Ukraine wants to accelerate privatisation

Natalie Jaresko, the former minister of finance of Ukraine (CC BY-ND U.S. Embassy Kiev Ukraine)

After last year's failure, the Ukrainian government plans a huge sale of state-owned companies in 2016. But critics worry that rather than helping reform the inefficient and corrupt economy, privatisation will strengthen the grip of Ukraine’s oligarchics.

The great privatization push planned for 2015 proved to be a complete failure – out of several hundred listed companies, only a few were successfully sold and the total proceeds only amounted to EUR200m instead of the projected billions. Meanwhile, the International Monetary Fund is insisting on the sale of state-owned assets.

“Privatization remains one of the structural requirements of the program of extended financing for Ukraine – the former finance minister Natalie Jaresko said in January during the World Economic Forum in Davos.

According to an August 2015 poll by the Rating group, almost half of all Ukrainians believe that state-owned companies should not be privatized. Only 1 per cent support the complete sale of state-owned enterprises, 30 per cent believe that only a small part should be sold, and only 12 per cent support the sale of a majority of state-owned assets.

No longer strategic

The Economy Ministry estimated that, in order to satisfy the IMF, at least 25 big Ukrainian state-owned companies would have to be sold this year.

Businesses remaining for sale from the unrealized 2015 privatization projects include 99.5 per cent of shares of one of the flagship companies of the Ukrainian chemical industry – the Odessa Port Plant, 78 per cent of state-owned energy giant Centrenergo, majority stakes in regional power companies – 70 per cent of both Nikolaev Oblenergo and Khmelnitsky Oblenergo, 65 per cent of Kharkiv Oblenergo, 60 per cent of Zaporozhye Oblenergo and 50 per cent  of Ternopil Oblenergo – as well as 99.9 per cent of the Sumykhimprom chemical company.

At the end of February, the State Property Fund of Ukraine, which manages the companies intended for privatization, informed about the preparation of the draft law, under which 44 additional companies were to be to be sold after being removed from a list of strategic enterprises excluded from privatization. These included the Cherkassy Tool Building Plant, the “Bolshevik” factory, Odessa Airlines, the Helij Scientific-Research Institute, the Lviv State Special Design Bureau “Topaz”, the Ukrainian Danube Shipping Company, the Azov Repair Shipyard in Mariupol and the alcoholic beverage factories in Odessa and Kharkiv.

The first state-owned company planned for sale in 2016 is the chemical industry giant Odessa Port Plant – the second largest Ukrainian producer of ammonia and urea, and the third largest producer of nitrogen fertilizers. The State Property Fund will launch the privatization tender on June 30, and the sale is to be completed by mid-August. Company management said the privatization is to be carried out by way of  “an auction with open price offers, and with the winner indicated by the tender committee.”

“It is necessary for the parliament to pass laws that will allow for a more transparent and fair privatization. It is yet another way of attracting foreign investment. I would call it the main way,” declared Arseniy Yatsenyuk at the end of January. Yatsenyuk was replaced as a prime minister in mid-April.

On February 16th, the Ukrainian parliament adopted a law allowing for the privatization of strategic state-owned companies, although a provision excludes Russian buyers.

Oleksandr Riabchenko, the former head of the State Property Fund, said the provisions will not really change anything.

“It is more of a marketing move than a real guarantee. The State Property Fund of Ukraine can exercise influence over who the owner will be for three years from the date of sale, but when the buyer meets all his investment commitments, which usually takes about three years, he can sell the company to whomever he wants. And it can be a company from any country. We have cases where a sale took place and such companies came which originally had no right to buy the plant,” he told the Kiev-based radio station Golos Stolitsy.

Family silver going under the hammer

The government is praising privatization, seeing it as a panacea for the Ukrainian crisis. However, the idea is criticized inside the country. The Property Fund estimated revenues from privatization in 2016 at HRN30bn, which in late February amounted to just over USD1bn, whereas the value of the Odessa Port Plant alone is estimated at between USD600m to several billion.

 Mikheil Saakashvili, the former President of Georgia currently serving as the governor of the Odessa Oblast, who is building his own “Movement for Purification” party in Ukraine, warned that the planned privatization has a great chance of transforming into a process in which the oligarchs take over the most precious “family silver” of the Ukrainian economy for next to nothing. This phenomenon has already been dubbed the prikhvatisatsya — a concept combining the words privatisation and prikhvatit’ , meaning “to steal”.

“The oligarchs are already putting their people in the supervisory boards of state-owned companies in order to facilitate their acquisition,” Saakashvili said on February 26th on the “Shuster Live” political talk show.

In early February Artem Sytnik, the head of the National Anti-Corruption Bureau of Ukraine (the newly created body for combating corruption), reported about the mass-scale siphoning of funds from state-owned companies intended for privatization. He said the purpose was to enrich the thieves and to bring the companies on the brink of bankruptcy, drastically lowering their prices so that they could be taken over by oligarchs for a fraction of their value.

“Why are we paying so much attention to corruption in state-owned enterprises now? Because of privatization. State funds are now being siphoned off through companies from tax havens and fictitious companies, which causes a reduction in the value of the state-owned companies with the aim of their subsequent privatization,” Sytnik said, stressing that audits would be necessary on any sold companies.

Stagnation instead of growth

According to Andriy Pavlovsky, the shadow labor minister during the presidency of Viktor of Yanukovich, ousted in 2014, the state treasury’s stake in the ownership structure in Ukraine is one of the lowest among European countries and is currently at 10 per cent, compared with 33 per cent in France and 30 per cent in Germany. Pavlovsky also pointed to a study by the National Academy of Sciences of Ukraine, which showed that only 5 per cent of privatized state companies subsequently increased their employment and demonstrated better efficiency than under state management. As a result, privatization in Ukraine carries few positive effects, but only deprives the state of income, which is redirected into the pocket of the privileged few, he said.

“The most horrible thing about the privatization launched by the current authorities is not even the fact that under the present conditions strategic and monopolistic companies which are in a good condition will be sold for next to nothing, but that this will further strengthen the economic power of the old and new Ukrainian oligarchs and their influence on the government. As a result, the conservation of the oligarchic socio-political system prevailing in Ukraine today and, consequently, the final destruction of any prospects for the gradual development of our country, will doom us to the role of a raw materials reservoir for the developed countries,” estimated in an analysis for the portal “Hvylya” by Vladimir Lartsev, former adviser to the head of the Property Fund and author of several studies on Ukrainian privatization.

He expected that the privatization of the Odessa Port Plant, which could also find willing buyers in the West, would be carried out properly. However, putting dozens of other state-owned companies on the market in a short time  (including six energy companies and 13 seaports) is designed to enable their acquisition by the oligarchs.

“On the one hand, the simultaneous privatization of the greatest possible number of companies will confuse public opinion, the media and the law enforcement bodies in terms of their response and control of the tender procedures and the inevitable abuses in the sale of state-owned companies. On the other hand, it will allow the state officials and the management of the State Property Fund of Ukraine to more effectively obtain their corruption `commission’. This is the explanation behind the State Property Fund of Ukraine’s latest proposal to remove 44 additional enterprises from the list of companies excluded from privatization. In the conditions of Russia’s war of aggression, the rampant corruption and the third consecutive year of economic decline, they can only be bought by our oligarchs,” said Lartsev.

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