Ukraine’s privatization authorities continue to sell off attractive state assets in backdoor deals at bargain basement prices.
The government needs cash and wants to show that it’s pushing through market-oriented reforms such as privatization to get it.
But the few deals conducted by the country’s State Property Fund, in charge of selling state assets to private investors, smack of old-style corruption and mean less silver for the national coffers.
Privatization supremo Oleksandr Ryabchenko announced last month that the State Property Fund would sell off the state’s majority stake in Ukrainian International Airlines, the country’s second largest carrier, without an auction.
Oleksandr Ryabchenko, head of Ukraine’s State Property Fund. (UNIAN)
And the price for the 61.5 percent share package in the major airline? No less than Hr 250 million, or about $31 million, Ryabchenko assured journalists on Nov. 22.
Not only does this figure seem low for an airline that posted more than $371 million in sales in 2008, it’s not clear where Ryabchenko came up with the price tag without holding a tender.
But more importantly, the Kyiv Post has learned from lawyers and privatization specialists that the State Property Fund might have been able to auction off the asset in an open tender, despite Ryabchenko’s protestations to the contrary.
Instead they [the State Property Fund] left it [the preemptive right clause] in and now they say their hands are tied and they cannot hold an open auction.”
– Olexander Bondar, first deputy head of the Ukrainian parliament’s special control commission on issues of privatization.
Ryabchenko insisted that the State Property Fund’s hands were tied by the airline’s charter, which stipulates that minority shareholders have the preemptive right, or first dibs, to buy out other shareholders such as the state.
“According to the charter, despite the fact that we have 61.58 percent, our decision [to hold an auction] has to be agreed by at least one other private shareholder,” Ryabchenko told journalists. “We proposed changes to the charter that would allow the sale, but no one supported them.”
But critics of the deal argue that the State Property Fund had a great opportunity to change the airline’s charter while implementing Ukraine’s new law on joint stock companies, which was passed last year but gives companies until April of 2011 to fully comply.
“Instead they [the State Property Fund] left it [the preemptive right clause] in and now they say their hands are tied and they cannot hold an open auction,” according to Olexander Bondar, first deputy head of the Ukrainian parliament’s special control commission on issues of privatization.
A spokesperson at the State Property Fund said the company’s charter prohibits an auction before minority shareholders are offered a chance to buy, and that’s that.
Scott Brown, an attorney at Ukrainian law firm Frishberg and Partners, said that because Ukraine’s new law on joint stock companies does not make the preemptive right clause mandatory, the State Property Fund, as the airline’s majority shareholder, should have been able to take out the clause during compliance changes to the airline’s charter.
During these compliance changes, which turned Ukrainian International Airlines from a closed joint stock company into a private company, long-time minority shareholders such as Austrian Airlines (over 22 percent) and the European Bank for Reconstruction and Development (almost 10 percent) began to make their exit.
At the same time, Ukrainian businessman Aron Mayberg, who headed the supervisory board of Ukraine’s other leading airline Aerosvit until November of last year, began to consolidate his stake in the airline. Repeated attempts to reach Mayberg were unsuccessful.
Mayberg is now to all intents and purposes the only other shareholder in Ukrainian International Airlines besides the Ukrainian state, sources close to the company told the Kyiv Post. Austrian Airlines has already left, and the EBRD is on its way out, the sources said.
During his Nov. 22 press conference, Ryabchenko himself all but acknowledged the advantage Mayberg was given in the company.
No one knows how much the company is worth because it’s never been put up for auction, but if you take into account all the aircraft, buildings and other assets alone, this figure is of course inadequate.”
– Oleksandr Ryabchenko, privatization supremo.
“It would be more profitable for us to sell the share package in an open tender, but not for them [i.e. Mayberg and the exiting shareholders],” Ryabchenko told journalists.
And that advantage will be primarily predicated in the price Mayberg is expected to pay in deal expected this month.
Privatization watchdog Oleksandr Bondar, himself a former State Privatization Fund chief, called the sum of Hr 250 million ridiculously low.
“If they were going to agree a single price with a single buyer, they could have at least made it a fair one,” he said.
“No one knows how much the company is worth because it’s never been put up for auction, but if you take into account all the aircraft, buildings and other assets alone, this figure is of course inadequate.”
The entire airline has been valued in media reports as high as $150 million – Hr 1.2 billion – with internationals such as Lufthansa, Aeroflot, Air France and Turkish Airlines once seen as potential bidders
However, it’s not clear if any of these airlines are currently interested in buying Ukrainian International Airlines or how much debt the state-owned carrier has, Bondar acknowledged.
Ukrainian International Airlines Executive Vice President Richard Creagh said he and the rest of the management are happy with the government’s decision to finally privatize its stake, which is expected to cut bureaucracy and open up new sources of funding.
“I think that privatization will go towards greater growth,” Creagh said, recalling, however, that the expected sale is still not a done deal.
If the State Privatization Fund does sell Ukrainian International Airlines this month, it will still be a drop in the bucket of the government’s loft privatization plans.
The State Privatization Fund had only fulfilled its privatization plan by 9.3 percent, or Hr 588 million, this year as of November, Ryabchenko said during his press conference.
The only way this government knows how to sell assets is through the back door.”– Olexander Bondar, first deputy head of the Ukrainian parliament’s special control commission on issues of privatization.
But more importantly, the sale will represent yet another highly questionable disposal of state assets by the current government.
In June 2010, the government sold a 76 percent stake in big locomotive maker Luhanskteplovoz to Russian Bryanskiy Zavod in an auction for $51.8 million, or almost $7 million less than the same buyer paid for the plant three years earlier.
The 2007 sale had been cancelled by a court decision because the only two bidders were both part of Russian Transmashholding and the sales price was tens of millions of dollars less than the company’s market capitalization at the time.
The State Property Fund has also announced that it will auction off state telecoms giant Ukrtelecom, the country’s monopoly provider of fixed-line communications. However, critics have already pointed out that the tender conditions set by the State Property Fund exclude major international investors who have expressed interest in the asset.
“The only way this government knows how to sell assets is through the back door,” Bondar said.
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Kyiv Post staff writer John Marone can be reached at [email protected].
