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CEO of the investment company

Concorde Capital

18

March 2016

06:46 PM

What to expect from the Ukrainian privatization?

Given the huge legacy of the Soviet economy, in 24 years of independence Ukraine managed to attract only 64 billion hryvna from privatization of its assets.

This figure corresponds to the three-month budget of the Pension Fund. At that, more than a half of total revenues generated only two objects: Ukrtelecom and Kryvorizhstal. It is safe to say that the successful sale of state assets is the exception rather than the rule.

The lack of any privatization strategy and a plain political will led to a permanent disruption of privatization processes. As a result, privatization plans were fulfilled only four times in the history of Ukraine. Their failure was a current practice.   

 

Recent years have been no exception. As the experience of Kryvorizhstal shown, a successful privatization can give serious grounds for awarding its organizers as historical figures of our young country. In this sense, the new government has a lot of opportunities – is another matter whether it will be able to use them?

 

How to sell?

In February, following adoption of the “progressive” privatization law, the country have got a chance to improve this shameful statistics. Now, the State Property Fund would have not valid   arguments not to privatize.

The new law is really progressive, at least because it allows the SPF to attract independent high-paid consultants for preparation and sale of its assets. This should bring the process to a new level, and potentially improve the sale price.

Of course, high-paid consultants are not a panacea – a lot depends on such “particulars” as the investment climate. Here, everything is very bad. Take, for example, our President who cannot find buyers for his confectionery business.

But even with unfavorable climates one may find a good buyer, especially if the attraction of an object depends on the vendor. Examples are the objects of the Ukrainian power sector (Centrenergo, large regional power companies). It is an open secret that these highly regulated companies can be sold better, if a buyer sees money-making opportunities. In particular, we should:

– liberalize the wholesale electricity market;

– implement a new incentive tariff system for power companies.

Here we can recall the successful experience of privatization of such facilities in Russia in 2006-2008.

There are other “little things” that can ruin a good initiative. For example, today they widely discuss the possibility to oblige the Centrenergo buyer to purchase the state coal. Vuhlehirsk Power Station of this company, located in Donbas, can burn 3 million tons of coal per year. At that, all state-owned mines of Donbas produced less than 2 million tons last year. It turns out that to fulfill its commitments, Centrenergo has to carry the state-owned coal in the Donbas from the west of Ukraine (by the way, the state coal in principle is not suitable for other power stations of Centrenergo). Obviously, such obligations can not in any way contribute to the competitiveness of Centrenergo and its attractiveness to potential investors.

In any case, new legislative initiatives are some kind of breakthrough, capable to customize the quality privatization process. But, as always, implementation of this process is at high risk.

 

What do we sell?

From among all the objects the state is ready to sell now, only a few companies are really bright: Odessa Portside Plant, Sumykhimprom, Centrenergo, Zaporizhzha Regional Power Plant, and Kharkiv Regional Power Plant. It is noteworthy that from three dozens of public companies having the revenue above 1 billion UAH, Ukraine today is ready to privatize only eight.

The idea that many of the state-owned companies represent a strategic value for Ukraine is quite controversial (Ukrtransgaz, Energoatom, Ukrhydroenergo, Ukrzaliznytsia). For example, in the Czech Republic and France, nuclear power plants are controlled by private companies, in the United States railroads and pipelines were always private – and none of the Czechs, Americans and Frenchmen feels any discomfort about it.

In this regard, it is unclear why the government holds on control packages of Turboatom, Electrotyazhmash, Ukrposhta, Zarya-Mashproekt, and Seaports Administration. And what is the benefit for the state of the controlling stake in scandalous Ukrnafta? But these companies would have become the truly stellar examples of privatization, as good as Kryvorizhstal.

Let’s presume, is not the best time for the sale of state-owned banks or Ukrhazvydobuvannia.  But here it is not necessary to delay the sale process.

The benefit of these total sales is not only money that the Ukrainian budget can get. I dare to suggest that the full deregulation will be the most significant contribution to the fight against corruption in Ukraine, as well as optimization of the government’s administrative costs.

As soon as Energoatom, Ukrhydroenergo, Ukrzaliznytsia, Ukrtransgaz and Ukrhazvydobuvannia and other “Ukr …” become private – would be much less room for public corruption, disappears the need for the various “gray cardinals” of power.  And instead of “base for stealing” we will have French / German / US operators of nuclear power plants, railways and pipelines. Moreover, our ministries and departments (instead of wasting resources on finding managers for specific assets) will finally be engaged in their main job: to make our lives better. In addition, with elimination of the “state-owned company” concept many departments and agencies will just disappear.

Currently, we sale assets the “old” government had not realized – OPP and some power facilities. The income from sale of these objects (at least in dollar terms) will be much lower than you could get a few years ago.

Also quite significant in terms of potential revenues are plans of the State Property Fund to sell 25% -41% packages in 11 power and coal companies. The potential value of these packages is up to 4 billion hryvna. But there is one major drawback – the main private owners do not need these packages, since they are already in full control of companies. Furthermore, the majority of these packages belong to DTEK, which faces serious financial difficulties and negotiates with foreign investors on debt restructuring. To spend several billions hryvna for purchasing small packages would be regarded as unnecessary luxury, undermining the company’s position in eyes of its creditors. Other prospective investors are less interested in these assets – they hardly to offer a good price.

In general, the plan to get 17 billion hryvna from the privatization proceeds in 2016 does not look very realistic. To fulfill such a plan we’ll need a new, “fresher” set of assets, and not only the updated law on privatization.

 

 

http://www.business.ua/opinions/chto_ozhidat_ot_privatizatsii_po_ukrainski-283584/

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