The problem of financial resources shortage was especially acute in those countries which in the course of general economic reform conduction used the “shock therapy” methods (Poland, Bulgaria, Romania). The carried out there urgent price liberalization resulted in practically complete devaluation of insignificant savings and made the participation of various strata of society in privatization very problematic.

The situation in Ukraine was similar to that one. In Ukraine the basic asset value in 1990 was 474 billion karbovanets, and the amount of the population savings in their deposits totaled approximately 2.5%. Statistical annual of Ukraine. — 1997. — Kyiv: Ukrainian Encyclopedia, 1999, Tabl. 14.1, p.13. It was insignificant. Refusal from the soviet karbovanets as a national monetary unit and introduction into the turnover the coupon as a means of payment immediately devaluated the population deposits and equated the adult citizens solvency. The process of further capital accumulation was according to L.M.Kravchuk Izvestia, 1998, October 27. of uneven character concerning the social indicators. Shortage of cash also became in the Ukrainian case critical for using in home privatization process the special privatization papers — registered property certificate. It became also the reason of chargeable principle of privatization application. In Ukraine both of those principles were combined: free state property transfer to citizens for registered certificates and sale of property for cash to legal and physical entities.

The Ukrainian model of privatization can be sometimes compared with the Czech one. However despite the “paper” similarity, they were very different both for the mechanism of their implementation and the results of their influence on the economic system reform in the post privatization period. The main difference of the Czech “voucher” from the Ukrainian certificate is that it was evaluated not in national monetary units, but in conditional credits (points). The vouchers did not enter the cash turnover and did not exercise the direct inflation pressure on the economy. Under Ukrainian scale of certificate privatization such an approach would allow the national governmental officers to overcome the financial problems in the national economic space easier.

Regarding the privatization influence on the economy as a whole, one may state that Czech Republic is now at the stage of economic development. Comparing to the year 1991 the rise in GDP and the increase in industrial production are being observed. In Ukraine the results are much worse. Despite the fact that at the beginning of 1999 comparing to 1992 the companies operating in nonpublic sector share went up more than 3 times, and the share of public fixed assets was reduced more than 1.5 times, the negative GDP dynamics was observed, and according to the race of industrial production development the home economy did not reach even the 1990 level. Statistical annual of Ukraine — 1997. Kyiv: Ukrainian Encyclopedia. 1999. Chapter 5.1, p.15. In 1999 first for the past decade there appeared some indicators of economic stabilization: the fall in GDP was mainly overcome, and the industrial production volume rose by 4.3%. Kuchma L. Ukraine: entering XXI century. — Uriadoviy Kur’er (The Governmental Messenger), No. 16, 2000, January 28, p.5. However, comparing with the overall economic recession during the last years, those positive changes cannot be considered essential.

The success of privatization in Czech Republic and Slovakia was guaranteed by the scientific theoretical approach and the well-grounded practical implementation. What are its major peculiarities?

First, that is minimization of the state intervention in post privatization activities both at the level of direct administrative control and at the level of economic means of influence. The companies privatized through being granted a number of credit and tax benefits had the possibility to use the additional financial resources for the production restructuring.

Second, the attraction of the investment funds to the privatization process had the state support. Just through the institute of investment funds in Czech Republic and in Slovakia the search and determination of strategic partners was conducted. It allowed to restructure production and to optimize the bodies of government system for a short period of time. In Ukraine the role of financial intermediary was given to exclusively private structures without the appropriate state guarantees and without control. That led to the “financial pyramids”, trusts, trust companies appearance, etc. The activities of the latter were negative, because they were accompanied by violations and abuses in financial sphere. That brought to nothing the role of institute of financial intermediaries and almost all of them terminated their activities.

Third, the state did not aim at earning money on privatization, because that would be decrease in its pace.

Such principal approaches to the privatization program formation that took place in Czech Republic and Slovakia, unfortunately, did not get recognition in Ukraine, though the authors of the national privatization concept knew them very well. By the end of 1993 — at the beginning of 1994 the Ukrainian economists Ph.D. V.L.Revenko and Ph.D. V.K.Cherniak Revenko V.L., Cherniak V.K. et al. First road: experience of privatization in Czech Republic and its lessons for Ukraine (project of economic reform in Ukraine). — Kyiv: Tirazh, 1994. studies and positively evaluated the legal and economic bases of Czechoslovak privatization. However the Russian model was put into the basis of national privatization process.

The success of privatization influence in majority of European countries on the processes of people’s economic complex reform becomes more understandable if to consider the standpoint of the economists and government officials concerning revenues from privatization utilization. The essence of those approaches is as follows: if to refer to the state property sale-purchase as capital operations being financed at the expense of the population’s savings and the enterprises’ financial resources, the proceeds from the state property sale should be directed to investment and not to repayment of budget deficits because the nature of budget deficits, as a rule, is the severe violations of financial discipline by the bodies of state government. So the way to deficit-free performance must be searched not at the expense of the external sources but in introducing order in the budget economy. Any capital transformation (for example, savings, funds of companies-buyers) not directed to the income accumulation was considered as both the capital “eating away” and “sacrificing” the current interests of economic future. In other words, lack of capital investment into industrial infrastructure effected negatively the economic growth and hampered the processes of the structural market reorientation.

The utilization of revenues from privatization exclusively for social consumption was not dominating in any of Eastern European countries. Thus, to reinvest the privatized companies in Poland, Hungary, and Slovakia the special financial-credit foundations were established for the funds obtained from privatization. In Hungary in 1991 the very concept of the privatization proceeds utilization was reconsidered, and after that half of the amount was directed by the state regulatory acts to the economy modernization, capital investment reanimation, and entrepreneurship support.

In Western countries where the privatization procedure was conducted by shares of corporations sale at exchange tenders, and therefore differed little from the shares of private companies sale, the utilization of the funds obtained was analogous: they were directed to the company itself to solve its internal production problems.

In Ukrainian model we can observe quite the opposite approach. The revenues from privatization are planned and are anticipated by all the adopted state budgets beginning from the year 1992, that is to secure the execution of the budget filling plan was dominating. Therefore big state-owned companies, holdings, strategic enterprises, which basic funds value is big enough to gain as much money as possible from their sale were selected for privatization. Thus, during 1999 the issue about the state-owned company “Ukrtelecom” privatization was raised repeatedly. The problem must be finally solved by means of the special act approval. That will allow to commence in the current year the privatization of 25% of the Statutory Fund shares at the first stage. The issues about sale of the companies of space, aircraft industries, privatization (reprivatization) of regional energy-generating companies etc. are most often considered from such a standpoint. The privatization of the industrial association “Pivdenmash”, the company “Naftogas Ukrainy” and others is being talked over. The necessity to revise the list of the strategic companies for privatization of which the moratoria was set up by the Supreme Rada was caused by similar considerations. Thus, only for the first quarter 2000 the country’s government set forth before the State Property Fund the task to transfer to the budget UAH 500 million Bondar O. Non-typical ways to the locomotive of privatization. — Uriadoviy Kur’er, 2000, March 2, p. 6. of privatization funds. As the Head of SPF of Ukraine O.Bondar said, ‘We will sell whatever has not been sold before.’ Bondar O. We shall sell everything. — Den’, No.16, 2000, February 1, p.5.

The fiscal orientation of Ukrainian privatization is firmly stipulated in one of the main government laws — in state budget: beginning from 50% of the proceeds in 1993 and ending with 80—90% in 1999 the privatization revenues are directed to the state and regional budgets to cover their deficits. Thus, in 1998 about UAH 470 million Governmental information bulletin on privatization. March 1999, Table. 10., in 1999 — UAH 790 million Governmental information bulletin on privatization. No.3, 2000, Table. 4. were concentrated for those purposes. Only insignificant share of those resources was allocated to the structural transformation and reconstruction of the companies privatized.

The negative character of the mechanic maximization of proceeds from privatization process is reflected in the company itself and defines the behavior of the new owner:

When the maximum revenues to cover the budget deficit are defined as a purpose of privatization, the implementation of the strategic innovation policy at this company is getting limited. Absence of working capital at the companies results in the payment crisis that hampers the current productions restructuring. On December 1, 1999 the volume of accounts payable throughout the country exceed the GDP volume in nominal calculation 1.9 times and totaled UAH 223 billion. The accounts receivable at the country’s enterprises amounted UAH 172 billion 1.5 times exceeding GDP. Kuchma L.D. Ukraine: entering the XXI century. Uriadoviy Kur’er. No.16, 2000, January 28, p.8.

The approaches used in the world practice were the most effective when they coordinated with other economic and administrative means in the country. Where the principles of national privatization were considered by the bodies of economic authority not as financial resources for social pressure in the society minimization, but as an element of complex state economy as a whole regulation, the result was much better.

Now Ukraine began the second stage of privatization. Transition to cash privatization and commencement of big companies privatization on competition grounds must eventually direct privatization to the investment process. Ukraine must take into account its major mistake of the past years, that is lack of understanding that the success of general social-economic transformations in the state depends not only on the scale of the public sector “destatization”, but on the clearly determined both principles of privatization policy and the state standpoint in the issues of the privatized companies economic management.

The awareness of changes in the privatization policy necessity stimulated to put the new emphasis to the process of privatization strategy. The starting point of such an awareness became the Decree approved by the President of Ukraine on December 29, 1999 “On immediate measures to accelerate the privatization of property in Ukraine.” It provided the necessary political support to the privatization process, its promotion, some correction taking into account the economic realities formed, and a guarantee for the maximum transparency of big attractive for investment objects sale.

The task to create the attractive for investment climate in Ukraine was clearly set forth before the privatization bodies. It should be made by means of the following top-priority measures:

To realize the strategy chosen the State Property Fund has prepared the draft privatization program for the year 2000 on the new conceptual grounds and admitted it to the Supreme Rada consideration. The main innovation in the draft law is the introduction into the privatization practice limitations as to the companies which at their sale moment are holding the monopoly state or are strategically important for the state participation in the privatization process. The permission to take part in the tenders would have only those entities that produce (or consume) the product (carry out operations or render services) of the same profile that the key activity of the company privatized. The concept of “industrial investor” is introduced for that. Assertion of such a position is based on the economic ground. The owner of the strategic companies and monopoly companies should become the production capital itself, as only he takes with him new technologies, management, and, the most important, sales markets. The financial capital follows the industrial capital and can also effect positively the processes of technical reequipment of the current productions. Such a selection order is proposed to establish for the companies of fuel-energetic complex, metallurgy, petrochemistry, machine-building, radio electronics, ship and aircraft building, that is the companies that compose the basis for the state industrial potential. The access to the other companies privatization is vacant.

The approach helps the new owner appearance at the very stage of the privatization process. That would prevent from the popular in the national practice system of resale of the whole property complexes and the blocks of shares of the companies privatized. Such a sale, as a rule, occurred through the financial intermediaries taking part in privatization aiming at gaining profits on the selling price difference.

The draft programs makes no difference between the home and foreign “industrial investor” and anticipates promotion to maximum blocks of shares consolidation in the ownership of the limited number of owners.

The discussion of the draft law in the Supreme Rada, according to Deputy Head of SPF Yu. Gryshan, is not easy. Gryshan Yu. Selling ourselves to an honest person. Kyivskiye Vedomosty, 2000, April 3, p.15. Especially acute debates are occurring now concerning limitations as to determination of entities participating in the privatization process, also establishment of general approaches to the group D objects privatization, definition of investment liabilities etc. However, there is some confidence that the revolution passion of the Program’s general concept would be preserved, and the document would be adopted as a whole.

The privatization program 2000 aims at solving one more problem — to direct to the state budget UAH 2.5 billion (practically as much as was transferred to the budget for all the past years). Not only a lot of internal social-economic problems, but also the problem of indebtedness before the international financial organizations repayment depend on the task solving.

In connection with that the State Property Fund took some actions to realize the scaled sale of large blocks of shares of powerful companies. Currently there are several lists of those companies:

In general that is more than 1,500 companies of national importance that belong primarily to D group (including 18 companies of fuel-energetic complex, 61of machine-building, 25 of metallurgy industry, etc.). Bondar O. Non-typical ways to the locomotive of privatization. Uriadoviy Kur'er, No. 40, 2000, March 2, p.6. Of this list the completion of 30% of shares of OJSC “Mykolaivskiy Glynozemniy Plant” sale could be considered successful, because the state as a result of it has got more than UAH 500 million. On a waiting list is 67% of OJSC “Linos” sale (the competition documentation is being prepared), some work is being done to prepare for privatization OJSC “Ukrtelecom,” a number of energetic companies etc.

Privatization combines the selected companies sale aiming at the concrete investment obligations and ensuring the general social-economic stabilization. It will certainly enable the companies to function more efficiently in the post privatization period and will promote the overall economic growth in the country.

In Ukraine where the productive means was dominating in the structure of production, the success of market transformations depended primarily upon the experience of home privatization that revealed the imperfect character of the methodology of the state property value appraisal. That is why that the property value valuations are under strong influence of certain regularities of the privatized company activities in the post privatization period determining primarily the principles of market behavior of the company’s new owners and managers.

According to the applicable legislation on privatization the mass appraisal of the whole public companies property complexes was carried out using standard methodology and standard initial data from balance sheets. Law of Ukraine “On privatization of the state-owned companies property”, Kyiv, 1992, No.2163-XII, p. 20. The assets of public companies formed under administrative-command planning appraisal was made under influence of the planned pricing and centralized resource allocation system determining their structure. The book value and the companies balance sheet items were calculated by the unacceptable under market conditions accounting standards and therefore did not reflect the economic development dynamics and the real value of the company’s assets.

For the home privatization history the Cabinet of Ministers of Ukraine has stipulated the balance method of mass appraisal in four techniques of the state property value estimation. Decree of the Cabinet of Ministers of Ukraine “On approval of the technique of the value of the privatization objects appraisal”, Kyiv, 1995, No. 36, Articles 12, 13, 17; “On approval of the technique of the value of the privatization objects appraisal”, Kyiv, 1996, No. 961, Articles 7,14, 15; “On approval of the technique of the value of the privatization objects appraisal”, Kyiv, 1998, No. 1114, Articles 6, 13, 14, 15. The theoretical substantiation of this approach were determined by both the very social-economic model of the country’s people’s-economic complex functioning in the past and plans of significant state property sale for privatization papers. That is, if the public company’s shares were exchanged for privatization certificates, the value equivalent was not of special importance.

The practice revealed that this approach was not balanced and economically grounded. Where the enterprise fixed assets value was essential, the object price was overestimated (but where the fixed assets value is greater more investments are necessary for the production restructuring). And vice versa, in those cases where the fixed assets value was less, the privatization object value was also less even in those cases when the production was more profitable.

If that property value definition could be justified at the beginning of the privatization process, but in process of the market relations strengthening in the economy of Ukraine its fallaciousness became more and more evident. The production means involved in the privatization process have some value as net assets but only as the means of additional public values creation, volume and structure of which are determined by the population requirements. The more the production outcome costs the more value should its factors have, and under demand for the product produced decline, the object’s under privatization price must decrease as well.

The balance method differs from other methods of asset valuation that were most often applied in the international practice, as follows:

So in March 1997 some corrections were made in the established technique of valuation by the Ukrainian legislation. Law of Ukraine “On making amendments to the Law “On the state-owned companies property privatization”, Kyiv, 1997, No.87-97 BP, p.20. The differentiated approach according to the privatization method and systems of expert valuations fixed by legislation was implemented. However those innovations were not directed by the will to achieve the privatization process as a whole optimization to find the efficient owner (investor) but by the will primarily to substantiate the price for the privatization objects increase, as the fixed assets depreciation and amortization in the framework of applicable balance method did not provide such a possibility. This approach introduction took place under pressure of social burden on the state economy such as the constantly increasing arrears of wages, pensions etc.

This practice lasted for almost two years (1997—1998). During that period of time the method of whole property complexes also of big companies blocks of shares estimations by the expert technique became widely applicable based on the privatization object value determination according to the hypothesis of primarily future revenues valuation. This approach as the only one and the most popular method for the big privatization companies appraisal was not grounded because under conditions of financial and economic instability it did not reflect the object or the block of shares real value.

It is evident that the valuation process optimization should be expressed* in the possibility of different methodical approaches use depending on the principles of privatization process selection or the privatization model itself. That is, if in the current privatization model the payment principle is crucial, the methodology of the property value determination must regulate the revenues from the state property sale maximization. The expert valuation can be efficiently used, for example, in “small-scale privatization” program.

If the main purpose of the privatization model is the efficient owner (potential investor) search, the imperfect character of expert valuation can be seen even better. First, under privatization proceeds maximization, the owner’s financial possibilities for reconstruction and technical renovation of the object acquired have been undermining. Second, the process of the object value determination proceeding from its future revenues under circumstances of the market instability did not look attractive for potential buyers. The process of the efficient owner search actuality of which gains more significance under the program of “large-scaled privatization” realization is the process of the two parties: the state and the buyer interests balance based on the object value search. The France’s privatization experience where the compromise was achieved by even not the market but by the administrative methods can serve the good example of the price parity attainment.

Therefore the new method of valuation, that is the regulatory one, was implemented in the methodology of the initial price for the open joint-stock companies (OJSC) subject to privatization, blocks of shares calculation. It has been established by the State Property Fund of Ukraine approval of the appropriate regulation in March 1999 Regulation on the order of the initial price for the OJSC blocks of shares subject to sale for cash at the commercial tenders. Order of SPF of Ukraine #473 of March 17, 1999. that the block of shares value was defined proceeding from not the future but the current economic state of the company. That influenced positively the privatization race. According to the SPF of Ukraine, prominent experts' appraisals, if in 1997—1998 the sale depth of OJSC blocks of shares evaluated by the expert method was 17—20%, then the sale depth of OJSC blocks of shares evaluated in 1999 according to the regulatory method was 30—35%. Currently this method was put into basis of the valuation of OJSC blocks of shares of strategic domestic companies subject to privatization in 2000.

Use of different valuation methods in home practice, that is balance, expert, and regulatory, — must effect positively both the efficiency of the privatization process as a whole and the solving of the social-economic problems set forth before privatization by the government.

While now the mass appraisal of privatization objects is being made by the outdated balance method, and it must be brought to compliance with the recognized international standards, it would be expedient to put into the basis of the public companies and blocks of shares mass valuation the expect method reflecting the real financial economic state of the enterprise and taking into account the place and part of the enterprise on the market of products and services, also the sale object investment attractiveness, and providing the experts-evaluators the possibility to determine the object value depending on the level of its technologic value etc.

Copyright© 2000, The Ukrainian Economic Monitor