Fiscal and Governance Linkages in Eastern European Energy : Enabling Growth and Convergence Through Flexible and Fiscally Accountable Regulation

Eastern Europe is one of the fastest growing transition economies of the world. The post-socialist countries of Central and Eastern Europe, especially the Czech Republic, Hungary and Poland, continue to undergo a radical economic reform program via microeconomic liberalization, macroeconomic stabilization and institutional reconstruction. Privatization has become one of the most important facilitators of this economic and political strategic policy, and together with regulation, targets the gradual emergence of a capitalist market economy. In a centrally planned economy the networked utilities sector were among those most vulnerable to the adverse effects of the attempts at practical implementation of the “socialist economy” dogma. The mono-utility model, which dominated the utility sectors, totally ignored market mechanisms. Privatization, liberalization, and regulation now subject these same industries to increasing levels of competition by applying open-market principles, and therefore challenge the de-monopolization and a complete turnaround of its ownership and governance structure. The main purpose of this paper is to analyze the roll of fiscal and financial relationships in foreign direct investment and the manner in which they support or hinder the privatization processes that lead to restructuring of networked utilities in transition economies. In the utilities sector, continued profit-maximizing growth is dependent upon access to international financial markets. Setting the conditions such that continued growth and development in the energy industries may be challenging, but successful implementation will provide significant gains to investors, consumers, and the state governments alike