The main battle for state assets, which have become significantly cheaper, will unfold between Ukrainian oligarchs and Russian businessmen.
The Verkhovna Rada has appointed Ihor Bilous as the new head of the State Property Fund. Now, the former head of the State Fiscal Service's primary task will be to deliver, not collect. The Ukrainian government plans to divest over 300 state-owned assets this year. The state has decided to abandon the management of energy assets. The privatization of Centrenergo and the remaining state-owned stakes in regional power companies and city gas companies has been announced. Sumykhimprom and the Odessa Port Plant, the most lucrative pieces of the privatization pie for Ukrainian oligarchs, are once again up for sale. The privatization list also includes strategically important assets for the state—the Danube River Shipping Company and 13 ports are currently prohibited from privatization, and the Cabinet of Ministers has yet to convince lawmakers to allow their sale. This is the third privatization list prepared by Arseniy Yatsenyuk's government. However, so far, nothing has been sold.
Come on in, it's cheaper
The idea of a major sale has already been criticized by some economists and politicians. They claim the government wants to quickly sell off the remaining state assets cheaply to benefit cronies. "The 2015 state budget law sets privatization revenues at 17 billion hryvnias. But the Odesa Port Plant alone is worth twice as much," the former defense minister complains. Anatoly Gritsenko"The government's sales list, in addition to the Odessa Port Authority, offers a whole smorgasbord of options: Sumykhimprom, Svema, a slew of regional power companies, a slew of city gas companies, a slew of coal mines, Ukrtorf, Ukrbud, numerous elite agricultural enterprises with tens of thousands of hectares of fertile land, a ton of real estate in the center of the capital, thermal power plants, hydroelectric power plants, and even strategic seaports are up for sale!"
Investment analysts confirm that, due to the hryvnia devaluation and the country's declining investment appeal, many state-owned enterprises have fallen in value by two to three times. However, they doubt that major Western investors will be tempted by these cheaper assets. "The war in eastern Ukraine certainly deters many potential investors from Europe, but their main fear is corruption, the level of which is currently off the charts here," a senior manager of an international food company operating in Ukraine shares his impressions of his interactions with European businessmen. Systemic changes in tax policy, progress in the fight against corruption, and the establishment of the rule of law remain pipe dreams for businesses.
Experts interviewed by Focus are confident that the main battle for state assets will unfold between Ukrainian oligarchs and Russian businesses operating under the cover of subsidiaries in EU countries.
Low prices for Ukrainian assets alone are not enough to attract Western businesses.
Mikhail Gonchar
Director of Economic Programs at the Nomos Center
All familiar faces
Although Western corporations are showing interest in Ukraine's energy market, they won't risk entering the country until the adoption of an electricity market law establishing rules of the game in the sector similar to those in the EU. A similar law on the gas market was recently adopted by the Verkhovna Rada. "If such a law were in place, low asset prices and a favorable competitive environment would outweigh the investment risks," explains Mykhailo Honchar, Director of Economic Programs at the Nomos Center. Therefore, the main contenders for Ukrainian energy assets remain the same: Russian businessmen Konstantin Grigorishin (Energy Standard) and Oleksandr Babakov (VS Energy), as well as Privat Group, owned by Igor Kolomoisky and Gennady Bogolyubov.
The main battle for major state-owned chemical industry assets—Sumykhimprom and the Odesa Port Plant—will likely unfold between Dmytro Firtash and Ihor Kolomoisky. Last year, the State Property Fund attempted to sell a 7% stake in Sumykhimprom on the stock exchange. The leading contenders were Dmytro Firtash's Group DF and Business Invest, which is linked to Ihor Kolomoisky's entities. Business Invest, which was barred from the privatization tender, managed to halt the share sale, accusing its competitors of creating an unequal playing field for bidders. In response, Group DF claimed pressure from its competitors on the auction organizer. "The sale of major assets now will provoke another redistribution of spheres of influence, which will be accompanied by high-profile scandals," predicts Oleksandr Bondar, former head of the State Property Fund from 1998 to 2003.
Russians may also participate in the privatization of the Odessa Port Plant, which could lead to the tender being blocked for political reasons. The primary raw material for the production of nitrogen fertilizers, the plant's main product, is Russian natural gas. The availability and price of gas determine the company's financial performance. Furthermore, a significant portion of the plant's revenue is generated by the Togliatti-Odesa ammonia pipeline terminal, through which Russian ammonia is loaded onto ships. "We shouldn't expect Western investors to come to the OPP. These will be 'disguised' Russian companies," asserts former Minister of Industrial Policy Valeriy Mazur. From an economic perspective, this is not a bad thing; Russians are capable of providing the plant with affordable raw materials. Another issue is that, in a war situation, our northern neighbor could, for political reasons, block the operation of the country's most powerful chemical plant by cutting off raw material supplies.
Currently, only oligarchs are showing interest in privatizing Ukrainian ports. Port infrastructure is one of the country's most attractive assets. According to the Center for Transport Strategies, the value of Ukrainian ports' grain terminals alone exceeded $3 billion in 2013. "Oligarchs have long since divided up spheres of influence in Ukraine's ports. We're unlikely to see any new names participating in port privatization," says transport expert Alexander Kava.
The creamiest
Focus selected the 10 most attractive assets from the Cabinet of Ministers' privatization list and identified the main contenders for their purchase.
China could theoretically invest in ports. China has long wanted to establish supplies of Ukrainian grain. Recently, the People's Bank of China and the National Bank of Ukraine signed a $2,4 billion swap agreement. It's safe to assume China will be willing to risk this money. "But if real agreements between the countries are reached, oligarch lobby groups in the Verkhovna Rada will block the privatization of the ports," claims one shipping industry insider. This is indirectly confirmed by the parliament's rejection of a government bill, which would have been disadvantageous to the oligarchs and would have abolished the mandatory listing of 5-10% of state-owned enterprises on the stock exchange prior to privatization. "With an underdeveloped stock market, this method doesn't allow for a market valuation of the asset," explains Artur Ogadzhanyan, partner at Deloitte & Touche. This means that currently, this mechanism allows interested parties to purchase state assets at a reduced price.
Patience has run out
Many economists see the logic in the idea of a major sell-off of state assets right now. For example, Oleksandr Paskhaver, president of the Center for Economic Development and presidential adviser, believes that the privatization "blitzkrieg" is a logical consequence of the inability to effectively manage state property. According to a report on the financial performance of state-owned enterprises published by the Ministry of Economic Development, the 100 largest state-owned companies suffered a loss of UAH 74 billion in the first nine months of last year. Less than 30% of enterprises are managed by a board of directors, and only about 40% have undergone an annual audit. "Minister of Economic Development Aivaras Abromavicius has become convinced that attempts to change management at state-owned enterprises are causing strong resistance from Ukrainian financial-industrial groups," Oleksandr Paskhaver explains the government's decision to organize a major sell-off of state assets.
A quick sale of state-owned assets may prove expedient from a purely financial perspective, despite the decline in asset values due to the hryvnia devaluation and the country's unfavorable investment climate (see "The Cream of the Crop"). An economic recovery is not expected in the coming years, meaning asset values will not rise. "Selling unprofitable enterprises now may prove more profitable than maintaining them," believes Oleksandr Borovik, a candidate for the position of Deputy Minister of Economic Development.
Former head of the State Property Fund, Alexander Bondar, is confident that announcements of a large-scale sell-off of state assets are primarily a desire to demonstrate the progress of economic reforms to potential investors. "Approving a list of assets for privatization in 2015 is nonsense," Bondar says. He argues that selling hundreds of state-owned enterprises this year is impossible. After all, the government is launching a complex privatization process involving foreign advisors. According to regulations, the pre-auction preparations will last at least six months. An additional two months are needed to close the deals. Therefore, it's possible that the large-scale sale of state assets will last several years.
The privatization blitzkrieg is due to the state's inability to effectively manage its property.
Alexander Paskhaver
President of the Center for Economic Development, Advisor to the President
It's better to wait.
In any case, economists advise the government to adjust the privatization program to ensure that the state benefits first and foremost. Oleksandr Paskhaver believes the government should make a Solomonic decision: divide assets into "ordinary" and "strategically important." The former should be divested as quickly as possible, while the latter should be held back until the country achieves tangible success in the fight against corruption and the investment climate improves, after which the price of state assets will return to pre-crisis levels. According to the economist, transparent privatization requires judicial reform first—the results of many privatization tenders in Ukraine are still being decided in the courts, so their independence is essential.
Until better times arrive, the authorities should focus on corporatizing state-owned enterprises and appointing management that is not tied to oligarchic groups. "Even if the cost of maintaining executives is comparable to the company's profits, independent top management will be able to achieve transparency in financial reporting and significantly increase asset capitalization within a few years," explains Vladimir Dubrovsky, senior economist at CASE Ukraine.
This is already being done. Recently, Minister of Economic Development Aivaras Abromavicius announced an audit of 47 state-owned enterprises. He is confident that the very fact that the audits are being conducted by companies from the "Big Four" will significantly increase the capitalization of these assets.
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