Neither hot nor cold: Gazprom top managers and Novgorod officials use the housing and public utilities sphere to enrich themselves
Novgorodskaya Heat Company, with support of local authorities, has captured the Veliky Novgorod heat market and pushes the consumers towards debt pit.
Housing and Public Utilities (HPU) – this abbreviation sounds like a curse. This is, probably, the most ineffective, clumsy, and costly system in Russia. Like black holes, HPU enterprises absorb money from all possible sources. Any laws are useless here – legal, economic, and even basic logic laws. A glaring example is Novgorodskaya Heat Company.
Beginners are lucky
As of today, Novgorodskaya Heat Company is the largest heat provider in Veliky Novgorod and its region. The company has been dominating on the Novgorod market since its foundation in 2013. How could it be possible? Prior to 2013, heat in Novgorod used to be distributed and supplied by Nozhilkommunservice State Regional Unitary Enterprise and then – by a cognominal limited liability company. Both entities went bankrupt, one by one, – and these bankruptcies raised lots of questions. In 2007 the Novgorod Regional Prosecutor’s Office has initiated a criminal case against Evgeny Shumilov, the Principal General of Nozhilkommunservice Limited Liability Company and the former head of the cognominal state enterprise. Shumilov was accused of deliberate bankruptcy and pseudo-entrepreneurship and later found guilty of these crimes. Apparently, the bankruptcy of the limited liability company was not 100% transparent, too.
On April 25, 2013 all assets of Nozhilkommunservice State Regional Unitary Enterprise, Nozhilkommunservice Limited Liability Company, and Novkommunservice Limited Liability Company have been leased to Novgorodskaya Heat Company that was founded two months earlier. Of course, there was no tender to select the best leaseholder. According to the lease contract, the monthly rent was 2.8 million rubles – such a small amount was paid for renting the vast majority of the regional heating infrastructure. At the time of contracting, the total cost of rented assets exceeded 1 billion rubles.
The luck of the newly-created company has continued. After getting the huge infrastructure virtually for free, the company began receiving huge profits thanks to the local authorities. Because the federal government restrains – with variable success – uncontrolled utility price hiking for the population, local businesses have been chosen as the ‘milking cow’. Entrepreneurs of the Borovichi district were the first to feel the ‘wind of changes’. A year before the triumphal arrival of Novgorodskaya, the heating rate for legal entities was 1.4 thousand rubles per gigacalorie – while in 2013 the businessmen found the rate of 3 thousand rubles per gigacalorie in their invoices. This innovation was very detrimental for Borovichi due to two reasons: (1) well-developed gas infrastructure in the district; and (2) differential tariff rates. Gas is an energy-efficient fuel, and the prices on heat produced by various boiler facilities in the Borovichi district were pretty humane. Such inequality was pronounced the universal evil and replaced with a ‘fair tariff leveling’: tariffs of Novgorodskaya Heat Company have been raised to the maximal price cap.
Growth of heating tariffs in the Borovichi district
No warmth at all
The new heating tariffs hit Borovichi businesses really hard. On a business summit organized by Opora Rossii (Backbone of Russia) All-Russian Public Organization of Small and Medium Businesses, the entrepreneurs have discussed the extortionate tariffs putting them on the brink of ruin. The hotel business, for which winter is the ‘dead season’, suffered most of all. Novgorodskaya Heat Company was dealing shortly with those unable to pay the invoices promptly: in the middle of winter it turned off heat and hot water in two Borovichi hotels. Both owners stated that their contacts with Novgorodskaya did not indicate prices – the tariffs have been increased after the heating season start.
Budgetary institutions had the same issues – and not only in Borovichi. The majority of debtors among state institutions are schools. Based on court documents analysis, the average sum of their arrears is 250–300 thousand rubles. But some institutions have accrued, in fact, unbelievable arrears; for example high school #7 owes more than 822 thousand rubles. The Central Polyclinic of the Novgorod Region owes the newly-created monopolist even more: the court has ruled that it must pay over 885 million rubles. We would like to note that prior to the arrival of Novgorodskaya Heat Company, all these institutions never had large utility arrears. The total number of arbitration cases related to utility arrears collection is almost one thousand. All these cases originated after the tariff hike in 2013.
Vladimir Alekseev, the Chairman of the Borovichi Municipal Duma, told at the above-mentioned business summit that the district budget has lost 10 million rubles due to the growing tariff rates – while these funds could be used for heating network maintenance. Especially taking that the heat distribution network requires not a simple repair, but total reconstruction. And while Sergey Mitin, the Governor of the Novgorod Region, speaks of multi-million investments into the heating infrastructure made by Novgorodskaya, Anatoly Trofimov, Deputy Head of the Borovichi Municipal District, speaks of total heating network deterioration. Only during the heating season of 2013–2014, there were 150 pipe bursts. According to Trofimov, utility providers were lucky because the winter was mild; if there were severe frosts, the number of bursts would increase severalfold.
The budgetary institutions, of course, keep silence despite all this mayhem. The businessmen have addressed the Prosecutor General’s Office and gathered over 6 thousand signatures on the Petition to the President of the Russian Federation against the tariff hike. No result. Meanwhile, Governor Mitin continued his innovations. On December 28, 2015, an Order of the Governor of the Novgorod Region #451 was published; it has made life in the region even more complicated and joyless than before. Finally, the Governor’s hand reached residents’ pockets. According to the Governor’s order, heating prices for Borovichi district residents have increased by 8%, while in the Khvoinaya district they jumped by 40%. Now Novgorod region residents treat ‘subsidized’ utility rates as a mockery.
Dreams come true
Novgorodskaya Heat Company has a totally different view on utility subsidies: these are beneficial for it. It might seem weird, but the company charging the highest rates and controlling the regional heat market is subsidized by the regional budget. According to Transparency International, in 2014 Novgorodskaya Heat Company received 760 million rubles as a compensation for utility providers’ lost income.
Subsidies to Novgorod region utility providers for lost income
The total amount of compensations paid to utility providers for lost income in 2014 was some 982 million rubles. Therefore, the almost thirty remaining utility providers of the Novgorod region received in total only 222 million. The financial report of Novgorodskaya Heat Company for the year of 2015 also provides some very interesting information. The Income Section includes a special ‘Subsidies’ account with the total amount over 1 billion rubles. This is more than haff of the company’s annual income.
Financial report of Novgorodskaya Heat Company for the year of 2015
The extensive support provided by the authorities to Novgorodskaya Heat Company has strong reasons behind. The company is controlled – via a long chain of legal entities – by Gazrpom top managers. The only owner of Novgorodskaya is Nordenergo company, which, according to SPARK-Interfax, belongs to Ilia Shabalenkov (51%) and Aviton company (49%). Aviton belongs to above-mentioned Shabalenkov (25%), Andrei Ishenko (60%) and Sergey Kazakov (15%). All of them are – either directly or indirectly – co-owners of Severnaya Kompania (North Company): 25% belong to Shabalenkov, 26% – to Kazakov, and 49% – Aviton. All these business structures are closely related to Novgorodskaya Heat Company. For example, Severnaya Kompania has provided to Novgorodskaya two loans in 2015 ( loan #1; loan #2) for the total of 600 million rubles. Nordenergo is a contractor for Novgorodskaya: it builds boiler facilities and provides service maintenance.
At the first glance, there are no links with Gazprom here – but only at the first glance. Aviton and Severnaya Kompania win Gazprom tenders on the regular basis. Delovoi Peterburg (Business St. Petersburg) newspaper states directly that Aviton is an affiliate of Gazprom. According to the newspaper, Aviton’s share in the charter capital of Peterburggaz-Engineering company – acting under the Gazprom brand – is 49.7%. The management of Novgorodskaya Heat Company includes many people close to Gazprom. For instance, Andrei Belov, the Principal General of Novgorodskaya, has the same position in Gazprom Mezhregiongas Veliky Novgorod and in Gazprom Gazoraspredelenie Veliky Novgorod – while his deputy Gleb Vasenev is the head of Nordenergo. These links with the principal state corporation of Russia are the reasons behind all the support provided by regional authorities.
Nordenergo company management
It is unclear, however, how the budget funds are being spent if the heat distribution network in the Borovichi district – one of the most profitable districts for Novgorodskaya – is almost destroyed? First of all, Novgorodskaya Heat Company has always been using a questionable acquisition scheme which could be also used for withdrawal of endless budget subsidies. Secondly, the heat supplier provides generous remuneration and social benefits to its employees. For instance, in 2015 the company spent on salaries and, apparently, various bonuses – under disguise of production, management, and subscriptions costs – 213 million rubles out of the 262.7 million rubles. And 99% of expenses incurred by the so-called subscriptions department are salaries. Financial reports for previous years show the same picture.
With regards to the acquisitions: according to Transparency International, since 2013 and until now Novgorodskaya Heat Company has conducted dozens of tenders involving suspicious companies – most of them were dummy firms – for the total cost over 600 million rubles. There is no point to list all these companies here, especially taking that 500 million rubles out of the above amount have been awarded to only 6 companies. Largest tenders have been won by Garant Severo-Zapad (Guarantor North-West) company. It participated in f our multi-million tenders and won them all. Three of these tenders were competition-free.
Other favorites of Novgorodskaya Heat Company are: Averus, Stroybaltsnab, Omega Stroy (liquidated), Teplovoe Obespechenie (Heat Provision), and SMU Na Veka (Building and Construction Department for Centuries). Reputations of all these companies are pretty suspicious. First of all, they have no other clients, except for the Novgorodskaya Heat Company; none of them had operated or even existed before its creation. The only company out of these six – Averus – can be located at its legal address. Some other contractors for Novgorodskaya have the same signs of dummy companies. Competition-free tenders and rejection of unwanted applications due to phony reasons – these are the favorite tricks used by Novgorodskaya to ensure victory of its ‘pocket’ companies. For example, in the tender to supply Thermotechnik boilers, Novgorodskaya wanted to award the contract to Averus so badly that it found reasons to decline more beneficial proposals – although the Izhevsk Boiler Plant offered to supply the boilers at half-price. The customer acted similarly in a tender to supply fans and smoke exhausts where its other ‘pocket’ firm – LOTOS Group of Companies – participated. Although Energo VN offered a better price, the dummy company has won the tender.
Equipment provision proposals
The list of ‘shady’ acquisitions is endless, but the two examples above are sufficient to understand the general scheme. Novgorodskaya Heat Company gains enormous profits from governmental subsidies and overpriced tariffs (which are also paid from the state budget when it comes to governmental institutions) – and then transfers these sums – via shady tenders – from the business to managers’ pockets. Apparently, another ‘surprising’ bankruptcy is about to occur in the Novgorod region soon – there are lots of people working in Gazprom, and everybody has his own needs and dreams.