You're reading: Ukraine’s privatization plans for 2013 on verge of failing

Ukraine’s State Property Fund will have to kick into high gear if it wants to meet this year’s revenue targets. It is scheduled to sell Hr 10.9 billion worth of state-owned assets in 2013, yet in the first seven months it hit just 1.67 percent of that total plan. That translates into Hr 182.3 million in cash, according to a UNIAN news agency report.

The next big privatization auction is set for Aug. 21, when the State Property Fund plans to sell a 60.7 percent stake in Donbasenergo, an energy generating company. The starting price is Hr 641 million. It suggests that the entire business, which posted revenues of Hr 5.57 billion and a net profit of Hr 30.98 million in 2012, was valued at about Hr 1 billion.

But even if the company is sold successfully, the fund could still likely fall well short of the annual revenue target, because no further big auctions have been scheduled for the rest of the year, according to former head of SPF Oleksandr Bondar.

Failing to meet the target would be nothing new for the SPF, though. In 2012, it sold Hr 6.763 billion worth of state property, which was 67.6 percent of the plan.

Ukraine’s Accounting Chamber, parliament’s financial control body, released a report last week explaining why Ukraine’s privatization has been unsuccessful. Although the legislation for it is relatively good, the process itself leaves much to be desired.

“Some ministries and state agencies failed to submit their proposals on pre-privatization preparation of companies to the SPF in 2012. Enterprises that were set for privatization in 2013 are not in demand, they are unattractive and are performing poorly, and that’s why they cannot provide the inflow of the declared amounts of money into the state budget in 2013–2014,” the report says.

On the other hand, some of the state-owned companies that were prepared for privatization in 2012 were not privatized that year, the Accounting Chamber said. Consequently, the budget failed to get the cash, and the assets might need a reevaluation, which actually requires more money from the budget, the report concluded.

In its 2013 plan the State Property Fund bet on companies like regional energy generators and distributors Donbasenergo, Volynoblenergo and Kharkivoblenergo, as well as Makiivka Iron and Steel Works, Odessa Port Plant, Turboatom and Sumykhimprom chemical works for revenues.

However, most of these companies cannot be sold without receiving a special permit from the Cabinet of Ministers. Others have failed to be sold at earlier privatization auctions. For example, the State Property Fund tried to sell a minority stake in Sumykhimprom twice, but received no bids from buyers whatsoever. Auctions to sell state-owned Makiivka Iron and Steel Works were canceled for the same reason several times.

Bondar says this year’s sales plan is unrealistic. He says it’s hard to predict how much money the fund will make because auctions for the biggest assets, such as the Odesa Port Plant, have not even been scheduled.

Bondar says the actual pool of potential buyers in Ukraine is also extremely limited. “In fact, there are three participants who are now eligible to buy state property. They are SCM, RosUkrEnergo group and the so-called ‘Family’ (a group of young, rich people associated with President Viktor Yanukovych and his elder son Oleksandr). No one else is allowed. Naturally, they have a limited number of financial resources, and each of them thinks that they can wait and (get it) cheaper,” he says.

Bondar believes that if foreign investors were to take part in privatization auctions, the bids would end up higher. But privatization conditions are often set in a way that foreign companies do not qualify or have a disadvantage. In fact, it’s typically clear which local oligarch-backed company can qualify, Bondar says.

His criticism of privatization procedures echoes the Accounting Chamber’s report.

Bondar says that this year’s list of state assets set for privatization has several jewels, including the Odessa Port Plant and energy generating companies.

Donbasenergo, the energy generator and distributor in Donetsk region, is the only one in the pipeline for an auction  —  with plenty of conditions attached.

The successful bidder is required to have produced in the past three years volumes of electricity equal to at least 15 percent of Donbasenergo’s output in the same period.

Alternatively, the company should have produced in Ukraine at least 15 percent of Donbasenergo’s coal consumption in the past three years. It should also own enough coal to be able to supply Donbasenergo for the next five years.

“This company (Donbasenergo) really needs investments. (But) privatization also has to solve the issue of Ukrainian coal sales. That’s our principle — the company should go to someone who is in the field of coal mining here in Ukraine. It is necessary to provide jobs and wages to Ukrainian miners,” Oleksandr Ryabchenko, head of SPF, said, according to the agency’s press statement.

Big energy companies like Rinat Akhmetov’s holding DTEK, Oleksandr Yanukovych’s MAKO and partially state-owned Zasyadko coal mine are among the few that can meet those requirements, but they all said they will not bid.

So far, the only company that has publicly expressed an interest in competing for Donbasenergo is TekhNova, which already rents a number of generation facilities in Cherkasy, Chernihiv and Sumy. However, as of autumn 2012, its owners were hiding behind offshore entities in Cyprus and the British Virgin Islands, according to media reports.

Ryabchenko, however, said that there are two contenders for Donbasenergo, but provided no details.

“Obviously, competition for the privatization of an energy generation company is smaller than the privatization of transporting companies… But there are buyers for Donbasenergo,” he said.

Kyiv Post staff writer Kateryna Kapliuk can be reached at [email protected]