You're reading: Odesa Portside Plant’s failed sale dashes bigger privatization hopes

Mismanagement and legal challenges from oligarchs have led to zero bids in the privatization tender for the Odesa Portside Plant, halting the sale of a key state-owned Ukrainian enterprise that was set to be the centerpiece of the country’s privatization program.

The State Property Fund announced its failure to find any potential bidders in a late July 18 press release, writing that “due to the absence of bids, the State Property Fund must declare the tender void.”

Members of Ukraine’s business community – and the government itself – blamed the lack of bids on interference from a number of the country’s oligarchs, who in turn claim that the plant either belongs to them or owes them hundreds of millions of dollars. Others still said that the starting price of $521 million for the factory was far too high to be competitive.

Many in Ukraine’s investment community, as well as the government itself, viewed the plant’s privatization as an opportunity for the country to strike a major blow against corruption in the state sector, and to prove that it is capable of meeting the requirements of Western business. If it is successfully sold to an outside investor instead of one of the country’s rapacious oligarchs, observers say that it will prove the Ukrainian government has moved beyond the corrupt privatization schemes of past years.

“The fact that they prepared for two years and weren’t able to attract buyers is a huge negative,” said Nick Piazza of SP Advisors. “This is disappointing because it’s one of those things that Ukraine could use as a positive.”

State Property Fund Chief Ihor Bilous said in a July 19 press briefing that he hoped the auction would be rescheduled for the autumn.
“We need to find a proper starting price that would be suitable for the majority of investors,” he said.

In a statement to the Kyiv Post, a State Property Fund spokeswoman said that the government’s ability to set the sale price was restricted by Ukrainian legislation. The spokeswoman added that the next sale attempt could see up to a 30 percent discount.

Tender loving care

The Odesa Portside Plant, located in the Odesa oblast town of Yuzhne, 522 kilometers from Kyiv, is the country’s largest ammonia-producing plant. The factory boasts clients from around the world, and is one of the few state-owned properties that generates significant profits. In 2015, the plant posted a net profit of Hr 211 million ($8.5 million).

The factory – which has been a victim of years of alleged schemes – has been at the top of the privatization agenda since the 2014 EuroMaidan Revolution, which brought in a government that named fighting corruption in the state sector as one of its priorities.

The U.S. Embassy, along with the IMF, International Finance Corporation, and the European Bank for Reconstruction and Development have all provided technical assistance to the government in preparing for the sale.

But members of Ukraine’s business community said that in spite of the help, the government set a price far too high for any potential buyer. Ammonia prices have fallen dramatically over the past year, reducing the plant’s potential profitability.

Moreover, the facility is roughly $193 million in debt to the Dmytro Firtash-controlled Ostchem Holdings over alleged unpaid gas deliveries stretching over the period of a few years. In June, a Stockholm arbitration court ordered that any ownership transfer be frozen until the debt is repaid.
“Debts are a normal condition of a company up for sale, any investor understands that if he buys, he will have debt obligations, he takes them together with the company,” said Group DF Director Boris Krasnyansky.

Krasnyansky added that his company could claim up to $250 million from the factory, when penalties are added in.

Scheming

Other corruption-related issues have also complicated the attempted sale.
Two officials from the plant were arrested by the National Anti-Corruption Bureau last week on allegations of embezzling money through a scheme involving overpriced gas purchases from state-run firm Ukrnafta.

The government attempted to privatize the plant in 2009 in an auction that went to Nortima, a company controlled by Privat Group owner Ihor Kolomoisky.

Though Kolomoisky claims to have outbid two other competitors in the auction with $600 million, the State Property Fund later said that it would not recognize the purchase as legitimate. Since the latest attempt at privatization, Nortima has been fighting the case through the Ukrainian courts.
Other legal issues dog the plant as well.

One court case, filed by the tax service, alleges that the plant evaded taxes by marking artificially low costs on its books and records. In another legal filing, Naftogaz claims a debt of Hr 18 million ($725,800) from the company over a November 2014 natural gas supply agreement in which the plant has allegedly not paid for the gas it received.

The supplier in that case – Ukrnafta – is partly controlled by Kolomoisky, who is the beneficiary of companies that control roughly 42 percent of the company’s shares.

Another try?

Piazza, the Kyiv investment banker who said he spoke with many of the potential investors, said that while intimidation from the oligarchs was important, it was the pricing issue that scared away many possible investors.

“The Ukrainian pricing had no connection to global markets” Piazza said. “It’s basic math.”
Another issue stemmed from the government’s failure to guarantee that it would abide by what was written in the facility’s books and records at the time of purchase, Piazza said. Without that guarantee, potential investors would have no way of being certain regarding the financial stability of the company that they were purchasing.

Roman Topolyuk, an analyst at Concorde Capital, said that another tender could take up to “six months or more” to prepare.
“The new starting price might be set at a lower level to induce potential bidders,” he wrote.
Prime Minister Volodymyr Groysman also wrote on Facebook that the government would begin to prepare a new tender.
“We will announce a new competition, for which we will prepare better,” Groysman wrote.

State Property Fund Chief Ihor Bilous. (Pavlo Podufalov)