balance sheet and profit/loss account. Each such entity must concentrate maximum effort on its core business and divest itself of any ancillary businesses.

A World Bank review2 of the reforms involving restructuring, private sector participation and competition in the power sector of Europe and Central Asia (ECA) countries during the 1990s indicates clearly the need to design reform proposals for each country based on its specific circumstances and not based on a general philosophical approach. Tajikistan operates a relatively small energy system. Its electricity sector has a capacity of around 5,000 MW, annual sales of around 14 Terawatt hours and a customer base of around than one million. Clearly there is little scope under these circumstances for competition from within Tajikistan by creating a large number of supply entities within such a small customer base. The resulting entities would be too small to have any economies of scale to be financially viable, and unlikely to be attractive to local or foreign investors. Their operations would not be any more efficient than those of the present entities.

Furthermore, the World Bank study identifies another important lesson namely that sector unbundling by function in the context of high levels of non-payment actually exacerbates the problem and results in the upstream companies getting practically no collection receipts at all. This is a major problem in Tajikistan and although it is being addressed, it will take some time before the impact of the present initiatives manifests themselves in higher collection rates.

Other specific features of the situation in Tajikistan that must be taken into account while undertaking institutional reform include:

a. The dominance of one hydro cascade in the generation sector which necessitate the management of generation facilities within the cascade as a whole;

8 The Unbundling Regime, Notes on Energy and Transport on directives 200/54/EC and 2003/55/EC on the internal market in

electricity and natural gas, January 1, 2004



b. The existence of one large customer (Talco) who accounts for 40% of the electricity output and who periodically suffers financial difficulties and also uncertainty about the level of payments;

c. The integrated nature of the Central Asian Power System, the role which the Tajik system plays in it and the scope which the integrated system offers for regional competition.

Restructuring of the energy sector, which is often a mix of functional unbundling (i.e. separation of generation from transmission and both separate from distribution), and geographical unbundling (creating full-function regional utilities), is not without costs. First, there is usually resistance from the current political and organisational establishment for the proposed changes, especially to separating generation from transmission. Second there is the increased cost of operating a restructured sector, which tends to be higher than operating a vertically integrated utility. Third, the regulatory capabilities tend to be weak, and to remain so for some time. These factors have to be fully taken in to consideration when deciding the timescale for the unbundling of Barki Tojik.

However, without some restructuring along the lines proposed, it is impossible to have transparency in the system. In an unbundled system, there is a natural tension created which leads to more transparency – the generator’s business is to show maximum sales to the distribution companies (and the transmission company will have to show exactly how much it transmitted), which forces the distribution company to account for the electricity it received. Moreover, without the existence of a common-carrier transmission system, it is not possible to enhance trade and attract outside investment.

In most developed countries restructuring of electricity industries has been successfully carried out. There have been some major mistakes made in some cases which have had to be corrected. For example, in California the wholesale market was de-regulated while the retail market continued to be regulated. This ultimately resulted in wholesalers refusing to supply the retail market at prevailing prices, and led to crisis which required government intervention. In Great Britain, the initial decision to have only three generating companies supplying power to a pool-based system created the opportunity for those companies to collude in fixing high prices for power delivered by them into the pool at peak times. This necessitated intervention by the regulator resulting in the largest company having to sell off some of its generating stations in order to have no single company owning more that twenty per cent of the national generating capacity. Also in Australia and New Zealand there has been the need for the regulator to continually monitor the functioning of the market and to make corrections to solve operational and market power issues. Nonetheless there is now full retail competition in Great Britain, Norway, parts of USA, Austria and New Zealand (i.e. customers in these countries are free to purchase their electricity from whatever generating company they choose).

In all of these countries the power utilities have been operating commercially for profit for decades. However, when embarking on restructuring they had ample resources in all the appropriate specialist areas; access to qualified accountants to separate accounting; availability of integrated cost and management information systems to inform managers on costs being incurred in every activity in every part of the power system; revenue collection rates which were ninety nine per cent of billing; and most importantly, they were operating in an environment where there were highly developed public administrative and legislative services available. None of these can be taken for granted in Tajikistan and significant effort and time will be needed to put the foundation in place to support restructuring.

The situation and the environment are very different in developing countries and in countries which were once part of the former USSR. Here many costly mistakes have been made as a result of Western government sponsored agencies pushing for early development of market economies without due appreciation of existing business systems, indigenous cultures,



traditions and behaviours. This is evident in the electricity sectors of several such countries where well-intentioned reforms have failed to produce the desired results. For example, in 1997 in Ukraine unsuccessful efforts were made to replicate the British system in a country with low liquidity and with a tradition of very low collection rates. One bizarre outcome was that privatised distribution companies were under no legal obligation to pay for electricity transmitted into their networks. More recently the restructuring of the sector in Kyrgyzstan along classical lines has in fact degraded the financial position of the overall electricity sector, as collection rates have declined5. The unbundling process has led to the alienation of the managers in the utility “KyrgyzEnergo” whose support and skills were needed to improve collection performance.

It is now recognised that to engage in radical restructuring, before financial viability is achieved, through improved collection of revenues, may exacerbate overall utility problems rather than improve them. The World Bank Document “Project Appraisal Document on a Proposed Credit in the Amount of SDR 12 million and Proposed Grant of SDR 2 million to the Republic of Tajikistan for the Energy Loss Reduction Project – dated May 27th 2005” asserts:

“Learning from these it is proposed that the reforms in Tajikistan be sequenced. This operation would focus on financial viability only, by providing the necessary tools (e.g. metering, billing and financial systems) for improving financial viability while also assisting in implementing policy measures (i.e. tariffs and collection) which would further be supported by implementation of a Social Protection Scheme. The remainder, institutional reforms and private sector participation, would come in a more phased manner”.

In order to avoid unnecessary risks, and since there is no real necessity to achieve restructuring in the shortest possible timescale, the restructuring of Barki Tojik should be carried out, initially, by forming “business units” which could later be separated out and granted independent legal status. The amount of time and effort required to establish these business units and to implement effective financial reporting systems should not be underestimated, and a timescale of three years is a minimum. The goal should be to have in place unbundled business units, each with a management structure and staff who are capable of operating as independent companies when the time is considered opportune and appropriate. The target of three years assumes that qualified personal can be appointed to introduce and manage the change process. A formidable impediment to the restructuring process at Barki Tojik is the lack of qualified and well-paid staff in the power sector. At best existing staff will be appointed to undertake the task, along with their day-to-day duties, and unless a solution can be found, the unbundling process could take even longer.



4 Proposed restructuring scheme

4.1 Strategic Objectives and Sector Constraints

The proposed approach to the restructuring of the electricity sectors is deigned to meet the Government’s stated strategic objectives for the power sector and address the existing constraints and weaknesses in the sector.

The strategic objectives of the Government of Tajikistan with regard to the electricity sector are:

Attracting private capital to develop the vast hydro resources of the country and maximising public revenues from the future sale of any of state-owned assets;

Safe guarding the integrity of the country’s power system during restructuring and avoiding any degradations in the financial performance of Barki Tojik and minimising interruptions to its operations;

Reducing the cost of electricity for the population and the industry to stimulate the country’s economic development;

Creating a more efficient power sector that is environmentally sustainable. Amongst constraints to be addressed are:

Existing prices are subsidised for some customers and rapid increases in prices caused by a rapid implementation of electric utility restructuring and competitive markets may be politically and practically impossible. The pace and timing of reform have therefore been carefully decided to coincide with the anticipated improvements in the population’s income and reductions in the cost of electricity provision;

Unlike other countries in the region which enjoy huge oil and gas resources, the electricity sub-sector in Tajikistan plays a significant economic role. The approach to reform has therefore been designed to minimise risks related to uncertainty, increases in operating costs, loss of management control, and degradation of services during the transitional phase;

The successful restructuring of Barki Tojik requires highly qualified personnel that are scarce in Tajikistan and management information systems which are weak at Barki Tojik. Building the institutional capacity of Barki Tojik will require time and resources and must be given the highest priority;

The institutional capacity to effectively manage the operation of a competitive power sector with private sector participants is still low in the country. The legal and regulatory framework governing the power sector will need to be strengthened before effective private participation is possible.

The immediate focus of restructuring of Barki Tojik will therefore be on commercialisation, including tariff reform and the establishment of an effective regulatory framework. Sector unbundling can only follow such commercialisation when appropriate steps are taken to improve the effectiveness and efficiency of operations of the power sector. Energy reforms should also focus on improving corporate governance.

4.2 Getting the Conditions Right

Getting the conditions right for the successful privatisation of Barki Tojik is the most critical challenge for the Government. The lessons learnt from other ECA countries have led to the following general conclusions:



When a country is experiencing a deep and prolonged economic and political crisis and is focusing on stabilisation, introduction of sector unbundling, competitive markets and privatisation for the power monopoly is counterproductive. It is good to wait for the economy to stabilise.

When a country is reeling under serious and prolonged non-payment and non-cash payment crisis, sector unbundling may actually exacerbate these problems. It is better to focus during this period on the macroeconomic factors causing the systemic non-payment problem, eliminate constraints (legal or political) to denial of service to defaulters, promote budget discipline to eliminate payment defaults by budget organisations, and improve procedures to recover debts and related measures.

Sector unbundling and competition evolved in the developed countries to achieve further efficiency gains, after they had reached practically the full potential for efficiency gains under the regulated monopoly regimes. ECA countries have a long way to go to reach that level under monopoly operation. A key lesson from the ECA experience is that attempts at restructuring, privatisation, and competition have a better chance to succeed only when they are preceded by comprehensive “commercialisation” of the operations of the existing utility. Such commercialisation is important to attract strategic investors, to optimise privatisation receipts, and to make the transition to the private sector operations smooth.

Three key steps to precede restructuring and competition are: (a) legal reforms; (b) tariff and regulatory reform; and (c) commercialisation of operations.

− Legal reforms aim at making electricity supply a fully commercial service available only to those who pay the bills. They should enable denial of supply to those who do not pay, make theft of electricity a criminal offence punishable with fines and jail terms, and enable speedy recovery of arrears.

− Tariffs should be adjusted to cover the cost of supply and to reduce, to the extent possible, internal cross subsidies; the process of tariff adjustments should be de-politicised through the establishment of professional and independent regulatory bodies. Tariff unbundling (i.e. final tariff = generation tariff + transmission tariff + distribution tariff + customer related costs) helps make price setting more transparent. Tariff reform must include social protection measures for the targeted poorer segments of the society.

− Some of the key elements of commercialisation are: (a) cutting the utility from routine annual budget support and compel it to operate with the revenues it generates, (b) functional accounting to identify costs and revenues by function, (c) tariff unbundling, (d) organising generation, transmission, and distribution functions by business units within the framework of the existing company, (e) evolving transparent transfer pricing among the business units and contract based relationships among the business units, (f) developing meaningful internal and external audits and disclosure procedures, (g) compilation of clear, comprehensive, and unambiguous inventories of all real and fixed assets and debts, and (h) improve metering, billing, and collection procedures and mechanisms to monitor payment defaults and take corrective actions.

Once the utility has been substantially commercialised and the tariff regimes (including social protection measures) are appropriate, the utilities can access the debt markets on the strength of their balance sheets. This is the appropriate time to consider legal unbundling and privatisation.

4.3 Proposed approach to Restructuring

Based on foregoing arguments and lessons emerging from other ECA countries, it is proposed to manage the restructuring and privatisation of Barki Tojik in three phases:




2. Phase 2 (2013 -2015) of the restructuring programme, which is referred to as the “competition” phase, Barki Tojik will be organised, if deemed appropriate, into a number of legally independent enterprises owned fully by the state. The links between these legally independent enterprises will be controlled via supply contracts and a regulatory system. In this phase independent power generation companies will be allowed to enter the market and be given access to the state-owned transmission network subject to clearly defined agreements. A detailed implementation plan will be developed by the MOE&I, other ministries and Barki Tojik for phase 2 which will be approved by the government.


The rest of this section lists actions to be taken in the first phase of the restructuring programme. The full approval of the government must be gained ahead of the implementation of the restructuring plan. This will require a governmental order for the restructuring of Barki Tojik. To maintain the timescales it is expected that this order should be made in August 2009. The MOE&I, other ministries and Barki Tojik will then develop a detailed implementation plan for Phase 1 including a timetable. This plan will be approved by the government before its implementation. 4.3.1 Reorganisation of Barki Tojik

Design a revised corporate structure to accommodate the creation of three business units (Generation, Transmission and Distribution) and to facilitate effective corporate governance;

Appoint management teams for each of the three business units and define their roles and responsibilities;

Commercialise the operation of Barki Tojik by introducing contract-based and transfer pricing mechanisms to govern the relationship between the business units and the relationship between the business units and ancillary functions;

Overcome technical barriers to measuring the volume of electricity transmitted to the transmission system and the volume of electricity transferred from the transmission system to the distribution network;

Increase financial transparency of Barki Tojik by separating accounting for business units so that financial statements can be prepared for each unit as well as consolidated financial statements for Barki Tojik. This will include achieving a clear, comprehensive, and unambiguous allocation of fixed assets and liabilities to each of the three business units;



Strengthen Barki Tojik’s financial management information systems to support the new organisational structure and commercial operation of the business units, and develop meaningful internal and external audits and disclosure procedures;

Improve metering, billing, and collection procedures and mechanisms to monitor payment defaults and to take corrective actions;

Introduce effective systems for target setting and performance monitoring and integrate these with a modern process of business planning and financial budgeting;

Define a financial and operational performance improvement programme for each business unit with the overall objective of minimising losses, increasing collection rates, reducing costs and rehabilitating the existing infrastructure;

Define a five-year business plan, including an investment plan, for each of the three business units to be updated annually;

Define and implement a human resources policy to address the training needs of staff, introduce an appropriate remuneration system, rationalise staffing levels and introduce and implement an effective performance evaluation system;

Agree a programme for divestment of social assets and develop a plan for involving private sector in the provision of ancillary functions.

4.3.2 Implementing a tariff reform programme

Analyse existing tariff approval mechanism and develop a tariff balancing methodology and propose a mechanism for 2010-2012. The impact of the government’s anti crisis measures passed on 29th April 2009 will need to be incorporated;

Propose appropriate tariff control mechanisms that will maintain tariffs in real terms for 2010-2012. The impact of the government’s anti crisis measures passed on 29th April 2009 will need to be incorporated;

Develop tariffs for the new generation and transmission business units that will meet current operational costs, including depreciation charges;

Analyse the existing tariff levels of the distribution business units and discuss the tariff level required for financial sustainability taking account of the bulk supply electricity purchase price from the generation and transmission business unit;

Review concessions and tariff policy and propose provisions and options for effective consumer participation and consumer protection.

4.3.3 Implementing a legal reform programme

Review the existing laws governing the energy sector, licensing, the regulation of natural monopolies, restructuring of state-owned enterprises to identify any gaps or inconsistencies;

Make any changes to the legal framework that allows third party access to transmission network and accommodates the existence of a System Operator (ISO) within the Transmission System Operator (TSO), and a Sector Regulator;

Define rules and mechanism for providing third party access to the transmission and distribution network;

Develop appropriate license provisions to ensure the generation, transmission and distribution businesses will be legally bound to meet all obligations;

Critically assess and recommend optimum licensing system, including new supply licences, considering the size of the energy industry;



Develop pro-forma license and recommend a transparent process for developing future licenses.

4.3.4 Establishing a regulatory framework

Define roles and responsibilities of MOE&I and other authorities with respect to the governance and regulation of the power sector;

Define the role and responsibilities of power sector regulator and agree the role of DAMPDC in sector regulation, tariffs setting and consumer protection and identifying its institutional development needs;

Develop the organisational capacity of the DAMPDC to act as the electricity regulator until such time when it is deemed appropriate to establish an independent regulator outside the DAMPDC;

Assist MOE&I and DAMPDC with defining the technical, operational and financial information to be furnished by Barki Tojik to assist effective planning and sector regulation;

Establish the forms and roles of technical and safety regulations and mechanisms for achieving it;

Recommend specific powers, including penalty provisions that MOE&I or DAMPDC may require to effectively perform their roles and to meet their legal objectives;

Draft guidelines for unbundling of Transmission System Operator and Distribution System Operator.



5 Implementation of the restructuring plan

As discussed previously, the successful implementation of the restructuring plan hinges on the following three factors:

1. Leadership from the most senior members of the government and their active support in achieving consensus amongst the key stakeholders, removing legal and institutional barriers to restructuring, and securing the financial and human resources needed to implement the restructuring programme.

The Government will establish a Steering Committee members of which will comprise representatives of the Minister of Energy and Industry, Minister of Finance, Minister of Economic Development and Trade, Minister of Justice and the Chairman of the State Committee on Investments and the Management of State Property The Steering Committee will be chaired by the representative of the Minister of Energy and Industry. If thought to be appropriate the committee may be chaired Deputy Prime Minister. The committee shall have overall responsibility for directing, supporting and monitoring the restructuring of Barki Tojik and to make the resources available to implement the restructuring plan.

2. Establishment of a dedicated Restructuring Group to take the lead in coordinating the implementation of the restructuring plan on a day-to-day basis.

A joint Restructuring Group will be established by the Ministry of Energy and Industry and Barki Tojik, to manage the implementation of the first phase of the restructuring programme and coordinate the input of international technical assistance projects. The Group shall comprise highly qualified specialists with in-depth knowledge of the Tajikistan Power Sector and include experts with experience in generation, transmission and distribution and skills in economics, utility regulation, accounting, engineering, and operations. The members of the Group shall be appointed on a fulltime basis and sufficient salaries and other incentives shall be offered to attract qualified experts. They shall be given the necessary authority to conduct their work and to call on other experts in the power sector to assist them. The selection and appointment of the members of the Restructuring Group should be done with the approval of the Steering Committee, World Bank and Asian Development Bank. The Head of the Restructuring Group should report directly to the Chairman of Barki Tojik and Steering Committee.

The Group will need sufficient financing to attract qualified experts and to support its activities. This financing should ideally come from outside Barki Tojik to ensure the objectivity of the Group and reduce uncertainties about its financing. One option would be to finance the establishment and operation of the Group from technical assistance funds for the first two years of its operation. In addition to the establishment costs, the monthly operating costs are estimated at around $25,000 which includes salaries and expenses.

3. The successful implementation of the restructuring plan, within the proposed timescale, will require personnel with strong management, commercial and technical skills who are currently unavailable in sufficient numbers at Barki Tojik.

Reorganisation of Barki Tojik to three business units will require significant technical, financial and legal work. The establishment of three business units will also necessitate the appointment of a core management team of four people to each business unit (i.e. Business manager, accountant, economist, and engineer). Barki Tojik does not presently have sufficient skilled resources and this poses the most serious risk to restructuring. In the short to medium-term this gap can only be filled through the provision of technical assistance by the international partners and donors. Options to be explored with the international community include appointment of full time consultants to



support the Restructuring Group and financing an extensive training programme to upgrade the skills of the senior and middle managers. Another option to be considered is the appointment of an international power operator to manage the power company, under a suitable contract, during the transitional period.

The first priority is to develop a detailed implementation plan for the first phase of the restructuring programme and this activity will be undertaken by the MOE&I and Barki Tojik. In this respect a meeting of the Steering Committee shall convene, with participation of the international community, to discuss the restructuring plan, mechanisms for the establishment of the Restructuring Group and the nature and timing of the technical assistance to be offered to support the implementation.

VERSION CONTROL

Corporate Governance of Barki Tojik



Documents Title: Corporate Governance of Barki Tojik

Prepared By: Eric Harrison

Reviewed by: Doug Rombough

Version: 1.0



ABBREVIATIONS

Asian Development Bank

BOD Board of Directors

BT Barki Tojik

C/M Chairman

CFO Chief Financial Officer


DTI Department of Trade and Industry

IND Independent Board Member

IFI International Financial Institutions





0ECD Organisation for Economic Co-operation and Development

PM Prime Minister

SPC State Committee on Investments and Management of State Property


WB World Bank


CONTENTS


2 BACKGROUND 4

3 WHAT IS CORPORATE GOVERNANCE? 6

3.1 Definitions of Corporate Governance 6

3.2 Corporate Governance Concepts 6

4 THE CORPORATE GOVERNANCE IN BT 10

4.1 History of Corporate Governance in BT 10

4.2 Corporate Governance in BT in 2009 12

4.3 Areas of Concern 13

4.4 Other Issues 14

5 CONSEQUENCES FOR THE GOVERNANCE OF BT 16

5.1 The BT Executive and the Management Board. 16

5.2 A Board of Directors and the Supervisory Board 18

5.3 Transforming the Management Board into a Board of Directors 20

5.4 The Developed Board Structure 21

5.5 The Appointment of Board Members 22

5.6 Remuneration Committee 23

5.7 Capability of Board Members and Training 23

6 RECOMMENDED CORPORATE GOVERNANCE STRUCTURE 25

6.1 Internal Audit 25

6.2 Regulatory Commission 25

6.3 The Recommended Corporate Governance Structure for BT 26

6.4 The Company Constitution 26

6.5 Recommended Next Steps 27

APPENDIX 1 – CORPORATE GOVERNANCE CODES 29

APPENDIX 2 – BARKI TOJIK CHARTER 32


CONTENTS - CONTINUED

APPENDIX 3 - REVIEW OF OTHER GOVERNANCE ARRANGEMENTS 41

UzbekEnergo - Uzbekistan 42

KEGOC - Kazakhstan 43

Energo Pro - Czech Republic 44

KomiEnergo - Russian Federation 45

APPENDIX 4 - BOARD OF DIRECTORS 46

1 INTRODUCTION 46

1.1 Definition of the Board of Director’s Role 46

1.2 The Scope of the Role 47

1.3 Board membership 47

1.4 Chairman and Chief Executive 48

1.5 Division of Responsibilities 50

APPENDIX 5 - THE DIRECTOR’S ROLE 51

1 INTRODUCTION 51

1.1 General Duties of Directors 51

1.2 Non-Executive Directors 53

1.3 Number of Non-Executive Directors 55

1.4 Independence of Non-Executive Directors 55

APPENDIX 6 - ROLE OF INTERNAL AUDIT FUNCTION IN CORPORATE GOVERNANCE 58


EXECUTIVE SUMMARY 1

1 Executive Summary The financial and operational performance of Barki Tojik (BT) is very weak as a result of a number of fundamental problems that have existed at the company for a number of years. Also the company’s auditors BDO Unicon in their management letter of 20071 identified a number of concerns which have significant impact on the performance of BT. These include:

• An organisational structure which is inconsistent with the scale of operations



• No adequate control over branch operations

• No treasury function and risk management

• Management judgements not addressed effectively

Corporate governance arrangements for BT need to be strengthened to address the above weaknesses and other issues. The current arrangements have not been developed in recent years or brought up to date with current best practice that should apply in a company the size and importance of BT. The company executive is managed by a Chairman who reports to the Government. There is no Board of Directors (BOD) but a Supervisory Board comprising very high level Government ministers and chaired by the Prime Minister represents the shareholder i.e. the Government.

BT’s executive structure comprises a Chairman, appointed by the Government and four deputy chairmen all who hold portfolios comprising a mixture of generation, distribution, transmission, sales, finance and other activities. These portfolios have a geographical focus instead of business activities with a common bond or theme. This leads to a loss of accountability and makes the management of the business activity more difficult.

It is recommended that an executive structure be established that has a business activity focus and comprises an Operations Director, a Commercial Director, a Chief Financial Officer and an Administration Director plus a Chief Executive who together will form the Management Board of BT and run the company.

The Operations Director should have three directors reporting to him; one for the generation activity, one for the transmission activity and one for the distribution activity. The Commercial Director will be responsible for the sales and purchasing of electricity, pricing and tariffs for electricity and the corporate planning function. The Chief Financial Officer will be responsible for accounting, financial and management reporting and the treasury function, etc. The Administration Director will be responsible for IT, human resources, legal affairs, procurement and facilities management, etc. To assist these directors in fulfilling their respective mandates, it is recommended that managers be appointed to undertake specific tasks under the directorship and report to the main directors. Together, these managers and the four directors would comprise the executive of BT. The report on the Corporate Structure of BT addresses these issues in detail2.

1 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008 2 Review of the Corporate Structure of Barki Tojik September 2009


EXECUTIVE SUMMARY CONTINUED

A company of the size and importance of BT needs a BOD to provide an appropriate level of governance. Consideration was given to developing the Supervisory Board into a BOD but a number of problems were identified:

• The members of the Supervisory Board are very senior ministers with major responsibilities in running the country and would have little time to sit at board meetings and take on the responsibilities of a board director which are quite onerous.

• The Supervisory Board is in reality a committee representing the shareholders. The Supervisory Board is therefore a useful body that can meet and undertake the responsibilities as defined in the company charter but not to act as a BOD.

It is usual for the company executive to form the BOD. It is recommended, therefore, that the Chief Executive, the Operations Director, the Commercial Director and the Chief Financial Officer form the BOD representing the company. In this way the main business activities, company strategy, and the financial aspects are all represented.

In modern corporate governance arrangements and as recommended in the many codes covering corporate governance, it is necessary to add additional capacity and focus to companies by including independent directors on the Board as well. Advantages for the company and the shareholder from these Directors are that they bring knowledge and experience from other fields to the decision making process and provide a balance to the executive members of the Board.

The BOD will also need a Chairman. It is recommended that the Chairman be appointed by the shareholder and not also be the Chief Executive of the company. The two roles have a completely different focus with the Chairman responsible to the shareholder and the operation of the board and the Chief Executive running the company and implementing the company strategy.

It is recommended therefore that a BOD be established comprising the four executives of BT, four independent members and an independent Chairman.

It is recommended that a search agency be used for the selection of the independent members and Chairman as this will bring the most objectivity to the process and be likely to identify the most experienced and suitable candidates. All members will need to have the skills necessary to operate effectively as board members and capacity building and training may be required.

The Supervisory Board would remain and represent the “superior body of management” which in Tajik law is the shareholder. This structure together with the developed executive and Management Board will bring BT in line with best practice governance arrangements.

The corporate governance arrangements will be complete with the addition of an internal audit team of appropriate capacity reporting directly to the BOD and with the establishment of a regulatory commission to monitor, review, and control the electricity market and BT.

To allow the introduction of a BOD to replace a single Chairman as the “executive body of management” in Tajik law and for the establishment of a regulatory commission it will be necessary to amend the legislation covering open joint stock holding companies and BT in particular.

The recommended corporate governance structure is shown in figure 1 below.


EXECUTIVE SUMMARY CONTINUED

Shareholder


Supervisory Board

PMChairman

Generation Director





Chief Executive



Board of Directors

IndependentDirector

IndependentDirector

IndependentDirector

BT C/M

Internal Audit

IndependentDirector


Figure 1: The Recommended Corporate Governance Structure


BACKGROUND 2

2 Background From November 2001 until November 2008 there were three bodies that controlled the operations of BT. These were the “superior body of management” who was the shareholder (i.e. the Government), the “executive body of management” who was the Chairman of BT, and a “revision committee” as the third body. Prior to November 2001 there had been a BOD and a Management Board but these were abolished in the legislation passed in November 2001 which created BT as an “Open Joint Stock Holding Company” (OJSHC) and the management and control arrangements were established as required by the law for all such companies.

The Chairman of BT had five deputy chairmen each with a portfolio of responsibilities. The portfolios lacked any real business focus being quite diverse without clear business objectives. This arrangement has led to a lack of objectivity and decision making which has been at best sub-optimal and at worst against the best interests of BT, the electricity sector and Tajikistan. This relatively simple arrangement offered little in regard to good commercial practice for BT which is a large utility business and of great importance to the potential revenues of Tajikistan.

As a consequence of the above situation and as identified in the BDO management letter for 20073, BT is in a very poor financial state, with unacceptable collection rates of its receivables, high electricity losses from both technical and commercial sources, inadequate control and reporting systems, weak financial management and a shortage of trained competent staff to run the business efficiently. Furthermore there are no formally agreed goals, objectives or strategy for BT as there is no comprehensive corporate planning process in place.

It is noted that over the last few months two changes have been introduced to the management and governance of BT in efforts to initiate remedial actions:

• From 31st October 2008 the governance arrangements were changed by amendments to BT’s charter to incorporate a “Supervisory Board” who will act for the shareholder to monitor and control BT’s operation. The Supervisory Board comprises seven people, five from Government ministries and departments plus the Chairman of BT and the Prime Minister who will be the Chairman of the board.

• In early January 2009 the Chairman of BT and his deputies (the executive) were replaced. The structure of the executive remains nearly the same as before except that there are now only four deputies not five as before.

Although there have been some improvements in performance since January, BT remains very short of funds to operate the business. A fundamental problem is that the governance and management structures remain weak. The above changes do not introduce a BOD nor do they give the deputy chairmen an appropriate business focus. Normal business practice today requires there to be at least a Commercial Director, an Operations Director and a Chief Financial Officer as well as a Chief Executive to run an operation as large and complex as BT. In addition members of management should have industry and business skills which they can draw on to run the business effectively.

In addition to these changes in governance and in response to the BDO Audit, BT has established an internal audit activity which reports directly to the Chairman of BT.

The International Financial Institutions (IFIs) and the auditors (BDO Unicon) consider that the business corporate structure and its governance need to be changed and improved to one which is

3 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008


BACKGROUND CONTINUED

consistent with current best business practice and suitable for a business of the size and importance of BT. These arrangements will require a BOD which can provide an appropriate business focus and undertake a monitoring and controlling role. Together with this there needs to be an effective independent internal audit activity which reports to the BOD.

This paper considers what corporate governance is, examines best practice for BODs, examines the current arrangements for the corporate governance of BT, considers if these arrangements meet the needs of BT and examines alternatives. The roles, responsibilities and duties of board members are described as is the need for BOD operating procedures, company charter, articles of association, etc. that embody provisions that define the work of the board and its relationship with the executive of BT.


WHAT IS CORPORATE GOVERNANCE? 3

3 What is Corporate Governance? 3.1 Definitions of Corporate Governance

Corporate governance is the system by which organisations are directed and controlled. (Cadbury Report4). Corporate governance is a set of relationships between a company’s director, its shareholders and other stakeholders. It also provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance, are determined (0ECD5).

There are a number of elements in corporate governance:

(a) The management, awareness, evaluation and mitigation of risk is fundamental in all definitions of good governance. This includes the operation of an adequate and appropriable system of control;

(b) The notion that overall performance is enhanced by good supervision and management within set best practice guidelines underpins most definitions;

(c) Good governance provides a framework for an organisation to pursue its strategy in an ethical and effective way and offsets safeguards against misuse of resources, human, financial, physical or intellectual;

(d) Good governance is not just about externally established codes, it also requires a willingness to apply the spirit as well as the letter of the law;

(e) Good corporate governance can attract new investment into companies, particularly in developing economies;

(f) Accountability is generally a major theme in all governance frameworks, including accountability not just to shareholders but also other stakeholders;

(g) Corporate governance underpins capital market confidence in companies and in the Government, regulators and tax authorities that administer them.

3.2 Corporate Governance Concepts

One view of governance is that it is based on a series of underlying concepts.

3.2.1 Fairness

The directors' deliberations and also the systems and values that underlie the company must be balanced by taking into account everyone who has a legitimate interest in the company, and respecting their rights and views. In many jurisdictions, corporate governance guidelines reinforce legal protection for certain groups, for example minority shareholders.

4 See Appendix 1 for details of corporate governance codes 5 Organisation for Economic Co-operation and Development


WHAT IS CORPORATE GOVERNANCE? CONTINUED

3.2.2 0penness/transparency

Transparency means open and clear disclosure of relevant information to shareholders and other stakeholders, also not concealing information when it may affect decisions. It means open discussions and a default position of information provision rather than concealment.

Disclosure in this context obviously includes information in the financial statements, not just the numbers and notes to the accounts but also narrative statements such as the director’s report and the operating and financial review. It also includes all voluntary disclosure that is above the minimum required by law or regulation. Voluntary corporate communications include management forecasts, analysts' presentations, press releases, information placed on websites and other reports such as standalone environmental or social reports.

The main reason why transparency is so important relates to the potential problem of conflict between owners and managers. Without effective disclosure the position could be unfairly weighted towards managers, since they have far more knowledge of the company's activities and financial situation than owner/investors. Avoidance of this information asymmetry requires not only effective disclosure rules, but strong internal controls that ensure that the information that is disclosed is reliable.

Linked with this issue is that the publication of relevant and reliable information gives confidence in how companies are being governed and thus significantly influences potential investors both IFAs and private investors. .

International accounting standards and stock market regulations based on corporate governance codes require information published to be true and fair. Information can only fulfil this requirement if adequate disclosure is made of uncertainties and adverse events.

Circumstances where concealment may be justified include discussions about future strategy (knowledge of which would benefit competitors), confidential issues relating to individuals and discussions leading to an agreed position that subsequently is made public.

3.2.3 Independence

Independence is an important concept in relation to directors. Corporate governance reports have increasingly stressed the importance of independent non-executive directors; directors who are not primarily employed by the company and whose other links with the company are very strictly controlled. They should be free from conflicts of interest and in a better position to promote the interests of shareholders and other stakeholders. Freed from pressures that could influence their activities, independent non-executive directors should be able to carry out effective monitoring of the company in conjunction with equally independent external auditors on behalf of shareholders.

3.2.4 Probity/honesty

Hopefully this should be the most self-evident of the principles, relating not only to telling the truth, but also not misleading shareholders and other stakeholders by presenting information in a slanted way. The UK Good Governance Code for the Voluntary and Community Sector defines probity in terms of receipt of gifts or hospitality by trustees. The Code stresses that all gifts should be clearly recorded, and trustees should not accept gifts with a significant monetary value or lavish hospitality. They should certainly not accept gifts or hospitality which may seem likely to influence their decisions.



3.2.5 Responsibility

The South African, King Report6 stresses that for management to be held properly responsible, there must be a system in place that allows for corrective action and penalising mismanagement. Responsible management should do, when necessary, whatever it takes to set the company on the right path.

King states that the BOD must act responsively to, and with responsibility towards, all stakeholders of the company. However the responsibility of directors to other stakeholders, both in terms of to whom they are responsible and the extent of their responsibility, remains a key point of contention in corporate governance debates.

3.2.6 Accountability

Corporate accountability refers to whether an organisation and its directors are answerable in some way for the consequences of their actions.

Accountability of directors to shareholders has always been an important part of company law, well before the development of the corporate governance codes. For example, companies have been required to provide financial information to shareholders on an annual basis and hold annual general meetings. However, particularly because of the corporate governance scandals of the last 30 years, investors have demanded greater assurance that directors are acting in their interests. This has led to the development of corporate governance codes7.

The UK Cadbury report stresses that making the accountability work is the responsibility of both parties. Directors, as we have seen, do so through the quality of information that they provide whereas shareholders do so through their willingness to exercise their responsibility as owners, which means using the available mechanisms to query and assess the actions of the board.

3.2.7 Judgement

Judgement means that the board makes decisions that enhance the prosperity of the organisation. This means that board members must acquire a broad enough knowledge of the business and its environment to be able to provide meaningful direction to it. This has implications not only for the attention directors have to give to the organisation's affairs, but also the way the directors are recruited and trained.

The complexities of senior management mean that the directors have to bring multiple conceptual skills to management that aim to maximise long-term returns. This means that corporate governance can involve balancing many competing people and resource claims against each other; although risk management is an integral part of corporate governance, corporate governance isn't just about risk management.

3.2.8 Integrity

Integrity means straightforward dealing and completeness. What is required of financial reporting is that it should be honest and that it should present a balanced picture of the state of the company's affairs. The integrity of reports depends on the integrity of those who prepare and present them (Cadbury report)

6 See Appendix 1 7 See Appendix 1



Integrity (means that) holders of public office should not place themselves under any financial or other obligation to outside individuals or organisations that might influence them in the performance of their official duties. (UK Nolan Committee Standards on Public Life).

Integrity can be taken as meaning someone of high moral character, who sticks to principles no matter the pressure to do otherwise. In working life this means adhering to principles of professionalism and probity. Straightforward dealing in relationships with the different people and constituencies whom you meet is particularly important; trust is vital in relationships and belief in the integrity of those with whom you are dealing underpins this.

The Cadbury report definition highlights the need for personal honesty and integrity of preparers of accounts. This implies qualities beyond a mechanical adherence to accounting or ethical regulations or guidelines. At times accountants will have to use judgement or face financial situations which aren’t covered by regulations or guidance, and on these occasions integrity is particularly important.

Integrity is an essential principle of the corporate governance relationship, particularly in relationship to representing shareholder interests. As with financial reporting guidance, ethical codes don't cover all situations and therefore depend for their effectiveness on the qualities of the accountant. In addition we have seen that a key aim of corporate governance is to inspire confidence in participants in the market and this significantly depends upon a public perception of competence and integrity.

3.2.9 Fiduciary duty

A legal definition of fiduciary duty is as follows:

Fiduciary duty is a duty imposed upon certain persons because of the position of trust and confidence in which they stand in relation to another. The duty is more onerous than generally arises under a contractual or tort relationship. It requires full disclosure of information held by the fiduciary, a strict duty to account for any profits received as a result of the relationship, and a duty to avoid conflicts of interest.

Under English law company directors owe a fiduciary duty to the company to exercise their powers bona fide in what they honestly consider to be the interests of the company. This duty is owed to the company and not generally to individual shareholders. In exercising the powers given to them by the constitution the directors have a fiduciary duty not only to act bona fide but also only to use their powers for a proper purpose. The powers are restricted to the purposes for which they were given. Clearly the concepts of fiduciary duty and accountability are very similar though not identical. Where certain wider responsibilities are enshrined in law, do directors have a duty to go beyond the law, or can they regard the law as defining what society as a whole requires of them.


CORPORATE GOVERNANCE IN BT 4

4 The Corporate Governance in BT 4.1 History of Corporate Governance in BT

The State open joint stock holding company “BT” was established on the 24th July 1992 by combining the entities and subdivisions of the “production association of energy and electrification of the Republic of Tajikistan”,

The independent self-sustained entities, organisations and structural units together with other units that were the property of the former production association were combined to form the company BT (BT).

In the period of 1992-2001 the following bodies managed BT:

• General Stockholders/Shareholders Meeting;

• Board of directors of the company;

• Chairman of the company (appointed to and dismissed by the Government);

• Audit (revision) committee conducting review and control of the financial and economic activity of the company.

By the Law of the Republic of Tajikistan “On adoption of the first part of the Civil Code of the Republic of Tajikistan” No.802 from 30 June 1999 it was prescribed that from 1 January 2000 all commercial organisations could be established and function exclusively as an organisation and legal structure, as specified in the civil code of the Republic of Tajikistan.

In this regard, by the decree of the Government of the Republic of Tajikistan No. 492 from 3 November 2001 the re-registration of the Charter of the company was undertaken and the State Joint Stock Holding Company “BT” was renamed to the Open Joint Stock Holding Company “BT”.

The management bodies of BT also changed.

The Superior body of management of BT is the General Stockholders/Shareholders meeting. Until the stocks (shares) of BT are sold the functions of the Superior body of management (as defined in the law) are implemented by the Government as the sole shareholder and founder of the company.

The exclusive powers of the Superior body of management include:

• Definition of the main areas of activity of the Open Joint Stock Holding Company “BT” and the approval of the annual reports and accounting balances;

• Changing the Charter of the Open Joint Stock Holding Company “BT” including the change of the amount of the statutory (charter) fund;

• Election of the members of the audit committee (auditor) of the Open Joint Stock Holding Company “BT” and early termination of their authorities;

• Approval of the reports and conclusions of the audit committee;

• Agreeing the issue and purchase of stocks issued by the Open Joint Stock Holding Company “BT”;

• Adopting a decision on the reorganisation and termination of activity of the Open Joint Stock Holding Company “BT”, appointment of the liquidation committee and approval of the liquidation balance;


CORPORATE GOVERNANCE IN BT CONTINUED

• Election of the Chairman of the Open Joint Stock Holding Company “BT” and early termination of his power;

• Implementing other powers provided by the laws of the Republic of Tajikistan and the Charter of the Company.

The Executive body of management of BT is the Chairman of BT.

The Competence of the Chairman of BT includes:

• Implementation of the united technical and economic policy of BT;

• Review of the annual reports and preparation of the related proposals to the Supreme body of management on this issue;

• Development of proposals regarding the normative documents on electrical power engineering and heat-power engineering;

• Submission of proposals on the conduct of audits;

• Provides for the implementation of the decisions of the Supreme body for the management and requirements of the Charter;

• Acts on behalf of BT and represents its interests in the Republic of Tajikistan and abroad;

• In accordance with the Law makes deals on behalf of BT;

• Opens bank settlement and other accounts;

• Appoints to and dismisses from the positions the heads of state enterprises, institutions and organisations of BT as well as the heads of branches and representations, their deputies and chief accountants;

• Establishes the powers and responsibilities of his deputies;

• Approves the conditions for the remuneration of the staff of BT and at its branches;

• Takes measures on the incentives and disciplinary penalties of the employees in accordance with the legislation;

• Approves the rules, procedure and other internal documents of BT and determines the organisational structure of BT;

• Implements other powers/duties which are not related to the exclusive competence of the Supreme body of management and which are defined by the legislation of the Republic of Tajikistan envisaged by the decisions of the Supreme body of management and the present Charter.

The Audit or Revision Committee conducts the control of the financial and economic activities of BT. It is appointed by the Superior body of management and consists of a number of shareholders. The committee presents the outcomes of audits to the Superior body of management. It is a left over from the soviet era.

External Audit. BT on its own account can employ a specialised agency to conduct checks and prove the annual financial statements. A decision to carry out an external audit is made by the Supreme body of management (senior management).



The Board and the Board of Directors of BT. The system of corporate governance stated in the charter of BT as amended by the decree of the Government No. 492 from 3 November 2001 abolished the BOD of the company.

4.2 Corporate Governance in BT in 2009

Following various auditors’ reports together with recommendations made in other TA projects, an alternative governance framework was developed by BT in association with the main stakeholder ministries and the Government. The proposal was that a Supervisory Board be established to act as a BOD aimed at agreeing forecasts, policies and procedures and to review capital spending, etc. It was necessary to amend the company charter to facilitate this change. Proposals were drawn up and presented to the ministries and Government and they received Governmental approval on the 31st October 2008. The charter also includes the list of committee members on the Supervisory Board. The members are:

The Prime Minister - Chairman (First Deputy Prime Minister to act as his deputy);

Minister of Justice;

Minister of Finance;

Minister of Economy Development and Trade;

Minister of Energy and Industry;

Chairman of the State committee on investments and management of state property;

Chairman of BT.

For the general management of the activities of BT, except for the issues, which, in accordance with the law on joint-stock companies and the present charter are under the competence of the General Shareholders meeting, the Supervisory Board was established as a central component in the corporate governance of the company.

The Supervisory Board’s function, roles and responsibilities are defined in general terms in the law but the overall scope is limited by the charter. The competence of the Board is limited to the following areas:

• Determination of the priority areas of activity of the company

• Approval of the annual business and financial plans of the company and reports on their implementation and the approval of the annual cost estimates.

Roles, responsibilities and duties together codes of conduct, etc. have not been defined for the operation of the Board . The board needs to determine these and gain approval from the “superior body” i.e. the shareholder. The Board has yet to meet despite the arrangements being made last October. One attempt was made in June but there were insufficient members present. This is not surprising as the members are all ministers together with the Prime Minister. These people are extremely busy on their day-to-day ministerial duties. It may in reality be an unworkable arrangement; however, it is still too soon to see how the new governance structure will operate.

Figure 2 below shows the current governance arrangements for BT.



Shareholder


Supervisory Board

DeputyChairman

DeputyChairman

BT C/M InternalAudit

DeputyChairman

PMChairman

BT C/M

First DeputyChairman

Figure 2: The Current Corporate Governance Structure of BT

4.3 Areas of Concern

There are several areas which cause concern in the new arrangements.

Inadequate definition of roles and responsibilities There needs to be a distinction between the Supervisory Board and the company executive. It is essential that the board undertakes the role of agreeing strategy, of monitoring performance and of giving guidance to the executive. The role of the executive should be focussed on running the company to achieve the goals and objectives agreed with the board. It is essential that the board and the executive perform their appropriate functions and that there are clear lines of responsibility.

Lack of professional skills and time If the Supervisory Board is to become a BOD the actions of the members are critical to the performance of BT. Members of the board need to have specific skills to perform these roles and the time to undertake them. The duties will not be confined to meetings of the board but they will be required to undertake research and develop ideas using innovative thinking and, in addition, contribute to various sub-committees needed to undertake such tasks as agreeing strategy, monitoring the executives’ performance, setting remuneration of the executive, reviewing and approving the audited accounts, etc. The members of the board as defined in the charter are very senior Government ministers who will have little time to undertake these tasks. It is unlikely, therefore, that the Supervisory Board will operate effectively as a BOD.

Lack of incentive for board members Members of the Supervisory Board are the members of the Government of the Republic of Tajikistan, holding official posts in the service of the state. The work of such members in the general management of BT is not their main task and is not paid for by the Government or the



company. It will be necessary to develop some form of remuneration or bonuses for the members of the Supervisory Board if they become involved in the management of BT such as a BOD or they may not participate effectively or contribute to the results of the company.

The need for independent directors The Supervisory Board comprises members from various ministries and departments of Government who is itself the shareholder of BT. It is usual now to ensure that boards include a number of independent directors as well as stakeholders. Indeed, international recommendations on the makeup of board members suggest that there should be more than 50% of independent directors sitting on the board. It may be difficult to easily identify such individuals. One possible solution would be that one or two individuals with the appropriate skills were appointed from outside Tajikistan and funded by the ADB or other IFIs to sit as board members. However, discussions with the shareholder suggest that independent members who sit on the Supervisory Board would have a limited ability to contribute and no voting rights.

No rational executive structure in BT Despite changes being made to the individual members of the executive in January 2009, the structure was broadly left unchanged with four deputy chairmen reporting to a Chairman and does not reflect a normal modern business structure. The deputy chairmen have a mixed portfolio of businesses with a strong geographical focus. It is normal in most businesses today, including utility companies, for the executive to have a portfolio of business which have a common bond or theme and are related to each other. The executive therefore should have a Commercial Director, an Operations Director, a Chief Financial Officer and a Chief Executive. The Chief Executive is responsible to the board for running the company. Taking into account the scale of the company, it is necessary for these roles to be created. The directors appointed to these positions will need to have the skill and experience to take on these roles and responsibilities and run these business activities effectively rather than as generalist managers. Therefore training and, capacity building or even new appointments will be necessary.

The Supervisory Board has no impact as BT is still run as a state enterprise The founder of BT is the Government of the Republic of Tajikistan. 100% of the shares currently belong to the founder. The Chairman of the Supervisory Board is the Prime Minister (or the First Deputy Prime Minister). The Executive body of the company, the Chairman of BT, is appointed by the Government. Therefore the company is still a State Company due to its management structure. The addition of a Supervisory Board has no effective impact on the running of BT as it is merely a body that represents the shareholder.

No regulation on the business of the board There is no document, which regulates the order of business or the conduct of the meetings of the Supervisory Board. This needs to be addressed if the board transforms into a board of directors.

No legislation in Tajikistan for holding company structures BT is effectively a holding company which has many joint stock companies operating under its umbrella. There is no legislative basis which regulates the activities of holding companies in the Republic of Tajikistan. Changes to the legal framework will have to be made to address this problem.

4.4 Other Issues

The business needs an effective internal auditing team which is independent and separated from the finance and accounting function. It should report to the board directly. An alternative approach



is to establish an audit committee comprising members of the board and other independent members who are qualified in auditing. The creation of such a committee is seen as important but not something which needs to happen immediately. The critical issue is to establish an internal audit function which reports to the board. BT has set up an internal audit team for the control of the financial activities of the Company in 2009. Its effectiveness needs to be assessed and steps taken to strengthen the skill set of the personnel possibly through the appointment of additional qualified staff and to ensure that it reports directly to the board.

The second issue relates to the regulatory framework. The Department of Antimonopoly Policy and Development of Competition (DAMPDC) acts as a regulator within the Ministry of Economy and Trade, to the extent that it reviews the tariff changes and other aspects of BT’s work. It has been envisaged in the commercialisation phase of the restructuring plan for BT8 that a regulatory body be established to oversee the operation of the electricity sector and BT in particular. This body should be established at arm’s length of the Government and the ministries and should be allowed to operate within an agreed framework, (to be determined), established in legislation without interference from the Government. Therefore, although the DAMPDC is identified as the likely source for the staffing of this body, it should not remain part of the Government or the MOEDT as it is today but be established as a non-Governmental body established in legislation.

8 The Restructuring Plan for Barki Tojik July 2009


CONSEQUENCES FOR BT 5

5 Consequences for the Governance of BT Appendices 4 and 5 discuss the roles and responsibilities of directors and the board on which they sit. It can be seen from these that the expected arrangements and responsibilities for any BOD are complex and demanding and not easily achieved especially in countries like Tajikistan where such bodies are rare, especially for state owned enterprises. However, it is thought necessary by the consultants that changes are made to the current governance structure to strengthen the effectiveness of the current arrangements to guide and focus BT in their business activities and its ability to shape and develop the company in a manner that will complete BT’s transition to be a modern, efficient, commercial, electricity utility business.

The current structure of the Supervisory Board effectively leads to a continuation of unitary management with the board totally comprising shareholders except for the Chairman of BT and it is also chaired by the Prime Minister. The board is therefore a body that represents the shareholder who, in Tajik law, is the “superior body” of BT. It is necessary therefore to consider how the structure of the governance arrangements can be changed to be one which is balanced, that can operate for the benefit of BT, the shareholder and Tajikistan to include a BOD rather than just a Supervisory Board.

5.1 The BT Executive and the Management Board.

A company’s executive is responsible for the effective management of the company, to develop and implement company strategy, to minimise business risks, to develop investment requirements, etc. The BOD will agree the strategy, approve investment plans and review the performance of the executive. The shareholders will appoint a Chief Executive and the other members of the company executive. However, at the present time in BT, the Government appoints the Chairman and the deputy chairmen of BT to form what is effectively the executive of BT. The BT Supervisory Board represents the shareholder and monitors the operation of BT as defined in the charter. It does not have the power to appoint the BT executive.

For BT to become an effective commercial organisation, it is vital that the executive is drawn from very experienced, capable, business focussed, senior managers with a deep understanding of the modern electricity industry and business processes. As the implementation of the restructuring process develops and the introduction of commercial business practices continues, such capability will be essential to maintain momentum and focus.

It is likely that appropriate persons will be drawn from those with a deep experience of European, ex CIS or Central Asian electricity companies who have undergone business restructuring, rather than those available in Tajikistan. However, opportunity should be taken to prepare local managers for these roles by providing appropriate and urgent learning experience possibly under some exchange agreement with appropriate electricity companies such that the executive can be established from Tajik sources in the medium term.

The Chief Executive will be responsible for the overall operation and management of BT and report to the Supervisory Board. He will be accountable to the board for the performance of BT. The role and responsibilities of Chief Executives is included in Appendix 4.

The current executive does not specifically include an Operations Director, a Commercial Director or a Chief Financial Officer. These functions are essential for the successful management of a company like BT especially in its transition to a commercial business. It is proposed that a BT Management Board be established comprising a Commercial Director, a Chief Financial Officer, an Operations Director and an Administration Director, managed by a Chief Executive.


CONSEQUENCES FOR BT CONTINUED

The position of Commercial Director is particularly important in that the individual will be responsible for the development of company strategy and corporate planning, risk assessment and avoidance, pricing strategy, electricity sales and purchasing activity, customer service issues and regulatory issues and champions the development of an effective commercial business.

The Chief Financial Officer position is fundamental in any organisation and is essential for the success of BT. The role will bring together the accounting, treasury, finance and reporting aspects of the business. Consequently the organisation of the department will span all the businesses of BT. The financial management improvement programme will fall under his responsibility as will reporting to board on business performance.

The Operations Director will concentrate on the operation of the engineering based heavy asset businesses. This is the heart of the company and it is proposed in the restructuring process to reorganise the business into the three basic units of generation, transmission and distribution. This will allow the business to operate effectively and effectively, to introduce operational improvements and create an effective electricity generation and electricity transport business at both extra high voltage in transmission and lower voltages in the distribution activity. This role is essential under the restructuring process.

It is also recommended that an Administration Director is appointed who will be responsible for information technology services, legal services, human resources and personnel management, property management and the procurement activity, etc. This director completes the company Management Board and will be critical for the development of staff, developing remuneration and retention packages, establishing staff training and development requirements, etc. Changes in the legal framework will be demanding during the restructuring process and the post will contribute a great deal to this process. IT systems will become of critical importance for the restructured business as they will underpin the information and control systems necessary for the business.

Figure 3 below shows the proposed executive structure with the main roles and responsibilities identified for each post.

Generation Director





ChiefExecutive





DirectorTariffs &

Charges

Chief Accountant

DirectorPlanning

& AnalysisTreasurer

HR Director


DirectorPurchasing

Director Lawyer

BT Management

Board

IT Director

Figure 3: The Proposed BT Executive



For more detailed information on the roles and responsibilities of the posts identified see the report on Corporate Structure developed as part of this project.9

A corporate governance structure for BT can now be considered by adding the BT Management Board structure onto the current governance structure shown in Figure 2 (see section 4 above). In this arrangement the role of Chairman of BT has been renamed the Chief Executive in line with the Management Board structure in figure 3 above. This is necessary to avoid confusion in the roles by having 2 Chairmen, i.e. one on the Supervisory Board and one on the Management Board, and is in line with modern governance arrangements.

Figure 4 below shows this governance arrangement which fits in with the restructuring aims and removes some of the issues identified in section 3 above by introducing a management structure appropriate to modern businesses.

.



ChiefExecutive

InternalAudit



Management Board

Shareholder


Supervisory Board

PMChairman

BT Chief Executive

Figure 4: The Introduction of a Management Board

5.2 A Board of Directors and the Supervisory Board

The governance arrangement shown in figure 4 improves the current situation by changing the management structure at BT but does not go as far as addressing the issue of a BOD. The advantages of introducing a BOD are discussed in Appendices 4 and 5. The Supervisory Board

9 Review of the Corporate Structure of Barki Tojik September 2009



does not have the time or remit to perform the roles necessary to direct and develop BT in the way that a BOD should. As such it is necessary that we consider in what way a BOD could be introduced to BT. One problem is that the legal framework within which BT operates and in Tajikistan as a whole does not provide for such an arrangement. This clearly means that there would need to be some legislative changes to facilitate the establishment of a BOD.

All codes relating to governance10 assume that a BOD of some sort exists. Supervisory Boards exist in Germany and operate well but the makeup of these Boards is very different to the BT Supervisory Board and includes stakeholders who are not just shareholders, e.g. customer representatives and employees among others. They do not include any representative from the company executive and separate the roles of Chairman (on the Supervisory Board) and Chief Executive on the Management Board.

As the BT Supervisory Board is made up totally of shareholders representatives this arrangement clearly does not work.

The current Supervisory Board could theoretically develop into a BOD. There would need to be changes in the legislation as discussed above. However as the membership of the Supervisory Board is at such a high level it is not possible to see how the members could perform the duties of a Director or a Board Chairman. As discussed in Appendices 4 and 5 these roles are time consuming and require specific knowledge and experience topped up with training.

Another serious problem is independence. None of the current members are independent as defined in Appendix 5 section 1.4. Some specific and quite complicated actions would need to be taken to establish a BOD that was balanced and capable of carrying out the role of a BOD.

5.2.1 Voting Rights

The Supervisory Board has a predominance of members representing the Government and ministries i.e. the shareholder. It is recommended that if the Supervisory Board is to transition to become a BOD then independent members will need to be appointed. Before the board achieves the target level of at least 50% of independent members, it is recommended that the shareholder board members’ voting rights be constrained such that the independent member(s) have an equal percentage of the votes to the shareholder members. If it was considered appropriate to transform the Supervisory Board to a BOD then it is proposed that this combined group of members (i.e. the shareholder members) be given one vote in total. It is also proposed that that at its inception, there should be two independent members on the BOD and it is recommended that these members have one vote each. Under these circumstances the Chairman, who it is assumed will also be from the Government (but see the discussion below), will be given one vote thus balancing the vote between independent and non independent members. In this case the Chief Executive of BT would be invited to board meetings but would not have a vote. This voting arrangement should continue until the BOD membership has developed to include at least 50% of independent members.

Such an arrangement for the governance would look like the diagram figure 5 below.

10 See Appendix 1 Codes of Corporate Governance



Shareholder

MOF

Chairman

Board of Directors



Chief Executive


BT Chief Executive

Exec DirectorEngineering

Management Board

SPC MOE&I MOJ INDIND

Shareholder Members Independent Members

MOED&T

Figure 5: The Supervisory Board Becomes a Board of Directors

This arrangement is unlikely to work due to the reluctance of the shareholder members to relinquish their control and for the reasons discussed in Appendix 5 section 1.2. In this case it is necessary to consider alternative structures for the establishment of a BOD.

5.3 Transforming the Management Board into a Board of Directors

In reality the Supervisory Board is a body representing the interests of shareholders, i.e. the Government. As such the arrangement in figure 5 above cannot work effectively as a BOD. In any other arrangement the shareholder will, however, want to keep the same level of control over the company that exists under the present governance arrangements. The Supervisory Board is currently able to:

• Determine the priority areas of activity of the company;

• Approve the annual business and financial plans of the company;

• Receive reports on the implementation of the plans.

This is similar to a shareholders meeting where the BOD presents reports and these are considered by the shareholder who takes appropriate action i.e. either to approve reject or propose modification. Shareholders of companies delegate the responsibility for running the company to a BOD; they also usually appoint the Chairman, the Chief Executive and the board members.

If we take this arrangement further it presents the prospect of a BT BOD being established from the existing BT Management Board. The international codes on the subject propose there should



be both a Chairman and a Chief Executive on the BOD with different roles and responsibilities. These are described in Appendix 4.

The structure proposed for the Management Board in the figures above do not include a Chairman therefore to follow the recommended structure a Chairman would need to be appointed.

5.3.1 Chairman of the Board

It can be expected that in the case of BT the shareholder will wish to appoint the Chairman but for the BOD to function effectively it will be necessary to identify and appoint somebody with the skills, experience and time to undertake this difficult role for BT. An assessment of the training needs of the appointee will help determine what additional capacity building and experience they will need.

An important aspect to consider when appointing a Chairman is the matter of independence. It would be tempting for the shareholder to appoint a Government representative, but there is a real opportunity here to appoint an independent person who would help develop the company and the other board members helping BT to become a modern, attractive and commercial business.

5.3.2 The Board Members

Company (Executive) Directors For the structure of the Management Board it was recommended that it comprise a Chief Executive, and four Directors. For the BOD it is recommended that, in addition to the Chief Executive those three executive directors i.e. the Operations Director, the Commercial Director and the Chief Financial Officer be appointed as main board members. The Administration Director would provide support services to the board including formally calling meetings, recording the meeting proceedings, resolutions and actions and provide other company secretarial duties.

Independent (Non Executive) Directors This would still leave the Board without independent members. To give the Board balance, to focus on the achievement of appropriate business goals and to allow the company executive to gain insight and business knowledge from other perspectives and industries, it is recommended that four independent board members be appointed. Four independent members equal the number of the executive members and will provide the necessary balance that will deliver good governance for BT.

The independent members will also provide comfort to the shareholder that the company is being managed and controlled appropriately on their behalf.

5.4 The Developed Board Structure

Incorporating all these aspects will modify the governance structure shown in figure 4 above. Accepting that the shareholder has the ultimate control of the company through the Supervisory Board, a BOD which includes the BT executive and independent members gives a good and sound governance framework. It will give the shareholder confidence that the operation of the company is focussed on achieving the agreed strategy and is more likely to achieve the agreed goals than running BT without such a board. The independent members will provide the appropriate balance to the board bringing judgements and knowledge and added value from their experience drawn from outside the electricity industry. This is particularly important for the successful development of BT. Figure 6 below shows the proposed governance structure.



It is recommended that this structure be developed and introduced during phase 1 of the restructuring process (i.e. by 2012), as it is a central element of the commercialisation of BT. There will need to be amendments to the legal framework to implement this arrangement but these should be relatively simple but they do require changes to the existing governance arrangements enshrined within the company charter. In particular it will be necessary to modify the definition of the “executive body of management” which is currently the Chairman of BT. Under the arrangements the BOD would become the executive body rather than the Chairman giving a collective responsibility for this role in the new arrangements. Detailed delegations from the BOD to the executive will be needed to ensure smooth operation while keeping firm control of the key strategic areas of responsibility. The “superior body of management” i.e. the shareholder, will remain the same but consideration should be given to modifying the Supervisory Board’s powers and membership.

Shareholder


Supervisory Board

PMChairman

Generation Directo r





Chief Executive



Board of Directors

IndependentDirector

IndependentDirector

IndependentDirector

BT C/M

IndependentDirector

Figure 6: The Transitional Board and Governance Arrangement

5.5 The Appointment of Board Members

The board members will be appointed by the shareholder but as the governance codes11 indicate a good and prudent shareholder will want to appoint independent directors to ensure that the company is run and operated appropriately for the good of the shareholders and to achieve the agreed company goals . In the early stages of the operation of the BOD there will have to be some means of identifying appropriate candidates, short listing them and then appointing them.

The UK Combined Code emphasises that the procedures for recruiting directors must be formal, rigorous and transparent. The Combined Code recommends that an external search consultancy

11 See appendix 1



and open advertising should be used, particularly when appointing a non-executive director or Chairman. This seems an appropriate solution in the case of BT.

Although the appointment will formally be made by the shareholder, during the first years of the board it is recommended that ADB and WB approve the choice of external directors.

The executive directors should also be selected on the basis of skill and experience and their potential contribution to the company rather than on a representational or other non-work related basis. Once again this is critical for the success of the company and its move to becoming a successful commercial modern business.

5.6 Remuneration Committee

The remuneration and incentives of the executive is critical to the success of the business. It is usual for the independent board members to form a remuneration committee and to sit to determine the pay and incentive structure for the company executive. In the case of BT this would be for the Management Board. It is recommended that a remuneration committee be established in the BOD comprising independent members who should carry out a review of executive pay and conditions and make recommendations. This may be a difficult area initially as the pay and conditions needed to attract and retain suitably qualified people may be significantly higher than current levels. The appointment of suitable individuals to the executive, their retention and motivation are key objectives in the governance of BT.

The performance of the company and the individual members of the executive are equally important and a significant proportion of the reward package should be linked to the achievement of agreed targets. As the performance of the executive is critical to the success of BT, the performance of BT will be monitored by the BOD on a regular basis. Some key performance indicators (KPIs) have been prepared under this project.12

5.7 Capability of Board Members and Training

The effectiveness of board members is critical to the success of the governance arrangements. All board members should be experienced and capable of contributing to the business of the company and the board. The training and development needs of board members will need to be assessed and appropriate actions taken.

Professional development should cover the following areas:

• Strategy development

• Management of human and financial resources

• Audit and remuneration issues

• Legal and regulatory issues

• Risk management

• The effective behaviours of a board director such as influencing skills, conflict resolution, chairing skills and board dynamics

12 Report on KPIs and the Benchmarking of BT August 2009



• The technical background of the company's activities so that directors can properly appreciate the strategic considerations

Training in some of the areas necessary for directors may not be easily available in Tajikistan and consideration should be given to obtaining training from international sources or the appointment of an international training consultant to undertake this onsite. It is recommended that before the formal creation of the BOD that a training assessment is undertaken and that an appropriate training programme be given that covers the needs of all the appointed members.


RECOMMENDED STRUCTURE 6

6 Recommended Corporate Governance Structure In addition to the introduction of a BOD to complete the governance of BT, it is also necessary to add an internal audit capability to monitor and check the business activity on behalf of the BOD and a regulatory body who will oversee the operation of the electricity market and electricity pricing, etc.

The regulatory body is necessary for a public utility to protect the customers and see that a level playing field is established for all participants in the industry.

Audit is an essential control body that will provide the board with information and reports to help with the management and control of the company.

.

6.1 Internal Audit

Internal audit is critically important in maintaining sound business and financial processes and procedures. It is therefore an essential aspect of the corporate governance of BT (see Appendix 6).

This activity should be independent from the BT organisational structure and report directly to the board. The role of the board in this regard is to direct the work of the internal audit team and to monitor and oversee their work. The need for this arrangement was discussed in section 4.4 above. Consideration should be given to establishing an audit committee from the board members, especially those with finance or auditing background. This would make the internal audit arrangements more formal and provide additional support to the audit team.

It is recognised that BT has already established an internal audit function and it is recommended that a review is undertaken of the team to establish what additional resources or capacity is needed to strengthen the activity.

6.2 Regulatory Commission

Under the current governance arrangements the Department of Anti Monopoly Policy and the Development of Competition (DAMPDC) acts as a regulator within the Ministry of Economy and Trade, to the extent that it reviews the tariff changes and other aspects of BT’s work

These roles are best undertaken through a Regulatory Commission which is at arm’s length from the Government and broadly independent.

It has been envisaged in the commercialisation phase of the restructuring plan for BT13 that a regulatory body be established to oversee the operation the electricity sector and BT in these areas of activity. This body should be established at arm’s length of the Government and the ministries and should be allowed to operate within an agreed framework established in legislation and without further Government influence. Therefore, although the DAMPDC is identified as the likely source for the establishment of this regulatory body it should not remain part of the Government or the MOEDT as it is today but be established as a non-governmental body established in legislation.

The establishment of a regulatory commission should be completed at the end of phase 1 of the restructuring plan and will be necessary for the operation of the electricity sector in phase 2, the

13 The Restructuring Plan for Barki Tojik July 2009


RECOMMENDED STRUCTURE CONTINUED

competition phase and will be essential in phase 3 and beyond which envisages private sector participation. (See the Restructuring Plan July 2009).

6.3 The Recommended Corporate Governance Structure for BT

An internal audit function and a regulatory commission have been added to the governance arrangements shown in figure 6 above. Figure 7 below shows these arrangements.

Shareholder


Supervisory Board

PMChairman

Generation Director





Chief Executive



Board of Directors

IndependentDirector

IndependentDirector

IndependentDirector

BT C/M

Internal Audit

IndependentDirector


Figure 7: The Recommended Corporate Governance Structure for BT

6.4 The Company Constitution

Company “Articles of Association” and “Company Constitution” will need to be drawn up for BT which will provide the contractual framework and rules for the operation of the company including the operation of the Board and its relationship with both the shareholder and the BT executive. The company charter is not comprehensive enough to cover all the issues proposed here and the charter is also part of the formal legal framework for OJSHC making change difficult. The legal framework will need to be modified to implement the recommendations contained herein and opportunity should be taken to include some of the items identified below. However, other items will need some degree of flexibility and should be the subject of agreements between the shareholder and the BOD. Other agreements will be needed to identify the relationship between the BOD and the Management Board. These will include the delegation of powers to purchase and sell assets, which actions will require a board decision, etc.

Items covered in these will be:



The Number and Mix of Members – How many Directors there should be and, of them, the split between executive and non-executive members.

The Quorum – The number of members that need to be present before business can be undertaken.

Frequency of Meetings – The minimum number of meetings that shall be held each year.

Types of Meeting – Meetings with Shareholders, Ordinary Board Meetings, Extraordinary Board Meetings, Emergency Meetings, etc.

How meetings can be called – the process by which meetings are arranged including how a notice is served, the minimum notice periods, etc.

The Requirement for a Secretary – The appointment of a Company Secretary who’s responsibility is usually to call meetings, to record the proceedings, to file the necessary documentation with the authorities, etc. on behalf of the Board, to send and receive correspondence, etc.

Decision Making – The process for making Decisions in the Board, i.e. by resolution, etc, what the majority vote should be i.e. from 100% to 51% depending on the importance of the decision.

How issues are tabled for consideration by the Board. Relationship with Shareholders – What are the various responsibilities each party has to the other, reporting information and frequency, disclosures, etc.

Relationship with BT – Appointment of the senior staff, approval of corporate plan and budgets, approval of capital expenditure programmes other levels of authority and delegation.

Split of responsibility between the Board and the BT Executive – What decisions can be taken by the BT Executive and what is retained by the Board.

6.5 Recommended Next Steps

Although the proposals and recommendations contained in this report are not revolutionary, they will be seen as significant in the context of the shareholder and managers of BT. The introduction of a BOD with independent members in itself will need to be carried out with great care demonstrating the benefits for both the company and the shareholder.

Similarly the development of an executive within BT with a modern business focus rather than a traditional geographical focus will need to be linked to the implementation of the restructuring plan; for example:

• The creation of a finance function that addresses all the existing concerns and one that can deliver appropriate information to allow the management of the business and identify risk will require and allow the appointment of a Chief Financial Officer;

• The creation of three business units to manage generation, transmission and distribution respectively will require close management allowing and requiring the appointment of an Operations Director;

• The need to introduce more commercial business practices, to concentrate on the collection of revenues, the implementation of cost reflective electricity charges and the need to develop a corporate strategy will require a Commercial Director.



To carry out the executive responsibilities mentioned above and also the Chief Executive role may need considerable capacity building for existing managers or possibly the appointment of additional and new resources to establish the appropriate capability within BT.

The proposals also will require changes to the legal framework to allow, for example, for the establishment of a BOD to replace the Chairman as the executive body and the introduction of independent members.

It is recommended that the next steps that are taken to progress these changes in the corporate governance of BT are:

• Develop a code of corporate governance for BT;

• Develop the specific roles and responsibilities for the BOD of BT to include both the executive and independent members and consider what committees will be needed;

• Develop the changes needed in the BT company’s charter and articles of association, etc. to allow the code of governance to be implemented plus the operation of the board and the executive to include the powers of delegation and levels of authority;

• Develop detailed terms of reference for the executive and their reports (refer to the report on corporate structure developed as part of this project14);

• Establish a skills and training needs assessment for the executive and independent board members and identify recruitment and selection arrangements.

14 Review of the Corporate Structure of Barki Tojik August 2009


CORPORATE GOVERNANCE CODES

Appendix 1 – Corporate Governance Codes The Cadbury Report

The Cadbury Committee in the UK was set up because of the lack of confidence perceived in financial reporting and in the ability of auditors to provide the assurances required by the users of financial statements. The main difficulties were considered to be in the relationship between auditors and boards of directors. In particular, the commercial pressures on both directors and auditors caused pressure to be brought to bear on auditors by the board and the auditors often capitulated. Problems were also perceived in the ability of the board of directors to control their organisations.

(a) Corporate governance responsibilities

The roles of those concerned with the financial statements are described in the Cadbury report, published in 1992.

i. The directors are responsible for the corporate governance of the company.

ii. The shareholders are linked to the directors via the financial reporting system.

iii. The auditors provide the shareholders with an external objective check on the directors' financial statements.

iv. Other concerned users, particularly employees (to whom the directors owe some responsibility) are indirectly addressed by the financial statements.

(b) Code of Best Practice

The Code of Best Practice included in the Cadbury report and subsequently amended by later reports was aimed at the directors of all UK public companies, but the directors of all companies were encouraged to use the Code

Provisions in the Cadbury report included:

(a) The board of directors should meet on a regular basis, retain full control over the company and monitor executive management. Certain matters such as major acquisitions or disposals of assets should be referred automatically to the board. There should be a clear division of responsibilities at the head of a company, with no one person having complete power. Generally this would mean the posts of Chairman and Chief Executive being held by different people.

(b) The report sees non-executive directors as important figures because of the independent judgement they bring to bear on important issues. There should be at least three non-executive directors on the board, a majority of whom should be independent of management.

(c) The report contains provisions about the length of directors' service contracts and disclosure of remuneration that are developed further in the Greenbury and Hampel reports (see below).

(d) The (internal) audit committee was seen by the Cadbury committee as a key board committee. The audit committee should liaise with internal and external auditors, and provide a forum for both to express their concerns. The committee should also review half yearly and annual statements.


CORPORATE GOVERNANCE CODES CONTINUED

(e) The annual report should present a balanced and understandable assessment of the company's position. The directors should explain their responsibilities for preparing accounts. Statements should also be made about the company's ability to continue as a going concern and the effectiveness of its internal controls.

The Greenbury Code

In 1995, the Greenbury Committee published a code which established principles for the determination of directors' pay and detailing disclosures to be given in the annual reports and accounts. The Greenbury code went beyond the Cadbury code. The Greenbury code recommends that the remuneration committee should determine executive directors' remuneration and that this committee should be comprised solely of non-executive directors. Directors' service contracts should be limited to one year

.

The Hampel report

The Hampel Committee followed up in 1998 matters raised in the Cadbury and Greenbury reports, as we have seen aiming to restrict the regulatory burden on companies and substituting principles for detail whenever possible. Under Hampel:

(a) The accounts should contain a statement of how the company applies the corporate governance principles. The accounts should explain their policies, including any circumstances justifying departure from best practice.

The Combined Code

The London Stock Exchange subsequently issued a combined corporate governance code, which was derived from the recommendations of the Cadbury, Greenbury and Hampel reports. Since the publication of the Combined Code a number of reports in the UK have been published about specific aspects of corporate governance.

• The Turnbull report (1999, revised 2005) focused on risk management and internal control.

• The Smith report (2003) discussed the role of audit committees.

• The Higgs report (2003) focused on the role of the non-executive director.

Major governance codes - South Africa

South Africa's major contribution to the corporate governance debate has been the King report, first published in 1994 and updated in2002 to take account of developments in South Africa and elsewhere in the world. The King report differs in emphasis from other guidance by advocating an integrated approach to corporate governance in the interest of a wide range of stakeholders - embracing the social, environmental and economic aspects of a company s activities. The report encourages active engagement by companies, shareholders, business and the financial press and relies heavily on disclosure as a regulatory measure.


CORPORATE GOVERNANCE CODES CONTINUED

Singapore Code of Corporate Governance

The Singapore Code (published 2001, revised 2005) of Corporate Governance takes a similar approach to the UK's Combined Code with the emphasis being on companies giving a detailed description of their governance practices and explaining any deviation from the Code. Some guidelines, particularly on directors' remuneration, go beyond what is in UK guidance. Revisions to the Code in 2005 reflected recent concerns; they included expanding the role of the audit committee, requiring companies to have procedures in place for whistle-blowing and the separation of substantive motions in general meetings.


BARKI TOJIK CHARTER

Appendix 2 – Barki Tojik Charter Appendix 1 to the Governmental order no 537

Approved

By Governmental Order

From 31st of October 2008

Under the No 537

The Republic of Tajikistan

The Charter

Of Open Joint-Stock Holding Company “BT”.

1. General Provisions

1. Open Joint Stock Holding Company “Barki Tojik” (hereinafter The Company) is the stockholder of shares - given by the Government of the Republic of Tajikistan - of joint-stock companies acting in the electric energy sphere; also Open Joint Stock Holding Company “Barki Tojik” exercises the right of possession, the right of enjoyment & the right to dispose of the property of ventures and establishments given to the Open Joint Stock Holding Company “Barki Tojik” according to the Article No. 232 of Civil Code of the Republic of Tajikistan.

2. Official full title:

• In Russian – Открытая акционерная холдинговая компания «Барки Точик»;

• In Tajik – Ширкати сахомии холдинги кушодаи «Барки Точик».

Abbreviated title:

• In Russian – ОАХК «Барки Точик»;

• In Tajik – ШСХК «Барки Точик».

3. Location of the Company: 734026, the Republic of Tajikistan, Dushanbe, Somoni Street, 64.

4. The company has the following subsidiaries & missions:

• Nurek subsidiary – Nurek HPS, 735000, Nurek city

• Baypaza subsidiary – Baypaza HPS, 735300, Nurek city, Lenin Street, 10.

• Varzob subsidiary – cascade of Varzob HPSs, 734017, Dushanbe city, Karamova Street, 70/1.

• Vakhsh subsidiary – cascade of Vakhsh HPSs, 734147, Sarband city.

• Dushanbe subsidiary – Central DC, 734045, Dushanbe city, Mir Said Ali Hamadoni Street, 1/3.


BARKI TOJIK CHARTER - CONTINUED

• Kairakkum subsidiary – Leninabad DC, 735750, Kairakkum city, Lenin Street, 113.

• Khujand subsidiary – Khujand DC, 735700, Khujand city, Lenin Street, 36.

• Rasht subsidiary – Rasht DC, 735450, Rasht district, Promishlennaya Street, 19.

• Mountain Badakhshan subsidiary – Mountain Badakhshan DC, 736100, Khorog city, Raisovet Street, 75.

• Kurgan-Tube subsidiary – Kurgan-Tube city DC, 735140, Kurgan-Tube city, Jomi Street, 24.

• Sales department “Energosbyt” of OJSHC “Barki Tojik”, 734026, Dushanbe city, Ismoil Somoni Street, 64;

• Kairakkum subsidiary – Kairakkum HPS, 735750, KAirrakkum city, Lenin Street, 113;

• Chkalovsc subsidiary – Chkalovsc city DC, 735730, Chkalovsk city, Oplanchuk Street, 1 A;

• Open Joint-Stock Holding Company “Barki Tojik” mission in the Republic of Uzbekistan;

• Open Joint-Stock Holding Company “Barki Tojik” mission in the Russian Federation, 121099, the Russian Federation, Moscow city, 1st Smolensky side street, house 7, office No 212;

5. In its activities the Company follows the Constitution of the Republic of Tajikistan, laws of the Republic of Tajikistan, instructions and decrees of President of the Republic of Tajikistan, orders and instructions of the Government of the Republic of Tajikistan, international standards acts which are acknowledged by the Republic of Tajikistan and the Charter.

6. The Company is legal successor of State Joint-StockHolding Company “Barki Tojik”.

2. Legal status of the Company

7. The founder of the Company is the Government of the Republic of Tajikistan.

8. The Company is a legal entity & it acquires the respective rights from the moment of its official state registration in order determined by the current legislation of the Republic of Tajikistan.

9. Financial & Production activities of the Company are performed on the basis of economic independence.

10. The Company is created for non-determined term except cases stipulated by clause 49 of the Charter.

11. The company has Civil Rights which correspond to the targets of activities stipulated in the Charter and is responsible for relevant to these activities actions.

12. The Company in determined by the current legislation order creates subsidiaries, missions and economic societies.



13. Subsidiaries and missions have no legal entity status and act on the basis of Regulations approved by the Company in order determined by the Charter.

14. The company has entity accounting, banking accounts (including currency account), official seal, stamp, letterhead, logo.

Goal & Objectives of the Company’s activities.

15. The overall objective of the Company is to provide the productive industries and the population with electric & heat energy, increase efficiency and technological level of production.

16. The Company performs industrial, commercial, financial, external economical & other kinds of activities according to the legislation of the Republic of Tajikistan.

17. To achieve its objective the Company performs generation, transportation, transmission, distribution, transformation & sales of heat & electricity energy.

18. The Company makes proposals to the respective state bodies on development and modernization of:

− Rules, standards & norms for ensuring safety generation, transportation, transmission, distribution and sales of heat & electric energy, energy resources & products;

− Price, tariff, investments, social and science & technological policies in energy sector;

− Order of licensing the performance of activities in energy sector;

− Takes measures on increasing functioning efficiency on the basis of introducing the modern technologies;

− Study dynamics of demand & offer of heat & electric energy.

Property & Chartered capital of the Company 19. The property of the Company is formed from the property which has been on the balance

of State Joint-Stock Holding Company “Barki Tojik”.

20. The Company is the proprietor of:

− Property given to it by the founder, except the property of legal entities recorded in the List of Joint-Stock Companies, state ventures, organisations & establishments which are under the Company’s governance;

− Production produced by the Company as the result of its economic activities;

− Received incomes & other property acquired by it on the other basis permitted by the legislation;

21. The chartered capital of the Company is 318 235 460 (three hundred eighteen million two hundred thirty five thousands four hundred sixty) somoni.



22. The decision on increasing or decreasing the chartered capital of the Company is to be made by the Superior Management Body according to the legislation of the Republic of Tajikistan.

23. The Company forms a reserve fund that is necessary for its activities at the rate no more than 15% of the amount of chartered capital.

The allocations to the Reserve fund are set by the Superior Management Body. The formation of the Reserve fund is to be done through annual allocations at the rate of 5% of the sum of net gain until the fund possesses the set amount.

Securities. 24. The Company can issue shares and obligations.

25. The order of issue, registration, allocation and payment on securities of the Company is determined by the legislation of the Republic of Tajikistan and the Charter.

26. The first issue of the Company shares consists only of nominal shares, ordinary (with right of vote) shares for amount of 318 235 460 (three hundred eighteen million two hundred thirty five thousands four hundred sixty) somoni at par value of 10 somoni each, in quantity of 31 823 546 (thirty one million eight hundred twenty three thousands five hundred forty six) shares.

27. The further issues of the Company shares can include both ordinary (with right of vote) and privileged (without right of vote) shares. The privileged shares are issued at the rate no more than 10% of the chartered capital.

28. The shares issued by the Company are on free sale according to the legislation of the Republic of Tajikistan.

29. The order of paying off dividends is agreed while issuing securities and is written on the back side.

30. The privileged shares issued by the Company give the right to receive dividends at the rate determined by the decision of Superior Management Body. The dividends are being paid off to the shareholders of privileged shares annually in time determined by the legislation of Superior Management Body.

31. The Company has no right to pay off dividends on ordinary shares until it has paid off the dividends on privileged shares. Only those shares have the right for dividend which have been acquired no later than 1 month before date of its paying off.

32. Each ordinary share gives its possessor one vote at shareholders meeting.

33. In case of liquidation of the Company the property of the Company left after satisfying demands of creditors is to be used for paying off the payments in the following order:

− Pay off present but not paid off dividends on privileged shares;

− The shareholders of privileged shares are to be paid the nominal value of the shares they possess;



− The rest of the property is to be shared between shareholders of ordinary shares respectively to their share in the total amount of shares.

Management Bodies of the Company 34. Management bodies of the Company are to be formed at the first meeting of shareholders.

35. Superior Management Body of the Company is Stockholders Meeting. Until the shares of the Company are sold the functions of Superior Management Body will be performed by the Government of the Republic of Tajikistan which was the founder of the Company. Exclusive powers of Superior Management Body include:

− Determine main directions of the Company activities, approve annual reports and balance sheets;

− Make changes to the Charter of the Company including changes to the size of the chartered capital;

− Elect members of audit commission (inspector) of the Company and dismiss them;

− Approve reports and conclusion of audit commission;

− Make decision on the acquisition by the Company of the shares which are issued by the Company;

− Make decisions on reorganisation and termination of the Company activities, appoint liquidation commission and approve liquidation balance;

− Elect the Chairman of the Company and dismiss him/her;

− Perform other activities prescribed by the laws of the Republic of Tajikistan and the Charter of the Company.

36. For the general management of the Company activities, except issues which according to the law “About Joint-Stock Companies” and the given Charter are competence of Stockholders Meeting & Executive Body of the Company, the Supervisory Board was entered into the system of corporate governance bodies of the Company.

The powers of Supervisory Board are:

− Determine the priority directions of the Company activities;

− Approve annual business reports & financial plans of the Company, reports on their implementation, and also approve annual estimate.

37. Supervisory Board comprises 7 members.

Election, recall & powers of the members of Supervisory Board are performed according to the Law “About Joint-Stock Companies”.

The issues which cannot be given to Executive Body of the Company for decision are included in the terms of reference of the Supervisory Board.

38. The Executive management body of the Company is the Chairman of the Company.

39. Powers of Chairman of Open Joint Stock Holding Company “Barki Tojik” are:



− Enforce general technical and economical policy of the Company;

− Examine annual reports and prepare respective proposals to the Superior management body on this issue;

− Develop proposals concerning normative documents on electric and heat power engineering;

− Make proposals on conducting an audit;

− Ensure the fulfilment of Superior management body decisions and demands of the Charter;

− Act on behalf of the Company and represent it in Tajikistan and abroad;

− In accordance with the law make a deal on behalf of the Company;

− Open settlement accounts and other accounts in banks;

− Appoint and dismiss the leaders of state enterprises, establishments and organisations which are the parts of the Company, and also leaders of subsidiaries and missions, their deputies and chief accountants;

− Determine powers for his/her deputies;

− Approve the terms of remuneration of labour of the Company and its branches officials;

− Make incentives and disciplinary penalties for the employees according to the legislation;

− Approve rules of procedures and other internal regulations of the Company, determine organisational structure of the Company;

− Perform other powers which are not in exclusive powers of Superior management body and which are determined by the legislation of the Republic of Tajikistan, prescribed by the decisions of Superior management body and the Charter.

40. The Audit Commission performs control over financial and economical activities of Open Joint Stock Holding Company “Barki Tojik” and is appointed by Superior management body and comprises shareholders.

41. The inspection is carrying out by Audit commission following the order of Superior Management Body, at its own initiative or following the demand of shareholders who in total possess more than 10% of all the shares.

42. Members of Audit Commission have the right to demand from the Company officials to provide them with all the necessary documents.

43. The audit commission will provide the Superior Management Body with the results of the inspections.

44. The members of Audit Commission have the right to demand and to call an extraordinary meeting of shareholders in case serious threat to the Company interest emerges.

45. The Company pays the specialized establishment or it to carry out inspection & approve annual financial reports (external audit).



46. The decision on carrying out an audit is to be made by Superior Management Body.

Accounting & reporting of the Company 47. Operational reporting, accounting, statistics reporting & reporting of the Company are

performed according to the current legislation.

48. The Company at its location keeps records of:

− Articles of association;

− Accounting documents necessary for holding inspections by the Company and by State Bodies according to the legislation of the Republic of Tajikistan;

− Register of shareholders which includes data on quantity & types of the shares, date of buying, names and places of residence of the shareholders, the price of the share bought;

− Minutes of sessions, meetings of shareholders & audit commission;

− List of people who have power of attorney to represent the Company;

− List of all the employees of the Company.

All these documents should be available to read by the shareholders and their authorised representatives in any time during the work day.

49. The Company ensures record keeping, registration of the shareholders according to the legislation of the Republic of Tajikistan.

Reorganisation & liquidation of the Company 50. Reorganisation and liquidation of the Company are to be done under the decision of

Superior Management Body and also by a decision of the court.

51. All the issues that emerge after liquidation of the Company are to be solved by liquidation commission created by the General Shareholders meeting or by the court.

52. The order of termination of its activity is determined by the legislation of the Republic of Tajikistan.

53. Claims and actions to the Company are to be tried by the court according to the legislation of the Republic of Tajikistan.



Appendix 2 of the Governmental Order 537: Approved by Governmental Order


Under the No 537


List of Joint Stock Companies, State enterprises, organisations and establishments, which are under the governance of Open Joint Stock Holding Company “Barki Tojik”

I. Joint Stock Companies

1. Open Joint Stock Company “Uro-tube city DC”

2. Open Joint Stock Company “Penjikent city DC”

3. Open Joint Stock Company “Kuliab DC”

4. Open Joint Stock Company “Dushanbe city DC”

5. Open Joint Stock Company “Tursunzade DC”

6. Open Joint Stock Company “Kyliab city DC”

7. Open Joint Stock Company “Pomir HPS”

8. Open Joint Stock Company “Dushanbe thermal PS”

9. Open Joint Stock Company “Southern DC”

10. Open Joint Stock Company “Yavan DC”

11. Open Joint Stock Company “Mechanical repairing plant”

12. Open Joint Stock Company “Dangara DC”

13. Open Joint Stock Company “Isfara DC”

II. State enterprises, organisations & establishments

1. Subsidiary material & technical provision enterprise “Tajikenergosnab”



Appendix 3 to the Governmental order no 537 Approved by Governmental Order


Under the No 537


Members of Supervisory Board of Open Joint Stock Holding Company “Barki Tojik”.

− Prime Minister (the First Deputy of Prime Minister) – the Chairman of Supervisory Board.

Members of Supervisory Board:

− Minister of Energy & Industry of the Republic of Tajikistan

− Minister of Economic Development & Trade of the Republic of Tajikistan

− Minister of Finance of the Republic of Tajikistan

− Minister of Justice of the Republic of Tajikistan

− Chairman of State Committee on Investments & State Property Management of the Republic of Tajikistan

− Chairman of Open Joint Stock Holding Company “Barki Tojik”.


OTHER GOVERNANCE ARRANGEMENTS

Appendix 3 - Review of other Governance Arrangements A review of electricity companies in the region reveals a number of important issues. Most companies already have a BOD sitting between the company and its shareholders. It is not clear who sits on the boards or if there are independent members but it is important to see that BODs exist in companies similar to BT.

The three company’s organisation charts below have some interesting features.

o We can see that in the Russian based KomiEnergos, the structure is very heavy with no board and have a structure very similar to BT in that they have a general director acting as the executive body (like the Chairman in BT) as currently defined in Tajik law and deputy directors running a portfolio of business.

o Uzbekenergo is the next level, there is clearly a BOD and the Chairman is also is the Chief Executive like BT but the portfolios of business make some business sense. There is a generation director, a transmission and distribution director, a director responsible for finance, and finally one with a forecasting and economic development responsibility.

o KEGOC in Kazakhstan shows a clear split of responsibility along business lines. They have an Operations Director, an administrations/legal director and a finance director. There is less need for a Commercial Director as they don’t buy and sell electricity as a supply company would do. They are the unbundled transmission company for Kazakhstan. KEGOC has both a BOD and a company executive, The BOD comprises the President who sits on the executive, two members who work in the state asset holding company (SAMRUK) and two more who are independent members, an auditor and a business consultant. It is unclear what the voting rights are but they show the move to include independent members.

o Energo-Pro, is based in the Czech Republic but has business in a number of other countries in the region. Their structure of governance is the most developed with an Operations Director, a generation business manager, a distribution business manager, a commercial manager and a finance manager. The company needs to have this structure mainly because they operate in a very commercial manner and provide services to a number of companies across the region. They have a corporate statement

“ENERGO-PRO is an independent power producer engaged in the generation, delivery and trading of electricity from renewable energy sources. We are specialists in the hydro power sector. We build, own and operate hydro power plants and electricity infrastructure in Central and Eastern Europe. Our business is conducted in a responsible way in order to achieve a solid financial return balanced with long-term growth and fulfil our commitment to the community and the environment”.

They have a BOD and an executive with a clear distinction between them.

The above analysis of the four electricity utilities covers a range of companies, countries and stages of development from a close to soviet style to a commercial western style of company. All companies have a board structure except for the Russian KomiEnergo whose structure is very similar to BT. The appearance of independent directors in KEGOC is a very interesting development for the region as few boards exist and the use of non-shareholding directors seems an encouraging although alien proposal.

OTHER GOVERNANCE ARRANGEMENTS - CONTINUED

UzbekEnergo - Uzbekistan


KEGOC - Kazakhstan


Energo Pro - Czech Republic


KomiEnergo - Russian Federation


THE BOARD OF DIRECTORS

Appendix 4 - Board of Directors

1 Introduction The governance of electricity companies and other utilities that are emerging from a unitary or soviet style of management will benefit from the adoption of modern governance arrangements which are found in other parts of the world to facilitate their transition to efficient and well run companies. The most common arrangement used by companies both private and state owned is the BOD. This appendix and appendix 5, provide a background to the operation of a BOD, the duties, codes of conduct, obligations and objectives of the directors and the relationship between the BOD and the company.

Section 5 of the report discusses the implications for BT and makes recommendations for the adoption of such structures to improve the corporate governance of BT.

1.1 Definition of the Board of Director’s Role

If the board is to act effectively, its role must be defined carefully. The South African King report provides a good summary of the role of the board:

'To define the purpose of the company and the values by which the company will perform its daily existence and to identify the stakeholders relevant to the business of the company. The board must then develop a strategy combining all three factors and ensure management implements that strategy.’

The UK Higgs report provides an alternative definition.

'The board is collectively responsible for promoting the success of the company by directing and supervising the company’s affairs. The board’s role is to provide entrepreneurial leadership of the company, within a framework of prudent and effective controls which enable risk to be assessed and managed. The board should set the company’s strategic aims and ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance. The board should set the company s values and standards and ensure that its obligations to its Stakeholders and others are understood and met.’

For Governmental organisations, the UK Good Governance Standard for Public Services defines the primary functions of the governing body as:

Establishing the organisation's strategic direction and aims, in conjunction with the executive:

• Ensuring accountability to the public for the organisation's performance;

• Ensuring that the organisation is managed with probity and integrity.

This involves:

• Constructively challenging and scrutinising the executive;

• Ensuring that the public voice is heard in decision-making;

• Forging strategic partnerships with other organisations

THE BOARD OF DIRECTORS - CONTINUED

1.2 The Scope of the Role

To be effective, boards must meet frequently. The Singapore Code of Corporate Governance emphasises the need for boards to meet regularly and as warranted by circumstances. Companies should amend their constitutions to provide for telephonic and videoconference meetings. The ICGN guidelines emphasise the importance of the non-executive directors meeting in the absence of the executive directors as often as required and on a regular basis.

1.2.1 Matters for Board decision

The UK Cadbury report suggests that the board should have a formal schedule of matters specifically reserved to it for decision at board meetings. Some would be decisions such as mergers and takeovers that are fundamental to the business and hence should not be taken solely by executive managers. Other decisions would include acquisitions and disposals of assets of the company or its subsidiaries that are material to the company and investments, capital projects, bank borrowing facilities, loans and their repayment, foreign currency transactions, all above a certain size (to be determined by the board).

1.2.2 0ther tasks

• Monitoring the Chief Executive

• 0verseeing strategy

• Monitoring risks, control systems and governance

• Monitoring the human capital aspects of the company, e.g. succession, morale, training, remuneration, etc.

• Managing potential conflicts of interest

• Ensuring that there is effective communication of its strategic plans, both internally and externally

1.3 Board membership

1.3.1 Key issues for consideration are:

• Size - greater size can create greater opportunities for representation of varied views. However, this can be at the expense of ease of operation and coherence of decision-making

• Inside/outside mix - what proportion should be executive decision-makers whose main employment is by the company and what proportion should be outsiders?

• Diversity - the issues here include male/female mix, representation from ethnic minorities, representatives from professions other than business (for example academia)


1.3.2 Attributes of directors

In order to carry out effective scrutiny, directors need to have relevant expertise in industry, company, functional area and governance. The board as a whole needs to contain a mix of expertise and show a balance between executive management and independent non-executive directors. The South African, King Report, reporting within a racially-mixed region, stresses the importance also of having a good demographic balance.

1.4 Chairman and Chief Executive

Ultimate leadership of the organisation consists of a number of strands, most importantly

• Heading the Board of Directors - the Chairman

• Leading the management team at and below Board level - the Chief Executive

1.4.1 Role of Chairman

The UK Higgs report provides a thorough analysis of the role of the Chairman. Higgs comments that the Chairman is 'pivotal in creating the conditions for overall board and individual director effectiveness, both inside and outside the boardroom'. The Chairman is responsible for:

(a) Running the Board and setting its agenda

The Chairman should ensure the board focuses on strategic matters and takes account of the key issues and the concerns of all board members. He should ensure the contributions of executives and non-executives are co-ordinated and good relationships are maintained.

(b) Ensuring the Board receives accurate and timely information

Will enable them to take sound decisions and monitor the company effectively.

(c) Ensuring effective communication with shareholders

The Chairman should take the lead in ensuring that the board develops an understanding of the views of major investors. The Chairman is often the public face of the company as far as investors are concerned.

(d) Ensuring that sufficient time is allowed for discussion of controversial issues

All members should have enough time to consider critical issues and not be faced with unrealistic deadlines or decision-making

(e) Taking the lead in Board development

The Chairman is responsible for addressing the development needs of the board as a whole and enhancing the effectiveness of the whole team, also meeting the development needs of


individual directors. The Chairman should ensure that the induction programme for new directors is comprehensive, formal and tailored. The Chairman should also ensure the performance of the whole board, board committees and individuals is appraised at least once a year.

(f) Facilitating Board appraisal

The Chairman should ensure the performance of the whole board, board committees and individuals is evaluated at least once a year.

(g) Encouraging active engagement by all the members of the Board (h) Reporting in and signing of accounts

Financial statements in many jurisdictions include a Chairman's statement that must be compatible with other information in the financial statements. The Chairman may also be responsible for signing off the financial statements.

1.4.2 Role of Chief Executive

The Chief Executive is responsible for running the organisation's business and for proposing and developing the group's strategy and overall commercial objectives in consultation with the directors and the board. The Chief Executive is also responsible for implementing the decisions or the Board and its committees, developing the main policy statements and reviewing the business's organisational structure and operational performance.

The Chief Executive is the senior executive in charge of the management team and is answerable to the board for its performance. He will have to formalise the roles and responsibilities of the management team, including determining the degree of delegation.

A guidance note supplementing the UK Combined code suggests that the major responsibilities of the Chief Executive will be as follows:

(a) Business strategy and management

The Chief Executive will take the lead in developing objectives and strategy having regard to the organisation's stakeholders, and will be primarily responsible for ensuring that the organisation achieves its objectives, optimising the use of resources.

(b) Investment and financing.

The Chief Executive will examine major investments, capital expenditure, acquisitions and disposals and be responsible for identifying new initiatives.

(c) Risk management

The Chief Executive will be responsible for managing the risk profile in line with the risk appetite accepted by the board. He will also be responsible for ensuring that appropriate internal controls are in place.

(d) Board committees


The Chief Executive will make recommendations to be discussed by the board committees on remuneration, policy, executive remuneration and terms of employment, also on the role and capabilities relating to future director employments.

1.5 Division of Responsibilities

All governance reports acknowledge the importance of having a division or responsibilities at the head of an organisation to avoid the situation where one individual has unfettered control of the decision-making process.

The simplest way to do this is to require the roles of Chairman and Chief Executive to be held by two different people, for the following reasons:

a) Both jobs are demanding roles and ultimately, no one person would be able to do both jobs well. The Chief Executive can then run the company; the Chairman can run the board and take the lead in liaising with shareholders

b) There is an important difference between the authority of the Chairman and the authority of the Chief Executive, which having the roles taken by different people will clarify. The Chairman carries the authority of the board whereas the Chief Executive has the authority that is delegated by the board. Separating the roles emphasises that the Chairman is acting on behalf of the board, whereas the Chief Executive has the authority given in his terms of appointment. Having the same person in both roles means that unfettered power is concentrated into one pair of hands; the board may be ineffective in controlling the Chief Executive if it is led by the Chief Executive.

c) The separation of roles avoids the risk of conflicts of interest.

d) The board cannot make the Chief Executive truly accountable for management if it is led by the Chief Executive.

e) Separation of the roles means that the board is more able to express its concerns effectively by providing a point of reporting (the Chairman) for the non-executive directors.

f) The Chairman is responsible for obtaining the information that other directors require to exercise proper oversight and monitor the organisation effectively. If the Chairman is also Chief Executive then directors may not be sure that the information they are getting is sufficient and objective enough to support their work. The Chairman should ensure that the board is receiving sufficient information to make informed decisions, and should put pressure on the Chief Executive if the Chairman believes that the Chief Executive is not providing adequate information.


THE DIRECTOR’S ROLE

Appendix 5 - The Director’s Role

1 Introduction Directors have powers to take majority business decisions on behalf of the companies and as a consequence, various duties are imposed on them to ensure that the companies’ interests are protected.

Under rules which are applicable in broad terms in many countries, the directors’ duties including duty to act in good faith and to the best interest of the company; duty to avoid conflicts of interest; duty not to profit from their position, and duty of care and skill are enshrined in the common law rules and equitable principles.

The UK Companies Act 2006 (‘the Act’) codifies directors’ duties including the long-established fiduciary duties as well as the common law duty of care and skill into a statutory statement of seven general duties.

1.1 General Duties of Directors

Summarised below are the seven general duties set out in the Act with particular reference to new additions introduced by the Act.

(a) Duty to act within their powers.

This codifies the common law rules that directors should exercise their powers under the terms that were granted for a proper purpose. A director’s powers are normally derived from the company’s constitution, i.e. its memorandum and articles of association.

.

(b) Duty to promote the success of the company

This is a duty developed from one of the overriding principles of the fiduciary duties, i.e., duty of good faith to act in the company’s best interest.

The Act imposes a duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company. When exercising this duty the director is required to have regards to various non-exhaustive list of factors including the long term consequence of the decisions as well as the interests of the employees; the relationships with suppliers, customers; and the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.

It can be seen that among other things, this duty introduces wider corporate social responsibility into a director’s decision making process.

‘Success’ is not defined in the Act. The Department of Trade and Industry (DTI’s) guidance to the Bill suggests that a success in relation to a commercial company is considered to be its “long-term increases in value”.

Giving the uncertainty in this area, it is important that detailed minutes are taken when exercising decisions to document the fact that directors have had regards to various factors.

(c) . Duty to exercise independent judgement

THE DIRECTOR’S ROLE - CONTINUED

A director of a company should exercise independent judgement.

A director must first exercise a judgement and secondly he must exercise the judgement independently. Prima facie, this rule would impinge on so-called ‘sleeping directors’ who play no active role in the management and leave decisions to others. By analogy, this would impact on ‘shadow directors’.

In addition, this duty is not infringed upon if a director acts in accordance with an agreement that was duly entered into by the company.

(d) Duty to exercise reasonable care, skill and diligence

A director is expected to exercise, care, skill, diligence as would be expected from a reasonably diligent person with:

a. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and

b. the general knowledge, skill and experience that the director has

The subjective test requires a director to carry out his duty with the general knowledge, skill and diligence he in fact possess. Therefore, a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty.

(e) Duty to avoid conflicts of interest

The conflicts of interest provisions are quite complex. This duty applies to a transaction between a director and a third party, such as the exploration of any property, information or opportunity, and does not extend to a transaction between a director and his own company.

Such transactions can be authorised by the non-conflicted directors on the board provided that certain requirements, including who can participate and vote on such authorisation are complied with.

However, it is feared that this duty might impact on a director who holds multiple directorships and discourage a director to hold especially non-executive directorships. On the other hand, it should be noted that the saving provision, i.e., authorisation by non-conflicted directors on the board goes some way towards easing the concerns.

(f) Duty not to accept benefits from third parties

A director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director.

Benefits cover both monetary and non-monetary including for example, non-executive directorship and even corporate entertainment. However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Nevertheless, because it is not always clear whether certain benefits will give rise to conflicts of interest, it is feared that directors might more likely to take advice on this area.

(g) Duty to declare interest in proposed transaction or arrangement with the company

A director is required to disclose his interest to the board of the company when a transaction is proposed between a director and his company. However, it requires a director to declare the


nature and the extent of the interest to the other directors. Further, disclosure must be made where a director is considered ‘ought reasonably to be aware of’ the conflicting interest. Disclosure also extends to a person connected with the director, for example, his wife and children.

It is not necessary to disclose in circumstances where the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or if other directors are already aware or ought reasonably to be aware of the director’s interest.

1.2 Non-Executive Directors

Non-executive directors should provide a balancing influence, and play a key role in reducing conflicts of interest between management (including executive directors) and shareholders. They should provide reassurance to shareholders, particularly institutional shareholders that management is acting in the interests of the organisation.

1.2.1 Role of non-executive directors

The UK's Higgs report provides a useful summary of the role of non-executive directors:

a) Strategy

Non-executive directors should contribute to, and challenge the direction of, strategy. They should use their own business experience to reinforce their contribution

b) Scrutiny

Non-executive directors should scrutinise the performance of executive management in meeting goals and objectives and monitor the reporting of performance. They should represent the shareholders interests to ensure agency issues don't arise to reduce shareholder value.

c) Risk

Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust. Non-executive directors have no executive (managerial) responsibilities.

d) People

Non-executive directors are responsible for determining appropriate levels of remuneration for executives, and are key figures in the appointment and removal of senior managers and in succession planning.

The UK Higgs report suggests that non-executive directors have 'an important and inescapable relationship with shareholders'. Higgs recommends that one or more non-executive directors should take direct responsibility for shareholder concerns, and should attend regular meetings with shareholders.

For the public sector, the Good Governance Standard for Public Services defines the role of non-executive directors as:

• Contributing to strategy by bringing a range of perspectives to strategic development and decision making

• Making sure that effective management arrangements and an effective team are in place at the top level of the organisation


• Delegating decisions not reserved for the governing body

• Holding executives to account through purposeful challenge and scrutiny

• Being extremely careful about getting involved in operational detail for which responsibility is delegated to the executive

1.2.2 Advantages of non-executive directors

Non-executive directors can bring a number of advantages to a board of directors.

a) They may have external experience and knowledge which executive directors do not possess. The experience they bring can be in many different fields. They may be executive directors of other companies, and thus have experience of different ways of approaching corporate governance, internal controls or performance assessment. They can also bring knowledge of markets within which the company operates.

b) Non-executive directors can provide a wider perspective than executive directors who may be more involved in detailed operations.

c) Good non-executive directors are often a comfort factor for third parties such as investors or creditors.

d) The English businessman Sir John Harvey-Jones pointed out that there are certain roles nonexecutive directors are well-suited to play. These include 'father-confessor' (being a confidant for the Chairman and other directors), 'oil-can' (intervening to make the board run more effectively) and acting as 'high sheriff (if necessary taking steps to remove the Chairman or Chief Executive).

e) The most important advantage perhaps lies in the dual nature of the non-executive director's role. Non-executive directors are full board members who are expected to have the level of knowledge that full board membership implies.

At the same time they are meant to provide the so-called strong, independent element on the board. This should imply that they have the knowledge and detachment to be able to monitor the company's affairs effectively. In particular they should be able to assess fairly the remuneration of executive directors when serving on the remuneration committee, and to be able to discuss knowledgeably with auditors the affairs of the company on the audit committee.

In addition, of course, appointing non-executive directors ensures compliance with corporate governance regulations or codes.

1.2.3 Problems with non-executive directors

Nevertheless there are a number of difficulties connected with the role of non-executive director.

a) In many organisations, non-executive directors may lack independence. There are in practice a number of ways in which non-executive directors can be linked to a company, as suppliers or customers for example. Even if there is no direct connection, potential non-executive directors are more likely to agree to serve if they admire the company's Chairman or its way of operating.


b) There may be a prejudice in certain companies against widening the recruitment of non-executive directors to include people proposed other than by the board or to include stakeholder representatives.

c) High-calibre non-executive directors may gravitate towards the best-run companies, rather than companies which are more in need of input from good non-executives.

d) Non-executive directors may have difficulty imposing their views upon the board. It may be easy to dismiss the views of non-executive directors as irrelevant to the company's needs. This may imply that non-executive directors need good persuasive skills to influence other directors. Moreover, if executive directors are determined to push through a controversial policy, it may prove difficult for the more disparate group of non-executive directors to oppose them effectively.

e) Sir John Harvey-Jones has suggested that not enough emphasis is given to the role of nonexecutive directors in preventing trouble in warning early of potential problems. Contra wise, when trouble does arise, non-executive directors may be expected to play a major role in rescuing the situation, which they may not be able to do.

f) Perhaps the biggest problem which non-executive directors face is the limited time they can devote to the role. If they are to contribute valuable experience, they are likely to have time consuming other commitments. In the time they have available to act as non-executive directors, they must contribute as knowledgeable members of the full board and fulfil their legal responsibilities as directors. They must also serve on board committees. Their responsibilities mean that their time must be managed effectively, and they must be able to focus on areas where the value they add is greatest.

1.3 Number of Non-Executive Directors

Most corporate governance reports acknowledge the importance of having a significant presence of nonexecutive directors on the board. The question has been whether organisations should follow the broad principles expressed in the Cadbury report:

“The board should include non-executive directors of sufficient character and number for their views to carry significant weight.”

or whether they should follow prescriptive guidelines. New York Stock Exchange rules now require listed companies to have a majority of non-executive directors (i.e. more than half the board); other codes, such as the Singapore code, suggest at least a third of the board should be independent (non-executive) directors.

1.4 Independence of Non-Executive Directors

Various safeguards can be put in place to ensure that non-executive directors remain independent. Those suggested by the corporate governance reports include:

a) Non-executive directors should have no business, financial or other connection with the company, apart from fees and shareholdings. Recent reports such as the UK Higgs report have widened the scope of business connections to include anyone who has been an


employee or had a material business relationship over the last few years, or served on the board for more than ten years.

b) Cross-directorships, where an executive director of Company A is a non-executive director of Company B, and an executive director of Company B is a non-executive director of Company A, are a particular threat to independence. This is often increased by cross-shareholdings. The problem is that non-executive directors will sit in judgement on executive directors when for example they consider their remuneration. Having one director sit in judgement on another who in turn is sitting in judgement on him is an obvious conflict of interest, with directors being concerned with their own interests rather than shareholders'.

c) They should not take part in share option schemes and their service should not be pensionable, to maintain their independent status.

d) Appointments should be for a specified term and reappointment should not be automatic. The board as a whole should decide on their nomination and selection.

e) Procedures should exist whereby non-executive directors may take independent advice, at the company's expense if necessary.

However the requirements do vary jurisdiction by jurisdiction, reflecting different approaches to the drafting of codes of governance. In some jurisdictions factors that impair independence are stressed, others emphasise positive qualities that promote independence. Ultimately, as the lCGN guidelines point out, all definitions come down to non-executive directors being independent-minded, which means exercising objective judgement in the best interests of the corporation whatever the consequences for the director personally.

The UK Higgs report summed up the attributes of the effective non- executive director:

• Upholds the highest ethical standards of integrity and probity

• Supports executives in their leadership of the business while monitoring their conduct

• Questions intelligently, debates constructively, challenges rigorously and decides dispassionately

• Listens sensitively to the views of others inside and outside the board. Gains the trust and respect of other board members

• Promotes the highest standards of corporate governance and seeks compliance with the provisions of the Code wherever possible

Higgs suggests that the following issues should be considered when appraising the performance of nonexecutive directors:

• Preparation for meetings

• Attendance level

• Willingness to devote time and effort to understand the company and its business

• Quality and value of contributions to board meetings

• Contribution to development of strategy and risk management


• Demonstration of independence by probing, maintaining own views and resisting pressure from others

• Relationships with fellow board members and senior management

• Up-to-date awareness of technical and industry matters

• Communication with other directors and shareholders


INTERNAL AUDIT FUNCTION

Appendix 6 - Role of Internal Audit Function in Corporate Governance Senior management (currently the Chairman) has the ultimate responsibility of ensuring that the following steps with regard to risk are followed in the company:

1. identification and assessment of impact of risks on the company and its operations;

2. control/management of risks at an acceptable level;

3. monitoring of risks on a continual basis.

The internal audit function plays an important role and can assist senior management in each of the foregoing activities and in the ongoing assessment of the Company’s systems of internal control. Internal audit provides objective assurance and advice with respect to risks and internal control. It is not internal audit’s primary role to manage risk in the company – this is the responsibility of senior management

The following guidelines are intended to assist the Company’s initiatives in these areas:

establish a defined process for the review of the effectiveness on internal control systems;

review regular reports on the effectiveness of internal control systems;

consideration of key risks and how they have been managed;

checking of the adequacy of action taken to remedy weaknesses and incidents;

consideration of the adequacy of the monitoring of risk and internal control;

conduct an annual assessment of risks and the effectiveness of internal control;

include in the annual report (notes to the financial statements) a statement on this assessment and monitoring process.

VERSION CONTROL

Review of the Corporate Structure of Barki Tojik



Documents Title: Review of the Corporate Structure of Barki Tojik

Prepared By: Eric Harrison and Doug Rombough

Reviewed by: Ebby Adhami

Version: 1.0



ABBREVIATIONS


BT Barki Tojik

C/M Chairman

CFO Chief Financial Officer


IFI International Financial Institutions

IT Information Technology

JSC Joint Stock Company






PM Prime Minister

PMTO Materials and Equipment Supply Entity

SPC State committee on investments and management of state property


WB World Bank


CONTENTS


2 THE EXISTING CORPORATE STRUCTURE 3

2.1 The Existing Corporate Structure of Barki Tojik 3

2.2 Main Reporting Lines 3

3 COMMENTS ON THE EXISTING STRUCTURE 5

3.1 The Overall Structure 5

3.2 Comments on the Finance Function 5

3.3 Comments on the HR Function 6

3.4 Comments on the Corporate Planning Activity 7

4 THE PROPOSED CORPORATE STRUCTURE 9

4.1 The Restructuring Plan 9

4.2 Corporate Governance of Barki Tojik 9

4.3 Operations Director 10 4.3.1 Generation Director 10 4.3.2 Transmission Director 11 4.3.3 Distribution Director 11

4.4 Commercial Director 12 4.4.1 Corporate Planning Director 12 4.4.2 Purchasing and Sales Director 12 4.4.3 Director of Tariffs and Charges 13

4.5 Chief Financial Officer 13

4.6 Administration Director 13 4.6.1 IT Director 14 4.6.2 Human Resources Director 14 4.6.3 Head of legal services 14 4.6.4 Procurement Director 14 4.6.5 Facilities Management Director 14

5 THE FINANCE ACTIVITY IN BARKI TOJIK 15

5.1 Chief Financial Officer 15

5.2 Chief Accountant 17

5.3 Director of Planning and Analysis 19

5.4 Treasurer 21


CONTENTS - CONTINUED

6 THE HUMAN RESOURCES ACTIVITY IN BARKI TOJIK 23

7 THE CORPORATE PLANNING ACTIVITY IN BARKI TOJIK 26

7.1 Company Mission, Goals and Strategy 26

7.2 Corporate Planning Activity 26

7.3 Proposed Organisation of the Corporate Planning Function 27

8 CONCLUSIONS AND NEXT STEPS 29

APPENDIX 1 - PROPOSED ORGANISATION OF THE FINANCE ACTIVITY 30


EXECUTIVE SUMMARY 1

1 Executive Summary The financial and operational performance of Barki Tojik (BT) is very weak as a result of a number of fundamental problems that have existed at the company for a number of years. The auditors BDO Unicon in their management letter 20071 identified a number of concerns which have significant impact on the performance of BT. These include:

• An organisational structure which is inconsistent with the scale of operations



• No adequate control over branch operations

• No treasury function and risk management

The above are of major importance to the structure and operation of BT. This report reviews the current structure and identifies some major problems and issues that need to be addressed urgently if the company is going to survive.

The lack of an appropriate business focus was identified as a major problem. The current focus is based on a geographic split of businesses and the portfolio approach to businesses without any common theme seriously detracts from the ability of the company to identify and deliver objectives and goals.

The report on Corporate Governance2 written as part of this project addresses these issues at a board and executive level while this report seeks to determine the detailed structure, roles, responsibilities etc for the next managerial level. The report also looks in some detail into the finance function, the human resource activity and the need for a corporate planning activity in the company.

Gaining information and access to staff as part of this project was initially difficult and delayed the consultants’ ability to commence the work as identified in the work plan. There remains reluctance to provide information but the consultant has been able to put together this report which highlights the issues and recommends revised structures, required in the company.

The recommended structure for the company management team is shown in the chart in Figure 1 below.

1 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008 2 Corporate Governance of Barki Tojik September 2009



Generation Director





ChiefExecutive





DirectorTariffs &

Charges

Chief Accountant

DirectorPlanning

& AnalysisTreasurer

HR Director


DirectorPurchasing

Director Lawyer

BT Management

Board

IT Director

Figure 1: Proposed Management Structure of Barki Tojik

The management positions shown in the above chart, except for the Chief Executive who is discussed in the corporate governance report3, are discussed in some detail in this report. The Chief Financial Officer the human resources director and the corporate planning director are discussed in detail in sections five, six and seven of this report.

The proposed structure is recommended by the consultants as it conforms to modern business practice and will provide BT with the ability to determine appropriate business goals and objectives, to introduce performance improvements, appropriate reporting and controls and ensure that its staff is properly motivated and rewarded for their efforts.

3 Corporate Governance of Barki Tojik September 2009


EXISTING CORPORATE STRUCTURE 2

2 The Existing Corporate Structure 2.1 The Existing Corporate Structure of Barki Tojik

BT is an open joint stock holding company (OJSHC) comprising some 13 subsidiaries two missions (one in Uzbekistan and one in Moscow), 13 joint stock companies (JSC) and one state enterprise. These are identified in the charter of BT. The majority of the subsidiary companies and JSC are either electricity generating stations or distribution centres for the distribution of electricity across the Republic of Tajikistan. One significant other subsidiary is the energy sales company Energosbyt.

The Distribution Centres undertake both the transmission activity (voltages 220kV and 500kV) and the distribution activity (voltages 0.4kV to 110kV). There are 15 distribution centres (DC) across Tajikistan each with associated district networks (DN). In total there are some 52 district networks that operate locally at the low, medium and high voltages to directly supply electricity to customers. The DN and DC provide the technical and engineering services necessary to maintain, repair, refurbish and expand the electricity transmission and distribution network which extends from the electricity generation stations to customer’s premises including metering.

The sales of electricity, meter reading, billing and collection activity is organisationally separated from the distribution activity and undertaken by a sales department. However the sales teams are located regionally based on the DCs and DNs and from a day to day management perspective they report to the distribution management in both the DCs and the DNs. Until recently these teams have operated under the company Energosbyt (literally energy sales) but recently it was reported to the consultant that this company is no longer used by the sales activity. The regionally distributed sales teams in the DNs report information to the regional sales units based at the DCs. The information is then sent to the company head office for collation at company level. Although Energosbyt still remains a subsidiary company of BT’s it is not currently used as a sales activity vehicle.

In addition to the transmission, distribution and sales activities, BT’s subsidiaries include 7 power stations including 5 hydro stations and 2 thermal plants. These plants are stand alone operations and generate as instructed by the central despatch unit. All but 1 power station is in the southern part of the country.

Finally the purchasing activity is undertaken by the PMTO, Tajikenergosnab which is a state enterprise. All equipment and materials are purchased through this company.

2.2 Main Reporting Lines

BT’s company executive comprises a Chairman and four Deputy Chairmen. Each deputy is responsible for a portfolio of businesses which are mainly based on a geographical split with one looking after the northern region, one the southern region and one (the first deputy) the central region plus all the generation activity in the south. The fourth deputy is responsible for the sales activity and the forecasting and economic department. The finance and accounting activity, the personnel function, the legal department and internal audit all report directly to the Chairman.

For the transmission and distribution activity, each of the 15 regional DCs has a director who heads the subsidiary company, a chief engineer and a deputy director. Each DC director reports directly to a Deputy Chairmen, i.e. one for the north, one for the south and one (who is the first deputy) for Dushanbe and the central region. In turn the chief engineer at each DC is responsible for the DNs in their own region. Each DN includes a head and a chief engineer who report to the DC director and chief engineer respectively.


EXISTING CORPORATE STRUCTURE CONTINUED

The sales activity in the DC until recently reported to the Energosbyt subsidiary. Since this procedure was changed earlier this year the reporting of performance etc is now made to a head of sales in Head Office of BT who then reports to one of the deputy chairmen.

The existing structure provided to the consultant by BT is shown in the figure 1 below: Attempts have been made by the consultants to obtain more detailed information including the organisation within the distribution centres and the distribution networks. The situation seems to be a changing one and as a consequence there appears to be no definitive representation of the current structure. For example it has not been possible to establish exactly how the sales activity now operates or how the sale company Energosbyt now fits into the activities of BT.

Chairman of JSC “Barki Tojik”

First Deputy ChairmanAzimov B.R.

Deputy Chairman Isoev Sh.O.

Deputy chairman Kholnazarov N.D.

Deputy chairman Sadulloev S.Ch.

Deputy of chief engeneer Gulov R.R.

Deputy of chief Engeneer Rakhimov R.S.

Deputy of chief engeneer Sharipov A.S.

Production- Technical service

Relay protection and automation service

Energy Department over Sughd region

Central Dispatch Service

Nurek HPS

Modernisation andReconstruction Service

Perspective Development Service

Energy department over Khatlon region

Yavan thermal PS

OJSC “Southern DC”

Kurgan-Tube city DC

OJSC “Kuliab DC”

Forecasting and economic department

Capital construction department

Department ofAutomated Management system

Prospective development service

Privatization & Restructuring Unit

Press-service

Executive office

Central service of Dispatch & Technological Management

Maintenance & Repairs service

Baypasy HPS

Cascade of Varzob HPS

Central DC

Kafarnikhon Mechanical repairing plant

Kairakum HPS

Leninabad DC

OJSC “Istravshan DC”

Khujand city DC

OJSC “Penjikent DC”

Chkalovsk DC

Logistic services

Translation unit

Reliability and safety measures service

Energy Distribution & Control unit

OJSC “Kuliab city DC”

Yavan DC

Dangara DC

OJSC “Tursunzade DC”

Rasht DC

Energy sales Department “Energosbyt”

EconomyPlanning unit

Labour and salary unit

Unit of external Economic relations

Unit of interstate Power interchange

Energy loss reduction project management

Bark Kymgan Personnel Training Unit

Transport and equipment kitting for modernisation of energy system department

Capital construction unit

Transport service

Garage

Personnel Department

Special Unit

Second department

Legal department

Office serviceGroup

PMTO“Energosnab”

Chairman advisor, Chairman assistant

Central accounting department

Internal audit unit

OJSC “Dushanbe city DC”

Dushanbe Thermal PS

Cascade of Vakhsh HPS

Figure 2: The existing structure of Barki Tojik from January 2009

Consequently the report discusses the current structure and recommends changes based on the current understanding of the BT structure plus the consultants experience of the potential structures that could be appropriate for an electricity company operating in Tajikistan.


COMMENTS ON EXISTING STRUCTURE 3

3 Comments on the Existing Structure 3.1 The Overall Structure

BT’s structure, as defined in the organisation chart shown in section 1 above shows that the basic organisation is based principally on a geographical split rather than a business split. This leads to lack of focus for each business and the business as a whole. No mission statement or company objectives have been provided to the consultant and it is clear from discussions with managers and staff at BT that the majority are unaware of the business goals and in many cases what their own contribution is to the company’s activity.

The BDO management letter commenting on the 2007 accounts4 was highly critical of the structure of BT which is a large and highly important company in the economy of Tajikistan.

The Government is seeking to make export revenues from the sales of electricity to other countries from the large potential sources of hydro energy in the country. The current vertically integrated structure of the company does not provide the correct vehicle or transparency to do this. It will be necessary to have a separate transmission activity which will allow transit and wheeling5 activities to be performed in an organised manner and at the same time providing for adequate revenues to be made by BT for these services.

Similarly the Government also wishes to make Tajikistan energy self sufficient and be able to supply the whole county with adequate supplies of electricity during all seasons. To do this there has to be a business focus on the provision and supply of electricity to all areas. This needs an adequate transmission and distribution infrastructure. To achieve this it is necessary for the two businesses (transmission and distribution) to identify specific problem areas and performance improvement programmes to remedy the situation.

Financing these programmes is critical and it will be necessary for the businesses to establish capital and revenue plans to identify and prioritise activities. Current revenue shortfalls make the reinvestment of funds difficult and at times impossible requiring external financing from Independent Financial Institutions (IFIs) to make grants and loans to the company.

The sales activity, which is different to both the distribution and transmission activities as it is customer focussed rather than an asset focussed, needs to concentrate on identifying the correct fees and tariffs to charge for the supply of electricity to customers, the billing for electricity and the collection of the charges. It needs to concentrate on the reduction of accounts receivables which are at the time of writing the report at very high levels. The collection of billings and debt is a key business activity.

It is clear, therefore, that there has to be some major revision of the structure to overcome these issues and problems by providing an appropriate business focus.

3.2 Comments on the Finance Function

During the past several years, previous Technical Assistance (TA) projects have focused on the core areas of accounting and financial reporting such as the following:

4 Audit of OSHPC “Barki Tojik” Management Letter 2007 by BDO Unicon dated 30th March 2008 5 Wheeling is the transit of electricity across the country’s network from one country interconnector to another country interconnector using BT’s transmission system but without being used, or consumed in Tajikistan.


COMMENTS ON EXISTING STRUCTURE - CONTINUED

the development and implementation of accounting policies, procedures and chart of accounts based on current National standards;

development of procedures for the production of consolidated IFRS financial statements including comprehensive user manuals and extensive on-the-job training;

design and implementation of IFRS reporting forms for completion by subsidiaries and other reporting units of the company;

a computerised accounting system was implemented at the company’s head office accounting department and five subsidiary locations.

Unfortunately much of these former achievements have fallen by the wayside as the company has experienced significant turnover in key staff positions and has undergone major organisational and senior management changes.

Currently, the accounting systems at the thirty odd subsidiaries and other reporting units comprise a variety of locally developed non-integrated computerised systems and some of the smaller units either use Excel or manual systems. The head office computer system is now out of date and needs to be upgraded.

Currently, the Accounting Department is unable to produce the required IFRS financial statements and has asked the creditors for a two year deferment in the reporting requirement in order to redevelop its ability to produce the statements for submission to external international auditors for audit.

The previous auditor, BDO Unicon, reported in its May 2008 management letter a number of very serious weaknesses and deficiencies in the company’s organisation, staffing, accounting policies, procedures and internal control systems. The consultant has been advised, but unable to verify at the time of writing this report, that the company is in the process of remedying these deficiencies.

The company does not have a dedicated finance or treasury function per se as the current Chief Accountant is fulfilling a small portion of duties normally ascribed to these functions. On a daily basis the Chief Accountant endeavours to determine the quantum of cash available to meet the company’s pressing financial obligations as they fall due. This is a daunting task as the company’s current indebtedness far exceeds the available cash resources (e.g., salaries payable to employees at some subsidiaries are in arrears, tax obligations are similarly overdue).

In short, the financial and accounting functions are in need of radical organisational and procedural changes.

3.3 Comments on the HR Function

Currently the human resources functions include a Personnel Department and a Labour & Salaries Department at head office with personnel departments established at the major reporting units of the company. The two departments report to two different senior management positions – the Personnel Department reports directly to the Chairman and the Labour Department to a Deputy Chairman.

The Personnel Department is generally responsible for the recruitment, selection and hiring of staff only for head office and maintains individual hard copy files on each staff member employed there. An individual data file containing personal information and employment history for technical and managerial staff is maintained in Microsoft Word. Each subsidiary unit of BT maintains their own individual employee files. No central employee data base is kept. On a company-wide basis the department provides employee conflict resolution services including disciplinary measures and substance abuse issues. The major responsibility of the department is in the establishment,



facilitation and monitoring of various training programs, essentially for technical employees, with contracting educational facilities in Dushanbe and Kurgan-Tube (e.g., the Energy Faculty at the Technical University in Dushanbe). The programs provide 100% coverage of tuition fees for children of BT’s employees. On an as needed basis, technical retraining is available but generally is limited to one month of skills updating. If funding is available from outside sources, the department can arrange English language training to employees as well as foreign-based training (from 30 to 45 days) in India and China.

The Labour Department’s primary responsibilities relate to the development of a planned Staff List (number of employees and basic salaries) for all authorised positions in BT. The department only exists at head office however some of its functions are performed by an economist in the planning department of the subsidiaries (maintenance of the staff list with numbers of employees and salaries information). The department is also responsible for developing and monitoring regulations regarding the company’s incentive system (the awarding of various bonuses based on specified performance criteria) and bonuses based on seniority. Although it is also responsible for making recommendations for the creation of more effective incentive schemes, the consultant believes that the department should more actively pursue this activity. The department provides its annually planned staff list to the Planning and Analysis Department for use in projecting salary expenses for the budget period.

In 2008, the company experienced a staff turnover rate of approximately 20% and, as BDO Unicon have stated, the low salaries paid to employees is the major reason for the high turnover rate. In addition employees are not motivated to efficiently discharge their work-related duties. Furthermore, BDO state that in their opinion, the level of education of personnel is not consistent with requirements of their role and the scale of operations of the company. Outdated job descriptions and misalignment of duties appears to be the norm.

3.4 Comments on the Corporate Planning Activity

Corporate planning in BT at this time comprises the development of three year financial forecasts and the development and approval of a budget. There is no formal or approved mission statement, no formally agreed goals or objectives and no approved strategy.

At meetings of the managers of BT the goals and targets were discussed but there is no formal plan or set of indicators against which to measure progress in the achievement of the agreed goals. This leads to an uncoordinated approach to performance improvement and a lack of understanding of the contribution staff and managers are making in the achievement of the company’s corporate goals

In the current structure a department is responsible for the prospective development activity which looks forward at the future requirements that will be placed on BT. This might be the need for additional generation capacity or the need to reinforce the network to reduce losses or system bottlenecks. This activity and financial aspects need to be co-ordinated and undertaken in a manner that achieves the company’s corporate goals and strategy documented and formally approved.

During the course of this project the consultant has been unable to determine the existence of a corporate mission statement or the presence of any strategic plan. The overall planning function appears to exist only as a result of efforts of the Planning and Analysis Department at head office in the annual development of its quasi multi-year “business plan”.

During the past several years, previous Technical Assistance projects have focused on the rationalisation of planning procedures within the department and developed the following:



a computerised budgeting model that, based on the input of various assumption parameters and selection of alternative calculation alternatives, produced a complete set of budgeted financial statements covering multiple years;

extensive user manuals and provision of extensive training to selected staff;

five year financial plans for 2002-2007 and 2006-2010 budget years together with supporting assumptions, explanations, KPIs and graphs.

Similar to the outcome of efforts in the accounting area, the above accomplishments have also fallen by the wayside. In the consultants opinion this occurred as a result of a limited understanding of the usefulness of such support systems by the senior managers who are traditionally technically oriented rather than business focussed. To facilitate the commercialisation of BT additional capacity and experience in the planning, finance and accounting activities will be vital for the success of BT. Additionally turnover in key staff, a lack of effective IT systems and failure of the senior management to support the reform processes are in the consultants’ opinion causes for current weaknesses.

The “business plan” prepared by the planning department covering the three period 2010-2012 which was presented to the consultant bears no relationship to the multi-year financial plans developed under previous TA projects and is essentially a high level; budget based on projections from previous budgets. The plan, in the consultants’ opinion, at best contains marginally useful information for the purposes of planning, control and decision-making. It provides no narrative explanations or information to support the highly condensed “one-line” amounts contained in the 8 pages of the prepared plan.

The “business plan” is definitely not consistent with best practice and the scale of operations of the company and definitely does not meet the requirements of the IFIs.


PROPOSED CORPORATE STRUCTURE4

4 The Proposed Corporate Structure 4.1 The Restructuring Plan

The restructuring plan6, prepared as a separate component of this project, is designed to introduce changes to BT which will facilitate improvements in the financial and operational performance of the company and more generally introduce commercial business practices. As part of this process the corporate structure will be defined in detail based on the three main businesses of generation, transmission and distribution. Other activities necessary for the business to function properly, including electricity purchase and sales, finance operations, corporate planning, procurement and human resources will also be redefined as part of the restructuring process. To facilitate the restructuring process, this report has been prepared to provide recommendations for the structure of BT, in particular for the finance, human resources and corporate planning activities.

4.2 Corporate Governance of Barki Tojik

The proposals made in the report on Corporate Governance7 for BT identified an overall structure that addresses some of the issues raised in section 3. This structure is shown in Figure 3 below.

Generation Director





ChiefExecutive





DirectorTariffs &

Charges

Chief Accountant

DirectorPlanning

& AnalysisTreasurer

HR Director


DirectorPurchasing

Director Lawyer

BT Management

Board

IT Director

Figure 3: Proposed Management Structure of Barki Tojik

6 Restructuring Plan for Barki Tojik - August 2009 7 Corporate Governance of Barki Tojik – September 2009


PROPOSED CORPORATE STRUCTURE - CONTINUED

The structure establishes the senior positions for the business units necessary to operate an electricity utility in line with best industry practice. The report “Corporate Governance of Barki Tojik” discusses this structure and the reasons for the recommendation for the most senior positions. This paper describes the roles and responsibilities of the businesses and the senior positions. For the finance, human resources and corporate planning sections a detailed commentary is provided in sections five, six and seven of this report.

4.3 Operations Director

The Operations Director is responsible for the three main businesses of generation, transmission and distribution. These businesses are all high value asset businesses which need to deliver revenue from the use of the assets at the least cost possible but with acceptable levels of service and reliability. His role will be to ensure that each of the businesses achieve this. He will give direction to the businesses in the early development stages as they acquire the necessary knowledge and experience to operate on a commercial basis. Therefore, as the businesses develop within BT, this post is critical and will be a member of the BT management board and Board of Directors. However it is envisaged that the post will be removed during the second phase to facilitate the development of the three businesses as separate entities in preparation for the third phase of the restructuring process.

4.3.1 Generation Director

The role of the generation director is to operate, maintain and develop the generation assets owned by BT. This business has high value assets and the generation of electricity is dependent on the availability of these assets and the availability of the input fuel. For the majority of generating stations in Tajikistan the fuel is water as the assets are hydro generating stations. Revenue is made by the business from the sale of electricity to sales division of the distribution business and the provision of ancillary services to the transmission business.

As Tajikistan is short of electricity especially during the winter period, the generation director is responsible for increasing the volume of electricity available from existing generation assets. This will focus on increasing the level of actual generation capacity available towards the theoretically available capacity and on towards the total installed (designed) capacity. (See report on Benchmarking and Key Performance Indicators created as part of this project8). This will be achieved by a combination of rehabilitation projects, improved management of the water supply, and the creation of an optimal maintenance schedule amongst others.

Emphasis should also be given to reducing the costs of generation per kWh generated across each generation station and the whole company by improving the efficiency of operation, avoiding outages, creating an optimal generation schedule, reducing generation losses and reducing the cost impact of the fossil fuel powered stations.

The director will be required to create a corporate plan for the business as a whole which should consider the overall objectives for the business, how it fits with the mission of BT in achieving the stated objectives, identify and set targets for the operation, create a capital project plan for rehabilitation and new build, create an operational plan with forecast cost savings and efficiency gains for the whole generation business.

8 Report on Benchmarking and Key Performance Indicators for Barki Tojik – September 2009



4.3.2 Transmission Director

The director is responsible for the transportation of electricity from the generation injection points (BT generators and Independent Power Producers (IPPs)) and from imports from other countries to the exit points including interconnectors to other country networks, extra high voltage (EHV) customers (ie 220kV and 500kV) and to the distribution networks.

The main role is to ensure that electricity is transported efficiently and securely over the network. This will involve adopting an optimal operating regime, reducing the cost of operation, limiting losses, increasing capacity, extending the network where necessary. This business is NOT responsible for the sale of electricity or for the buying and selling activity of BT.

The director will create a code of operations (a transmission network code) that transparently sets out the rules of connection to the transportation network, the rules associated with exit points, the operating arrangements for transporting electricity from entry point to exit point, the treatment of losses and the services available from the transportation company. The charges for operating the transport activity will be determined to reflect the costs of operation and will be included in the network code.

Revenue is generated from the transportation of electricity from entry points to exit points on behalf of the sales activity. Ancillary services will also be offered by this business for additional fees. The need to balance the volume of electricity entering the system with that being delivered to exit points will also require action from the transmission business. Charges for these services will be needed in the future.

Objectives for this business are to reduce losses across the network, to increase capacity or manage the electricity flow to avoid system constraints, to expand and develop the network to provide adequate capacity and connection within the country and adequate interconnection to other countries networks.

A system operator activity will also have to be established. This business will be responsible for generation despatch, the use of ancillary services from generators, ensuring an electricity system balance, operating the energy settlement systems and the operation of the electricity market. This business will operate under the transmission director for the initial phases of the restructuring although it is envisaged that this activity, under a fully competitive market would be established as an independent business but under state ownership.

The director will be required to create a corporate plan for the business as a whole which should consider the overall objectives for the business, how it fits with the mission of BT in achieving the stated objectives, identify and set targets for the business operation, create a capital project plan for increasing capacity and rehabilitation projects and, create an operational plan with forecast cost savings and efficiency gains for the whole transmission business.

4.3.3 Distribution Director

The director is responsible for the distribution of electricity from the transmission injection points, usually at the Grid Supply points to the exit points of the distribution network which are at customers’ meters and will cover low, medium and high voltages (i.e. 0.4kV to 110 kV).

The main role of the business is to ensure that electricity is transported efficiently and securely over the network to reach end users. The business should focus on reducing the cost of operation by identifying and limiting technical losses, identifying and eliminating commercial losses, increasing capacity where necessary, replacing systems that are overloaded or short of capacity and extending the network where necessary.



Metering plays a significant part in this business and a key objective must be to ensure that accurate metering is in place and used to record consumption. The meters should be read on a frequent and regular basis and used to calculate the electricity charges to customers. This will help to identify sources of commercial losses and prevent fraud in the application of electricity charges.

This business is not responsible for the purchasing and sales activity which falls under the Commercial Director’s responsibility.

The director will create a code of operations (a distribution network code) that transparently sets out the rules of connection to the distribution network, the rules associated with exit points, the operating arrangements for distributing electricity from entry point to customer exit point, and the treatment of losses. Charges for using the distribution system will be determined to reflect the costs of operation and will be included in the network code.

Revenue is generated from the distribution of electricity between the distribution system entry points and the exit points for the sales activity.

The director will be required to create a corporate plan for the business as a whole which should consider the overall objectives for the business, how it fits with the mission of BT in achieving the stated objectives, identify and set targets for the business operation, create a capital project plan for increasing capacity and rehabilitation projects and, create an operational plan with forecast cost savings and efficiency gains for the whole distribution business.

4.4 Commercial Director

This activity will be new to BT although some elements of the activity have been undertaken previously. The main difference is in the emphasis of the role. As recognised in previous reports from consultants and auditors, BT needs to introduce more commercial business practices and develop a corporate planning activity which would shape the future direction of the business. As the structure of the industry develops and a regulatory commission is established it will also fall to the Commercial Director to be the interface, in close consultation with legal services and the business units, with the Industry Regulator and help shape the regulatory framework for the industry. A new position dealing with the regulatory aspects of the business may need to be appointed towards the end of the commercialisation phase of the restructuring programme.

The Commercial Director is responsible for the activities of purchasing and sales of electricity, the corporate planning activity and the calculation and development of charges for electricity and heat. Each of these activities will be managed by a head of section or a director reporting to the Commercial Director. 4.4.1 Corporate Planning Director

The Commercial Director is responsible for developing the corporate vision and strategy for the company as a whole and will gain the approval and agreement of the Board of Directors and the shareholders of the company. Individual directors of the main businesses will develop business plans for their activity (i.e. generation, transmission, distribution and sales) and these plans will be combined into a company corporate plan by the corporate planning director. It is recommended that the post of a corporate planning director is established reporting to the Commercial Director. The role and responsibilities of the corporate planning activity is described in some detail in section 7 of this report. 4.4.2 Purchasing and Sales Director

The sales activity is distinctly different from the distribution business. The distribution business is an asset based business with few customers, whereas the sales activity is driven by customers, cash,



debt and the purchase of electricity and for the purchase of services for the transportation and distribution of electricity to customers.

It is recommended that a purchasing and sales director be appointed to be responsible for this activity. It may be, in the initial stages that the sales activity and the distribution activity are combined from an accounting perspective, as the sales activity with a high cash flow but a very small profit margin is vulnerable and potentially not viable. A more secure business is achieved when combined with the distribution business which has a more stable revenue stream and larger margins as a consequence of its large asset base. This director will be responsible for billing and collection of revenues for electricity and heat and for the reduction in commercial losses resulting from theft and other fraudulent practices.

Electricity purchase will be also undertaken by this director from both the BT generation business through an agreed market mechanism as well as from other countries (import) and from IPPs in Tajikistan. An obligation could be placed on this director to ensure that sufficient electricity is purchased to meet all customers’ demands to include demand side actions and energy efficiency methods to limit demand thus easing the need for more generation capacity and imports. 4.4.3 Director of Tariffs and Charges

This position will be responsible for the development of a charging mechanism and tariff structure that is cost based and balanced across the various customer categories. The charges need to be sufficient to provide BT with enough income to provide it with sufficient revenues to make BT a viable business, hence increasing its credit rating and giving the company the ability to borrow capital on international markets.

Charges must be sufficient to pay for electricity generation and imports, transmission charges, distribution charges, ancillary services and losses and include a sales business profit element. A challenge in the early years will be that the current overall charges are below breakeven rates and the company will have to decide how to split the revenue across the businesses and hence which business will be in profit and which in a loss position. Charges will therefore also need to be developed for electricity transmission services and electricity distribution activities. It is recommended that in the early stages of these businesses and certainly in the first phase of restructuring, these charges are determined by the commercial department.

4.5 Chief Financial Officer

The BDO Unicon management letter regarding the BT 2007 accounts, comments in many places that the finance and accounting activities within BT are weak and that the structure of the activity is inappropriate for a company the size of BT. Consequently and in line with good business governance practice, it is recommended that a Chief Financial Officer (CFO) be appointed at the highest level in the company. The responsibilities and activities of the CFO are described in detail in a section 5 of this report.

4.6 Administration Director

The company requires support activities to allow the operation of the main businesses to function correctly. These activities include information technology (IT), human resources/personnel function, legal services, facilities management and the procurement activity. It is recommended that an Administration Director is appointed as a member of the management board to be responsible for these activities.



The director will have reporting to him five main heads of section; an IT director, a director of human resources, a head of legal services, a facilities management director and a procurement director.

4.6.1 IT Director

The company does not at this time have an effective Information Technology (IT) function. As a consequence there is no overall policy on the use of or the development of systems or the maintenance of existing systems. A company the size of BT needs this capability especially when new and significant system requirements are being requested. Such systems as billing and collection, management information, accounting, payroll and human resources will be required in the next few years to support the management and performance improvement programmes.

The responsibilities of this post will be to establish the IT systems processes, policies and procedures necessary for the business activities across the company and to develop the appropriate business support systems in collaboration with the business units and departments.

4.6.2 Human Resources Director

Detailed information of the roles, duties and the organisation are contained in section 6 of this report.

4.6.3 Head of legal services

As implied by the title, the head of legal services will provide an internal legal advisory service to the executive and the operational units. As the company develops, changes will be needed to the legal framework and the company’s charter. The legal services activity will be at the centre of this and help shape the changes on behalf of BT.

Services will also be needed by the main business departments as they move to being internal profit centres with individual balance sheets during the first 2 phases of the restructuring process. 4.6.4 Procurement Director

The procurement of materials, equipment, services is an area where costs and quality issues are often ignored. The BDO management letter identified procurement as a problem area. The appointment of a procurement director should help to provide a central point for this service and introduce the necessary controls BT need. It is expected that the three main business departments will in time undertake this activity themselves, but initially, in phase 1 of the restructuring process, this will form part of the centrally provided services. The relationship between BT and the PMTO and Tajikenergosnab, will need to be determined during the first phase of restructuring. 4.6.5 Facilities Management Director

The responsibilities of this director are quite wide but essentially cover the management of the non operational buildings and facilities including the payment for the services required for upkeep of the buildings, the provision of conference facilities, canteen and restaurants and the management of other non-core activities.


THE FINANCE ACTIVITY 5

5 The Finance Activity in Barki Tojik As shown in Figure 2 in Section 4.2 of this report, it is recommended that a senior level position of Chief Finance Officer (CFO) be created. The CFO will be a member of the company’s Board of Directors and an important member of the Management Board. The CFO reports directly to the Chief Executive. An organisation structure of the CFO’s area of responsibilities is presented at the end as Appendix1 to this report.

5.1 Chief Financial Officer

Reporting directly to the CFO will be three key positions: a Chief Accountant, a Director of Planning and Analysis and a Treasurer. Major responsibilities of the CFO and the three positions are presented below.

Figure 3 – The Chief Financial Officer’s Organisation

Reporting directly to the Chief Executive, the CFO’s major responsibilities include the following:

In line with the objectives established by the by the Board of Directors and Chief Executive, assisting in the formulation of mission statements and long-term strategies for the company;

Providing input and making recommendations for improvements in operational efficiencies, cost control measures and other methods generally designed to improve the company’s productivity and profitability;

Ensuring that the accounting records of BT, its subsidiaries and other reporting units are appropriate for the accurate and timely recording of financial transactions and reflect all the entities’ activities in a manner commensurate with the relevant legislation and regulations in the Republic and subject to internal guidelines set from time to time by the Management Board and/or Board of Directors of the company as applicable;

Ensuring that the level of automation of accounting and planning operations and procedures is consistent with the scope and complexity of the company’s activities;

Ensuring that an appropriate system of internal controls is implemented and operating effectively throughout the company thus providing reasonable assurance of the achievement of objectives such as the efficiency and effectiveness of operations, safeguarding of assets, reliability of internal and external reporting, compliance with applicable laws, regulations, contracts and internal policies and appropriate risk management;


Chief Accountant

Director of Planning and

Analysis

Treasurer


THE FINANCE ACTIVITY - CONTINUED

Ensuring that financial audit and control systems are appropriate and continuous to monitor the performance of the company, its flow of funds, the adherence to the budget in terms of the expenditures, the income, the cost of sales and other budgetary items. It is the job of the CFO to provide management with a real time tool which informs them what is happening in the company and where there are problematic, potential problem areas of activity and performance;

Preparing timely, regular and relevant financial statements and reports and present to the Board of Directors as required by all pertinent laws and regulations in the Republic and as deemed necessary and demanded from time to time by the Management Board and/or Board of Directors of the company as applicable;

Ensuring that BT complies with all reporting, accounting and audit requirements imposed by the international investors (IFIs, donors and creditors) such as audited International Financial Reporting Standards (IFRS) financial statements and compliance with financial covenants set out in loan agreements;

Preparing and presenting for agreement of the Management Board and the approval of the Board of Directors an annual budget (multi-year), forecasts, financial plans, business plans, investment memoranda and all other financial and business documents as may be required from time to time;

Informing the Management Board and Board of Directors regarding any irregularity, lack of compliance, lack of adherence, omissions and problems whether actual or potential concerning the financial systems, the financial operations, the financing plans, the accounting, the audits, the budgets and any other matter of a financial nature or which could or does have a financial implication;

Collaborating and coordinating the activities of outside suppliers of financial services contracted by the company, including accountants, auditors, financial consultants, the banking system and other financial institutions;

Maintaining a working relationship and to develop additional relationships with banks, financial institutions and capital markets with the aim of securing funds necessary for the operations of the company, the attainment of its development plans and its capital investments;

Fully computerising all the above activities in a combined hardware-software and communications system which integrates with the systems of the company’s various subsidiary and reporting units;

Initiating and engaging in all manner of activities, whether financial or other, conducive to the financial health, the growth prospects and the fulfilment of investment plans of the company to the best of his ability and with the appropriate dedication of the time and efforts required;

Planning, directing and controlling the functions of the accounting, planning and analysis and treasury departments.



5.2 Chief Accountant

The Chief Accountant at Head Office is responsible for managing the accounting processes at BT and the preparation of financial statements in compliance with local regulations and in accordance with IFRS.

The Chief Accountant manages a team of deputies including for: Methodology; Recording; and Reporting. The following figure shows the structure of the Head Office Accounting Department and major functions performed.

Figure 4 – The Chief Accountants Organisation

Reporting directly to the CFO, the Chief Accountant’s primary responsibilities include the following:

Developing and implementing appropriate accounting systems in BT’s Head Office, its subsidiaries and other reporting units and ensuring that such systems result in the accurate and timely recording of financial transactions and reflect all the entities’ activities in a manner commensurate with the relevant legislation and regulations in the Republic and subject to

Chief Accountant

Deputy Chief Accountant, Recording

Deputy Chief Accountant, Reporting

Training programs

IFRS

Local laws & regulations reporting, labour code, taxation, etc.

Deputy Chief Accountant, Methodology

Payroll

Fixed assets

Construction in progress & financing

Taxes

Settlements

Materials

Cost accounting

Fund accounts

Energy imported/exported

Cash payments

Gross balances & typical reports

Local financial statements

IFRS financial statements

Special reports

Liaison, external auditors



internal guidelines set from time to time by the CFO, the Management Board and/or Board of Directors of the company as applicable;

Ensuring that the level of automation of accounting operations and procedures within Head Office, its subsidiaries and other reporting units is consistent with the scope and complexity of the company;

Developing and implementing an appropriate system of internal controls throughout the company and ensuring that it is operating effectively thus providing reasonable assurance of the achievement of objectives such as the safeguarding of assets, reliability of internal and external reporting, compliance with applicable laws, regulations, contracts and internal policies and appropriate risk management;

Developing accounting policies and procedures that are in agreement with local laws and regulations as well as reporting requirements of IFRS and ensuring that all such approved accounting policies and procedures are promulgated, understood and consistently and uniformly applied throughout the company;

Directing and participating in the development and revision of procedures in order to meet requirements of law, providing services to management, improving efficiency in branch activities, and coordinating branch activities with those of other sections, branches, and divisions;

Managing the activities of the staff of the Accounting Department by the appropriate assignment of duties, providing guidance in the performance of their activities and reviewing and approving all output;

Developing job descriptions for all staff of the accounting department and ensuring that they remain current, reflect all assigned responsibilities and are understood and followed by each member of the department ;

Liaising with the Planning and Analysis Department and Treasurer to ensure the unfettered flow of pertinent information between them;

Providing explanations and responding to enquires from senior managers and other interested persons concerning information contained in financial statements and reports including underlying accounting policies and procedures; in other words, expressing technical terminology and methods of accounting in terms that non-accounting managers can clearly understand;

Providing methodological aid to the company’s subsidiaries and other reporting units on the issues of accounting policy and procedures, control and reporting (compliance with Head Office reporting requirements, local regulations and IFRS);

Providing assistance to the Director of Planning and Analysis Department, Treasurer and heads of other reporting units in the design of meaningful management reports such as performance reports, control reports, accounts receivable, cash flow reports, and other internal management reports that clearly focus on the informational needs of senior management and other stakeholders;

Consulting with representatives of the taxation authorities and other Governmental agencies in regard to the company’s compliance with the pertinent legislation including resolution of disputes concerning specific transactions and supporting documentation;

Directing, reviewing and approving the company’s semi-annual and annual consolidated financial statements prepared in accordance with local regulations and IFRS and other periodic and special reports prepared by the accounting department;

Liaising with the company’s external auditors (Government and international external auditors) in the conduct of their review and audit of the company’s subsidiary and corporate consolidated



financial statements by ensuring that all information, documentation and explanations requested by the auditors is provided on a timely and complete basis.

Reviewing and establishing procedures for the timely resolution of all weaknesses and deficiencies in the company’s organisation, policies, procedures, documentation and system of internal controls that the external auditors have identified in their annual management letter and have made recommendations thereof;

Providing assistance and suggestions to the company’s internal audit department with regard to the review and assessment of the company’s policies, procedures, systems of internal control and risk management procedures including reviewing and implementing recommendations put forward by the internal audit department;

Within established approval limits, providing a final review and approval of all internal accounting orders and memoranda and source documentation prior to their recording in the books of accounts (including but not limited to such areas as: wages, employment related taxes, all other taxes, fixed assets, construction in process accounting, loans and credits, settlements, materials, cost accounting, funds accounting, energy imported/exported, cash payments, bank transfers, etc.);

Developing and implementing an appropriate document archival and storage system for all source documents, accounting records and reports;

Performing other duties as assigned by the CFO.

5.3 Director of Planning and Analysis

The Director of Planning and Analysis Department at Head Office is responsible for managing the financial planning process at BT and reporting on the actual realisation of the company’s annual budget. Through this process and the timely reporting of both financial plans and budget/actual comparisons, senior management is placed in a better position to effectively plan, direct, control and make informed decisions regarding the company’s activities.

The Director of Planning and Analysis manages a team of deputies including for: Budgeting, Analysis and Management Reporting. The following figure shows the structure of the department and major functions performed.



Figure 5 – The Director of Planning and Analysis Organisation

Reporting directly to the CFO, the Director’s primary responsibilities include the following:

Providing leadership in the annual planning and budget development process by ensuring adherence to corporate strategic financial objectives and goals established by the Corporate Planning Director;

Managing the operational and capital planning processes in BT’s Head Office, developing annual multi-year budgets (3-5 year minimum recommended) and making recommendations to the CFO regarding resource allocation;

Monitoring, updating, and communicating adjustments to the budget as needed during the course of the annual cycle;

Developing planning policies and procedures in line with best practices and dissemination to counterpart planning staff at the various subsidiaries and reporting units;

Coordinating the budget development process with counterpart staff in all subsidiary and reporting units; reviewing submissions received from them and incorporating their projections into the consolidated corporate budget for BT;

Forecasts

Financial plan (multi-year)

Analysis of actual results

Performance reports

Variance analysis, explanations

KPIs

Compliance with financial covenants

Director, Planning & Analysis

Deputy Director,

Budgeting

Deputy Director, Analysis

Deputy Director,

Management Reporting



Directing and managing budget cost studies and analyses of budget information to respond to external queries and provide critical management information to senior decision-makers;

Collecting, analysing, and reporting corporate and benchmark data used in the development of operational and strategic plans;

Developing recommendations with supporting reasons for additions to and changes in the company’s tariff structure for electric and heat energy (by consumer categories) for agreement by the Ministry of Economic Development & Trade and the Ministry of Energy & Industry and subsequent approval by the Government;

Liaising with the Accounting Department and Treasurer to ensure the unfettered flow of pertinent information between them;

Developing and implementing procedures for collecting and analyzing actual performance data on a timely basis;

For distribution to senior management, preparing timely performance reports showing budget vs. actual comparisons together with analysis and explanations of significant variances and other management reports showing Key Performance Indicators and information concerning compliance with financial covenants required by the international financial institutions;

Preparing monthly, quarterly and annual reports required by the Ministry of Energy & Industry, other Ministries and the Government;

Ensuring that the Department’s staff use modern budgeting and analytical models and techniques in the performance of their assigned duties either through the in-house development of computerised tools or the acquisition of them;

Managing the activities of the staff of the Planning and Analysis Department by the appropriate assignment of duties, providing guidance for their planning and analysis activities and reviewing and approving all output.

5.4 Treasurer

The Treasurer, reporting directly to the Chief Financial Officer, is a new position in BT’s Head Office whose proposed responsibilities include the following:

Development of policies and procedures for the treasury function at Head Office including developing procedures for the timely receipt of daily cash flow information from the company’s banks and from BT’s subsidiary units (e.g. collection of accounts receivable by the Sales Departments at each of the Distribution Centres);

Appropriate planning and analysis of cash movement within the company and the development of quarterly cash flow plans for approval by the CFO;

Management and control over cash, cash equivalents and short-term financial instruments;

Prioritizing payments in accordance with authorised cash movement plans;

Effecting bank transfers and cash payments on a daily basis within authorisation limits;

Maintaining good working relations with banks, including negotiating short-term bank loans to cover temporary cash shortages, etc.;

Developing, implementing and monitoring policies and procedures throughout the company dealing with settlement and credit management functions;



Credit administration, cash flow administration and, within authority limits, approves operating and capital expenditures

Assisting the CFO in the negotiation and management of short- and long-term loans from banks and other financial institutions;

Development and implementation of procedures for advances given to employees and other authorised persons (travel, business trips, etc.);

Performance of periodic cash counts and procedures for reconciliation of counts to relevant accounting records;

Maintaining a cash ledger;

Producing cash flow reports on a weekly basis for distribution to the CFO and other authorised persons;

Liaising with the Director of the Planning and Analysis Department and the Chief Accountant to ensure the unfettered flow of pertinent information between them;

Overseeing the activities of the Cashier including review and approval of periodic cash reports and cash reconciliations prepared by the Cashier;

Performing other duties as assigned by the CFO.

The Treasurer should possess the requisite credentials to appropriately discharge the assigned duties. These include: an economics degree from a recognised university and 5-10 years of practical experience in progressively responsible positions in finance and/or banking


THE HUMAN RESOURCES ACTIVITY 6

6 The Human Resources Activity in Barki Tojik The Director of Human Resources is a new position proposed by the consultants and will be responsible for the Personnel Department and the Labour & Salary Department that currently reports to a Deputy Chairman and the Chairman respectively. The following figure shows the structure of the Head Office Human Resources Department and major functions performed by its constituents.

Figure 6 – The Director Human Resources Organisation

Reporting to the Administration Director, the Director of Human Resources is responsible for managing the human resources process at BT and has the following responsibilities:

Developing, implementing and promulgating to staff in BT’s head office, subsidiaries and other reporting units the company’s human resources policies and procedures that are, as a minimum,

Director Human

Resources

Head Personnel

Department

Head, Labour & Salary

Department

Staff recruitment, selection and hiring

Maintenance of employee data base

Employee conflict resolution, discipline issues, substance abuse, etc.

Training programmes

Performance appraisals

Staff List (planned no of positions, basic salary amounts)

Performance incentive schemes

Monitoring & control of no of employees and salary fund

Annual Planned salary fund

Reporting

Reporting

Employee motivation schemes


THE HUMAN RESOURCES ACTIVITY - CONTINUED

in compliance with the Labour Code and other applicable legislation and regulations of the Republic affecting the work force;

Providing guidance and recommendations to the Heads of Personnel and Labour & Salary Departments for improvements in the overall planning, development, and administration of the assigned human resources, employee development, and related administrative support programs within the company as well as overseeing the development and implementation of planning issues in the company’s subsidiary and other reporting units;

Reviewing and/or revising programs to ensure compliance with laws, regulations, policies, plans, and procedures;

Assisting in the general management of policy development, program planning and coordination, and the evaluation of policy and/or organizational changes and new programs;

Conducting investigations and instituting special studies including preparing and/or reviewing reports and related information in the evaluation of existing organizations, policies, procedures, and practices within the company and generally in advising management in the area of human resources issues, and the need for corrective action if and when necessary;

Participating in labour-management negotiations and discussions including assisting staff with labour relations problems and advising management in the area of labour relations issues;

Advising managers and operating department heads on personnel needs and problems, and makes recommendations regarding personnel planning, procedures and transactions and providing interpretation, and application of company policies and procedures, etc.;

Managing the activities of the Labour & Salaries Department and the Personnel Department by the appropriate assignment of duties, providing guidance for their activities and reviewing and approving all actions taken and reports issued;

Assisting the Personnel Department in the design and implementation of a formal annual performance evaluation process, including development of suggested assessment criteria, for implementation in the company’s head office, subsidiaries and other reporting units;

Assessing the effectiveness of employee motivation schemes and making recommendations for improvement therein (e.g., the company’s incentive system that currently takes the form of three major types of potential bonuses: a monthly increase of 50% of basic salaries according to prescribed performance criteria being met; annual bonuses based on acceptable year end-results and a special onetime bonus recognising special work, efficiency, extra work load, etc.);

Assist the Personnel Department in the design and implementation of plans to motivate key employees and reduce the company’s personnel turnover rates (in addition to salary increases, consideration should be given to other schemes such as the introduction of flexible working hours, improvements to the working environment, job rotation, employee suggestion system whereby bonuses are paid for specific suggestions in how to improve operating efficiencies, etc.);

Assessing the effectiveness of the monitoring and control process by the Labour Department of the salary funds and number of employees and making recommendations for improvement therein;

Reviewing the Personnel Department’s process for the investigation and resolution of employees' complaints and grievances and the explanation of policies, procedures, rules, etc. to the parties and departments involved;

Advising managers in the company’s labour relations policies and procedures and providing recommendations regarding formal grievance procedures;


THE HUMAN RESOURCES ACTIVITY - CONTINUED

Developing and implementing in the centralised personnel department of a companywide computerised employee data base containing pertinent personal and employment information;

Directing the maintenance of personnel files and records, the preparation of reports, and the processing of all personnel actions in conformity with the company’s policies, rules and regulations, the Labour Code, etc.

Providing guidance and otherwise assisting the Personnel Department in the design and establishment of procedures in the creation of a register of eligible candidates from the centralized personnel data base for job openings within the company (authorised new positions or the filling of a vacant authorised position);

Ensuring the maintenance of an updated position classification plan within the company including the maintenance of up to date job descriptions for each approved position and that employees occupying the positions know and understand their assigned responsibilities;

Reviewing the adequacy of the company’s employee training and development program for technical and office staff including assisting in the development and/or coordination of training programs and participation in supervisory training, orientation, and in other training areas. Efforts would include procedures for attracting and retaining qualified employees, especially at key and senior positions (e.g., providing ongoing basic and advanced professional training to eligible candidates);

Participates in the development of the company’s annual budget estimates for human resources (numbers of employees and remuneration) for submission to the central Planning and Analysis Department;

Performing other duties as assigned by the Administration Director.


THE CORPORATE PLANNING ACTIVITY 7

7 The Corporate Planning Activity in Barki Tojik 7.1 Company Mission, Goals and Strategy

To provide a focus for the company and define its direction for all the staff and employees of BT, it is important that the mission and goals of the company are established formally and communicated across the company. It is also important that these objectives are communicated with the customers of BT especially when the service provided is below acceptable levels and it is intended to make improvements or at times of change.

At this time there is no formally agreed mission or objectives for BT. The Government has approved a two track strategic plan for the energy sector:

The first track focuses on the domestic energy sector, taking a sector-wide approach by covering the electricity, gas and heating sectors. The main aim of this track is the recovery of the domestic energy sector, for which purpose it is intended to take a series of policy and investment measures;

The second track of the development strategy is oriented towards the exports markets. This strategy calls for realising the sector’s significant potential to contribute to meeting the country’s economic growth through electricity exports. There are at present electricity surpluses in the summer which are already being exported to neighbouring Afghanistan, Kazakhstan, Uzbekistan and Russia. It is intended to intensify these exports and secure more long-term contracts for existing surpluses.

This two-track approach is a determined effort to rehabilitate the existing electricity infrastructure and systems which have been neglected in the years since independence, and to develop new hydroelectric power which can become a major export for Tajikistan. If successfully implemented this plan will transform the operational efficiency of the electricity industry and significantly improve the country’s economy.

BT needs to develop a strategic corporate plan for the business which seeks to confirm the Government’s objectives and identifies key targets and objects for the business units within BT such that the business can develop plans and actions that are designed to achieve these objectives.

7.2 Corporate Planning Activity

Corporate planning at this time is not carried out as a formal business activity. Budgeting and forecasting of costs that will result from the business operation is undertaken on a 3 year time horizon but this is undertaken by the finance and accounting function. The activity is discussed in detail in the section on the Finance Activities in section 5 above. There is no formal process that identifies the mission, objectives and strategy that BT should follow in the medium-term and no long-term goals established for the business.

As a consequence the company does not have a corporate planning function. As mentioned above the forecasting and economic department undertakes the financial elements of a planning process but does so without an agreed strategic framework or agreed goals. It is vital for BT that for the commercialisation of the company that a formal corporate planning activity is created. This activity must be established at the highest level of BT.

The corporate strategy of the company is formally the responsibility of the company Chief Executive as defined in the Report on Corporate Governance of BT September 20099 Appendix 4. His responsibility is to ensure that the business has a corporate strategy and that the operation of the

9 Corporate Governance of Barki Tojik August 2009


THE CORPORATE PLANNING ACTIVITY - CONTINUED

business and the actions taken by the business units are in line with the strategy and designed to achieve the company’s objectives as defined in the corporate plan.

The position of Chief Executive doesn’t exist in BT at this time and the responsibility would lie with the Chairman or potentially the First Deputy Chairman. However, the proposed company executive structure shown above includes a Chief Executive and also identifies that specific responsibility for the development of the corporate plan is given to a corporate planning director who will report directly to the Commercial Director.

The overall responsibility for the company’s mission, goals and strategy is the Board of Directors of the company. As proposed in the corporate governance paper produced as part of this project,10 a Board of Directors will be created to oversee the operation of the company on behalf of the shareholders. It is the responsibility of the Commercial Director to prepare and present the complete corporate business plan to the Board for approval. The activity will be guided by the Chief Executive and the work undertaken by the corporate planning director and his staff.

The Supervisory Board, representing the shareholder may wish to retain the right to review the strategy approved by the Board in situations where there is a departure from the current business activity or a radical change in business strategy. The business charter and other company documents will identify exactly what issues are within the competency of the Supervisory Board and the Board of Directors. These issues are discussed in the corporate governance report.

This activity will affect all activities of the business and it will be critical to the success of the process that their involvement and contributions are fully included. For example the forecasting and planning activity will provide key financial inputs and forecasts for the plan and the sales activity will provide sales forecasts, etc. The financial elements of the business plan will continue to be developed by the director of planning and analysis working alongside the corporate planning director. It is important that all relevant parts of the company work towards producing the company plan.

It is expected that once the three main business units are established as described in this report and in the restructuring plan, (ie the distribution, transmission and generation departments), each will develop their own plans for their businesses. There will need to be a corporate planning capability in each of these businesses. Their plans will be agreed with the Operations Director before they are fully incorporated into the BT’s company level plan.

The process which will coincide with the annual budgeting cycle will require considerable effort to achieve as there will be conflicting interests between the businesses for a limited resource. It is important that the process starts with the development of a company-wide mission, goals and objectives and an agreed strategy to achieve the stated goals. This will be agreed with the Board of Directors. This framework can then be used to guide the development of action and business plans to facilitate the consolidation of these to a BT corporate plan.

7.3 Proposed Organisation of the Corporate Planning Function

The corporate planning function could be at one extreme a co-ordination and facilitation role which collates the individual plans and assembles them into a corporate document. This process could be achieved with the activity totally managed under the CFO. However, the proposed activity here is one which is very proactive, seeking to identify and develop alternative goals and strategies for the company in its transition to becoming a more commercial business. Innovative and lateral thinking is required and challenges made to the traditional solutions and activities. This activity is critically important to the commercialisation of BT.

10 Corporate Governance of Barki Tojik August 2009


THE CORPORATE PLANNING ACTIVITY - CONTINUED

As such this activity has been placed under the Commercial Director and will need to be staffed by a motivated, dynamic and determined people. They will need drive and be able to present cogent arguments even at the very top levels of the company.

The numbers of staff in the organisation of the activity will be very small bearing in mind that the finance function will prepare forecasts, budgets and prepare reports on performance, etc. There will need to be assistance and support given to the three main business units in the compilation of their individual business plans.

It is recommended therefore that the structure comprises four individuals; a corporate planning director and three corporate planning officers. The officers will, together with the business directors, be responsible for developing the business plans of the three main businesses. As the sales activity is critical to the success of the business it is also recommended that the corporate planning director be personally responsible for the development of the business plan together with the purchasing and sales director. It should be noted that the responsibility for the individual plans lie with the business directors and not the corporate planning department. As discussed above the corporate planning department provides the stimulus, lateral thinking and challenges necessary to develop well thought out, comprehensive and cohesive business plans that fit within the overall company strategy, etc.

The corporate planning team will also develop, together with the company executive and management board (see the corporate governance report), the company overall mission statements, goals objectives and strategy. This is a critical activity for the success of BT. The director will assist the Commercial Director in gaining board approval for these. The completion of the annual corporate planning process will be that the individual plans, once produced will be brought together into a consolidated plan for the formal approval by the Board of Directors. This will coincide with the budget cycle and approval process.

The approved company mission and goals together with the contribution that the individual business units make to the overall plan will need to be communicated to staff and managers across the company. The responsibility for the way this is achieved should be part of this department but liaison with other departments especially Human Resources will be necessary.

The basic structure is shown in the figure below.

Corporate Planning Officer

Generation




Transmission


Distribution

Figure 7 - Structure of the Corporate Planning Function


CONCLUSIONS AND NEXT STEPS 8

8 Conclusions and Next Steps The report highlights some serious shortcomings with the existing structure of BT In particular the lack of effective finance and corporate planning functions as well as weak human resources and personnel function. These shortcomings were enumerated by BDO Unicon in its management letter on the 2007 accounts.

The proposals and recommendations contained in this report are designed to address these weaknesses and if implemented facilitate BT’s transition towards becoming a company that knows clearly where it is going, performs well and is well controlled. The overall restructuring activity as presented in the Restructuring Plan covers the changes for the company as a whole and recognises that a phased approach to change is the appropriate way for BT to restructure its operation. During the first phase the changes identified in this report will need to be introduced. However, should the restructuring be delayed or modified the recommendations for changes in finance, HR and corporate planning can and should be implemented in any case.

The next steps are to develop an implementation plan for the changes which should concentrate on:

• Establishing a corporate planning function and developing a long term and medium term corporate plan with a mission, goals, objectives and the development of a strategy for their achievement;

• Introducing a board level Chief Financial Officer with the appropriate competences to develop and create a finance function which separates accountancy from treasury and develops the reporting and planning and forecasting activities;

• Overhaul the human resources function, combining it with the labour activity and producing procedures for staff retention, development and a sound reward system.

The reorganisation implied by this report, as well as the Restructuring Plan, will present BT and the Government with significant challenges. The critical barriers are likely to be lack of sufficiently qualified and experienced managers in Tajikistan to oversee the restructuring and the scale of investment required in the retraining of existing staff and remunerating them sufficiently to retain them. It was for this reason that this TA was originally designed to help the Government appoint an international company, under a management contract, to implement the commercialisation phase (Phase I) of the restructuring plan. Given the reluctance of the Government and BT to trust the restructuring of BT to a third party, an alternative implementation strategy has to be defined in consultation with IFIs. Otherwise it is highly doubtful whether the first phase of restructuring will be implemented successfully.


APPENDIX 1 – PROPOSED ORGANISATION OF THE FINANCE ACTIVITY

Director, Planning

& Analysis Chief

Accountant


Payroll

Fixed Assets

Construction in process & financing

Taxes

Settlements

Materials

Cost accounting

Fund accounts

Energy import/export

Cash payments

Gross balances & standard reports

Deputy Chief Accountant, Recording

Deputy Chief Accountant, Methodology

Training programs

Local laws & regulations re reporting, Labour Code, taxation, etc.

IFRS

Deputy Chief Accountant, Reporting

Local financial statements

IFRS financial statements

Special reports

Liaison, external audits

Deputy Director,

Budgeting

Forecasts

Financial plan (multi-year)

Deputy Director, Analysis

Analysis of actual results

Deputy Director, Management

Reporting

Performance reports

Variance analysis, explanations

KPIs

Compliance with financial covenants

Treasurer

Cash management plans

Banking

Cashier

Short-term financial investments

Negotiation, short- & long-term loans and credits

Prioritisation of payments

Advances Cash flow ledger

Reporting

VERSION CONTROL

Benchmarking and Key Performance Indicators



Documents Title: Benchmarking and Key Performance Indicators for Barki Tojik

Prepared By: Chyngyz Osmonov and Guy Stalens

Reviewed by: Eric Harrison

Version: 1.0



ABBREVIATIONS


BT Barki Tojik

EHV Extra High Voltage (Above 11KV)

GWh 1,000,000 KWh


HV High Voltage (Above 1KV)

KPIs Key Performance Indicators

KV 1000 Volts

KWh 1 unit of electricity or 1000 watt hours



Talco Tajik Aluminium Company Formally TadAZ

VHV Very High Voltage (above 100kV)

WB World Bank


CONTENTS

1 GOALS AND OBJECTIVES 1

1.1 Background 1

1.2 The Role of Benchmarking 2

2 SOME ASPECTS OF ELECTRICITY SYSTEMS 3

2.1 Adequacy of Capacity 3

2.2 Sustainability of the Development 3

3 THE BENCHMARKING PROCESS 5

3.1 Benchmarking Models 5

3.2 RTE’s Benchmarking Model 7

3.3 Proposed Benchmark Systems 8 3.3.1 List of utilities (Eastern Europe) 8 3.3.2 Proposed evolution towards a regional benchmark (Central Asia) 8

4 ANALYSIS OF THE DATA PROVIDED 9

4.1 Validity of Information 9

5 BENCHMARKING OF BARKI TOJIK 11 5.1.1 Employees/GWh 11 5.1.2 Operating Cost/GWh 12 5.1.3 Total Cost/Energy transmitted 12 5.1.4 Overall performance 13

6 KEY PERFORMANCE INDICATORS 15

6.1 Introduction to Key Performance Indicators 15

6.2 The Key Performance Indicators 16 6.2.1 Electricity Sales and Accounts Receivable 16 6.2.2 Electricity Losses 28 6.2.3 Barki Tojik Electricity Generation 34 6.2.4 Operating Costs 37

7 CONCLUSIONS AND THE WAY FORWARD 43

APPENDIX 1 – SUMMARY OF KEY PERFORMANCE INDICATORS 45

APPENDIX 2 – ELECTRO ENERGY BALANCE 50


GOALS AND OBJECTIVES 1

1 Goals and Objectives 1.1 Background

The financial performance of Barki Tojik (BT) has been deteriorating in the recent years and the company is experiencing difficulties in meeting the growing electricity needs of the country. Consideration is being given to the restructuring of BT to improve the financial and operational performance of the company.

The restructuring of BT will require a new framework for managing the relationship between the company and its stakeholders including investors, the Government, the regulator. The Government objective will always be to safe guard reliable supply of electricity to the populations and industry at the lowest cost to the country.

• Access to reliable and affordable electricity;

Consumers today consider that electricity is a first-necessity service as many basic needs can only be met with the support of electricity:

• at home: heating, cooling, media, lighting, cooking and many daily activities rely on a stable electricity delivery;

• at work: computers and machines as well as large industrial processes are dependant on the electricity delivery.

Thus electricity must be available in quality and quantity needed and be affordable for all categories of consumer. It is the Government’s policy that will define the priorities for the different uses of electricity, keeping in mind that the higher the quality of supply, the stronger the acceptability of higher tariffs.

As regards to quality and quantity they are impacted by capacities, availability and reliability of generation, transmission and distribution equipment.

As regards to affordability, the main criterion is the tariff, which reflects a balance between the priorities of the Government and the arbitration it makes between financing by use (consumers) or through subsidies (taxpayers).

To achieve its social and economic objectives the Government will assign specific objectives to BT, and BT must in turn assign these objectives between the business units: arbitration between generation, transmission and distribution capacities, remuneration and qualification of employees, and renewing and refurbishment.

Measuring the performance of the sub-sector must cover operation, maintenance and development, all of which generate expenses. The revenues balancing these costs come from the billing of energy and the use of the infrastructure. They are collected through metering, invoicing and collection of the customer’s bills. As a result, the Key Performance Indicators (KPIs) to be monitored regularly by the Government, regulator and BT must illustrate the progresses made in the accomplishment of these activities at least cost for the benefit of the consumers.

In order to run efficiently and improve its performances, BT’s management needs to set regular targets covering costs and the, quality and availability of services and monitor these through benchmarking and the evaluation of KPIs


GOALS AND OBJECTIVES - CONTINUED

1.2 The Role of Benchmarking

Benchmarking is a useful tool in analysing the efficiency of decisions made.

The electricity network businesses are natural monopolies: and as such its efficiency cannot result from having to compete with other companies but from the actions taken by the

• The regulator or the regulatory authority,

• Shareholders’ requests,

• The management of the companies

Benchmarking is the usual method to determine the efficiency and productivity levels. However care must be taken as no power company is the same and differences exits which may distort the results of benchmarking. Benchmarking must attempt to iron out these differences and provide measures of performance comparable with other companies operating in the same field. Thus, the comparison of certain performance ratios can help understand if the problems met in one company are confirmed by the experience of similar companies, and if not what are the causes of the differences. Also the efficiency of different solutions to a problem can be compared and improved.

A benchmarking study will help to highlight the performance of Barki Tojik with regards to similar utilities. The selection of the benchmarks must take into account a certain number of criteria to make sure the comparison will be representative of similar situations.


POWER SYSTEM ASPECTS 2

2 Some aspects of Electricity Systems One of the goals of the company will be to guarantee the adequacy of capacity of the electricity system to fulfil the required demand on a permanent basis. Technically and practically, the electricity generating stations, new substations or overhead lines cannot be built overnight but requires several years between a decision to build, its construction and commissioning. Financially, the huge amount of money required for the construction of lines, dams and power plants can also severely limit the ability of the company to invest in its electricity system

.

2.1 Adequacy of Capacity

If there is insufficient capacity to fulfil the demand, shortages may occur and a some demand will stay unsatisfied. The risk of shortage will be reduced by:

• A larger investment in generation plant, or the introduction of Independent Power Producers (IPPs)

• An advanced strategy in the use of power facilities (e.g. management of the water reserves)

Even when the generation capacity is sufficient, congestions1 may occur between the generation sites and the consumption areas. The solutions here are:

• Increase in the investment in transmission facilities to avoid bottlenecks

• A de-optimisation of the generation scheduling (re-dispatching) inducing additional costs

• The use of load shedding as curative solution

Suitable indicators can help the decision makers to decide on an appropriate strategy e.g.

• Solutions based on investment growth deliver a solid financial health;

• Operation oriented solutions bring extra costs;

• Shortage or shedding of load decreases revenues and increases customer dissatisfaction.

2.2 Sustainability of the Development

The collection of fees from consumers is at the other end of the process and several factors must be monitored:

Are all the consumers metered and are the meters accurate?

The invoicing for the consumption requires that all loads are metered in the distribution (and sometimes transmission) network. In addition the knowledge of the consumption is a major requirement in developing a suitable load forecast. Metering is the key factor in the identification of the demand as unauthorised connections may occur. Invoices based on meters are not questionable unless they are inaccurate.

Are all the customers properly invoiced?

1 Shortages in the required Transmission capacities


POWER SYSTEM ASPECTS - CONTINUED

The tariff should take into account the underlying costs of supply for each distinct customer category and service, the duration of use (short durations induce investments with poor financial compensation) and other cost drivers. In addition the non-metered loads may be under-estimated, as their growth is not known by the utility.

Are the bills paid?

When the difference between the invoiced energy and the actual income received large, (ie a poor collection rate), the expenses related to the operation of the business may not be covered. Borrowing may be necessary just to allow the business to continue. Any potential investor would check the financial health of the business before risking investments in the generation or distribution activities.

The KPIs and benchmarking of electricity utilities aim at highlighting these issues and allow the identification of specific actions designed to correct and improve problem areas.


THE BENCHMARKING PROCESS 3

3 The Benchmarking Process Benchmarking models aim at determining the efficiency of a given company with the following objectives:

• The overall efficiency: analysis of all costs

• The efficiency on a particular activity: construction costs and maintenance costs…

Whatever the objective there is never an explicit definition of efficiency as it is always the difference between a theoretical model and reality, or between cost of other companies and the cost of the benchmarked company.

Benchmarking models give qualitative answers to the question: “Is the benchmarked company efficient for this activity or overall?

Thus benchmarking is a means of setting and justifying productivity targets for certain activities of the company, but it is difficult to deduce precise quantitative objectives from the numerical results of benchmarking models. Benchmarking should therefore be combined with other approaches in setting performance targets!

Coming back to the basic missions of BT, the most visible weaknesses at present are the frequent shortages of electricity (especially in the winter months), the poor collection rate and the high volume of losses. The first weakness stems from the management of the total power system, rather than the hydro power plants performance although this issue cannot be ignored. The second is more related to the weakness in billing and collection process and actions are already being taken by BT to improve metering, invoicing and recovery mainly at the distribution level. The third weakness derives from a combination of old and overloaded systems, poor management control systems and poor metering. However, their effect will impact the overall financial performance of BT. As detailed and reliable information on different aspects of the businesses and the individual activities is unavailable the present project has focussed on the overall efficiency rather than an activity per activity benchmarking. When appropriate information is available dedicated benchmarking can be used for particular activities or business units. Please see section 4 in this report for a discussion on information availability.

3.1 Benchmarking Models

In the academic literature, some common terms are used to define the different benchmarking models. Two of them are based on the economic analysis by function of costs. They consist of testing economic models of costs from statistical databases:

• COLS method (= Corrected Ordinary Least Squares) is based on the following:

o External factors are explanatory variables

o Companies identified as presenting the best performances are the reference for the others

o The vertical distance between each dot and the COLS slope is the potential for efficiency gains


THE BENCHMARKING PROCESS - CONTINUED

• SFA (= Stochastic Frontier Analysis) is one method used to correct the fact that there may be some « statistical noise » in the data

Figure 1 - COLS and SFA methods

• DEA (Data Envelopment Analysis) is based on non-parametric analyses.

It is derived from direct comparison between the resources (« inputs ») of benchmarked companies and their products (« outputs »). One or several companies define the best practice for the activity. This standard serves to classify all other companies according to their relative performances measured by their distance from the standard. The results of the classifications depend on the definition of the rates expected from the benchmarked companies (their « outputs ») and the means they use (their « inputs »). Different ways to improve efficiency give different variants of DEA.

• Inputs : Operating expenses, Size of the System, Size of the transformer

• Outputs : Supplied energy, Number of customers, Peak demand

Figure 2 - Example of inputs and outputs

London Economics (1999, 219 distribution companies from Australia and New-Zeeland, UK and US from 1995 to 1998)

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Ci = a + Xi. b + ui + vi Inference of the dissimilar error

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Function of costs

The least squares slope is calculated

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3.2 RTE’s Benchmarking Model

RTE’s benchmarking model is a pragmatic approach based on the Electricity cost analysis, and combining three types of method:

• Engineer expertise analyses - aims at defining the factors that intervene structurally on the costs. It means reconstructing a typical system on a computer, or models of real systems, by respecting normalised planning rules using standard costs and based on standard technical performances

• Accounting expertise analyses - for the analysis of the annual costs. It means combining the accounting data with expertise and internal databases. The accounting data are organised in a functional segmentation of the costs

• Analyses by function of costs - The objective is to explain the different values of the Utilities’ global costs:

Costs of a Utility Energy

Where the «costs of a Utility» in M€2 are all the costs allocated to the utility. These costs are those that are readable in the annual report in the profit and loss account

Where « Energy » is the energy generated by the utility in TWh (for vertically integrated utilities)

As many external factors naturally create high cost differences between countries each Utility can be compared to a reference utility, which is chosen for instance as the average of the utilities used in the benchmarking.

2 A single reference currency should be used for all the utilities of the benchmark. Appropriate currency rates will be used



3.3 Proposed Benchmark Systems

3.3.1 List of utilities (Eastern Europe)

As a first set of benchmarks corresponding to the global approach the consultant proposed to use some of the Eastern European systems that went through the process of joining the standards of UCTE (the association of the European utilities founded in the sixties). These utilities have successfully improved their performances during the last ten years.

REN (Portugal)

NEK (Bulgaria)

EMS (Serbia)

SEPS (Slovakia)

HEP-OPS (Hungary)

PSE-EAD (Poland)

3.3.2 Proposed evolution towards a regional benchmark (Central Asia)

As BT is part of the interconnected system of Central Asia, it is proposed that further benchmarks could be the countries neighbouring Tajikistan, as they should reach common standards both technical and financial in the next few years, to develop the regional market.


ANALYSIS OF DATA 4

4 Analysis of the data provided 4.1 Validity of Information

BT is a vertically integrated company comprising generation and regional transmission/distribution entities operating and interacting without transfer pricing mechanisms between them. As a result the subsidiaries of the company (i.e. generation and transmission/distribution) prepare incomplete sets of financial statements (e.g. no statements of income, losses, or comprehensive cash flow are produced), and incomes are calculated for the company as a whole on the basis of official tariffs for energy consumers. The problem is aggravated by the fact that both transmission and distribution functions are performed by the same regional subsidiaries of the company with no segregation of information by function. These issues make it quite difficult to assess and analyse BT’s activities, or to calculate standard KPIs separately for generation, transmission and distribution functions that would facilitate comparative analysis and benchmarking against other companies which have unbundled generation, transmission or distribution.

Furthermore, , there are, in many cases, difficulties in obtaining comprehensive, consistent and correct information relevant to all aspects of BT’s activities. This is caused by:

• The absence of standardised methods and rules for preparing, collecting, storing and reporting of information and data,

• Problems with the organisation and performance of accounting, planning and financial activities throughout the company, and

• The irregularity of the organisational structure and limited interaction between different departments and entities of the company.

The financial statements of BT, for instance, are prepared according to the National Financial Reporting Standards which do not correspond to IFRS. It was assumed that the company’s local financial statements would be restated in accordance with IFRS at the company level, however, due to the lack of qualified specialists in the central accounting department, the company’s consolidated IFRS financial statements are not currently prepared.

Consequently, BT did not prepare IFRS consolidated financial statements for 2007 and 2008. BDO Unicon, the international auditing firm engaged to conduct an audit for 2007, stated in their management letter to BT’s Chairman that they could not express an audit opinion because they were unable to plan, perform and complete their audit as the company did not provide them with the required information and IFRS financial statements. In their management letter the auditors listed many serious shortcomings and problems in BT relevant not only to matters of accounting and financial statements but also relevant to all the company’s activities (absence of a strategic development plan, an inappropriate organisational structure, lack of integrated systems of data storage and planning, lack of an internal control system, lack of an internal audit department, etc.). The auditors believed that due to the existing shortcomings BT financial statements cannot be considered as reliable and acceptable.

As a consequence of the above and the absence of audited financial statement we were left with no choice but not to calculate some of the common financial indicators and ratios, such as profitability and solvency ratios, which are calculated on the basis of balance sheet and statement of income. Nor were we able to undertake the detailed benchmarking that would have been possible with access to this data. Despite the problems with data, KPIs have been chosen which cover key areas of operational efficiency and problem areas of the company’s activities, including those relevant to the sales of energy, losses and the collection of accounts receivable. These KPIs can be used for both comparative analysis (benchmarking) and for the assessment and monitoring


ANALYSIS OF DATA - CONTINUED

of the performance of the company and its subsidiaries leading to remedial action being taken and focussing on the performance improvement programmes.


BENCHMARKING 5

5 Benchmarking of Barki Tojik This section describes the approach to and outcome of the benchmarking exercise3. The consultant has used the following utilities, which offer some illustrations of the performances in Power System management:

• REN (Portugal)

• NEK (Bulgaria)

• EMS (Serbia)

• SEPS (Slovakia)

• HEP-OPS (Hungary)

• PSE-EAD (Poland)

A serious problem with benchmark analysis is the structure of BT having an integrated distribution and transmission activity. The structure of the business in BT is not compatible with the standard analysis framework in comparable utilities. Thus in the time allocated for the project the benchmarking has been limited to the most pertinent indicators. 5.1.1 Employees/GWh

A usual indicator in utilities is to report the number of employees to the Energy delivered.

In this indicator, the ratio of BT is very high although not the highest. This is probably due to the maintenance activities that are not outsourced4 by the companies showing the larger ratios. This indicator alone, however, does not take into account differences in the structure of the utilities.

3 The timetable for benchmarking did not allow for confirmation or agreement to be sought or received from the utilities used as

benchmarks in this exercise. 4 Outsourcing the repair and maintenance activity to contracting organisations is common in many utilities

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BENCHMARKING - CONTINUED

5.1.2 Operating Cost/GWh

This indicator gives a better view of the overall performance of the operation and maintenance activities. In the companies which outsource their maintenance, while the staff expenditures are lower, there is an increase of other expenses due to the subcontracting process. However the charts above show that their operational performance is still high and better than that of BT.

5.1.3 Total Cost/Energy transmitted

This indicator sums up the financial performance of the utility as it compares the overall energy cost reported to the total energy delivered.

The chart above shows that the main difference is caused by the size and value of the assets employed in the business. For instance in the case of NEK (Bulgaria) the high value is due to the

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Total Cost/assetsAssets/transmettedCosts/Energy



underutilised existing 750 kV network which is still in the hands of HEP although neither the present consumption of Bulgaria nor the level of exchange with neighbouring countries requires this level of voltage. The indicator for BT is also very high and this is probably due to the 500 kV system which, until the level of generation is increased and the export of large volumes of electricity becomes a reality, will remain underutilised. Sangtuda 1 has recently come on stream which will increase the utilisation of the capacity and probably improve this indicator. The development of energy exchanges with neighbouring countries could also improve this indicator

5.1.4 Overall performance

This last indicator best shows the performance of BT as a utility as it compares the cost of the operation of the business (as extracted from the financial data) to the average simulated cost of the operation in an average Transmission System Operator running the same electrical system in an optimised manner.

Where the « Simulated Cost » is the cost the Reference Utility would have if it was operating Utility X’s grid

This indicator suppresses the differences between the utilities that result from such variables as company size, business activities, geographic and demographic variables (e.g. mountainous or plain, climate population densities,… etc).

In the benchmarking process the model determines the average operator taking into account the variables mentioned above. In the above case the average or reference utility is SEPS in Slovakia. The chart shows this by giving a performance measure of zero to SEPS for running its own electrical network. The chart also shows an indicator of the performance which SEPS would achieve if they operated the other company networks. As SEPS is the average utility in the above

Real Operating Expenses of Utility “X” – Simulated Operating Expenses of Utility “X”

Sum of Simulated Costs of Utility “X”

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benchmarking model the costs of operation in some cases will be higher if SEPS were running the company and some will be lower.

In the above case as there are quite large extremes of performance between the companies, SEPS would perform worse in all companies except BT, that is their simulated costs would be greater for these companies than the company themselves. In the case of BT, however, the simulated cost of SEPS operating BT’s optimised network is significantly less than BT’s own costs hence the above graph shows a large negative value. More detailed analysis of BTs operation would be needed before it is possible to examine the reasons behind the poor performance of BT.

It should be noted that that the figures used for the chart above have been corrected. In BTs case the additional costs of the 10kV lines in the overall costs of operation have been removed. If these figures had not been corrected the corresponding figures for this indicator would have been worse.


KEY PERFORMANCE INDICATORS 6

6 Key Performance Indicators 6.1 Introduction to Key Performance Indicators

As part of the benchmarking exercise the opportunity was taken to identify and select Key Performance Indicators (KPIs) for BT to facilitate the setting of targets for performance improvement. In undertaking this exercise a number of problems and constraints were experienced with respect to identifying and collecting data to measure performance against a number of KPIs. This stems largely from the lack of intergraded management information systems at BT and partly the reluctance of staff to provide what is considered sensitive financial and operation information to third parties.

The KPIs selected relate to operational efficiency and ratios which cover what is believed to be the problematic areas of the company’s activities, including revenue collection and account receivables. The KPIs can be used for both comparative analysis (benchmarking) and for the assessment and monitoring of the performance of the company and its subsidiaries, leading to remedial action being taken and focussing on performance improvement programmes. All the indicators can be calculated on a quarterly and annual basis simultaneously with the preparation of financial and management reports.

The KPIs for BT for the period 2006 to 2008 have been calculated on the basis of the information and data provided by BT’s accounting, sales, planning and economy, and technical departments. A description of the results of each KPI is provided below. In spite of some shortcomings in the accounting information, inaccuracy in some of the numbers and contradictions in some of the data provided, on the whole we believe that the selected KPIs reliably measure the performance of the company’s activities in sales, revenue collection and accounts receivable. For some other indicators, where the initial data cannot be considered as reliable (e.g. electricity losses) we have provided additional commentary. A summary of the results is attached as Appendix 1.


KEY PERFORMANCE INDICATORS- CONTINUED

6.2 The Key Performance Indicators

6.2.1 Electricity Sales and Accounts Receivable

Total electricity entering into network

16 700 17 27214 741

1 106

4 840 4 3615 298

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Chart 1 – Total electricity entering into the network



Chart 2 - Electricity sales, export and losses

Electricity sales, export and losses

7430 7178 6635

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4 231 4 2594 375

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BT sales and account receivables data

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Chart 3 – Sales and account receivables data

1) Trade Receivables days

2006 2007 2008 a) Total Receivables (365 * Average A/R from external customers) / Total sales) 245 186 150

b) Residential Receivables (365 * Average A/R from residential) /Residential sales) 286 217 137

c) For Talco (365 * Average A/R from Talco) /Sales

Talco) 204 143 113

The data to calculate the indicator covering the sale of energy and receivables split by the main categories of consumer over the last 3 years was collected from the accounts department and the sales department of BT.

Accounts receivable represents sales for which payment has not yet been collected. Collection of accounts receivable is likely to be the single most important problem facing the company. Calculation of trade receivable days (average collection period in other words) can be helpful in determining the effect that accounts receivable is having on the company’s cash flow, and it can serve as useful indicator and tool for evaluating how efficiently BT deals with electricity consumers and implement its revenue collection function. This indicator can and should be calculated and be



compared across each distribution subsidiary of BT. It can be used by the management of BT for planning, target setting and the evaluation of staff performance and efficiency of each distribution subsidiary.

The indicator serves as a measure of the time required for the company to convert sales into cash. This measurement defines the relationship between accounts receivable and cash flow. A longer average collection period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying accounts payable.

Receivables by days are calculated by dividing average receivables by average sales per day. Average sales per day is calculated by the dividing annual sales by 365 days (in case there is data on sales per quarter, average sales can be calculated by dividing sales per quarter by 90 days).

The indicators calculated over the last three years show that the level of receivables in T is very high, in 2006 it was more than 8 months (245 days), and in spite of the reduction in 2008 to 5 months (150 days) the figure remains very high. In efficiently performing companies the standard level of revenue collection for the electricity sold is usually no more than 1-1.5 months. This is the time taken for reading meters, billing and receiving payment.

It should also be noted that, according to the data for the first 5 months of 2009, the receivables in each category of consumers has considerably increased which is a cause for concern. For instance, in the beginning of the year the receivables for the residential sales were 52.9 mln. somoni and by the 1st of June they had increased to 91.3 mln. somoni, Talco receivables had increased from 97.6 mln. somoni to 120.4 mln. somoni over the same period. This tendency can be explained in part by the increase in tariffs for electricity but also by the deterioration in people’s ability to pay as a result of the financial crisis. However, we believe that the main reason for the increase is the ineffective performance of BT’s revenue collection process.

The increase in receivables shows that it is necessary to take immediate measures to improve the functions of sales and collection, possibly by the use of prepayment devices and through disconnections for non-payment. Taking into account the poor financial situation of BT and the lack of cash assets to finance the current operational performance and the ability to pay off the loans, BT has to concentrate on the improvement in the collection of its accounts receivable and the target in the first instance should be to stop the increase in receivables and during the year to reduce the level to no more than 2 to 3 months.



Sales of electricity and collection during a year

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Chart 4 – Accounts Receivable, Sales of electricity and collection during a year

2) Collection Rate % (Collections during year / (Accts Rec. at beginning of year + current year’s billings)) * 100

Another calculation that focuses on accounts receivable and the impact on the company’s cash flow is the collection rate. The rate is calculated by dividing the amount of collections during the period by the total of accounts receivable at the beginning of the period + the current period’s billings. To calculate the indicator data on energy sales, money collection and receivables for the main categories of consumers were taken from the sales department and accounts department of Barki Tojik.

Collection Rate 2006 2007 2008

Total for all consumer groups 57,0% 64,6% 63,4%

For the residential consumers 54,3% 61,1% 66,7%

For Talco 64,3% 72,5% 74,7%

Collection Rate in accordance with BT method (without taking into account Receivables )



For Talco 100,5% 101,5% 96,7%



It should be noted that in the course of data collection it became clear that usually energy sales and money collection for the electricity sold is performed and accounted for by the sales department using the set categories of consumers net of value-added tax. However the amount of accounts receivable are being recorded and accounted for by a sub set of the categories of consumers and include VAT both of which hamper the data comparability. For this reason it is recommended that BT introduces a common system for defining data, collection and analysis across the company for energy sales and accounts receivable.

It should also be noted that while analysing and evaluating the money collected, BT also calculates a collection rate but it only takes into account the current sales for the period, without taking into account the receivables at the beginning of the period. Although this indicator can be used for some evaluation, it does not show the true situation for money collection and artificially overrates the position because the sum of money collected involves not only payment for the current period sales but also some payment from previous debts.

The rate collection in BT is quite low and leaves much to be desired. For the entire operation the indicator over the period 2006 was 57% (94.7% according to BT methods) and later it improved a little, so that in 2008 it was 63.4 % (or 84.5% according to BT methods). A low collection rate produces a constant shortage of cash assets in the company, making it difficult for the company to fund its operating expenses as they fall due (e.g. payment of salaries and wages and replacement of equipment). This results in short term measures being taken including borrowing to cover cash shortages to fund operations which that inevitably requires interest payments leading to a worsening financial position.

Taking into account the data for the first 5 months of 2009 and the reasons mentioned above, the level of revenue collection in 2009 is worse which will further negatively influence the company’s capacity to finance its business operations.

Currently the company works with the Ministry of Finance to reduce the debts of budget companies through offsetting debts of tax obligations of the company, but we believe that this is insufficient. The senior managers of the company should immediately and comprehensively address the problem by developing measures and programmes to improve accounting for electricity sold, reduce electricity losses and increase revenue collection. At the same time a cost reduction programme should be undertaken to reduce other operating costs.

3) Net Electricity Distributed for the “Autumn-Winter” season to the whole volume for the year (%)

Consumer group 2006/2007 2007/2008 2008/2009



For Talco 47,1% 44,3% 44,7%

This indicator was developed taking into account the specifics of the region where due to the difficulties experienced in energy generation in the autumn-winter period the provision of electricity for the consumers across the Republic is significantly reduced. The calculated indicator indirectly shows the shortage of electricity supply during the winter period (6 months October to March



inclusive) and can be used to identify and monitor the achievement of the company’s goals concerning the improvement in the supply of electricity

For the calculation we have taken the net electricity distributed for “autumn-winter” period of 6 months, from October till March inclusive and the net electricity distributed for the year which includes the second half and the first half of two succeeding years (for instance, the second half of 2006 and the first half of 2007 for comparison). Taking into account that in the “autumn-winter” period demand for electricity increases significantly in every category of consumer (except pumping irrigation) by at least 20-30% and in residential category by more than twice, a figure of around 70% of consumption over the winter 6 months would result.

The data shows that overall the net electricity distributed over the 6 “autumn-winter” months is even less than 50% and was only 43-44% of annual net electricity distributed. For the residential users this indicator is higher and in 2008 it was 54%, however, this is not high and falls well short of a target of around 70%. This demonstrates that over the past few years severe deficit has been experienced by the energy consumers during the winter period. The company therefore needs to develop both long-term and medium-term measures to improve and stabilise the supply of electricity to consumers.



4) Average Accounts Receivables to the Sales during the year (%)

Consumer group 2006 2007 2008



For Talco 56,0% 39,2% 31,0%

The indicator is calculated as the proportion of average accounts receivables to total electricity sales for the year. It provides the managers of BT with another indicator of company’s performance in the sphere of sales and collections. Data over the last 3 years show that receivables for electricity was about 67% to total amount of sales in 2006 and reduced in 2008 to 41%. However, it is still an unacceptably high level of receivables and the company must take all measures possible in order to reduce receivables.

5) Average Accounts Receivables per residential consumer (in somoni)

excluding VAT


For the residential consumers 38 36 39

The indicator calculates the average accounts receivables per residential customer by taking the total sum of receivables from residential customers and dividing it by the number of customers in that category. This is one more indicator which characterises the level of consumers’ debts for the electricity used. However, unlike the previous indicator (correlation of receivables with volume of electricity sold for year) this one does not show percentage but characterises cost of receivables. So in percentage terms the level of receivables seemed to be reducing with respect to the volume of sales during the last 3 years (see above indicator 4), in absolute terms the value of receivables per customer has in fact increased. The value has reached 39 somoni per customer (net of value-added tax) and according to the data over the 5 months of the current year it has increased significantly again to nearly double at 76 somoni per customer (net of value-added tax). Such an increase of receivables should be a serious signal to the managers of the company and alert them to the necessity of taking immediate and serious measures in this area. The indicator can also be compared with the indicator of average sales per customer (see 6 below) for the evaluation of receivables to the sum of sold energy.



6) Average sales per residential consumer (in somoni)


For the residential consumers 48 59 100

The indicator is calculated by dividing total energy sold by the average number of residential customers, which gives the average amount of sales per residential customer. The ratio can be calculated separately for “winter” (with limitation) and ‘summer” period for comparison purposes and also can be compared with average accounts receivable for this consumers group and used for assessment, analysis, planning and budgeting purposes. Also the indicator can be compared with the indicators for average receivables and net electricity distributed per customer. It can also be used in analysing the performance of each regional energy distribution subsidiary as a check on the correctness of charging and tariffs used for the electricity sold. Every significant distortion and irregularities found between the subsidiaries should be the subject to serious examination and study from both the internal audit department and the management of BT.

According to the calculated data the average sales per one residential consumer was 48 somoni in 2006, and in 2008 this value had increased to 100 somoni (without VAT). Taking into account that the average value of net electricity distributed (in kWh) increased only marginally it can be assumed that the increase resulted mostly from tariff increases. The indicator calculated for each electricity distribution subsidiary can also be used to evaluate the difference between net electricity distributed and energy sales on the average for customers separately in every region.

7) Actual average tariffs for residential consumers in dirams


For the residential consumers 1,37 1,89 3,57

Actual average tariff for residential consumers is calculated by dividing the amount of total energy sales to residential consumers by the value of net electricity distributed to them. The value determines the actual average tariff at which energy was sold to those electricity consumers. The indicator can be calculated for all categories of consumers (i.e. industry, budget, pumping irrigation, etc) for further comparison with the official tariffs and help determine the correctness of recording and billing of amounts, and the value of electricity distributed and the application of the tariffs (see below).



8) % of average actual tariff to official tariffs for residential consumer


For the residential consumers n/a 68,5% 73,1%

The above indicators 7 and 8 can be used as a very important control mechanism and a tool for the evaluation of the correctness of the energy sales procedure (accounting for the net electricity distributed and sales both in kWh and in money value terms and also the correctness of the application of tariffs to the consumers).

While collecting the information and calculating these indicators the consultants faced the problem that actual tariff was in many cases much less than the officially stated tariff in spite of the fact that they are to be of the same value. So according to data provided in 2007 the average actual tariff was 68.5% to the officially stated one, and in 2008 it was 73.1%.

Deviations from 100% occur because:

• the indicators were calculated as an average for the year;

• tariffs can be changed during the year;

• the results can be distorted as a result of the application of differential tariffs depending on the volume of electricity consumed;

• volumes of consumption vary by season with higher consumption in the winter.

However, allowing for some inaccuracy in calculations for one year, the additional calculations for a shorter period (month or quarter, when a tariff did not vary) and by different subsidiaries of the company show that the actual tariff in many cases is less than the official one. This indicates that there may be some serious shortcomings in the accounting of net electricity distributed and the sales revenue and probably indicates the incorrect onsite application of tariffs.

We suppose that one of the reasons for the difference between actual tariffs and officially stated tariffs is the fact that the company does not officially admit to commercial energy losses (though on-site sales specialists prove that the losses exist) and regional subsidiaries are provided with a standard volume of acceptable losses which they can record in their balances. Due to this practice, the real situation with net electricity distributed to consumers is distorted and probably the net electricity distributed in kWh is overstated which causes a low actual tariff. In our opinion this problem needs to be solved immediately.

The average actual tariffs should be calculated on a monthly and quarterly basis by the main categories of consumers and by each regional energy distribution enterprise. Differences between the official tariffs and the indicator should be studied and the reasons why it occurred identified. For instance, according to the new tariff plan, the general tariff is set for residential consumers with no preferential group. Therefore the actual average tariff calculated for a month, quarter or year should be equal to the officially stated tariff and the difference in these two indicators would therefore show either an incorrect sales figure or an over-evaluated volume of net electricity distributed. All of the differences between the actual and official tariffs from every regional enterprise separately and BT as a whole should be the subject of serious review and study both by internal audit and by the management of BT.

Relying on the facts and information obtained, we believe that BT faces a serious problem in the accounting of the energy sales function. This problem needs a solution starting by correcting the



method of accounting and calculation of technical and commercial energy losses across the whole system from generation to distribution to consumers.

9) Average kWh distributed per residential consumer during a year


For the residential consumers 3 475 3 134 2 809

The indicator is calculated by dividing the total amount of net electricity distributed (in kWh) in a year by the number of customers in the residential category showing the average amount of energy distributed per consumer. The indicator can also be calculated for the other categories of consumers and also separately for the autumn-winter season and the summer season and can be used for a comparative analysis and correlation with data from other countries, for planning and budgeting, and for calculations necessary for tariffs determination.

Based on the data calculated, each residential customer is supplied on average between 2,809 -3,475 kWh a year, which is quite a large number. However, as we can see, the average amount during the last three years has decreased considerably. As was discussed in the previous section, due to the problems with billing and accounting for electricity sales, it seems plausible that the amount of net electricity distributed is overestimated for the company which is a problem that should be studied and solved.

The indicators should be calculated separately for every regional distribution enterprise in order to compare the difference in the average amount of net electricity distributed per customer in different regions and especially for the autumn-winter period when the distribution of energy is strictly limited. As we know during the winter period residential consumers in some regions have electricity for only a few hours a day and the indicator can be used by the BT’s head office to help assess the level of energy limitation for a more equitable supply of energy across the Republic.

10) % of un-metered consumers to total consumers

a) for total consumers


For total consumers 2,09% 1,70% 1,29%

b) for residential consumers

Consumer group




The indicator shows the level of customers without meters and can be used for evaluating the sales data validity and for setting goals and objectives for a meter installation programme. The data received shows that the level of provision with meters is quite high. Only 1% of energy consumers have no meters, for the most part they are residential customers; about 12,860 residential customers had no meters at the beginning of 2009. During the last three years the number of customers without meters had constantly reduced due to the implementation of various metering installation programmes. Electronic meters in particular are being installed in Dushanbe under the reduction of energy losses financed by the World Bank. However it should be noted that for the most part existing meters are old and need replacing. More accurate meters should be installed which will improve the accuracy of data. An indicator reflecting the age of meters could also be introduced.

11) Average number of residential consumers to number of Sales Department Controllers


For the residential consumers n/a 575 617

The ratio is a measure of the adequacy of the number of Sales Department controllers (meter readers) in relation to the number of residential consumers they service. The ratio can be used for benchmarking purposes. Also it can be calculated separately for urban and rural regions, and by regional distribution unit.

The indicator is calculated by dividing the total number of residential customers by the number of energy sales department inspectors who work with residential customers. The indicator identifies the number of residential customers that are served by one inspector. It is necessary to calculate the indicator for every regional sales department separately and also by regions and cities separately. The findings can then be used for comparative analysis not only between regional sales enterprises within the company’s structure but also with those in other countries. This indicator can be used for planning and determining the optimal number of staff of required in both the city and country areas, taking into account the total number of residential customers they serve.



6.2.2 Electricity Losses

12) Electricity losses (in kWh and %)

Electricity entering into network, total and transmission losses

21 540 21 633 21 145

2 889 2 9641 427 1 6592 680

1 207

0

5 000

10 000

15 000

20 000

25 000

2006 2007 2008

Mill

ion

kWh

Total electricity entering into networkTotal technical lossesTransmission losses

Chart 5 – Transmission losses

8 902 8 6407 940

7430 71786635

1 472 1 462 1 305

01 000

2 0003 000

4 0005 0006 000

7 0008 000

9 00010 000

2006 2007 2008

Mill

ion

kWh

Total electricity transmitted to Distribution CentresNet electricity supplied through Distribution CentresDistribution losses - total

Chart 6 – Distribution losses



Electricity losses

12071427

16591472 1462

1305

2 6802 889 2 964

0

500

1 000

1 500

2 000

2 500

3 000

3 500

2006 2007 2008

Mill

ion

kWh

Transmission losses Distribution losses Total losses

Chart 7 - Electricity losses



a) Electricity losses in thousand kWh

2006 2007 2008

Total electricity technical losses 2 680 023 2 889 017 2 964 132

including:

Transmission Losses 1 207 812 1 426 784 1 658 909

Distribution losses 1 472 211 1 462 233 1 305 233

b) % of technical losses

2006 2007 2008

1) % of total technical losses to total electricity entering into network 12,4% 13,4% 14,0%

2) % of transmission losses to total electricity entering into network 5,6% 6,6% 7,8%

3) % of distribution losses to total electricity transmitted to the distribution network 16,5% 16,9% 16,4%

Measuring and accounting for technical and commercial losses of electricity is another major problem for BT. The existing system and procedure for determining and measuring losses in our opinion do not give clear and reliable information . The following describes the current situation for measuring losses in BT.

Measuring technical losses

BT’s Central Dispatch Division with other central and regional services determine the volume of electric energy transmitted, the volume received by each regional electrical network and the volume distributed to consumers as well as losses of electricity in the electricity grid - transmission and distribution lines. The volumes and losses information is partly based on data recorded by meters installed at various substations throughout the system (however, the existing meters are generally old, 30-40 years, with some producing significant errors in the measurement of electricity generated, transmitted and distributed) and partly by calculation techniques and technological loss norms (based on the type of electricity lines, their length, diameter, voltage, etc.) developed during the Soviet era. Consequently, many inaccuracies and disputes arise - divergence in the total electro-energy imbalance is settled by BT’s head office. We can expect this issue will become even more urgent and will worsen. BT should conduct a detailed evaluation of all existing metering systems and electricity measuring procedures, starting from the generators through the transmission network to the distribution network and to the ultimate consumers, and identify all shortcomings and weak points. If necessary, new procedures should be developed regarding the



agreement and approval process for electricity volumes transferred from one part of the network to another. In reality, the losses should be calculated without using norms and one would expect to be given volumes of kWh generated, transmitted and distributed plus export and import so that losses can be calculated from metered volumes rather than being calculated by the use of norms.

Measuring commercial losses

This is an obscure area as throughout BT, commercial losses of electric energy are not officially recognised (therefore there is no official estimate of the amount of commercial losses) although BT’s sales specialists unofficially recognise the existence and seriousness of this problem. Because BT doesn’t officially recognise and reflect the commercial losses in its financial statements and electro-energy balance, it is very likely that the actual amount of commercial losses is being wrongfully hidden between technical losses and the accounts receivables figure. The problem has resulted from a combination of technical issues, organisational inadequacies and social reasons. These include inadequate and ineffective metering systems, poor organisation and lack of control of the sales, billing and collection activities, etc. It is recommended that a detailed review is undertaken of the whole activity such that recommendations can be made to improve the situation which will lead to an understanding of losses, their cause and the means of controlling them.

According to the official data received from BT, total technical electricity losses in absolute figures have been increasing during the last three years and amounted to 2680, 2889 and 2964 m kWh in 2006, 2007 and 2008 respectively. If we compare these losses as a percentage of the total electricity entering into the network, the percentage of total losses amounted to 12.4% in 2006, 13.4% in 2007 and 14.0% in 2008. It should be noted that during the collection of data concerning energy generated, transmitted and distributed, imported and exported, it was found that the information received from different departments of BT are often different with many discrepancies. Our calculation of electricity losses was based on BT’s official information provided to the Government and also information from BT’s central technical department which varied from information received from the sales department. Particularly this concerned the volume of electricity imported and exported data (net and wheeling) which influenced the total amount coming in and out of the system and the amount of electricity losses. Although such differences are not very significant, it is necessary to find out the reason for such discrepancies and create a unified system of collecting, checking and recording all types of financial and technical data through better allocation of responsibilities in this area and improving the interaction between BT’s entities and departments in terms of data flow procedures.

The percentage of transmission losses to the total amount of energy entering into the network over the last three years has greatly increased and amounted according to our calculations to 5.6% in 2006, 6.6% in 2007 and 7.8% in 2008 which in absolute figures amounted to 1,208, 1,427 and 1,659 m kWh of electricity for 2006, 2007 and 2008 respectively.

Concerning percentage distribution losses, this indicator correlates the amount of distribution losses to the volume of net electricity entering the distribution network (i.e. the total amount of electricity entering into the whole transmission network minus transmission losses and electricity transmitted to Talco, Afghanistan and GBAO through EHV electricity lines). Studying the losses both in absolute figures and in percentage terms and comparing its change over the period provide a better understanding of the situation. So despite the fact that the amount of distribution losses in absolute figures looks to be decreasing in 2008 amounting to 1,305 m kWh in comparison to 1,472m kWh in 2006 and 1,462m kWh in 2007, in percentage terms the correlation with the amount of electricity entering the distribution network over this period remains around the same level at 16.5%, 16.9% and 16.4% in 2006, 2007 and 2008 respectively.

The analysis of losses above can be compared to some international vertically integrated electricity utilities. The table below shows the percentage of losses in seven countries. The total amount of



losses (Transmission and Distribution) in BT is currently 14%, which is high. It is comparable to Croatia however but improvements are expected and the volume of losses has been reducing. The average value in most countries is below 12% (less than 8% in large countries). It should also be noted that the figures below are total losses which include commercial losses. This makes the comparison with BT much worse.

(TWh) France Czech Rep Portugal Croatia Poland Great

Britain USA

Consumption 446 54,8 47 14,6 128,2 368,2 3656

Losses 32 5,1 3,55 2,1 14,3 30,7 233

Losses % 7% 9% 8% 14% 11% 8% 6%

Due to reasons mentioned previously we could not provide data on commercial energy losses in the company, although on the basis of the current situation in the Republic and the experience in neighbouring countries (Kyrgyzstan, and Kazakhstan) we can assume that they do also occur and amount to a significant figure.

However, given the unwillingness of the company to acknowledge the presence of such losses, or to try and determine the real volume of these losses or to develop a series of measures in order to reduce these losses, in our opinion significantly influences the performance of BT. This is shown in the misrepresentation of many performance indicators from the overstatement of net electricity distributed to overrating the amount of accounts receivables (we assume this issue relates mainly to residential consumers).

The new management of the company is actively trying to improve the situation through the work on energy sales and loss reduction (which is being funded by the WB), however, in our opinion it is doing so through command and administrative methods. Managers of regional distribution network enterprises responsible for this activity have been asked to reduce losses. That was probably the reason why over the 5 months of the current year, the percentage of total electricity losses looks to have decreased in comparison with the data for 2008 and amounted to 815.2m kWh or 11.16% (according to BT’s sales department) down from 14% in 2008.

However we should note that the amount of receivables from all main categories of consumer, especially for the residential consumers, has increased significantly over the same period. At the beginning of the current year the receivables (data including VAT) from residential consumers amounted to 52.9m somoni; at the beginning of June it had increased to 91.3m somoni or an increase of more than 70%. Receivables from Talco increased from 97.6m somoni to 120.4m somoni over the 5 months of the current year, an increase of more than 23%.

This could indicate that that rather than achieving real reductions in electrical losses there have been some adjustments to increase the net electricity distributed with a consequent reduction in the losses and an increase in accounts receivable. This situation needs to be fully investigated

In conclusion it has to be noted that we believe that the proper measurement, recognition, and accounting of all types of electricity losses on the one hand and the development and implementation of effective programs and action plans directed to decreasing them on the other hand are the most important priorities for BT.



An effective solution for this problem should be one of the main methods which will allow improvement in the company’s performance and sustainability. However this cannot be done during a short period and especially using instructional methods. In general, we recommend the development and implementation of a special four stage program/project to improve the situation.

1. Carry out a detailed assessment of the current procedures for measuring and reporting electricity losses in all levels of the company, identifying weaknesses and discrepancies;

2. Develop a detailed action plan for creating the necessary conditions for the proper measurement, the identification and reporting of losses;

3. Develop a detailed action plan for the reduction of electricity losses in each activity (ie generation, transmission, distribution and sales to customers);

4. Implement the action plans to introduce systems for the measurement and reporting of losses across the business and in each region, the reduction of losses and the simultaneous establishment of an effective external control mechanism of these procedures.



6.2.3 Barki Tojik Electricity Generation

BT Power Stations Capacity

4354 4354 4354

3065 29792528

1913 19791690

0500

100015002000250030003500400045005000

2006 2007 2008

Cap

acity

in M

Wh

Installed Capacity Available Capacity Actual Capacity

Chart 8 – Capacity of BT power stations

As can be seen in the above chart the nominal or installed capacity of BT power stations has remained unchanged over the last 3 years and amounted to 4,354 MW. It can also be seen that the capacity actually used for generation over the three years varied between a low of 1,690 MW and a high of 1,979 MW; each representing less than half the installed capacity. However the available capacity (i.e. that is technically capable of being used) is lower than the nominal capacity and is falling despite rehabilitation works. The level of available capacity for 2008 was 2,500 MW or approximately 60% of installed capacity which is an indicator of the need for rehabilitation of existing stations, Also, actual capacity as a percentage of available capacity (also about 60%) indicates that there are technical problems using the available generation. Taking into account major limitations in the generation and supply of electricity to consumers, especially during the autumn-winter period, these indicators can provide a focus on where problems exist. These indicators should be calculated for each generating station to further identify the problem areas. Details of the indicators are presented below.



13) % Capacity available

Indicator 2006 2007 2008

Total available capacity 70,4% 68,4% 58,1%

Including

Nurek Hydro Power Station (HPS) 75,0% 73,4% 61,8%

Baipasa HPS 86,2% 79,7% 73,0%

Cascade of Vakhsh HPS 64,4% 61,3% 48,9%

Cascade of Varsob HPS 40,0% 40,0% 32,0%

Kairakum HPS 60,3% 61,9% 44,4%

Dushanbe Thermal Power Station 15,7% 18,7% 17,2%

This indicator calculates the correlation between available capacity of the power stations (HPS & thermal PS) with installed (nominal) capacity of BT’s power stations. The indicator to some degree shows the condition of the station, equipment and generating capacity. It also indicates the potential increase in generating capacity which is theoretically possible, as a result of rehabilitation works at the stations.

As can be seen from the above table, the amount of capacity available has reduced over the last 3 years; in 2006 the overall value was 70.4%, in 2007 it was 68.4% and in 2008 it reduced to 58.1% of total installed capacity. The smallest percentage of capacity available in correlation with installed capacity occurs at the Dushanbe thermal power station where it is less than 20%. This indicates the urgent need for rehabilitation of the generating equipment at the thermal power station.

The calculations show the reduction of available capacity across all the main power stations of BT. In terms of the deficit of electricity generation in the Republic, an appropriate level of rehabilitation could address this problem and needs the attention of BT’s management. The situation should be improved by identifying the reasons for the reductions in available capacity and the development of a plan to implement the necessary measures to rehabilitate and increase generating capacity of the stations.



14) % Capacity actually used

Indicator 2006 2007 2008

Total actually used capacity 62,4% 66,4% 66,9%

Including:


Baipasa HPS 56,0% 61,0% 58,4%



Kairakum HPS 97,0% 97,3% 99,5%


This indicator is calculated as the correlation between the amount of actual energy generated divided by 8,760 (the number of hours in a year) and the amount of capacity available at the stations.

The indicator of actual generating capacity shows the amount of capacity actually used as an average over a year. In 2006 it was 62.4%, in 2007 – 66.4% and in 2008 – 66.9% across BT. The small increase is not regarded as significant as it is the result of a reduction in the amount of available capacity and a fall in the actual used capacity as can be seen in Chart 7 above.

This is a very important indicator which characterises how effectively the company used its generating capacity. Of course there are some objective reasons and circumstances which restricted the generation and therefore the amount of actual capacity used; for example, the low water level in HPS reservoirs, lack of fuel or high price for fuel. However, despite this, the company can plan to optimise its generation output and with efficient use of resources can improve the actual capacity usage and consequently increase the output of the stations. Taking into account great limitations in generation and supplying of electricity to the consumers of the Republic, especially during the autumn-winter period, BT should assess and analyse the effective capacity usage, develop the optimal and efficient regimes for station operation (especially taking into account seasonal needs in energy) and for resource usage, particularly water resources. This indicator can also be calculated for the summer and winter periods for the further comparison, analysis and taking decision making.



6.2.4 Operating Costs

15) BT operating costs

Chart 9 – BT total cost separated by function in thousand somoni

Total BT operating costs per net kWh supplied to consumers (in dirams)

Indicator 2006 2007 2008

Total BT cost per 1 kWh net supplied to consumers 1,41 1,99 2,99

Total BT cost for 2008 separated by function in thousand somoni

Dushanbe Thermal Plant;

156 232

BT Head office ; 29 249

Transmission/Distribution subsidiaries

124 846

Electricity purchased

67 424

BT Hydro Power Stations 48 194

Sales departments

21 166

BT other entities; 8 351

BT Hydro Power Stations

Dushanbe Thermal Plant

Transmission/Distributionsubsidiaries

Sales departments

BT Head office

BT other entities




Total BT cost for 2008 separated by function in %

BT Hydro Power Stations

11%


34%

Sales departments

5%

BT Head office 6%

BT other entities2%


15%

Transmission/Distribution subsidiaries

27%

BT Hydro Pow er Stations


Transmission/Distributionsubsidiaries

Sales departments

BT Head off ice

BT other entities


Chart 10 – BT total cost separated by function in %

a) Generation costs per kWh net generated (in dirams)

Indicator 2006 2007 2008

Total Generation cost per 1 kWh 0,40 0,69 0,85

including

Hydro Generation cost per 1 kWh 0,27 0,28 0,33

Thermal Generation cost per 1 kWh 11,27 21,23 31,30

b) Transmission and Distribution costs per net kWh supplied to consumers (in dirams)

Indicator 2006 2007 2008

Transmission and Distribution cost per 1 kWh 0,56 0,71 0,87



c) Sales costs per net kWh distributed through BT Distribution System (in dirams)

2006 2007 2008

Sales cost per 1 kWh net supplied through DC 0,20 0,34 0,32

The cost of 1 kWh for the total net electricity supplied is calculated by dividing the sum of the total expenses of the company, including expenses for Head Office and the material and technical supply enterprise, by the total volume of net electricity that BT supplied to the customers (this includes net electricity supplied through BT regional distribution centres to the local consumers, sales to Talco, GBAO and Afghanistan) and calculated in dirams.

The indicator can be used for comparison with the official tariffs and the evaluation of how the current tariff covers the company’s costs and ability to pay off loans, and also provide funds for new investments and development (assuming of course the full collection of revenues for the electricity distributed).

At the end of 2006 the cost of 1 kWh of net electricity supplied was 1.41 dirams, in 2007 – 1.99 dirams and in 2008 – 2.99 dirams. For the same period the weighted average of official tariffs (according to BT data) was 2.11 dirams in 2006, 2,61 dirams in 2007 and 4,88 dirams in 2008. At first glance it seems like the official tariffs cover expenses and provide financing for investment activities. However, the actual situation is worse. As discussed previously, due to serious problems in the collection of accounts receivable (current billings and outstanding receivables), the company does not have sufficient funds for financing its current activities and certainly nothing for financing investment activities.

It should be taken into account that one of the consequences of a lack of cash funds in the company is the inability to fully finance the operational activities which leads to a reduction in actual expenses for the company in comparison with that which is actually necessary or a previously planned level. This situation will lead to a reduction in this indicator.

The cost of 1 kWh of net electricity generated is calculated by the division of the sum of operating expenses of all thermal and hydro PS of the company by the volume of net electricity generated. This indicator characterises the amount of expenses for the generation of 1 kWh of electricity at stations and can be calculated separately for each station for further comparison and analysis. The calculations show that the cost of 1 kWh of energy generated as an average for all generating stations is increasing; in 2006 it was 0.40 dirams, in 2007 – 0.69 dirams and in 2008 – 0.85 dirams. It should be noted that these values are insufficient to finance the required operating expenses across all generating stations due to the reason mentioned above, (i.e. a lack of money in the company).

When we compare the indicators between HPS and the thermal power stations there is a large discrepancy. The average cost of generation at HPS was 0.27 dirams in 2006, 0.28 dirams in 2007 and 0.33 dirams in 2008. At the Dushanbe thermal power station (the company’s only thermal station which actually generates electricity and heat energy) over the same period the average cost was 11.27 dirams in 2006 (42 times more than at HPS), in 2007 – 21.23 dirams (76 times more than at HPS) and in 2008 increased up to 31.3 dirams (95 times more than the average indicator).



Net Electricity generation in BT Hydro and Thermal Stations

16 503 16 936

14 490

197 336 2510

2 000

4 0006 000

8 000

10 000

12 00014 000

16 000

18 000

2006 2007 2008

Mill

ion

kWh

Net generation in BT HydroPower Stations

Net generation inDushanbe Thermal PowerStation

Chart 11 - Net electricity generation

The use of the Dushanbe thermal power station and its performance needs special study, analysis and a thorough review. The station generates only about 1.5% of the total amount of electricity generated by BT (see Chart 11 above) and produces a small amount of heat energy (at average about 450-500 thousands G cal a year). Its contribution to the cost in relation to all expenses for the generation stations of BT is about 35% (without heat energy) and with expenses of heat generation is more than 70% (see Chart 12). Of total expenses of the company, the expenses of the thermal power station contribute a large percentage and vary depending annually – between 33% and 40%. Taking into account the difficult financial position of the company, BT together with MOE&I and possibly the Government, should immediately review the operating regime of the station and its performance. This may result in a significant reduction in periods of generation (e.g. operate only in cold periods of winter and other periods of severe shortages and emergencies as a peaking plant). As mentioned earlier the available capacity at the plant is only 17.2% of nominal capacity indicating that it needs urgent rehabilitation to improve the thermal and generation efficiency. A special study and thorough technical and financial evaluation of this situation is required.



BT Hydro and Thermal Power Stations costs

99 930

194 646204 426

45 023 47 946 48 19454 907

146 700 156 232

0

50 000

100 000

150 000

200 000

250 000

2006 2007 2008

In th

ousa

nd s

omon

Total BT Power Stations CostsBT Hydro Power Stations CostsDushanbe TPS costs (incl. for heat energy)

Chart 12 – BT Hydro and Thermal power generation costs

The cost of the transmission and distribution activities per 1 kWh is calculated as sum of expenses of all the regional distribution centres of BT, divided by the volume of net electricity supplied to the consumers. As we have noted before, the transmission and distribution activities are not separated and are both undertaken by the regional distribution centres of the company and expense accounts for these functions are not separately maintained. For this reason the calculated indicator includes both activities. In 2006 the average transmission and distribution cost was 0.56 dirams throughout all of BT’s regional network enterprises, in 2007 – 0.71 dirams and in 2008 – 0.87 dirams.

The cost of the BT sales activities per 1 kWh is calculated as sum of expenses of all the regional sales entities of BT (Energosbyt), divided by the volume of net electricity supplied to the consumers. In 2006 the average sales cost per 1 kWh was 0.20 dirams, in 2007 – 0.34 dirams and in 2008 – 0.32 dirams. It has to be noted that recently BT decided to liquidate these separate sales entities and delegated the sales function to BT’s regional distribution centres. In BT’s opinion this decision will help to improve control over the sales function and reduce corruption in this area, and consequently improve collections and reduce accounts receivables for the supplied electricity. In our opinion the incorporation of the sales function under the authority of BT’s regional distribution centres which already simultaneously performs transmission and distribution functions was not a good idea. The transparency of these functions (transmission, distribution and sales) will probably even worsen and cannot be considered as an effective measure for improving the sales function in the company. BT obviously needs a fundamental change to improve its sales function. Because of the specifics of the sales function it is common to separately carry out this activity; improvements can be reached through a better allocation of responsibilities between management and staff responsible for the sales and implementing effective internal control system in this area, as well as the development and implementation of actions and procedures for better measurement and billing of the volume of electricity distributed and sold to the final consumers.



It is recommended that the above indicators are calculated by each BT regional subsidiary in order to have the opportunity to compare performance and facilitate the identification of measures and corrective actions where required.


CONCLUSIONS AND THE WAY FORWARD 7

7 Conclusions and the Way Forward The analysis detailed in the Benchmarking Report shows that BT could improve its overall performance considerably. The main recommendations to achieve this in the short term are:

• Improve the internal data collection (financial and technical) to allow a pertinent view of the performance of each business activity. This will be possible after internal restructuring and the unbundling of the accounting system. It should be regarded as a first step towards the improvement of the performance through an action plan based on measurement of performance against agreed KPIs;

• Adopt the international standards in analysing performance and ensure the performance of separate parts of the business can be measured by setting up three business units. This will allow the comparisons of the KPIs with similar entities abroad which are unbundled and provide guidelines for setting performance targets for BT;

• Implement a business structure which includes an Independent System Operator which will sit between the generation and distribution businesses. This will allow the monitoring of the quality of service, the arbitration of the risk management, an optimised use of existing capacities and measuring the adequacy of future transmission and generation capacities.

• Make an Improvement in the recovery of revenues from consumers. The consumption segments and categories could be simplified and the analysis of the distribution flows clarified. The senior managers of the company should immediately and comprehensively address the problem by developing special measures and programmes to improve the accounting of electricity sold and revenue collected by each type of customer category.

• Introduce a common system for defining data and procedures for collection and analysis across the company for energy sales, revenue collection and accounts receivable to increase data reliability, comparability and analysis.

• Introduce effective system of internal control for the sales function and particularly in recording and billing of amounts and the value of electricity supplied (both in kWh and somoni) and paid by the customers. Some of the proposed indicators, such as actual average tariff, can be used as important control mechanisms and as a tool for the evaluation of the correctness of the energy sales procedure. This indicator has to be calculated for all categories of consumer and for all of BT’s regional distribution centres for additional comparison with the official tariffs. The indicator will determine accuracy of recording the billing of amounts, the value of electricity distributed and the application of the tariffs.

• Conduct a detailed evaluation of all existing metering systems and electricity measuring procedures, (starting from the generators through the transmission network to the distribution networks and to the ultimate consumers), and identify all shortcomings and weaknesses.

• Develop and implement an effective program and action plan directed at decreasing all types of electricity losses. This can be achieved with the implementation of a four stage program/project to improve the situation.

1. Carry out a detailed assessment of the current procedures for measuring and reporting electricity losses in all levels of the company and identify weaknesses and discrepancies;

2. Develop a detailed action plan for creating the necessary conditions for the proper measurement, identification and reporting of losses;

3. Develop a detailed action plan for the reduction of electricity losses in each activity (i.e. generation, transmission, distribution and sales to customers);


CONCLUSIONS AND THE WAY FORWARD - CONTINUED

4. Implement the action plans to introduce systems for the measurement and reporting of losses across the business and in each region, reduce losses and establish an effective external control mechanism of these procedures.

• Identify the reasons for the reductions in available generation capacity and develop a plan of implementing the necessary measures to rehabilitate and increase available generating capacity of the stations.

• Assess and analyse actual generation capacity usage, develop the optimal and efficient regimes for station operation (especially taking into account seasonal needs in energy) and for resource usage, particularly water resources.

• Implement a special study and thorough technical and financial evaluation of the state and performance of Dushanbe thermal power station. Prepare an expert’s report with sound recommendations and actions required for improving the effectiveness of the station.

The above recommendations are not intended to be exhaustive but provide valuable input to the design of a financial and operational performance improvement programme during the implementation of the 1st Phase of the Restructuring Plan.

Following governmental approval of the restructuring of BT, the creation of three internal business units for generation, transmission and distribution will be undertaken during the first phase of the process (by 2012).

The introduction of mechanisms for transfer pricing and segmental reporting will provide information for a comprehensive evaluation of performance of each function. In addition the implementation of initiatives aimed at improving performance in the finance, planning and accounting departments and the introduction of improved reporting according to IFRS will allow more detailed benchmarking and comparisons of financial indicators of BT with those of similar international electricity companies.


APPENDIX 1 – SUMMARY OF KPIS

KPI Formula 2006 2007 2008

1 Trade Receivables days

a Total receivables (365 * Average A/R from external customers) / Total sales) 245 186 150

b Residential receivables (365 * Average A/R from residential) /Residential sales) 286 217 137

c Talco receivable (365 * Average A/R from Talco) /Sales Talco) 204 143 113

2 Collection Rate % (Collections during year / (Accts Rec. at beginning of year + current year’s billings)) * 100



For Talco 64,3% 72,5% 74,7%

3 Net Electricity Distributed for the “Autumn-Winter” season to the whole volume for the year (%)

Net electricity distributed October to March / Net electricity distributed for year (July to Dec + Jan to June)



For Talco 47,1% 44,3% 44,7%


APPENDIX 1- SUMMARY OF KPIS - CONTINUED

KPI Formula 2006 2007 2008

4 Average Accounts Receivables to Sales % Average Accts Rec. for year / Total electricity sales for year



For Talco 56,0% 39,2% 31,0%

5 Average Accounts Receivables per residential consumer (in somoni) excluding VAT

Average Accts. Rec. for year for residential consumer / total number of residential consumers 38 36 39

6 Average sales per residential consumer (in somoni) Total energy sold / Average number of residential consumers 48 59 100

7 Actual average tariffs for residential consumers (in dirams)

Total energy sales to residential consumers / Net electricity distributed to residential consumers 1,37 1,89 3,57

8 % of average actual tariff to official tariffs for residential consumer

Average actual tariff charged to residential consumers / Official tariffs for residential consumers n/a 68,5% 73,1%

9 Average kWh distributed per residential consumer during a year

Total net electricity distributed in kWh for year to residential consumers / Number of residential consumers 3 475 3 134 2 809

10 % of un-metered consumers to total consumers Number of un-metered consumers / Total number of consumers

a for total consumers Number of un-metered consumers / Total number of consumers 2,09% 1,70% 1,29%

b for residential consumers Number of un-metered residential consumers / Total number of residential consumers 2,06% 1,68% 1,28%



KPI Formula 2006 2007 2008

11 Average number of residential consumers to number of Sales Department Controllers

Average number of residential consumers / Total number of Sales Dept. Controllers n/a 575 617

12 Electricity losses

a Electricity losses in thousand kWh

Total electricity technical losses Total electricity technical losses in kWh 2 680 023 2 889 017 2 964 132

Transmission Losses Transmission Losses in kWh 1 207 812 1 426 784 1 658 909

Distribution losses Distribution losses in kWh 1 472 211 1 462 233 1 305 233

b % of technical losses

% of total technical losses to total electricity entering into network

Total electricity technical losses in kWh / Total electricity entering into the network in kWh 12,4% 13,4% 14,0%

% of transmission losses to total electricity entering into network

Transmission Losses in kWh / Total electricity entering into the network in kWh 5,6% 6,6% 7,8%

% of distribution losses to total electricity transmitted to the distribution network

Distribution losses in kWh / Total electricity transmitted to the distribution network in kWh 16,5% 16,9% 16,4%



KPI Formula 2006 2007 2008

13 % Capacity available

Total available capacity Total available capacity / Total installed capacity 70,4% 68,4% 58,1%


Baipasa HPS 86,2% 79,7% 73,0%



Kairakum HPS 60,3% 61,9% 44,4%


14 % Capacity actually used (Total actual energy generated / Number of hours in a year) / Total available capacity

Total actually used capacity 62,4% 66,4% 66,9%


Baipasa HPS 56,0% 61,0% 58,4%



Kairakum HPS 97,0% 97,3% 99,5%




KPI Formula 2006 2007 2008

15 Operating costs per kWh

a Total BT operating costs per net kWh supplied to consumers (in dirams)

Total operating expenses for BT including Head Office and PMTO / Total net electricity supplied to all customers 1,41 1,99 2,99

b Generation costs per kWh net generated (in dirams) Total operating expenses of generation plants / net electricity generated in kWh

Total Generation cost per 1 kWh 0,40 0,69 0,85

Hydro Generation cost per 1 kWh 0,27 0,28 0,33

Thermal Generation cost per 1 kWh 11,27 21,23 31,30

c Transmission and Distribution costs per net kWh supplied to consumers (in dirams)

Total operating expenses of regional distribution centres / net electricity supplied to consumers in kWh 0,56 0,71 0,87

d Sales costs per net kWh distributed through Distribution Centres (in dirams)

Total expenses of regional sales entities / net electricity supplied to consumers in kWh 0,20 0,34 0,32


APPENDIX 2 – ELECTRO ENERGY BALANCE

Barki Tojik Electro-Energy Generation and Distribution Balance 2006 2007 2008

Total Total Total Total capacity (MW) 4 354 4 354 4 354 Hydro Power Stations 4 036 4 036 4 036 Nurek Hydro Power Station 3 000 3 000 3 000 Baipasa Hydro Power Station 600 600 600 Cascade of Vakhsh Hydro Power Stations 284 284 284 Cascade of Varsob Hydro Power Stations 25 25 25 Small Hydro Power Stations 0,5 0,5 0,5 Kairakum Hydro Power Station 126 126 126 Thermal Power Stations 318 318 318 Total available (effective) capacity (MW) 3 065 2 979 2 528 Hydro Power Stations 3 034 2 942 2 494 Nurek Hydro Power Station 2 250 2 203 1 854 Baipasa Hydro Power Station 517 478 438 Cascade of Vakhsh Hydro Power Stations 183 174 139 Cascade of Varsob Hydro Power Stations 10 10 8 Small Hydro Power Stations 0,1 0,1 0,1 Kairakum Hydro Power Station 76 78 56 Thermal Power Stations 31 37 34 % capacity available 70,4% 68,4% 58,0% Power generated (million kWh) 16 756 17 340 14 808 Hydro Power Stations 16 528 16 961 14 519 Nurek Hydro Power Station 11 946 12388 10663Baipasa Hydro Power Station 2 535 2556 2239Cascade of Vakhsh Hydro Power Stations 1 318 1270 1064Cascade of Varsob Hydro Power Stations 81 81,7 65,8Small Hydro Power Stations 0,6 0,5 0,5Kairakum Hydro Power Station 646 665 488 Thermal Power Stations 228 380 290Dushanbe Thermal Power Station 228 380 290Yavan Thermal Power Station - - - Internal consumption (million kWh) (55) (69) (60)

Net electricity generated (million kWh) 16 700 17 272 14 741


APPENDIX 2 - ELECTRO ENERGY BALANCE - CONTINUED

Hydro Power Stations 16 503 16 936 14 490 Nurek Hydro Power Station 11 928 12370 10646Baipasa Hydro Power Station 2 533 2553 2230Cascade of Vakhsh Hydro Power Stations 1 316 1268 1062

Cascade of Varsob Hydro Power Stations

80 81 65

Small Hydro Power Stations

0,553

0,500 0,549

Kairakum Hydro Power Station

645 664 486,6

Thermal Power Stations

197

336

251

Dushanbe Thermal Power Station

197 336 251Yavan Thermal Power Station - - - From Sangtuda (IPP) 1106

Electricity imported (million kWh)

4840 4361 5298 Total electricity entering into network 21 540 21 632 21 145 Transmission losses (million kWh) 1 208,4 1 426,4 1 658,9% of losses 5,6% 6,6% 7,8% Net electricity transmitted 20 332 20 206 19 486Electricity exported (million kWh) 4 279 4 310 4 421GBAO 15 14 13Talco- total 7 116 7 223 7 107Talco - through BT 6 222 6 789 5 904Talco - direct imports 893 434 1 203Technological usage (Dushanbe Thermal Plant) 20 19 4

Total for Distribution Centre 8 902 8 640 7 940including;

Dushanbe Distribution Centre 1 742 1 776 1 695

Central Distribution Centre 896 766 599Tursunzade Distribution Centre 230 213 183Garm Distribution Centre 196 190 162Nurek Distribution Centre 13 99 78Total for Rasht 1 334 1 268 1 021

Southern Distribution Centre 1 353 1 288 1 164Kuliab Distribution Centre 525 430 379



Kuliab city Distribution Centre 237 222 231Kurgan-Tube city Distribution Centre 140 152 154Yavan Distribution Centre 191 194 167Dangara Distribution Centre 7 83 106

Total for Hatlon 2 452 2 369 2 202

Khujand city Distribution Centre 416 406 412Istaravshan Distribution Centre 1 292 1 251 1 125Penjikent Distribution Centre 311 269 267Leninabad Distribution Centre 1 277 1 113 966Chkalovsk city EN 78 76 72Isfara Distribution Centre 0 112 180

Total for Sogd 3 374 3 228 3 022 Distribution losses - total 1 472 1 462 1 305% of distribution losses 16,5% 16,9% 16,4% Total transmission & distribution losses 2 681 2 889 2 964% of total losses 12,4% 13,4% 14,0% Total net electricity supplied to customers 13 715 14 032 12 598including; Afghanistan 49 51 46GBAO 15 14 13Talco Aluminium Smelter Plant 6 222 6 789 5 904

Total for BT Distribution Centres 7 430 7 178 6 635including; Dushanbe Distribution Centre 1 428 1 448 1 385Central Distribution Centre 731 605 491Tursunzade Distribution Centre 194 178 151Garm Distribution Centre 157 156 134Nurek Distribution Centre 10 85 67Total for Rasht 1 092 1 024 843Southern Distribution Centre 1 129 1 072 964Kuliab Distribution Centre 423 351 318Kuliab city Distribution Centre 211 190 202Kurgan-Tube city Distribution Centre 125 133 135Yavan Distribution Centre 171 173 149Dangara Distribution Centre 12 71 96Total for Hatlon 2 070 1 990 1 864Khujand city Distribution Centre 357 350 350Istaravshan Distribution Centre 1 108 1 052 944Penjikent Distribution Centre 250 229 229Leninabad Distribution Centre 1 056 924 802



Chkalovsk city EN 68 66 62Isfara Distribution Centre 0 94 154Total for Sogd 2 839 2 715 2 542

VERSION CONTROL

Methodology for the Use of Loan Repayments from Barki Tojik for Electricity Tariff Subsidies



Documents Title: Methodology for the Use of Loan Repayment from Barki Tojik for Electricity Tariff Subsidies

Prepared By: Leszek Kasprowicz and Guy Block

Reviewed by: Eric Harrison

Version: 1.0



ABBREVIATIONS


BT Barki Tojik






SPC State Committee on Investments and Management of State Property


WB World Bank


CONTENTS


2 INTRODUCTION 2

3 APPROACH AND METHODOLOGY 4

4 DESCRIPTION OF THE EXISTING ASSISTANCE PROGRAM 5

4.1 Number of Low-Income Households Participating in the Program 5

4.2 Availability of Financial Resources 6

4.3 Present Compensation Scheme 6

4.4 Qualification Process 9 4.4.1 Definition and disclosure of income 9 4.4.2 Definition of a low-income household and a minimum qualifying income 9

4.5 Amount of Compensation 10

4.6 Fund Distribution and Payment for Utility Services 11

5 SUGGESTED OPTIONS FOR USE OF LOAN REPAYMENT 12

5.1 Option 1 12 5.1.1 Identification of the qualified households 12

5.2 Elimination of Payments in Cash 14

5.3 Establishment of a Dedicated Account 14

5.4 Prohibition of Returning of any Residual Loan Repayment Funds to the State Budget 14

5.5 Loan repayment Under Option 1 15

5.6 Option 2 17

5.7 Comparison of the Options 22

5.8 Timing of Implementation 24

6 DISTRIBUTION CENTRE SURVEYS 26

7 CONCLUSIONS 28

APPENDIX 1: GENERAL CONSIDERATIONS ON POVERTY AND FUEL POVERTY 29

APPENDIX 2: ENERGY SAVING LIGHT BULBS MEASURE 31

APPENDIX 3: EVOLUTION OF MAJOR PROVISIONS OF THE UTILITY ASSISTANCE PROGRAM 33

APPENDIX 4: RESULTS (TOTALS) FROM THE DISTRIBUTION CENTRE SURVEY 34


EXECUTIVE SUMMARY 1

1 Executive Summary Under the agreement between the Asian Development Bank (the ADB) and the Government of Tajikistan (the Government) the loan repayment from the electric utility company Barki Tojik to the Government for the use of the grant made by the ADB to the Government for the rehabilitation of the 500 kV switchyard at Nurek hydro power station shall be used for tariff subsidies for the poor and vulnerable electricity consumers. The 25-year loan valued at US$ 54.77 mln and has to be re-paid after a five year grace period, at an interest rate of 5% per year.

The objective of this task was to develop a methodology for a loan repayment scheme that will be satisfactory to the ADB and provide assurance that the funds are used exclusively for tariff subsidies for poor and vulnerable electricity consumers.

This study reviews the existing compensation scheme, which proved to be a good starting point for developing two options that may be considered for the loan repayment methodology and provides necessary recommendations for their implementation.

The first option is based on the existing support program and continues compensation to qualified household for all of the electricity used up to a certain level depending on the time of year and availability of other energy services.

The second option also stems from the existing assistance program. Its implementation though is based on the introduction of a life-line tariff which requires the participating households to partially contribute to the costs of their basic electricity usage while still benefiting from the assistance program.

While both options will secure the objectives of the task, the preference is given to the second option as it offers future possibilities for the redesign of overall system wide electricity tariffs. It also provides a pricing signal to the consumers that may be essential in the successful implementation of energy conservation programs in Tajikistan in the future.

There is no specific timeline requirement when it comes to the implementation of either option as the leading methodology. They can be implemented without any delay within the framework of the existing assistance program and be available when the loan payment disbursements become due. On the other hand an early implementation of the selected option would allow testing and modification if necessary.

The report also provides recommendations for improvements in the present assistance program to increase its effectiveness and eliminate possible abuse. These improvements are critical regardless whether or not any of the recommended options are implemented.

Should one of the options be chosen for the loan repayment methodology further research has to be undertaken to better understand the energy usage pattern among the residential consumers so as to properly structure the sizes of basic consumption blocks. Additionally, changes will be needed to the legal framework to accommodate some of the recommended changes.


INTRODUCTION 2

2 Introduction Under the revised terms of reference for the project “Strengthening of the Corporate Management of Barki Tojik”, dated April 2009, the Asian Development Bank (the ADB) required that the consultant propose a methodology for the use of the grant made by the ADB to the Government of Tajikistan (the Government) for the rehabilitation of the 500 kV switchyard at Nurek hydro power station1, and the subsequent loan repayment from the electric utility company Barki Tojik (BT) to the Government for tariff subsidies for the poor and vulnerable electricity consumers2.

Following the award of this grant, the Government shall provide to BT, on the basis of a subsidiary loan agreement, a loan valued at US$ 54.77 mln for the implementation of the above mentioned Project. This loan will have to be re-paid after a five year grace period, at an interest rate of 5% per year.

Clause 8 of the Grant Agreement concluded between the Republic of Tajikistan and the ADB states that:

“The Recipient shall ensure that the principal and interest repaid under the Subsidiary Loan Agreement are used exclusively to subsidise the poor and vulnerable consumers in accordance with a methodology satisfactory to ADB. The specific methodology shall be agreed with ADB and duly reflected in the Subsidiary Loan Agreement. 3”

Further elaboration of this clause can be found in the Report and Recommendation of the President to the Board of Directors for the proposed ADB fund grant to the Republic of Tajikistan:

“The Government shall ensure that repayments of principal and interest by Barki Tajik to the Government arising from the Subsidiary Loan Agreement between Barki Tajik and the Government are used exclusively for tariff subsidies for poor and vulnerable electricity consumers in accordance with a methodology satisfactory to ADB. The specific methodology shall be agreed with ADB and duly reflected in the subsidiary Loan Agreement4”

The Government for many years has been granting strong support to the poor and vulnerable customers for the consumptions of electricity and natural gas. This study reviews this compensation scheme and provides the necessary recommendations for a methodology ensuring that the repayment of the BT loan is exclusively used to support poor and vulnerable electricity customers.

In the process of preparing this report the consultant has met with a number of relevant local stakeholders:

• Mr. Davlatnazar Kurbanov, Deputy Head of Antimonopoly Policy and Competition Development Department of the Ministry of Economic Development and Trade

• Mr. Anvar Latifov, Assistant to the Minister of Economic Development and Trade

• Mr. Alexander Astakhov, Attorney, OJSHC Barki Tojik

1 Nurek 500 kV Switchyard Reconstruction Project, Project Number 42189 2 Work Plan. Strengthening Corporate Management of Barki Tojik. ADB TA No. 4908-TAJ. May 7, 2009. 3 Grant Number 0124-TAJ(SF) dated December 26, 2008. 4 Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Republic of

Tajikistan: Nurek 500 kV Switchyard Reconstruction Project, Project Number 42189. October 2008, Asian Development Bank. (paragraph 84).


INTRODUCTION - CONTINUED

• Mr. Orif Ubaidov, Head of Social Grants and Quality of Living Department, Ministry of Labour and Social Protection

• Mr. Alamkhon Naimi, Deputy Head of Government Budget et Department, Ministry of Finance and Amirov Fahredin, Head of Investments Department, Ministry of Finance

• Mr. Rashid Gulov, Deputy Chief Engineer, OJSHC Barki Tojik

• Mr. Usmonali Usmanov, Deputy Director of the Project Implementation Unit

• Mr. Bakhadur Khabibov, Executive Director of Consumers Union of Tajikistan

• Mr. Mubin Rustamov, UNDP Program Analyst

• Mr. Yodgor Fayzov, Chief Executive Officer of the Aga Khan Foundation

• Mr. Daler Jumaev, General Director, Pamir Energy Company

• Mr. Halimov Khurshed, Head Specialist, Ministry of Labour and Social Protection

• Mr. Madzihidov Rustam Ganievich, Head of Planning and Economy Unit of BT

• Mr. Mamadkhuja Narzullaev, Head of Economy and Forecasting Department, Ministry of Energy and Industry

• Mr. Zoran Morvac, Adviser to the Minister of Economic Development and Trade

Their kind cooperation and constructive feedback is hereby acknowledged and highly appreciated.

3

Page 4


APPROACH AND METHODOLOGY

3 Approach and Methodology In order to determine a suitable methodology for the use of the loan repayments from BT for the support of poor and vulnerable electricity customers, the consultant analysed the existing support mechanism in Tajikistan. Very helpful and informative meetings were held with the staff of the following government and non-government organisations:

• Ministry of Energy and Industry

• Ministry of Economic Development and Trade

• Ministry of Labour and Social Protection

• Ministry of Finance

• Electro Energy Sector Project Management Unit under the Government of Tajikistan

• Barki Tojik OJSHC

• Consumers Union of Tajikistan

• United Nations Development Program

• Aga Khan Foundation

• Pamir Energy Company

• the World Bank

• the Asian Development Bank-Dushanbe local mission

In addition to meetings and consultations with local stakeholders the consultant conducted a mail-in survey of the BT distribution centres in Tajikistan. The objective of the survey was to obtain more detailed information regarding the participation in the assistance program, the level of arrears, and possible violations of the terms of the program by its participants.

Throughout this report we are using the term “household” to describe the classification of a consumer type eligible for utility payment assistance. It may include families (more than one individual living together at the same address) as well as individuals living alone.

This report does not address certain issues that, although important to the energy system as a whole, remain outside of the scope of the consultant’s task. These are:

• the size and availability of Government-financed assistance for utility bill payment in the future

• adequacy of the ADB loan repayment for the social assistance needs throughout the entire repayment period

• the path, including the timing, of tariff increases in Tajikistan

• assessment of the level of actual and/or future tariffs applicable to low-income households.

All numbers used in the report are for the purpose of illustration of the recommended options only.


DESCRIPTION OF EXISTING ASSISTANCE PROGRAM 4

4 Description of the Existing Assistance Program 4.1 Number of Low-Income Households Participating in the Program

Based on the official statistics5, as of 1 January 2009 there were 7,392,000 residents or 1,218,500 households in Tajikistan. At present, 53% of population in Tajikistan live in poverty and out of that 70-80% lives in extreme poverty6. The financial resources required to assist everybody in need would be considerable and most likely beyond the capacity of the State budget. Therefore the decision was made to cap the assistance to only 20% of the households and select only those that are in the worst financial situation. That translates to 241,000 households. The summary of the geographical distribution of low-income households in the regions and cities is presented in the table below:

Administrative Unit Population

(‘000)

Number of households

(‘000)

Number of low-income households

(‘000)

Gorno Badakhshan Autonomous Oblast 191.3 32.5 6.5

Sogdijskij Oblast 2,171.4 381.7 75.8

Khatlon Oblast 2,656.5 397.3 77.4

City of Dushanbe 695.3 139.2 27.8

Subordinated cities and regions 1,677.5 267.8 53.5

Total 7,392.0 1,218.5 241.0

It is becoming obvious that the proper identification of those 20% of households is critical to the success of the assistance program.

The Ministry for Labour and Social Protection expects in the coming years a reduction in the number of low-income households of approximately 40.000, primarily due to general improvements of the economy and results of the social policies.

5 Attachment to the Government Decision no. 306, May 28, 2009. 6 See discussion on poverty in Appendix 1.


DESCRIPTION OF EXISTING ASSISTANCE PROGRAM - CONTINUED

4.2 Availability of Financial Resources

Over the years the Government allocated financial resources in the state budget dedicated to financing the utility payment assistance program. The amounts available in the past and projected for the nearest future have been as follows:

Year State budget-allocation (Somoni)

Allocation to electricity (%, Somoni)

2007 25 mls 65%, 17 mls

2008 28 mls 70%, 19 mls

2009 36 mls 70%, 25 mls

2010 (estimate)7 36 mls 70%, 25 mls

In 2009, changes were made to the support scheme for low-income households. By Presidential Decree8 it was decided to provide, from May 2009 through October 2009, energy saving light bulbs at no charge to 241,000 low income households. Approximately 2 million lamps at the cost of 18 mln Somoni will be purchased and distributed under this program. This assistance is being provided in lieu of direct subsidy payments due during the second half of 2009. An advertising campaign was launched to promote energy savings and the use of these energy saving lamps. Further discussion of this in-kind assistance is presented in Appendix 2.

4.3 Present Compensation Scheme

The utility payment assistance program has been in place in Tajikistan since at least December 2003. Over time it has undergone several modifications to bring it up to date, increase the coverage and eliminate the leakage. The program involves a “compensation scheme” according to which low-income households are granted compensation for their usage of electricity and natural gas. The evolution of the terms of the assistance program has been presented in Appendix 3.

Basically, the compensation scheme involves the following steps:

1. Identification of the households eligible to participate in the program through the review of their applications based on a set of predefined selection criteria;

2. Creation of lists of eligible households by the local commissions and submission of those lists to appropriate Ministers;

3. Allocation and transfer of funds from the central budget to the regional branches of the Government bank-Amonat Bank;

4. Allocation of funds to eligible households;

7 Due to financial crisis no significant increase in budget allocation as compared to previous years is expected. The goal, however, is

to maintain at least the same level of financial support as in 2009. 8 Presidential Decree no. 653, April 24, 2009.



5. The households pay for their utility bills either through collecting the funds in cash and making the payment in person or electing for an automatic transfer of the funds directly to their BT accounts.

The main parties involved in this process are:

Government: Ministry of Labour and Social Protection, Ministry of Finance

Utility Company: Barki Tojik

Local Administration: Local governments and councils in settlements, villages, and residential-communal administrations in towns and cities

Banking: Amonat Bank

The chart below illustrates the process and involvement of the parties.



Chart 1: Information and financial resources flows in the current assistance program



4.4 Qualification Process

Low-income households have to apply for participation in the utility payment assistance program by providing information on specially designed application forms. The qualification process involves the evaluation of such information by the local and regional commissions9 according to the predefined guidelines. Understandably, the majority of the information is related to establishing a household’s financial situation and comparing it to the current indicators. Avoiding fraud and the identification of those in real need is the ultimate objective of this process. 4.4.1 Definition and disclosure of income

Over time the questions about a household’s income have become more detailed and started to include more categories. Presently, incomes in the following categories have to be disclosed by the prospective program participants10:

• monthly salaries, including compensation and stimulus payments, as provided by the remuneration schemes of the labour system

• compensation for seasonal, temporary and other kinds of works performed under term labour contracts; incomes from the execution of public contracts, and incomes from entrepreneurial and individual labour activities, and self-employment

• incomes derived from the farming activity as a result of concluded agreements or contracts

• incomes derived from the sales of produce and production from the personal land plot

• incomes derived from leasing (renting) real estate and other properties

• scholarships, pensions, assistance payments (except for one-time payments), received alimony and awards for inventions and improvements

• remittances from a family member who is a migrant worker

• other incomes

The inclusion of income from remittances from abroad is a significant change when compared to previous income disclosure requirements11.

Each low-income household participating in the assistance program has to reapply every six months by providing necessary documentation to substantiate its eligibility.

4.4.2 Definition of a low-income household and a minimum qualifying income

The primary factor qualifying a household for the assistance program is its average monthly income per member of the household in question. To further identify those households that are in true need of assistance, the reference level-average official minimum monthly salary12, or its fraction, has been steadily lowered over time as presented in the table below.

9 The commissions consist of 7-9 members and usually include staff from energy company, labour union and other individuals that in

their professional capacity deal with social protection, finances, employment, or statistical issues. A commission is chaired by the deputy head of the oblast or a region (city), where applicable.

10 Government Decision no. 379, August 1, 2008. 11 Government Decision no. 145, April 3, 2007. 12 At present, the official minimum monthly salary is set at 60 Somoni.



Decision No. 145

April 3, 2007 Decision No. 379 August 3, 2008

Decision No. 306 May 28, 2009

Income threshold to qualify for assistance

Equal or less than one month of official minimal salary

Equal or less than 50% of official minimal monthly salary

Equal or less than 50% of the average monthly wage prevalent at the place of residence

The exception is the most recent decision (Decision no. 306); its consequences are discussed in Chapter 5.1.1.2.

In case of households being in similar financial situation, the priority is given to13:

• families with many dependent children which lost their bread-winner and have disabled children

• families consisting of more than two people who are disabled

• families the head of which is an unemployable disabled person

• single elderly and disabled people with unfavourable material situation when compared to other residents

4.5 Amount of Compensation

The amount of compensation provided to each low-income household is based on the time of the year, the actual electricity consumption, the availability of natural gas service to the household and whether or not such service is metered.

The levels of current allowances are presented below14,15:

13 Government Decision no. 306, May 28, 2009. 14 Government Decision no. 145, April 3, 2007. 15 Government Decision no. 379, August 1, 2008.



Type of service Allowances

Usage indicators-electricity Natural gas service available

April-September up to 100 kWh/household October-March up to 200 kWh/household

Usage indicators-electricity Natural gas service unavailable


Usage indicators-natural gas Natural gas meter absent

April-September 10 m3/person October-March 12 m3/person

Usage indicators-natural gas Natural gas meter present

April-September up to 20 m3/person October-March up to 30 m3/person

On an annual basis, in case of the unavailability of natural gas services in the household, up to 2,400 kWh/year (equivalent to 172.80 Somoni a year16) is covered by the program. When natural gas services are available, a maximum of up to 1,800 kWh/year (equivalent to 129.60 Somoni a year17) is covered by the program. It should be noted that a similar program exists for natural gas supplies as indicated in the table above.

4.6 Fund Distribution and Payment for Utility Services

Once qualified, the eligible household will be entered into the program for one year. They will receive payments every two months.

The payments are distributed through the local branches of the government bank-Amonat Bank. The household has a choice of receiving the payment in cash or transferring it directly to the utility company (see Chart 1). Should the program participant decide not to pay for its electricity consumption and retain the assistance payment for other purposes, he may be excluded from participation in the assistance program in the subsequent months.

16 Using a tariff of 7.2 diram/kWh. 17 ibid


SUGGESTED OPTIONS FOR LOAN REPAYMENT 5

5 Suggested Options for Use of Loan Repayment The objective of this task is to develop a methodology for using the loan repayment from BT to the Government for tariff subsidies for low-income households. Therefore the methodology should address the following critical sub objectives:

1. Making sure that the funds benefit the households that are in a dire financial situation

2. Making sure that the funds are used exclusively for payments for electric utility services

3. Making sure that any balances of the loan repayments are not returned to the Government

The consultant has identified two options to achieve these objectives:

Option 1 Model a new subsidy mechanism based on the social assistance program for utility payments that is currently in place, introduce any necessary modifications to fully address the sub-objectives

Option 2 Introduce a life-line tariff for low-income households

The details of each option, including the mechanisms of their implementations, are presented below. With regard to Option 1, the information provided in the previous chapters serves as an ideal starting point.

5.1 Option 1

The current utility payment assistance program in Tajikistan falls in the category of earmarked cash transfer subsidy mechanisms. Its features are quite reasonable and well within the framework of similar assistance programs. However, the following modifications are needed to secure the sub objectives:

• Improve the identification of qualified households

• Improve the definition of the income threshold

• Elimination of payment in cash

• Establishment of a dedicated fund for the loan repayment

• Elimination of the funds return to the state budget

5.1.1 Identification of the qualified households

Regardless of which option is chosen the common part to both is the proper identification of the qualified households. The selection process currently in place is somewhat adequate; however, additional modifications are suggested to further enhance it:

Reaching out to households in need

Although the assistance program has been active for a number of years there still may be individuals or families, including those living in remote areas, which may qualify for the program but have not yet been considered. There is a role for the regional staff of the Ministry of Labour and Social Protection to continue scouting their respective regions in search of those individuals. They


SUGGESTED OPTIONS FOR LOAN REPAYMENT - CONTINUED

may team up with the BT’s meter readers who have first-hand contacts with electric customers and may not only distribute the information about the assistance program18 but also inform social workers about families in need they encounter during their functions.

At the same time, the members of the regional commissions should make an effort during the qualification process to make site visits to the prospective participants to verify their situation. After all, the members of the commissions are personally responsible for the accuracy and truthfulness of the statements provided on the application forms19.

Finally, a reasonable and positive assistance should be provided to the applicants in filling out the application forms and explaining what supporting documents are needed to substantiate the financial claims.

Definition of the income threshold

The definition of a low-income household as set out in the Tajik regulation conforms well to international standards as far as the inclusion of certain types of individual goes single women heading a family, large households with disabled members, households headed by handicapped or unemployed members, etc. However, the most recent Government Decision modified the qualifying income threshold of low-income households to be20:

…equal or less than 50% of the average monthly wage prevalent at the place of residence…

The major change is the reference to “wage prevalent at the place of residence”; there is no more reference to a “national” or “official” average. Lack of fixed reference level could result in major differences from one city/region to another while the electricity tariff is not geographically differentiated and remains constant21. Identification of low-income households in richer areas could be problematic and lead to “qualifying for assistance households” that are in a relatively better financial position and would not otherwise qualify should they lived in poorer areas. It may also result in the increase in the number of applications filed while the total assistance remains limited to 20% of all households.

The Consultant offers two options:

• Going back to the former definition of the reference level (50% of the minimum wage as defined on a national level), or

• Putting a cap, for instance 90-120 Somoni/month, above which a household could not be considered as a low-income household, even if its income is less than 50% of the wage prevalent at their place of residence.

The first option is preferable as any flexibility in departure from the nationally recognised average may result in unnecessary manipulations to affect the participation in the assistance program.

18 That may be as simple as distributing small leaflets about the program. 19 Attachment 2 to Government Decision no. 379, August 1, 2008. 20 Article 3, Government Decision no. 306 of 28 May 2009, modifying Article 6, Government Decision 1 no. 379 of August 1, 2008. 21 For instance, in the Dushanbe Somoni District, as for May 1, 2009 the average wage is 280 Somoni/month. According to the new

definition, 50% means 140 Somoni/month. In the city Dushanbe, the average minimum wage is 539 Somoni/month for self-employed and private persons and 454 Somoni/month for State budget employees. 50% means respectively 270 Somoni/month and 226 Somoni/month. In the countryside and in the other regions, it will be much lower and close to former average of 60 Somoni/month.



5.2 Elimination of Payments in Cash

The Consultant recommends that the option of making payments for utility bills using cash rather than direct transfer from Amonat Bank to the BT account be discontinued. Such an option could be a potential source of fraud and misuse of dedicated funds. When faced with a dilemma whether or not to use financial assistance to pay for food or utilities the participant is most likely to choose the former causing him to delay or even forego the timely payment for utilities, eventually risking being eliminated from the program. The cash disbursement is considered by the Consultant to be a major flaw of the current assistance program. Since the program funds have to be used exclusively for utility payments, there is no reason for the cash option to be available to the participants. An automatic transfer of the funds by the Amonat Bank to the participants’ BT account simplifies the process and allocates the money for the purpose they were disbursed in the first place. Any other option creates an appearance of an informal and very tempting “loan” from the Government to appease the recipients. Dealing with cash also creates problems for people living in areas distant from the Bank locations and those that are unable to pick up the cash in person. Relying on third-parties for cash deliveries creates opportunity for fraud and further lowers the positive impact of such cash payment for its ultimate recipient.

Technically the problem can be resolved by sharing the list of participating households with BT, which in turn will issue the utility statements to both, the participants and the Amonat Bank. The Bank will pay the bill of actual electricity consumption up to the allowance limit; the rest will be the responsibility of the participant. If the consumption is within the free allowance limits the trip to collect cash payment is no longer needed. The BT bill would need to show the amount paid in subsidy and any net charges that fall to the household to pay.

5.3 Establishment of a Dedicated Account

The Consultant recommends that a dedicated interest bearing account (the Fund) be established at the Amonat Bank. Such Fund will be used exclusively for receiving the loan repayments from BT and disbursing those repayments back to BT to cover exclusively the electric utility bills of participating households. The financial resources in the Fund should not be comingled with any other financial assistance funds available to the government. This Fund shall be subject to periodic external audits on ADB-approved terms. Any excess financial resources left in the Fund after periodic assistance payment disbursements should be exempt from being returned to the Central Treasury, as discussed below.

Additionally, an activity report should be prepared and delivered to the ADB on the annual basis.

5.4 Prohibition of Returning of any Residual Loan Repayment Funds to the State Budget

Under the current assistance scheme, any residual funds left in the Amonat Bank after the periodic compensation payments to low-income households have to be returned directly to the Central Treasury22. To avoid a similar treatment of any balances accumulated in the Fund a restriction provision should be introduced so that financial resources in the Fund remain unaffected.

22 Article 33 of Government Regulation no. 379 states: “…if after paying the compensation there are unused resources left those

resources must be transferred, without deduction of any percentage charges to the Central Treasury of the Ministry of Finance of the Republic of Tajikistan...”



The Consultant recommends also that in a situation when there are other funds available in parallel for utility payment assistance the financial resources from the Fund be depleted first prior to drawing the other funds to minimise, if not eliminate, the residual amount of the Fund.

5.5 Loan repayment Under Option 1

Taking into account all the suggested improvements to the existing assistance program and pairing it with the loan repayment process will result in the following steps:


2. Creation of lists of eligible households by the local commissions and submission of those lists to appropriate Ministers and BT

3. Allocation and transfer of funds from the central budget to the Government bank-Amonat Bank

4. Transfer of loan repayments from BT to the Fund at the Amonat Bank

5. BT provides utility bills to qualified households with a copy to Amonat Bank

6. Amonat Bank transfers payments from the Fund in the name of the eligible households to their BT accounts

7. The households pay for the balance of their utility bills to BT

The entire process is presented in the following chart:



Chart 2: Information and financial resources flows in Option 1 All of the recommendations presented under Option 123 may be implemented immediately with regard to the existing assistance program to improve its effectiveness without waiting for the disbursement of the loan repayment which is still at least five years away from now.

23 With the exception of establishing the Fund.



5.6 Option 2

The second option approaches the objective through a special tariff design, called a life-line tariff. There are many ways of providing assistance to vulnerable consumers but we have decided to use this approach as it is related to tariffs in the most direct way and it can use many features of the existing assistance program for the ease of its implementation. In the transition phase such a tariff is offered only to qualified consumers and instead of a flat tariff offered today it splits the tariff into two blocks based on the electricity consumption level:

• first, from 0 kWh to a certain consumption level, priced at one tariff, and

• second, going beyond the ending value of the previous block, usually priced at a higher rate24

There can be more than two blocks to customise the tariff system to the consumption patterns but that may also increase the complexity of the overall scheme.

Such a tariff structure has been successfully implemented by the Pamir Energy Company in the Gorno Badakhshan Autonomous Oblast.25

The major steps under Option 2 are very similar to those of Option 1 and include:


2. Creation of lists of eligible households by the local commissions and submission of those lists to appropriate Ministers and BT

3. Allocation and transfer of funds from the central budget to the Government bank-Amonat Bank

4. Transfer of loan repayments from BT to the Fund at the Amonat Bank

5. BT provides utility bills, calculated using the life-line tariffs, to qualified households with a copy to Amonat Bank

6. Amonat Bank transfers payments from the Fund in the name of the eligible households to their BT accounts

7. The households pay for the balance of their utility bills to BT.

What differs between the two Options then? The differences are subtle yet with important consequences going forward. Under Option 1, the fact that a consumer is receiving free electricity up to a certain consumption level through a direct payment may be perceived as a gift from the Government with no pricing signal motivating the rational use of electricity while under Option 2, especially in its second and third scenario, the consumers receive the signal that the electricity is not a free commodity, even at the lowest consumption level.

The extended list of differences between the two Options, including their overall advantages and disadvantages, is discussed in the following chapter.

24 The increasing block pattern stimulates the rational use of electricity while the inverted block enhances the electricity usage. 25 Under a special concession agreement with Pamir Energy Company (PEC) a life line tariff has been implemented. During

November-March period, the first 200 kWh and during April-October the first 50 kWh are billed at $0.0025 (approximately 0.01 Somoni) and monthly consumed kWh above these thresholds are billed at $0.0247 (approximately 0.1 Somoni).



Similar to Option 1 the following elements have to be in place in order for Option 2 to be successfully implemented and ultimately complying with the task sub objectives:

• Proper identification of the qualified households, including:

o Reaching out to households in need

o Definition of the income threshold

• Establishment of a dedicated account for loan repayment funds

• Elimination of the return of the residual loan repayment funds to the state budget

The descriptions or requirements that apply under Option 1 also apply to those elements under Option 2 and will not be repeated.

The entire process is presented in the following chart:



Chart 3: Information and financial resources flows in Option 2

Option 2 can be implemented in BT service territory under three scenarios:



Scenario 1 By using a revenue neutral approach-keeping the first consumption block(s)26 equal in size to current allowances and discounted tariff for the block(s) at 0 Somoni/kWh resulting in no change in either the expenditure level for the consumer or the revenue level for BT as compared to the current situation since the utility payment assistance program covers the difference between the current tariff applicable to other consumers and the discounted tariff.

Scenario 2 By making a symbolic increase of the lowest tariff for the first consumption block, resulting in a small increase in annual expenditure level on the consumer side and no increase in revenues for BT since the utility payment assistance program covers the difference between the current tariff applicable to other consumers and the discounted tariff.

Scenario 3 By making the block tariff available to all BT consumers, with adjustable consumption blocks and appropriate tariff levels corresponding to those blocks. Depending on the magnitude of the changes made to the blocks and tariffs and the consumers’ pattern of electricity use this could result in a net increase of expenditures for the consumers, including low-income households. The change in BT revenues will depend on the magnitude of consumptions in those blocks, especially in the second block. Low-income households may continue participating in utility payment assistance program to soften the impact of the respective changes.

The graphical representation and discussion of the scenarios’ specific features follows below.

Chart 4: Possible scenarios of life-line tariffs structure implementation

26 There are two consumption blocks depending on the time of year.



Scenario 1 With its first block tariff set at 0 diram/kWh and second block tariff equal to the current tariff it mimics exactly the present assistance scheme. Should the Government decide to implement this version the low-income households would not notice any change in their utility payment obligations and would not have to deal with cash transfers. That part will be done in their name automatically by the Amonat Bank. On BT’s side a modification of the billing scheme is needed. Once introduced, such scheme will be capable of easy modification in the future to accommodate any tariff and block size changes (see Scenario 3).

Due to the fact that there is no charge for the initial block, this tariff pattern has limited impact on efficient energy use. Since the blocks/energy allowances are rather high at present (see the survey results), reducing them may offer some energy conservation stimulus. Downward block size adjustment may also be justified by the fact that installations of energy efficient bulbs will somewhat lower the overall household energy use.

Scenario 2 In this version the tariff for the initial block is set at a symbolic level of, say, 1 diram/kWh while the second block tariff is kept equal to the present tariff. The rationale behind this approach is linked to the issue of whether or not maintaining a “free” minimum monthly consumption of electricity is a good signal in the current and future energy situation in the country.

The move away from a free give away policy is supported by the following arguments:

1. electricity is not a free commodity;

2. efforts to save energy, as emphasised by the Presidential Decree27, must be made by everybody, including low-income households as the target of electricity independence by 2014 should also be the concern of these households;

3. without any “minimum” or “symbolic” price for the first block of consumed kWh, low-income households could not be expected to make proper usage of the provided energy saving lamps or make reasonable efforts to save energy.

A symbolic co-payment of 1 diram/kWh for electricity consumed within the allowed blocks would result in an annual charge to a low-income household not exceeding 24 Somoni per year or 1.5 to 2.5 Somoni per month depending of the time of year. Similarly to Scenario 1, adjusting the size of the first consumption block downwards may offer an additional energy conservation stimulus.

Scenario 3 This version of life line tariff with two blocks would be available to all residential consumers, including the low-income households. The tariff in the first block is set somewhat lower than the average cost of electricity while the tariff for the second block is set above that cost. The actual sizes of the blocks will depend on the residential consumer consumption patterns but should be designed in a way that places the majority of the consumption of the non-poor households in the second block with the majority of the consumption of the poor-households in the first block. To smooth the possible increase in the tariff in the first block the utility payment assistance program may still be continued, but on a smaller scale. The assistance program will cover the difference

27 Presidential Decree no. 653, April 24, 2009.



between the tariff in the first block and the symbolic level of, say, 1 Somoni/kWh, as described under Scenario 2. Freed up assistance resources may support expansion of the program beyond the 20% level afforded today.

This version of tariff structure may be of particular help to borderline low-income households that do not fall within the 20% limit yet their income is only marginally better than those that qualify for assistance. In their situation paying a discounted tariff in Block 1 offers measurable savings when compared to the regular tariff that they would have to pay like other non-poor consumers (see Scenarios 1 and 2).

Finally, since this tariff structure is available to all consumers, the increases in the tariff, coupled with the level of consumption, may have a positive impact on the rational electricity use in the country.

On the BT’s side, the implementation of this version of life-line tariff would require relatively uncomplicated adjustments to the billing schemes outlined before. It needs to be kept in mind that those billing schemes share the same principle, only the size of the consumption blocks and tariff levels differentiate them from each other.

These scenarios can be implemented in consecutive steps or by starting directly with any of the proposed options depending on what final outcome is desired: Consecutive steps are recommended when there may be a strong opposition to a tariff approach in general; starting with Scenario 1 which does not result in any material monetary changes to either low-income households or BT and may alleviate those concerns. Starting directly with Scenario 2 is recommended when the transition to tariff-based assistance needs to be accelerated and the energy conservation efforts have to be advanced forward. Version 3 is recommended when the tariff issue for the entire residential class, including low-income households, has to be structured correctly from its outset with an immediate system-wide impact on the rational use of electricity.

5.7 Comparison of the Options

Either option has its advantages and disadvantages; they also share common elements that have to be part of the process no matter which way the methodology is developed.

The table below summarises major positive and negative aspects of both options.

Option 1 Continue targeted payments with

modifications

Option 2 Introduce life-line tariffs

The assistance program is already in place, though some modifications are needed to accommodate the sub objectives of the loan repayment task.

Commonly used in electric power systems.

Most of the population is familiar with the program. The Government administration staff at the central as well as regional level knows the program well.

It may serve as a basis for a more sophisticated tariff reform for all classes of consumers in the future.

Advantages

Does not offer the consumers the cash payment option.



May be more effective in sending the proper pricing signal to emphasize need for energy conservation. Increasing-block tariffs are prerequisite for successful implementation of future energy efficiency programs.

Offers indirect assistance to borderline low-income households that would not otherwise qualify for utility payment assistance program.

Positive experience with implementation of similar tariff structure in the GBAO-Pamir Energy Company.

After modification of the current assistance program will satisfy the task sub-objectives.

If implemented as recommended will satisfy the task sub objectives.

An option of a cash payment to low-income households is at the core of the program, creating an opportunity for a misuse of the funds.

Population is not familiar with such a tariff structure, major informational campaign is necessary. Similarly, the institutions involved in the current program may resist any major changes to the already established mechanisms.

Identification/Qualification of participants may be subject to abuse.

Identification/Qualification of participants may be subject to abuse.

Document-intensive application and reapplication process.

Document-intensive application and reapplication process.

May be viewed as a Government supported money give-away.

It may be perceived as a tariff change and therefore excluded from serious consideration by both the consumers and the Government.

It is a reactive approach, without any far reaching goals or objectives.

It is potentially sensitive to abuse by meter readers. Requires properly functioning metering and billing system.

Disadvantages

Requires an energy usage analysis to properly structure the supported consumption level.

Requires an energy usage analysis to properly structure the supported consumption level.

The identification and qualification of the participants remains the most critical and weak points of both approaches. The list of qualification criteria can be expanded to eliminate ineligible participants but at the same time a reasonable balance has to be maintained so the collection of information from the participants does not turn into an excessive and administratively burdensome process, as it is already perceived by many participants. In either option effective auditing and control procedures have to be established and enforced. That role can be maintained by the Ministries (Ministry of Labour and Social Protection and Ministry of Finance), or given to the



Ministry of Economic Development and Trade, the Antimonopoly Policy and Competition Development Department.

5.8 Timing of Implementation

Neither of the options is tied up to any particular schedule and can be implemented without any further delay. Introducing them early will give the Government enough time to test their appropriateness and take corrective actions if necessary. However, should the Government decide to delay implementation of one of the options then the modifications recommended in this report, should be introduced to the existing assistance program. The current structure has a few flaws that prevent it from being fully efficient and function as intended. As a minimum, the following actions, mentioned under the descriptions of the Options, have to be taken:

• Proper identification of the qualified households, including:

o Reaching out to households in need

o Definition of the income threshold

• Elimination of payments in cash

The modifications should result in an assistance program that will function according to the following scheme:



Chart 5: Information and financial resource flows in the modified current assistance program

Taking corrective actions early will positively impact future implementation of one of the Options and will make that process so much easier.


DISTRIBUTION CENTRE SURVEY 6

6 Distribution Centre Surveys In addition to meetings and consultations with local stakeholders the consultant conducted a mail-in survey of the BT distribution centres in Tajikistan. The objective of the survey was to obtain more detailed information regarding the participation in the assistance program, the level of arrears, and possible violations of the terms of the program by its participants.

The survey was conducted in Russian and addressed the following:

• number of low-income households participating in the program

• total electric energy consumed by low-income households

• number of low-income households that did not pay their electricity bills on time

• amount of unpaid electric energy by low-income households

• number of low-income households receiving the compensation in cash

• number of program violations, and

• amount of fraudulently claimed assistance

Seventeen survey forms were sent to distribution centres. Up to date fifteen responses have been received. The distribution centres located in the following cities and service areas responded to the survey:

• Municipality of Dushanbe

• Municipality of Kulob

• Municipality of Dangara

• Central

• Chkalovsk

• Isfara

• Istrafshan

• Khujand

• Kulob

• Kurgan-Tube

• Leninabad

• Penjikent

• Rasht

• Southern and

• Tursunzade

It was the first survey of this kind ever conducted in Tajikistan. The information collected was far from ideal (missing data, suspicious looking entries) and therefore should not be used for any sophisticated analyses or firm policy conclusions; however, the results offer a glimpse into some consumer data and how the utility payment assistance program is being implemented.

The sample questionnaire and the collected numerical results (totals for all centres) are presented in Appendix 4.


DISTRIBUTION CENTRE SURVEY - CONTINUED

The aggregated results show that:

1. The number of reported low-income households participating in the program varied from 270,562 to 56,932; the lowest numbers reported for the most recent months. The average reported number was 188,188 households. The overall trend was showing a decrease in the program participation. However, this trend may be reversed due to the following factors:

• changes in the definition of low-income family switching to 50% of the average monthly “wage usually paid at the place of living”28 will lead to an increase of the number of qualified low-income households;

• increases of the electricity tariffs since August 2009;

• current financial crisis.

2. The maximum, average, and minimum monthly consumption per low-income household was as follows:

Period Maximum

[kWh/month] Average

[kWh/month] Minimum

[kWh/month]

July 2007-September 2007 161 154 147

October 2007-March 2008 231 201 181

April 2008-September 2008 164 153 143

October 2008-March 2009 270 217 168

April 2009-June 2009 175 141 116

It has to be kept in mind that some areas of the country are subject to frequent electricity outages which may affect the consumption averages.

3. The portion of households not paying their electric bills on time varied from 0% to as high as 32%, with 6% being the average. The number of such households has increased in the reported past four months.

4. The amount of unpaid energy varied from 0% to 14% of the total energy consumed, with 4% being the average.

5. The number of households choosing a cash option varied from 36% to 64% of the total of participating households, 50% being the average. Some service centres reported 100% participation level in that option though.

6. The reported number of committed program violations was relatively small and did not exceed 3% of the participating households.

7. The average value of the program violation was 10 Somoni.

28 See above and point 3 of Gov. Reg. 28 May 2009 n°306, modifying art. 6 of Gov. Reg of 1 August 2008 n°379.


CONCLUSIONS 7

7 Conclusions Two of the proposed options will adequately secure the objectives of the task and can be chosen as the leading methodology. Both of them are very similar in nature and are based to some extent on the existing utility payment assistance program which should contribute to the ultimate ease of their implementation.

• Option 1 continues along the path of the existing targeted payment assistance program and after the implementation of the suggested improvements to that program will continue to serve the low-income households well.

• Option 2 uses a life-line tariff approach. It is also based on the structures of the existing assistance program when it comes to household selection but uses a pricing signal as a tool in affecting households’ energy use.

Therefore, it is the consultant’s opinion that while Option 1 may be more immediately applicable and easily implementable Option 2 offers a forward looking approach and is thus preferable.

There is no specific timeline requirement when it comes to the implementation of either option as the leading methodology. They can be implemented without any delay within the framework of the existing assistance program and be available when the loan payment disbursements become due. If implemented early they can be tested and improved, where necessary.

In any event, it is recommended that the features of the existing program be modified as soon as possible to improve its efficiency of delivery. This needs to be done regardless of if and when any of the above options are chosen and implemented.


APPENDIX 1 – GENERAL CONSIDERATIONS ON POVERTY AND FUEL POVERTY

Appendix 1: General Considerations on Poverty and Fuel Poverty “Poverty” is traditionally defined as the inability of an individual or a family to command sufficient resources to satisfy basic needs29. Basically, it is a condition in which a person’s income or consumption at a certain time falls below a certain threshold, which is referred to as the poverty line.

“Vulnerability to poverty” can be defined as the probability that a household will become poor in the near future. This concept deals with probability, that is to say a risk that a currently non-poor may end up being poor in the near future, due to events such as natural shocks disasters, economic shocks or crisis, security problems and others30.

The calculation of household vulnerability rests in the sustainable livelihoods approach which considers human, financial, social, natural and physical resources. Gender mix, production systems and households consumption patterns are considered.

The following categories of people are generally considered as “poor and vulnerable households”, by order of preference: households headed by women whose male members are either dead or incapacitated through sustained injuries, unemployed landless households, and small farmers who do not have other supplementary source of incomes31.

Recently, in the context of the energy crisis, the concept of “fuel poverty32” emerged in Europe and drew the attention of the European Parliament: people spending more than 10% of their overall incomes for energy (electricity, gas, heating) should fall in the category of “fuel poor”33. The European Parliament notably underlined, in the report on housing and regional policy, that:

“This impoverishment is often exacerbated by energy problems. Although growing energy prices may result in a rationalisation of use (the establishment of measures and technologies to help save energy and the introduction of sustainable energy, development of new energy sources, etc.), the combination of low-income, high energy prices and inadequate heating and insulation systems result in 'fuel poverty' and energy exclusion”34.

The concept of 'fuel poverty' was defined in the European Parliament in this report as:

“when more than 10% of income is devoted to paying energy bills”35.

In questions raised by the European Parliament to the European Commission, the latter also underlined that:

29 Fields, “Poverty and Income Distribution: Data for Measuring Poverty and Inequality Changes in the Developing Countries”, Journal

of Development Economics, 1993, p. 88. 30 Ari A. Perdana, Risk management for the poor and vulnerable, May 2005, Economic Working Paper Series,

http://www.csis.or.id/working_paper_file/54/wpe093.pdf 31 Asian Development Bank, JFPR-9092: Immediate Support to Poor and Vulnerable Households Inaccessible Areas Devastated by

the 2005 Earthquake, Pakistan. 32 See Report of the European of the European Parliament of 28 March 2007 on housing and regional policy, A6-0090/2007, p. 11,

European Resolution of 19 June 2008 on Towards a European Charter on the Rights of Energy Consumers, 2008/2006(INI), para. 28 and 29, and Communication from the Commission to the European Parliament concerning the common position of the Council on the adoption of a Directive of the European Parliament and of the Council concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, point 3.4.3.

33 European Parliament, Report on housing and regional policy (2006/2108(INI)), Committee on Regional Development, 28 March 2007, p. 11, European Parliament, Towards a common EU Energy Policy, 5 December 2006.

34 Report of the European Parliament on housing and regional policy (A6-0090/2007), 28 March 2007, p. 11. 35 Report of the European Parliament on housing and regional policy (A6-0090/2007), 28 March 2007, p. 11, footnote 1.

APPENDIX 1 - GENERAL CONSIDERATIONS ON POVERTY AND FUEL POVERTY - CONTINUED


“A policy response to energy poverty requires the input of most parts of government as it requires the combination of both social and economic policy”36.

The concept of “fuel poverty” emerged in the United Kingdom, where it is defined as:

“A household is considered to be in fuel poverty if it needs to spend 10 per cent or more of its income to maintain an adequate level of warmth (usually defined as 21 degrees for the main living area, and 18 degrees for other occupied rooms”37.

Social protection legislations generally refer to a list of “poor and vulnerable households”, taking into account among others:

• income support;

• housing support;

• tax benefit;

• disability living allowance;

• large households;

• minimum revenue;

• elderly;

• long term sickness and disability;

• etc38.

36 Parliamentary questions, 24 October 2008, Answer given by Mr Piebalgs on behalf of the Commission, E-4841/2008. 37 DEFRA, News Release, Fight must continue on fuel poverty says ministers, 2 October 2008, at

http://www.defra.gov.uk/news/2008/081002a.htm 38 For example see Office of the Deputy Prime Minister, United Kingdom,

http://www.birmingham.gov.uk/GenerateContent?CONTENT_ITEM_ID=63340&CONTENT_ITEM_TYPE=0&MENU_ID=13771&EXPAND=12818


APPENDIX 2 – ENERGY SAVING LIGHT BULBS

Appendix 2: Energy Saving Light Bulbs Measure In 2009 changes were made to the support scheme for low-income households. By Presidential Decree39 it was decided to provide, from May 2009 through October 2009, energy saving light bulbs at no charge to 241,000 low income households40. Approximately 2 million lamps at the cost of 18 mln Somoni will be purchased and distributed under this program. An advertising campaign was launched to promote energy savings and the use of these energy saving lamps.

In execution of this Presidential Decree, a Governmental Regulation was adopted on 28 May 200941, modifying the above mentioned Governmental Regulation of 1 August 2008, as follows.

According to international standards, the use of energy saving light bulbs has the potential to reduce total electricity consumption from between 10 and 15%. Such potential was notably highlighted in the technical briefing drafted in the context of adoption of a regulation for the phasing out of incandescent bulbs in the European Union:

“…Lighting may represent up to a fifth of a household's electricity consumption. There is a four to five-fold difference between the energy consumption of the least efficient and the most efficient lighting technologies available on the market. This means that upgrading the lamps could reduce a household's total electricity consumption by up to 10-15% and save easily 50€/year (taking into account the purchasing costs of lamps”42…”

The positive effects of this measure on the consumption of electricity by low-income households in Tajikistan are examined below.

The total amount of money dedicated to this measure equals to 18 mls Somoni to be taken from the 2009 Budget allocated to the utility payment assistance program for low-income households43. Article 13 of the Governmental Regulation of 28 May 2009, suspends the compensation scheme for the rest of 2009:

“…Articles 25 and 26 on “the definition of low-income households, rules of compensation for electricity and natural gas” which were approved by Regulation of Government of 1st August 2008 n°379, in their parts addressing compensation for electricity for year 2009, are temporarily suspended…”

It follows from this article that the monetary compensation which low-income households receive from the Amonat Bank to pay their electricity bills is replaced for the second part of 2009 by compensation in kind, consisting of above-mentioned energy saving lamps.

The Consultant found therefore this measure to be very positive, that should achieve direct effects, not only in terms of energy efficiency but also in terms of the maximisation of the use of State

39 Presidential Decree no. 653, April 24, 2009. 40 This Presidential Decree of 24 April 2009 n° 653 states other important measures in terms of energy savings such as:

1. improvement of the standards on energy savings (Art. 6); 2. energy independence within 3 years for natural gas demand and within 4 years for electricity demand (Art. 7); 3. planning of an energy saving plan for 2010-2015 (Art. 8); 4. action plan until 2013 for building new and rehabilitation of existing power stations (Art. 9); 5. program to reduce energy losses between 2009-2015 (Art 9).

41 Government Regulation no. 306, May 28, 2009. 42 Phasing out of incandescent bulbs in the EU, Technical briefing, p. 1, at

http://ec.europa.eu/energy/efficiency/ecodesign/doc/committee/2008_12_08_technical_briefing_household_lamps.pdf 43 Government Regulation no. 306, May 28, 2009.


APPENDIX 2 – ENERGY SAVING LIGHT BULBS - CONTINUED

funds. It also gives straightforward encouraging signals to low-income population about energy savings as emphasised by the Presidential Decree44.

44 Presidential Decree of 24 April 2009, n°653.


APPENDIX 3 – CHANGES IN THE ASSISTANCE PROGRAM

Appendix 3: Evolution of Major Provisions of the Utility Assistance Program

Decision No. 42 February 4, 2004

Decision No. 145 April 3, 2007

Decision No. 379 August 3, 2008

Decision No. 306 May 28, 2009

Allocation of assistance

electricity vs. natural gas

Electricity-55% Natural Gas-45%

Electricity-70% Natural Gas-30%

Electricity-70% Natural Gas-30%: 20% of households w/ gas meter 5% of households w/o gas meter

Income threshold to qualify for assistance



Equal or less than 50% of official minimal monthly salary

Equal or less than 50% of the average monthly wage prevalent at the place of residence

Usage indicators-electricity

Natural gas service available





Usage indicators-electricity

Natural gas service unavailable





Usage indicators-natural gas

Natural gas meter absent

April-September 10 m3/person (up to 6 people) October-March 12 m3/person (up to 6 people)

April-September 10 m3/person (up to 6 people) October-March 12 m3/person (up to 6 people)



Usage indicators-natural gas

Natural gas meter present





Regional Commissions’ fees

Office expenses-0.1% Stimulus package for the commission-0.5% Computer-related expenses-1.0% (2005 only)

Office expenses-0.1% Secretary of the Commission salary-0.5% “Amonatbonk” fee-1.0%

Material and technical expenses-1.0% Computer equipment-0.5% Secretary of the Commission’s salary-0.5% “Amonatbonk” fee-0.8%

Material and technical expenses-1.0% Computer equipment-0.5% Secretary of the Commission’s salary-0.5% “Amonatbonk” fee-0.8%, including return of excess deposits


APPENDIX 4 – RESULTS FROM THE DISTRIBUTION CENTRE SRVEY

Appendix 4: Results (totals) from the Distribution Centre Survey

Month

Number of low-income

households participating in the assistance

program

Total amount of electricity used by

low income households (shown in column 3) during

the month [kWh]

Number of low-income households

participating in the assistance program who do not pay for electricity on time,

including using program funds

Total amount of electricity that was not paid for by low-income households participating in the

assistance program [kWh]

Number of low-income

households participating in the

assistance program receiving payments in cash

Number of program violations

Total value of improperly claimed

assistance as a result of program violations

(see column 8) [Somoni]

2 3 4 5 6 7 8 9

7/1/07 249,621

38,847,915

-

1,342,801

124,327 - -

8/1/07 258,358

37,924,508

-

972,311

124,427 - -

9/1/07 254,425

40,918,014

-

890,667

110,389 - -

10/1/07 248,610

49,294,128

-

1,284,977

110,361 - -

11/1/07 269,333

50,926,593

-

447,168

111,590 - -

12/1/07 270,562

48,914,599

1,245

3,216,540

115,165

1,245

5,976

1/1/08 247,900

57,147,895

-

323,833

112,850 - -

2/1/08 239,960

51,009,758

-

60,205

112,015 - -

3/1/08 240,106

46,889,906

34,449

2,703,228

89,631

5,751

36,806

4/1/08 228,671

33,460,156

36,266

2,592,087

83,037

5,751

36,806

5/1/08 247,853

40,537,717

-

497,909

106,911 - -

6/1/08 237,023

38,110,714

-

641,193

107,358 - -

7/1/08 235,788

33,678,388

3,048

1,568,290

109,062

542

3,902

8/1/08 156,467

24,123,075

3,840

1,165,115

78,791

3,840

27,648

9/1/08 141,072

21,150,216

3,857

572,132

72,195

3,857

23,054

10/1/08 138,508

23,261,269

3,857

788,793

89,050

3,857

37,027

11/1/08 137,497

27,845,872

4,176

1,077,559

85,385

4,176

40,090


APPENDIX 4 – RESULTS FROM THE DISTRIBUTION CENTRE SURVEY - CONTINUED

12/1/08 149,005

33,451,039

4,176

1,242,809

84,748

4,176

40,090

1/1/09 123,907

33,472,647

1,050

563,983

77,378

1,050

15,750

2/1/09 119,171

29,806,329

7,654

363,017

68,481

2,330

34,950

3/1/09 104,659

19,287,912

12,651

847,973

66,760

1,824

34,950

4/1/09 103,840

18,139,203

12,651

902,805

65,712

1,824

16,416

5/1/09 57,232

6,644,028

18,300

898,199

27,082

1,860

16,740

6/1/09 56,932

7,470,883

18,068

879,030

27,082

1,860

16,740

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