Ukrainian Privatization is on the Rise

In early April, the Board of Directors of the International Monetary Fund, after a brief stand-by, decided to allocate to Ukraine a fourth credit tranche of USD 1 (one) billion. The bilateral Memorandum implies ensuring economic growth by the Ukrainian Government through implementation of structural reforms. By the opinion of the Ministry of Finance of Ukraine, this tranche serves as a confirmation of the fulfilment of earlier obligations given by the borrower to the Fund, and gives hope for further reforms.

One of the key sections of the Memorandum is devoted to the privatization of state-owned enterprises of Ukraine. The IMF drew the attention of the Ukrainian Government to the fact that the privatization process is currently practically frozen. The Ukrainian party believes that it was not only due to subjective reasons, but objective ones as well. In particular, the failure of privatization of the largest chemical enterprise in the country, the Odessa Port Plant, is explained not only by the large debt of the plant for the used gas, but also by the decline in world prices for fertilizers produced by the OPP and increase in energy prices.

The main requirements of the IMF in the privatization sphere concerned the legislation improvement, which currently allows the stakeholders in Ukraine to artificially delay the process of selling the state-owned property. One of the first persons who pointed out this issue on the part of Ukraine itself was the Head of the State Property Fund (SPF) Ihor Bilous.

At the end of 2016, Mr. Bilous, a former investment banker (since 2005, worked in the Swiss UBS AG) who was invited into the Government to carry out reforms in privatization, made a statement that directors of a number of state-owned enterprises were actually sabotaging the transfer of these facilities to the SPF for sale and urged the Ukrainian Government to influence this process. Since the SPF plays the role of a technical player in the privatization process, the activity of which is substantially limited and regulated, it turned out to be an actual hostage in this situation.

According to Mr. Bilous, one of the main reasons for non-fulfilment of privatization programs is the constant introduction by the Government and Parliament of a number of enterprises into the list of enterprises not to be subject to privatization on far-fetched excuses, as well as the inability to legally exert influence on the profile ministers to transfer enterprises to the SPF for their subsequent sale. He also believes that most of the enterprises put up for sale are illiquid and technically obsolete, which, in turn, does not make them attractive. Mr. Bilous, who before the involvement at Government was often acting at the side of buyers, also says that most of the Ukrainian state-owned property is greatly overpriced for this and other reasons.

According to Ihor Bilous, for the entire history of Ukraine’s independence, the privatization plan has never been implemented. In 2017, Ukraine has planned to raise UAH 17 billion hryvnias (USD 630 million) from the sale of state-owned companies, but most of this amount can be brought only by the sale of the largest facilities, such as the OPP. According to the Head of the State Property Fund of Ukraine, maintaining the status quo in the Ukrainian legislation allows to count on the state budget revenues from privatization only in the amount of several tens of millions of US dollars, not more.

Ihor Bilous, together with the Ministry of Economic Development and Trade of Ukraine and the European Bank for Reconstruction and Development, prepared a draft law that can correct the current state of affairs. The draft document has already been submitted to the Prime Minister, the public and received the first positive feedback. The key provisions of this document have already been reflected in the Memorandum between Ukraine and the IMF.

Thus, according to the Memorandum and the new draft law on privatization, the process of selling state-owned companies will become more transparent and faster, and, among other things, Ukraine has pledged not to reduce the list of the facilities on sale, as it happened before, but to expand it.

Mr. Bilous explains that the new draft law stipulates the separation of all facilities into large and small ones according to clear criteria. Facilities of the first group will be sold with the direct involvement of advisors from among investment banks with a worldwide reputation. It is the advisers who will determine the real price of the facilities, negotiate with potential buyers, conduct an audit and due diligence and bring the entire process to the final stage – the auction.

Facilities of the second group – the so-called small privatization – will be put up for sale through ProZorro electronic auction system that has proven successful without setting a starting price: it will be determined upon applications of potential investors. “Their value will be determined by the market,” says Mr. Bilous.

And as an anti-corruption element, Ukraine intends to strengthen the liability of the relevant ministries for blocking the privatization. In addition, the Head of the SPF proposes to introduce a limitation period for privatized facilities for a maximum of 3 years and provide an opportunity to consider post-privatization disputes in international arbitration rather than in Ukrainian courts.

The law will also reduce the list of companies banned by the Parliament from privatization by abolishing a number of criteria, which in turn will increase the number of facilities for sale.

According to the signed Memorandum, this document will be adopted by the Ukrainian Parliament in August 2017.

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