Spectre of large-scale privatization haunting Ukraine

Dmytro Shvartz
09:00, 19 June 2019
Economy
842 0
Opinion

For Ukraine, with its under-reformed economic system, monopolized in the key sectors, privatization of large enterprises has always been painful, since the authorities often failed to create a favorable investment climate and ensure equal access to all those bidders willing to acquire state property.

That is why the re-privatization of Kryvorizhstal in 2005 for almost $5 billion is still both a benchmark and an unattainable height.

Since then, all annual plans for the sale of state property have been turning into loud failures. The reason lay in the fact that the government could not stop taking into account the interests of persons of influence who are not willing to lose their feeders and destroy their monopolies.

As a result, the budget didn't receive the revenues planned, while state-owned enterprises did not get new efficient owners. For example, over the past year, revenues from privatization to the state budget amounted to only UAH 300 million with the declared target of over UAH 23 billion! That is, the plan was executed at a little over 1%.

At the same time, after the Verkhovna Rada early last year adopted a new law on privatization, the authorities drew bright pictures of the future sale of large state assets, which are branded an extra burden for the state and a hotbed of corruption.

But it was the presence of profitable gray schemes in these enterprises that was the main argument of skeptics who predicted active opposition to the forward movement of the Ukrainian privatization cart. As of the end of last year and the half of this year, it can be said that the sale of so-called large-scale privatization objects is unlikely in the near future.

At the same time, after the Verkhovna Rada early last year adopted a new law on privatization, the authorities drew bright pictures of the future sale of large state assets, which are branded an extra burden for the state and a hotbed of corruption

There are several reasons for pessimism.

First, large-scale privatization has already begun to sink in courts. It all started with the fact that last year the sale of Krasnolymanska coal company, Electrotyazhmash Plant, Indar pharmaceutical company, the United Mining and Chemical Company, and the Odesa Portside Chemical Plant was actually disrupted at the suit of one of the bidders in the competition to select investment advisors.

A state-owned Centrenergo, one of the country's leading electricity producers, saw the same fate. The sale of a controlling stake in this company would have brought at least UAH 6 billion, but at the end of last year, the competition was canceled. In May of this year, the Kyiv District Administrative Court prohibited the State Property Fund from carrying out any actions toward selling the company. This is how the court satisfied the claim of one of the bidders who had submitted the application for participation in the competition that was later canceled.

So far it is difficult to imagine what needs to be done to get out of this dead end because litigation in Ukrainian courts can drag on for years as practice shows.

Another argument proving that, at least until the end of this year, one can hardly expect the sale of large state assets is the political situation within the country. After Volodymyr Zelensky won presidential elections, a vacuum was created because the Verkhovna Rada and the Cabinet of Ministers remained the same, and the central governing bodies are in opposition to each other, which obviously does not help the cause. Even if the Constitutional Court does not cancel the presidential decree on holding early parliamentary elections scheduled for July 21, the process of forming a new coalition and a new government may be delayed until early autumn. In case of cancellation of the early dissolution of the Rada, the election will be held as earlier scheduled, that's in late October.

In addition, we should not forget that there will be much more important tasks on the agenda of the authorities. For example, receiving a new tranche from the International Monetary Fund or extending a contract for the transit of Russian gas, which expires exactly at the end of this year. It is clear that efforts will have to be focused on addressing these global challenges, and therefore it may simply not be enough time for lower priority issues, including privatization.

Another argument proving that, at least until the end of this year, one can hardly expect the sale of large state assets is the political situation within the country

The third point is that uncertainty arose in the issue of launching the electricity market from July 2019. Earlier this week, the president submitted to the Rada a bill providing for the postponement of the new market launch until July 1, 2020. Obviously, this may postpone plans to sell the earlier mentioned Centrenergo at least until the end of next year.

Since part of the problematic objects of large-scale privatization are directly or indirectly tied to electricity (including chemical enterprises), much will depend on whether the launch of the market will lead to an increase in electricity tariffs.

Despite promises made by Prime Minister Volodymyr Groisman to prevent the rising cost of electricity for the households and industry, the reality may be quite different.

The next reason for pessimism is a low level of confidence in Ukraine on the part of foreign investors. In the near future, serious players in the global market will most likely look over Ukraine, even if over time the problem with courts is "settled". Besides, the very structure of the national economy with significant oligarchic influence implies the formation of monopolies, rather than competitive markets.

And finally, I must say that Ukraine in dragging with large-scale privatization is losing perhaps the most important resource, which is time. The assets scheduled for sale over the years basically only see their attractiveness for a possible future buyer reduced, since the cost of fixed assets falls and, as a result, the costs necessary for upgrading those enterprises grow as well.

The next reason for pessimism is the low level of confidence in Ukraine on the part of foreign investors

The situation can be changed by the upcoming parliamentary elections. At least there is such hope that the new configuration of the Rada will give impetus to a radical reform of the national economy. According to opinion polls, it is likely that the presidential party will have a serious representation in the new parliament and, as a result, take an active part in the formation of a new government with the ability to influence the State Property Fund and the entire privatization policy.

With this in mind, I wish to believe that the new team will finally be able to launch the process of large SOEs' privatization. The importance of selling them is not so much about bringing money to the budget (for this year, the target was UAH 17 billion), but also attracting efficient management and reducing the level of corruption in the public sector.

And these changes over time will ensure a new quality of life for all Ukrainians.

Dmytro Shvarts

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