The international consortium Overcon Enterprise Ltd. hopes to bid again for a stake in Odessa oblast's electricity distribution company after seeing its winning bid for a large stake in the firm struck down by a court, according to the local representative of one of the companies involved in the consortium.
In late July, Overcon appeared about to become the first foreign investor – and the first investor of any sort with known strategic interests in the energy sector – into Ukraine's energy industry when the State Property Fund awarded the consortium a 35 percent stake in the distributor, Odessaoblenergo, via a commercial tender. But a successful appeal to Ukraine's Supreme Arbitration Court by one of the consortium's competitors in the tender, FS Trading Ltd., nullified the victory.
While stakes of several of Ukraine's 27 regional electricity distributors, known as oblenergos, have been sold since the government launched its energy privatization plan in the beginning of the year, investors in these stakes have been financial concerns, rather than strategic energy investors. These financial concerns are for the most part intermediaries working on behalf of nebulous third parties.
The announcement that Overcon had won the Odessaoblenergo tender thus appeared to be a major breakthrough. Overcon, registered in Cyprus, was set up by a group of foreign industrial powerhouses with the specific aim of investing into the power sector in emerging markets.
Instead of a breakthrough, however, Overcon's victory has quickly turned into yet another black mark for Ukraine's privatization program. And it has brought into question the motives of all sides involved in the case.
Management of Ukraine's state industrial giants have a history of playing favorites when privatization time comes around. Often management opposes privatization entirely, unwilling to cede both power and whatever financial boost their management positions might give them. Politicians, for their part, often have their own reasons for preferring one investor or another.
There is no proof that politics has come into play in the case of the Odessaoblenergo tender. But there is some evidence that it has. Volodymyr Katkov, the head of Odessaoblenergo's security department, was quoted by Interfax as saying that sufficient grounds existed for the appeal. Meanwhile, Ukraine's energy minister, Olexiy Sheberstov, told Interfax that the Energy Ministry supported Overcon's victory in the tender.
In fact, Sheberstov was instrumental in awarding the tender to Overcon in the first place, despite the fact that the consortium offered a lower bid. Since the tender was of the commercial variety, the winner should have been the investor with the highest bid, no questions asked. Sheberstov had argued that Overcon's impressive pedigree in the energy field made it by far the more logical investor. But such an argument, while justified in a non-commercial tender, is should not be applicable in a commercial tender.
FS Trading used this discrepancy to successfully win its case in the Supreme Arbitration Court on August 20. The Court ruled that in fact Overcon offered considerably less than money than that offered by the plaintiff, FS Trading.
The defendant in the case was the SPF. Commenting on the case, SPF representative Nina Dvorzhanskaya seemed to agree with the logic of the court. She said that Overcon was chosen because of its investment commitments and because of its experience in the energy field. However, she admitted that FS Trading submitted a higher initial bid. 'Of course, according to a commercial tender that company wins which offers the highest bid,' she said.
Which leaves two questions unanswered. Knowing the rules, why did the SPF go ahead and chose Overcon the winner anyway? And why does Odessaoblenergo seem to prefer the nebulous FS Trading to the proven strategic investor Overcon?
Several representatives of the SPF contacted by the Post refused to comment on the matter. Members of the Overcon consortium, which includes ABB (Switzerland), Mitsui (Japan), Tomen Power (Japan), INA (Italy), Europa Capital Management (Czech Republic), the Inter-American Development Bank (U.S.), CMS Energy (U.S.) and FondElec Group (U.S.), were also hesitant to comment on the affair. The Post was only able to receive comment from one member of the consortium, European Capital Management (ECC).
Describing Overcon as the first reputable foreign consortium to make an investment into the Ukrainian energy sector, ECC Director Vladimir Vishnevskiy said Overcon had in fact offered more money if future investments were taken into account. 'As far as I know, the initial plan of FS Trading was to pay Hr 26 million to the government and commit an additional Hr 49 million in future primary investments. Overcon, on the other hand, offered Hr 23 million to the government and committed to an additional $410 million in direct investments over the next [15-30] years, including $90 million over the first five years.'
Vishnevskiy added that the SPF was justified in choosing the known entity Overcon in this case. 'Odessaoblenergo is a strategic company in the Odessa region. No one wants the blackout of an entire region because of an unreliable company.'
Its activity veiled in secrecy, it is unclear what advantages FS Trading might bring to the table. 'As far as I know FS Trading Ltd. is registered somewhere in Georgia, US, but I am not sure,' opined Vishnevskiy. Both the Supreme Arbitration Court and the SPF refused to reveal any information about FS Trading.
Odessaoblenergo management refused to take sides on the issue in the wake of the Court decision. 'We are a state-owned company; therefore, all questions over privatization are decided by the SPF and the Ministry of Energy,' said Katkov. 'We have no voice at all. It is they who choose the strategic partner.'
In the wake of the Court decision, it is unclear whether the SPF must point blank award the tender to FS Trading, or whether it must rerun the tender. 'It is not clear how to follow the court decision,' says SPF lawyer Marina Sharapa. 'The court has annulled the protocol of the commission that named the winner of the tender. But it does not say whether to annul the whole tender or confer a victory upon the plaintiff.'
Overcon's Vishnevskiy, for one, is confident that Overton will have another opportunity to get its claws on Odessaoblenergo – and confident the consortium will win the next tender. Moreover, if the Supreme Arbitration Court does confer victory upon FS Trading, Overcon will launch an appeal of its own to the Court.
With yet another privatization tender having turned into a debacle, however, one must wonder whether other foreign investors will retain Overcon's high level of commitment to Ukraine.
