Big plant on sale block for small price

Print version
April 2, 2010, 1:19 a.m. | Business — by John Marone

Luhanskteplovoz, a state-owned locomotive manufacturer, has been at the center of privatization scandals in recent years. The government said the plant will be auctioned again at a starting price of $50 million (Ukrinform)

One bellwether of a government’s transparency, accountability and commitment to end corruption is how it sells off state assets. So far the team of new Prime Minister Mykola Azarov looks like it’s off to a bad start with respect to privatization sales. Luhanskteplovoz, a lucrative state-owned locomotive maker, has once again been put on the auction block by the government. But the starting price of $50 million for a 76 percent stake is at least $75 million less than the prized asset’s market value, raising concerns. The cash-strapped Ukrainian state needs all the money it can get and, if Luhanskteplovoz is underpriced, its sale will cast a shadow on the fate of other valuable assets awaiting privatization.

To make matters worse, some fear that the plant, which in the past has drawn interest from the likes of German electronics giant Siemens, has become a sweetener in the new cabinet’s ongoing gas negotiations with the Kremlin. Businessmen in Russia are also interested in Luhanskteplovoz.

Azarov and his patron, President Viktor Yanukovych, have assured Western investors that they are ready to support an open market economy and root out corrupt practices. The need to win international financing, public and private, to help revive Ukraine’s damaged floundering economy is seen as a powerful driving force for these government promises.

But the possible return of shady privatization practices raises alarming questions, namely: Is the Yanukovych-Azarov team merely dusting off the playbook of the crooked 1990s by telling outsiders everything will be on the up-and-up, while in reality they will do whatever their ruling Party of Regions wants to do with state money and assets?

The Luhanskteplovoz development recalls the infamous days of their former patron, ex-President Leonid Kuchma, when billions of dollars worth of state gems were sold for a pittance to well-connected oligarchs. Many think they now have a strong hold of the government as well as the economy. There was hardly a transparent or competitive transfer of the nation’s most valuable assets to private hands during Kuchma’s decade-long rule.

“It looks like they are stepping on the same rake,” Andriy Kozhemyakin, a privatization watchdog and lawmaker in the opposition faction of former Prime Minister Yulia Tymoshenko, said.

Privatization watchdog and parliamentarian Andriy Kozhemyakin

Luhanskteplovoz was first privatized in March 2007, when Yanukovych was still premier. Although analysts at the time valued the asset at as much as $200 million, it was sold in a last-minute auction that included, essentially, one bidder from Russia for $58 million.

Later, after replacing Yanukovych as the head of government, Tymoshenko had the controversial privatization of Luhanskteplovoz overturned and its shares put back under state control.

Now Yanukovych has returned to power, only this time as president and Luhanskteplovoz is again up for sale. And the price: $50 million.
“This looks a repeat of 2007,” Kozhemyakin said. Back then, other potential buyers were effectively eliminated from bidding by tender conditions tailored to Russia’s Transmashholding.

Although most analysts agree that Transmashholding, as a customer of the Ukrainian locomotive maker, makes for a good buyer, the starting price set by the Ukrainian government is once again surprisingly low.

Ivan Kharchuk, senior analyst of Troika Dialog Ukraine investment company, said a fair price for the asset would be $150 million to $250 million.
Alexander Pochkun, managing partner at the law firm Baker Tilly Ukraine, said a starting auction price should be at least equal to the stake’s market capitalization – or what the stock market values it at (currently around $127 million in the case of Luhanskteplovoz).

“Anything paid by the bidders above the market capitalization is a premium, which reflects how much each bidder individually values the asset,” he said.
So why would the Azarov government, which is faced with the daunting task of reviving an economy that last year witnessed a 15 percent drop in gross domestic product, want to get less instead of more for state assets?

One possible reason could be that the Yanukovych-Azarov Regions Party, which controls parliament, is chock full of eastern industrialists who are primarily concerned with lower prices for the gas they import from Russia.

Azarov and Ukrainian Energy Minister Yury Boyko were in Moscow only last week to negotiate lower gas prices. Neither has clearly explained what Ukraine is prepared to offer Moscow in return.

“I wouldn’t be surprised if this were related to ongoing gas talks. In that case, we can probably expect more of the same down the road,” Kozhemyakhin said.

When Tymoshenko took over the government in 2005, in the wake of Ukraine’s much touted Orange Revolution, she tried to reverse such deals.
The best example of her success was the resale of the nation’s largest steel mill, Kryviy Rih, to Mittal (now ArcelorMittal) for a record-breaking $4.8 billion.

Kryvorizhstal had been originally sold by the state to companies controlled by two of Ukraine’s richest men, Viktor Pinchuk (Kuchma’s son-in-law) and Rinat Akhmetov (also a member of Yanukovych and Azarov’s Regions Party faction) for only $800 million.

A view of Odesa Portside Plant, a state-owned chemical plant put up for sale last year. After it failed to fetch a good price, the privatization deal was canceled by the government. (PHL)

The danger is that other prized state assets -- such as the Odessa Portside Plant, a chemical plant, and Ukrtelecom, the telecommunications monopoly – will be sold off in under-handed ways And with Yanukovych in control of the presidency, the parliament and the government, he can conduct privatizations pretty much the way he wants.

The sale of the Odessa Portside Plant, for example, was opposed by former President Viktor Yushchenko but favored by Tymoshenko when they were in power.

In the end, despite great efforts to get the best price for the asset ($1 billion) – including another nationally televised auction – Tymoshenko ended up cancelling the sale due to what she said was collusion between the bidders.

Ukrtelecom is also a state monopoly being eyed by Western investors with deep pockets, and is also on Ukraine’s privatization list, where it has been for a long time.

New privatization chief Oleksandr Ryabchenko announced last month that the state would sell a 67 percent stake in the asset for nearly Hr 700 million later this year.

The state telecommunications giant Ukrtelecom has been on the privatization list for a long time, but its sale is yet to be scheduled. (UNIAN)

Ironically, Ryabchenko was among those who criticized the first attempt to privatize Lukhanskteplovoz as well as the numerous other controversial state auctions that preceded it under Kuchma.

But Ryabchenko is not talking now, at least to the Kyiv Post for this article. Attempts to reach him were unsuccessful this week.

Kyiv Post staff writer John Marone can be reached at
The Kyiv Post is hosting comments to foster lively public debate through the Disqus system. Criticism is fine, but stick to the issues. Comments that include profanity or personal attacks will be removed from the site. The Kyiv Post will ban flagrant violators. If you think that a comment or commentator should be banned, please flag the offending material.
comments powered by Disqus


© 1995–2015 Public Media

Web links to Kyiv Post material are allowed provided that they contain a URL hyperlink to the material and a maximum 500-character extract of the story. Otherwise, all materials contained on this site are protected by copyright law and may not be reproduced without the prior written permission of Public Media at
All information of the Interfax-Ukraine news agency placed on this web site is designed for internal use only. Its reproduction or distribution in any form is prohibited without a written permission of Interfax-Ukraine.