With over 100 employees and an annual turnover of over 120 million lei, Megaconstruct is one of the top five large independent distribution operators in the natural gas sector. Active in over 20 communes in 8 counties, the company is expanding, currently running three other concession contracts in Prahova and Constanța. We talked with the general manager of Megaconstruct Cătălin Ivan about the future projects and about the challenges of the moment.
Dear Mr. Cătălin Ivan, Megaconstruct has a long history, and the numbers from the Ministry of Public Finance show a solid evolution, with the doubling of the number of employees in the last decade and not a single year in the red. What is the main factor that has given you this stability during the years?
As you have well noticed, the company has had a spectacular growth in the last decade, generated by an aggressive development of its natural gas distribution portfolio. This generated a 10-fold increase in turnover during this period. The main development factors were generated by the appetite of the shareholders to invest in this sector and last but not least by the professionalism of the management team.
The total length of the networks we operate today is 921 kilometers, in 23 localities (municipalities, cities and communes), in 8 counties. The total number of consumers is about 20,000, of which 19,000 are households.
Legislative changes in recent years and the European funds available now promise a new wave of investment in the development of new natural gas distribution networks. Do you share this opinion?
No, neither I nor my colleagues in the sector share this view. The legislative changes of the last three years have been made without respecting the principle of transparency in decision-making, they have disturbed the market among both operators and consumers. At the same time, these repeated changes, made without an impact study, lead to a lack of predictability in the development of investments throughout the technological flow in the sector (extraction, storage, transport and distribution) and will have the immediate effect of stopping all scheduled and ongoing investments and the entry of companies into insolvency. The defining role of the principle of transparency in decision-making is to increase trust and cooperation between the legislator on the one hand, and society on the other. These latest changes in legislation have repealed perhaps the healthiest principle that a company, be it a state-own company or a private one, should be guided by – the principle of economic efficiency.
The Ministry of European Funds has launched the call for projects for ‘Development of smart natural gas distribution networks in order to increase the level of flexibility, safety, efficiency in operation, as well as the integration of transport, distribution and final consumption activities’, a program worth of 235 million euros, as a start. Are you considering getting involved in building and operating new networks through this program?
Personally, I do not believe that the government program you are referring to will have the expected success in the area of investments in natural gas distribution networks. The way of implementing and accessing these funds excluded from the very beginning the participation of distribution operators as it is addressed mainly to local authorities. This program launched by the Ministry of European Funds is more efficient in the transport area, because an investment can be operationalized quite easily. In the distribution area it is much more difficult to implement a smart system, because it must be operationalized with tens, hundreds, or thousands of networks and delivery points that are supposed to be not very smart at the moment as it is intended to be implemented through this program.
How are the potential beneficiaries of a new natural gas distribution network selected? Is it strictly related to the financing capacity of the initial investment or is it also related to the financial potential of future clients, households or economic agents?
The principle underlying the decision to grant a public service was that of economic efficiency. An analysis of the return on investment based on an estimated income to be generated in a period X of the distribution / supply of natural gas was elaborated. The results of the analysis were presented to the shareholders / bank for financing and a decision was made in this regard. Due to the new legislation, it is impossible to see an investment in setting up a distribution service in a new locality made by a distribution operator from its own funds.
As far as you know the potential customers in the areas where you operate, is there a risk that those who will be connected to the distribution network for free will become bad payers or will not be interested in this type of service from the very beginning?
Yes, there is this major risk, because customers who are not connected today in places where there is a history of operating natural gas distribution grids are generally customers who have low purchasing power and who usually face difficulties in paying current bills. The higher their percentage, the lower the liquidity and the more problems the operator encounters in the operational activity. Another aspect derived from these free connections is that the applicant can choose to make the connection because it is free, without any intention of becoming a gas consumer or for reasons related to the opportunity that the street on which he lives would be modernized. All these unjustified expenses will be found in the distribution tariff that will be paid by all customers connected to the respective distribution system.
About 60% of schools in Romania are not connected to the natural gas network. I assume that similar shares are registered in the case of other public institutions (hospitals, administrative buildings, etc.); on the other hand, the idea of connecting everybody is unrealistic. In your opinion, what is the real potential of connecting new beneficiaries to the natural gas distribution networks?
We do not have these data regarding the share of connection of schools at national level. However, I believe that the low degree of connection is also influenced by the fact that in large cities where most schools are located, they are connected to heat / hot water through centralized RADET-like district heating systems. I think that the connection of a school or a high school would require a fairly large investment in the connection, the installation, the heating unit; as long as the heating agent is subsidized it is more difficult to connect these institutions to the gas network. In the localities where Megaconstruct operates and where, as a rule, there are no centralized heating systems, the degree of connection of public institutions of all kinds is over 90% and it is a priority for local authorities.
What is the advantage (if any) of independent companies, such as Megaconstruct, over the giants that dominate the natural gas distribution market in Romania?
As much as I would like to look for any advantage that we would have against the two major operators, it is almost impossible to find one. The major advantages they have over independent operators stand on the strength of the organizations of which they are part and their funding capacity. Perhaps that is why the Romanian state should have as its main priority the support of these approximately 35 independent operators who today have a market share of approximately 10% and who have invested, built and operate gas distribution systems in over 300 localities and from whom approximately 300,000 consumers nationwide benefit today.
I would also like to point out that the new legislation on the extension of the natural gas distribution network, which forces operators to invest in connections without an analysis or an impact study, leads to massive decapitalization and will force the companies to enter into insolvency, and then to declare bankrupt. And we should also add the obligations imposed by the legislation governing the alert state, whereby operators cannot stop gas supply in the event of non-payment. As a result, they are obliged to finance additional costs as well. No matter how optimistic we try to be, both large and independent operators, we realize every day that the new tasks forced on us by the legislator are unrealistic and will immediately result in the destruction of this important sector for domestic consumers, as well as for the revival of the economy.
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This interview firstly appeared in the printed edition of Energynomics Magazine, issued in December 2020.
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