Project number:


Business sector:

Power and energy

Notice type:


Environmental category:


Approval date:

31 Oct 2006



PSD disclosed:

02 Nov 2006

Project Description

The proposed project involves acquiring common shares in the public offering of OGK-5, one of the six thermal wholesale generating companies operating in the Russian electricity sector created during the restructuring of RAO UES. The proceeds of the public offering are for priority capital investment needs of the company, mainly for rehabilitation of existing four power stations and preparatory work for prospective new plants.

Transition Impact

The proposed project is consistent with the Bank’s Energy Operations Policy in promoting private sector participation and competition in the power generation sector. The project also is in line with the Bank’s Strategy for Russian Federation in supporting power sector reforms and competition as the main priorities for the Bank’s activity in the energy sector in the country.

The project will be a next logical step in the Bank’s involvement in the Russian power sector reforms which began with the RAO UES Restructuring Loan of 2001. To date, the Bank financed the key market infrastructural investments, such as the System Operator, Federal Grid Company and modernization of Volga Kama hydro cascade (Hydro OGK), as well as major regional electric utilities (Mosenergo and Lenenergo). Today the reforms have come to a point where the interest of private investors to the sector will be one of the determining factors of the overall success of the reforms. Hence, the next key step in supporting the reforms for the Bank is facilitating the involvement of private investors.

The project has substantial transition impact. The transition impact of the project comes from the following sources:

Promoting private ownership
The project will lead to a substantial increase in private ownership of OGK-5, one of the first Russian power generators slated for privatisation. The ordinary share offering will constitute 14.4 % of OGK-5 share capital. If successful, the share issue will demonstrate that private capital can be used to finance rehabilitation and restructuring of power sector in Russia. In addition, the success of the offering and the presence of EBRD are expected to increase the attraction of this Company to strategic investors looking to enter at the next stage of privatisation of 25% block of shares.

Demonstration effects of successful restructuring
The funds raised through the planned share issue will provide essential support for the ambitious restructuring and modernisation programme undertaken by OGK-5. The programme foresees improving heat rates in existing power plants to increase their economic efficiency and commissioning of new generation assets based on the latest technologies.

Corporate governance
At the moment 87.67% of shares in OGK-5 are owned by RAO UES. This will decline to around 75% following the share issue. A strategic block of 25% will be sold in the next year with the intent to attract a strategic investor. Further fragmentation of the shareholding structure is expected when RAO UES shares are transferred directly to its current owners on dissolution of the company. Significant presence of minority shareholders will require OGK-5 to improve its corporate governance standards and put in place mechanisms capable of protecting interests of minority shareholders. The Bank will seek to engage in close dialogue in this area and sign a Memorandum of Understanding that would outline the most important measures necessary to implement adequate corporate governance standards.

Standards for Business Conduct
The project is expected to contribute towards improving environmental standards in OGK-5 and bring them closely in line with international best practice. The Bank will sign a Memorandum of Understanding with the client outlining the Environmental Action Plan that would commit the Company to the use of best available techniques of environmental management. The share issue will also support some of the currently planned environmental investments. In addition, OGK-5 is considering the possibility of selling its pollution quotas under mechanisms established by the Kyoto Protocol. If State Duma ratifies the Kyoto Protocol allowing for such a sale, the Bank will seek to assist the client in implementation of this programme.


The Client

OGK-5 is one of the six thermal wholesale generating companies created during the restructuring of RAO UES in September 2004. Its structure was finalised in April 2006. The company’s installed capacity is 8.67 GW, which accounts for 4% of the total Russian generation capacity. The Company’s electricity production constitutes 3.8% of the total electricity production in Russia.

EBRD Finance

Acquisition of up to 10% of common shares in an open subscription at the final offering price of USD 0.09 per share. Final allocations to be announced by OGK-5 on November 15-20, 2006.

Total investment not to exceed of USD 45.9 million.


Project Cost

USD 459 million.

Environmental Impact

The project has been screened as C/1, requiring a corporate Environmental Audit. The main environmental risk is associated with the actual environmental performance of the generating assets and future requirements for upgrade to meet both Russian and international (such as EU) environmental standards, notably in terms of air emissions at the coal fired facility. These are likely to be associated with significant capital expenditure requirements which may affect the value of the Company.

The Company has undertaken a number of investments in the past and based on information obtained it is believed to be in compliance with current Russian environmental standards. Nevertheless, environmental risks and liabilities have not been appropriately assessed as part of the prospectus, and the prospectus indicates that future environmental investments as well as liabilities are an unquantified risk. The overall nature of a Public Offering severely limits the Bank's ability to conduct due diligence and agree prior to an investment any action plan to achieve ERBD Environmental Policy.

In order to meet Bank Policy requirements, the Company and its advisors have agreed to allow limited due diligence to be undertaken prior to subscription, and have also agreed that they will commit to implementing an environmental action plan (EAP). A draft of such an EAP has been prepared and this will be further reviewed and revised as part of a top level Environmental Audit prior to subscription. An external international consultant has been retained to undertake this top level Environmental Audit, inclusive of site specific visits to all four generating plants. This will allow for an assessment to be made of the environmental risk and liabilities and further tailoring of the EAP. The EAP is focused on environmental investments to ensure that all generating assets meet Russian and EU environmental standards (such as the Large Combustion Plant Directive) within a reasonable period of time. Furthermore, all new generating assets will be structured to meet Russian and EU environmental standards.

The Bank will undertake systematic annual monitoring visits of the company to check progress in terms of implementing the EAP.


Technical Cooperation


Company Contact

Olga Ovchinnikova, OGK-5

Email: ovchinnikova@ogk-5.com



Business opportunities

For business opportunities or procurement, contact the client company.

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