By stalling the privatization of Ukraine’s more than 3,000 state-owned enterprises, the country’s lawmakers risk seeing investors lose even more interest in the country and taking their money elsewhere.
That was the key takeaway from a panel discussion on Ukraine’s privatization investment outlook held by the American Chamber of Commerce on April 19. Business representatives said that they were tired of waiting, while government officials put most of the blame on parliament.
Yulia Kovaliv, the first deputy economy minister of Ukraine, said parliament inaction was the main reason Ukraine’s privatization plan failed last year. The plan had been to sell $778 million worth of state property, but in the end only $7 million worth was sold.
“I can tell you for sure who is derailing privatization – and it’s the parliament,” Kovaliv said. A draft law drawn up by the Economy Ministry that would substantially cut the amount of state-owned enterprises has been rejected by parliament at least five times, she said.
Out of 3,500 state-owned enterprises, half are idle or are not allowed to be privatized, Kovaliv said. The state simply can’t afford to manage so many businesses, which is why the Economy Ministry proposes that the state retain ownership of only 100 enterprises, while privatizing or closing down the rest.
Bad executors
But Ihor Bilous, head of the State Property Fund, said he finds it difficult to cooperate with parliament.
“We’re all good on paper here in Ukraine… We have a problem with execution,” he said.
Kovaliv added that every new government comes up with a new privatization strategy, but little is ever accomplished.
“When I entered the ministry of economy there was the idea of creating a new strategy,” Kovaliv said. “Each ministry team arrives, and the first six months they work on a new strategy, then for three months they try to carry it out. But then, usually, they are fired and the whole story starts again.”
Kovaliv hopes that cycle can finally be broken. She said the new government headed by Prime Minister Volodymyr Groysman is not rewriting the plans of the previous Economy Ministry, but is trying to implement work already done by the reformist team of former Economy Minister Aivaras Abromavicius.
Independent directors
William Laitinen, economic counselor of the U.S. Embassy to Ukraine, said that the United States was keeping a close eye on Ukraine’s appointment of independent boards and directors, which would make state-owned companies attractive to investors.
“Certainly the anti-corruption agenda is huge, and again, you look at some of the troubles that companies have had, just trying to get these independent directors in – that’s the fight that’s going on right now,” Laitinen said.
U.S. investors now want to see a 100-day plan of what the government plans to do with regard to privatization, he said.
New CEOs
On the plus side, the Cabinet approved Polish citizen Wojciech Balczun as the new CEO of Ukrzaliznytsia and Odesa native Igor Smelyansky, who became the CEO of Ukrposhta on April 20. Ukrzaliznytsia is Ukraine’s state rail administration and Ukrposhta is the state postal service.
In the meantime, government ministries are looking for professionals from around the world who could take CEO positions at other Ukrainian state enterprises.
“It’s the first time in Ukraine that we’ve offered competitive salaries to the CEOs of our state-owned enterprises,” Kovaliv said.
Kovaliv, who is a member of the board of both Ukzalyznytsia and Naftogaz, said that she was satisfied with all of the proposed board members of Naftogaz. The three candidates selected are Marcus Richards, Paul Warwick and Charles Proctor, all of whom have worked for more than 25 years for global energy companies.
First privatizations
The first privatization success story might happen relatively soon, Bilous said. The privatization of Odesa Port Side Plant is expected to be completed in July.
An official announcement of the sale of the chemical plant will be made in the second half of May, and the auction will take place at the end of June, he said.
The initial price of the enterprise will be announced on April 22. “After that, it’s entirely the responsibility of the new government to stick to the deadlines… We’ve done everything else,” Bilous said.
Only a controlling stake in the plant will be sold. The terms of selection criteria are simple as well: the investor’s company has to identify its ultimate beneficiaries, providing copies of their passports, as well as state whether the company is under sanctions, and if it is registered in an offshore zone.
There are no requirements regarding investment terms and obligations.
Further privatization plans include six big oblenergoes, or power distribution companies, the privatization of which should start in September and end in December.
Centrenergo?
The State Property Fund has over the past month received the shares of Centrenergo, one of Ukraine’s largest power distribution companies, in preparation for its sale.
But Dale Perry, one of the founders of energy-sector development company Energy Resources of Ukraine, says that there is no clear plan for energy-sector privatization – a plan that serious investors have to be able to see.
“When will Centenergo be put up for privatization?” Perry asked Bilous. “If it’s not until 2018, then we just need to know that, and people will move on, investors will move on and do other things.”
Realistically the privatization of Centrenergo will take place around the second quarter of 2016, Bilous said.
Lines of responsibility
Bilous made it clear that while the ministries and government are responsible for identifying and proposing privatization strategies, the Cabinet itself does not have the authority to execute the privatization program.
“There is only one body in the country that is responsible for preparation and conduct of privatization – that is the State Property Fund,” Bilous said.
Infrastructure Minister of Ukraine Volodymyr Omelyan added that cooperation between the Economy Ministry and the State Property Fund was good right now.
Omelyan’s ministry manages 250 state-owned enterprises, including Ukrzalyznitsia and Ukrposhta, which are now at the stage of corporatization.
Bilous said that the infrastructure ministry needs to hire investment bankers, since once a state-owned enterprise is corporatized, it is no longer a subject of privatization, and therefore the State Property Fund is not responsible for it.
“So whatever non-core assets they have, they are selling them by themselves,” Bilous said.
Asset transfers
For the State Property Fund to privatize state-owned enterprises, it must first receive controlling stakes in these enterprises from the ministries. “We very often have this sort of mid-level sabotage at the ministries,” Bilous said. “The preparation of a company for privatization takes six to nine months for a big company.”
