Ukraine's parliament has halted a government plan that would give ownership of huge swathes of Ukraine's industrial sector to two state-owned investment funds linked to the presidential administration.
Following a Sept. 15 parliament resolution that ordered a halt to a massive, month-long privatization auction begun in late August, the State Property Fund issued instructions by telephone to auctioneers to stop accepting bids.
The auction of 399 firms was open only to holders of compensation certificates (CCs), a type of privatization coupon distributed by the state to compensate Ukrainian citizens for savings lost during hyperinflation, among other things.
Just before the auction opened, the government gave all unclaimed CCs – more than 70 percent of the amount issued – to the state investment funds Derzhinvest and Finprom. Since most CCs claimed by individual citizens were cashed in at previous auctions, the overwhelming majority of CCs in play at the ongoing auction are in those two funds' hands.
Also on Sept. 15, the parliament approved a draft law on first reading that would extend the deadline for citizens to collect compensation certificates until the end of February 1999. If enacted, the law would throw into doubt a set of presidential and cabinet decrees that set that deadline at July 1 and afterward gave unclaimed CCs to the two funds.
The suspension order promises a showdown between the parliament and presidential administration, as each jockeys for control of how the unclaimed CCs are to be used.
The Verkhovna Rada's move was a predictable reaction to the government's auction scheme, which clearly runs counter to the CC program's original populist purpose and appears to be at least partly aimed at circumventing legislative controls on privatization.
One of the sponsors of the draft law claimed Kuchma aims to use the state investment funds to finance his 1999 re-election campaign, or, in the event that he loses, as a golden parachute.
Prior to the auction, Kuchma and his successive governments had long tried to scuttle the CC program by auctioning only low-value stocks, which was why more than 70 percent of CCs were left unclaimed.
Following the government's move to collect unclaimed certificates, the State Property Fund rushed through an auction of shares in 399 enterprises, including 93 of Ukraine's most attractive outfits. The book value of share packages offered in the current auction – listed at Hr 647 million – nearly matched the total value of share packages offered in all the 28 previous auctions combined.
The plan was developed mostly in secret, with most of the details not emerging until after parliament went on summer recess in July.
The trading price for CCs on secondary markets was a fair indication of how little interest earlier auctions aroused among Ukrainians. With a face value of Hr 10, they sold at around Hr 1.5. With the announcement of the most recent auction, however, their sale value doubled overnight.
The text of the Rada resolution says that 'any actions with CCs, collected or uncollected by their owners, are forbidden without the consent of the citizens.'
State entities are forbidden by law from bidding in privatization auctions. To evade that requirement, Derzhinvest and Finprom, who reaped about 200 million unclaimed CCs between them, contracted private intermediaries to bid on their behalfs.
In return for the CCs, Derzhinvest and Finprom were to give Hr 10 for each CC to the state budget. A Derzhinvest official said that constituted compensation to citizens.
According to a plan obtained by the Post, Derzhinvest and Finprom would be required to use the revenues earned from sales of their share holdings to make loans to enterprises to cover capital investment and operating costs. In that way, the funds were supposed to gradually increase the value of their holdings and sell all their shares.
However, the process would be virtually unregulated, leaving large scope for opaque deals. Also, the experience of other former communist countries shows that giving large shares of industry to state investment funds impedes restructuring and inhibits growth.
Industry Minister Vasyl Hureyev told parliament during discussions on the resolution and draft law that funds earned from the use of CCs would be channelled to support Ukraine's strategic industry, underwriting, in particular, the manufacture of AN-140 and AN-70 aircraft.
'We cannot find a better solution right now. It was the industrial sector's last hope', Hureyev was quoted as saying by the Interfax news agency.
Observers said it is unclear how the halt would affect bids that have already been cast. By Sept. 14, over 9,000 applications had been received to participate in the auction, mostly from private individuals who had held onto their CCs.
A Western privatization adviser speaking on condition of anonymity said the worst-case scenario would be 'a full cancellation of the auction [after] all the companies had already been bid on.'
The auctions, which put 25 percent stakes of each company up for sale, were conducted on a proportional basis; for example, an individual who bid 10 CCs for a company in which a total of 100,000 CCs were bid would receive 1/10,000 of the 25 percent share or 1/40,000 of the company's stock.
The privatization adviser said the Rada's resolution was on shaky legal ground. 'The Rada is not managing the SPF,' he said. 'Only the Cabinet of Ministers is entrusted with this responsibility.'
It was unclear whether the SPF was carrying out the parliament's orders or acting independently when it issued the halt order to auctioneers. Ukraine's executive branch routinely brushes off parliamentary resolutions as legally meaningless.
If enacted, the draft law extending the deadline to claim CCs would carry real force, but it would probably have to overcome Kuchma's veto and could be challenged as unconstitutional.
The CC auction was originally scheduled to continue until September 22. At press time, it remained unclear whether bids cast before the auction was halted would be considered valid.
