OREANDA-NEWS. July 01, 2008. The European Bank for Reconstruction and Development is providing 3,1 billion roubles (equivalent to ?84 million) in pre-equity financing to a structure controlled by Russia’s Integrated Energy Systems (IES) as a first step towards a possible long-term investment in OJSC Russian Communal Systems (RKS), the country’s largest private utility operator in the municipal services sector. The EBRD financing can be extended for up to one year, reported the press-centre of EBRD. 

The EBRD funds will be used to pay for the acquisition of a blocking stake of 25 percent plus one share in RKS awarded at a May 22 auction by RAO UES ahead of the scheduled dissolution of Russia’s energy giant at the end of this month. The winning bid at the auction was made by Indville Management Ltd., a Cyprus-registered company owned by IES. Previously, IES owned 75 percent minus one share of RKS.

The transaction gives the EBRD a right of first refusal should IES decide to sell its recently acquired stake in RKS. The Bank will carry out due diligence on RKS and subject to satisfactory findings and completion of a restructuring process at RKS meeting the goals set out in a separate Memorandum of Understanding, the EBRD’s may seek the permission of its Board of Directors to acquire a minority stake in the company.

The MoU’s aim is to encourage good governance and transparent practices at RKS and, as well as an environmental and social action plan, it includes commitments to competitive processes in the acquisition of new concessions as well as obligations to seek the rebalancing of the company’s public sector contracts, which could create the conditions for deeper EBRD involvement.

The goal is to create a world class utility in Russia now that IES’s consolidation of RKS clears the way for the company’s restructuring to be completed. RKS at present operates in 12 of Russia’s regions, providing services to a total of 1,2 million people.

When RKS was established in 2003, it initially acquired long leases on municipal services through direct negotiations with local authorities. At the time Russian legislation did not require local bodies to organise public tender for such services. Ensuring competitive tendering for municipal services has long been a cornerstone of the Bank’s policy on the sector in Russia.

Russia’s Renova group is the majority shareholder in IES, a company established in 2002 which is now the country’s single largest private investor in the power and utilities sector.