MainMain

PM adviser warns of evils of cross-subsidization

Ivan Miklos: deformed energy prices create space for corruption.

PM adviser warns of evils of cross-subsidization
Ivan Miclos

An adviser to the Ukrainian prime minister and former Slovak deputy prime minister, Ivan Miklos, has said Ukraine needs to abandon cross-subsidization, which he described as an archaic tool of planned economy.

"Cross-subsidization [the practice of charging higher prices to one group of consumers to subsidize lower prices for another group, often used by state monopolies] creates space for corruption. It distorts the price and does not create the necessary incentives for energy saving. Subsidization as a method is banned in Europe and runs counter to free trade rules," Miklos warned in an interview with the Comments weekly.

Miklos insists that transparent pricing for electricity is one of the key conditions for interconnection of the energy systems of Ukraine and the EU. The waiver of such cross-subsidies is also important to the gas sector, and rail transport, he went on to say.

Miklos noted that subsidies through the distortion of prices is one of the worst possible economic and social policies and stressed that the government needs to clearly convey this to the public.

"Populists abuse the deformation of energy prices, which they earlier established an re-established. It is crucially important that reformers fight populists. It is necessary to explain people why the populist policy is dangerous for the country," he said.

The reformer believes that the demonstration of a direct link between regulated prices and corruption must be the key argument in such a public awareness campaign. He drew an example of Estonia, where energy prices were deregulated immediately after the collapse of communism.

As of 1 May, Ukraine has set a uniform price of natural gas, which is calculated according to the formula based on the forecast of gas prices at the German gas hub NCG. The government has also reduced the rate of gas consumption, which determines the size of subsidies, by around 20 per cent.