Privatization of small entities had to be completed by the mid-summer of 1996. Just the same tasks were set in the previous year but numerous objective and subjective factors prevented from their implementation.

Substantial changes have been introduced into the new privatization program and that made it possible to eliminate drawbacks in the legislation that was effective in the previous year. First (and most importantly), the property of Group A entities had to be sold together with the premises small businesses occupy and should be privatized as a single unit. The owner of a small business had the priority right to privatize the premises in which his business was located if he had not used this right before. Second, the procedure of selling entities through competition or auction was simplified: they may be held even if there were only two buyers (instead of three as it was before). In order to encourage local authorities to privatize Group A entities the privatization program stipulated allocation of 80% of the overall small-scale privatization receipts to local budgets.

It was planned to introduce a lot of changes into mass privatization of medium- and large-size enterprises. The possibilities to use different instruments of payment for privatized entities have been extended. Legal entities and individuals could use both privatization ownership certificates and compensation certificates Face value of compensation certificate was, as a rule, 1 million karbovanets. Its market value in 1996 did not exceed 250 thousand karbovanets. Compensation certificates were provided to the citizens of Ukraine but were not registered ones. They were in circulation and there were no restrictions concerning their sale and purchase. This extended possibilities for investors (including foreign) to take part in privatization.. According to the Privatization Program the distribution of privatization ownership certificates had to be completed by June 30, 1996. During three years of privatization 8120 thousand people became the owners of the certificates. In a year, in January, 1996, 29449 thousand citizens became the certificate holders; i.e. more than 20 million citizens received certificates during one year. Another 20 million citizens had to receive privatization ownership certificates in the next half year.

It was planned to privatize 4085 new (medium- and large-size) entities and to complete selling shares in the enterprises privatization of which had begun in the previous years. Management of the enterprises (under condition that preferential subscription to shares is performed very quickly) received shares for the amount of 10% of the authorized fund (it was 5% in the previous years).

Privatization of unfinished construction projects had also undergone changes, first of all due to liberalization of privatization legislation.

In 1999 nearly 20 thousand (19953) entities were privatized. The number of this year’s privatizations increased by 5.6 times as compared to the first years of privatization (1992—1993). Privatization process was more intensive in municipally owned enterprises (as a rule these are small-scale enterprises). Thus, the number of such enterprises increased by 7.8 times while the number of state-owned enterprises that changed ownership form (these are presumably medium- and large-size enterprises) increased only by 2.8 times. In 1995—1996 three thirds of the overall number of privatizations throughout the past five years occurred, and in 1996 — 41.4%. This is evidence of the increased pace of privatization achieved mainly through accelerated privatization of small-scale entities.

In 1996 the target of small-scale privatization was fulfilled by 135%, the plan of large-scale privatization was met by 90%, and this well exceeds the figures of 1995. The privatization policy that has been pursued in the course of privatization since 1992 contributed to achieving the above-mentioned results. The objective of this policy was to complete mass privatization. In 1996 mass privatization of small-scale entities was mainly accomplished, the “critical mass” for the development of the competitive environment for small-scale entities was created.

“De-statization” of assets in 1996 was mainly implemented by non-competitive methods (58% of the overall number of privatized entities). At the same time, commercial competitions and open bids became more common in 1996. The real market value was formed by these competition-driven methods. The share of entities “de-statized” in 1996 by these two methods was nearly 25% compared to 17% in 1995.

State and local budgets received UAH 245.5 million of proceeds from privatization. This is more than twice the target amount. Much effort was put forward to complete the “certificate-driven” privatization, which mainly involved medium- and large-size enterprises. In the early 1997 43.4 million citizens (85% of the Ukrainian population) received privatization ownership certificates. Sixteen million citizens invested their certificates through the network of centers for certificate auctions. Throughout 1996, shares in OJSCs were offered at an average rate of 350 each months. In 1995 the respective figure was as low as 160. Financial intermediaries (trust companies, investment funds and companies, banks and agents engaged in trade in securities) played a significant role in the process of mass “certificate-driven” privatization. These intermediaries accumulated nearly 20 million privatization ownership certificates (POC), which account for 47% of the securities distributed among the population. At the same time, these financial intermediaries invested over 14 million POCs (or 73% of their accumulated POCs) in privatization entities.

Increase in cash privatization conducted on market principles through a stock exchange network was a specific feature of the last year. The sale of shares through stock exchanges was dictated by a need to identify a market price for the entity subject to privatization. This was not fully achieved because sales volume was low and shares were offered in large blocks and lots, therefore small-scale investors were poorly represented in stock exchange bids. There was also a shortage of attractive enterprises offered for bid.

Carrying out mass privatization by means of certificates is only one of the steps aimed to reform the economy. There is a need in real investments for restructuring. It is expected that investors, including foreign ones, for whom it is necessary to create favorable investment condition, will play an important role. It was stipulated that privatization terms and conditions for enterprises that hold monopolistic position, enterprises of military and industrial sector (MIS), gigantic enterprises, research, design and some other institutions will be determined by the Cabinet of Ministries for each entity individually. The largest enterprises had to be privatized according to individual business plans. Limited in size blocks of shares (5—15% of the authorized fund) were to be sold through auctions. Big blocks of shares were intended for sale to strategic (national and foreign) investors under condition that they had met investment commitments.

Privatization concept in Ukraine was aimed to achieve many results: to get as much proceeds from privatization as possible; to make all citizens the owners; to ensure preferential terms to the labor collectives and at the same time to develop real owners. Provisions of the Privatization Program to some extent adjusted privatization priorities balancing between total privatization and efficient owner formation.

At the same time delays in the elaboration of new legislative and normative framework of privatization prevented the fulfillment of the set tasks. In particular, the Verkhovna Rada approved the Privatization Program with a half-year delay (only at the beginning of June 1997). The 1997 State Budget planned significant proceeds from privatization (UAH 500 million). In order to fulfil this target the State Property Fund of Ukraine (SPF) had to begin forming a new legislative framework for privatization in order to put into practice the mechanisms of money-driven privatization. At the same time the Regulations on the sale of shares on competition basis have been worked out only in August 1997. Thus, the most attractive entities, including power companies, were offered for privatization through competitions and the stock exchange only in the autumn of this year. Therefore, the pace of privatization has increased significantly. However, when proceeds from privatization had been collected by the end of 1997 they only amounted to UAH 207 million. Out of this amount state budget revenues were UAH 65 million, that is UAH 435 million less than the projected target.

Against the background of the previous five years of privatization the 1997 process of ownership form transformation looks modest. The number of entities privatized in 1997 was 2.3 times as many as in 1996. At the same time the pace of privatization decelerated in small-scale entities privatization process (Group A) and in large-scale privatization (Groups B, C, D). The only exemption was the group of unfinished construction projects (Group E) whose privatization continued to accelerate. The number of entities from this Group privatized in 1997 was as many as the number of entities privatized during preceding 4 years of privatization. New regulatory framework, which simplified the procedure to change the form of ownership to these entities, fostered the acceleration of privatization of Group E entities. In 1997 54.9% of the overall number of entities were privatized using methods that do not involve competition (buy-out, lease with buy-out) and 45.1% — through auctions, tenders, sale of shares, i.e. methods which imply competition between the participants when acquiring privatization entities. These figures showing privatizations by competitive methods are a little higher than they were in the previous year (42%).

Overvaluation of initial auction prices for the entities was one of the main causes that decelerated privatization process of Group A entities in 1997. Contradictions in determining privatization priorities affected the pace of medium- and large-size enterprises privatization. On the one hand, the aim was set to replenish budget by proceed from privatization; on the other hand — to rapidly reach significant privatization depth of entities through selling shares at the auctions open to certificates. In addition, case-by-case approach to privatization of the enterprises that were of strategic importance to the economy of Ukraine has been introduced. But the preparing of these enterprises to privatization in order to make them attractive for investors usually took several months.

Lack of coordination in actions of privatization body and sectoral ministries concerning restructuring and privatizing in the first place super-large enterprises had a negative impact on privatization process.

One of the main tasks of privatization is to replenish the State Budget. According to 1998 State Privatization Program proceeds from privatization have to be allocated as follows: the State Budget — 80% (UAH 1040 million); development of entrepreneurship — 5%; purchase of modern equipment, creation of new jobs — 10%; administration of the Program — 5% The Law of Ukraine “On State Privatization Program for 1998” of February 12, 1998, #124/98-VR.. Privatization Program orientation towards completion of certificate-driven privatization and extension of money-driven privatization was supported by the following measures. The SPF issued orders with instructions to significantly decrease the proportion of shares in enterprises meant for sale in exchange for privatization securities. The number of privatization ownership certificate-driven tenders was minimized. The management of enterprises was not allowed to subscribe for compensation certificates (they might subscribe only for cash). The biggest portion of assets (nearly 75%) of the largest enterprises was subject to privatization for cash including privatization involving foreign investment in keeping with the interstate treaties signed by Ukraine.

Privatization field was extended by means of privatization of social and cultural assets and entities that were detached from the body of an enterprise in the restructuring process. The sphere of privatization was significantly extended by including enterprises whose blocks of shares were in the state ownership in the process of privatization. This was simplified by the new procedure for determining what enterprise should be under state control and narrowing the frames of such control.

In 1998 5494 entities were privatized in Ukraine (it was 1.6 times less the level in 1997). Among 5494 entities Group A enterprises (small-scale) were the most — 4254 entities (or 77.4%) were privatized. Privatizations of medium- and large-size enterprises (Groups B, C, D) account for 831 (15.1%), unfinished construction projects (Group E) — 394 (7.2%), Group G entities (social sphere assets) — only 15 (0.3%). During this period relationship between non-competitive and competitive methods of privatization has tended to change in favor of the latter. The share of competitive privatization methods has reached 50.3% (compared to 45.1% in 1997) due to the relative decrease in number of the entities that were bought out by labor collectives and increase in the share of entities sold through auctions. Out of the overall number of entities that were “de-statized” in 1998 the integral property complexes accounted for 24.1%, structural units totaled 69.1% and 6.8% were unfinished construction projects.

In 1998 shares in 881 newly founded OJSCs and shares in joint-stock companies that had been registered in the previous years were sold. In 1998 the blocks of shares were sold for the amount of UAH 1385.2 million, and 37.3% of these shares were bought for cash and the rest (62.7%) were exchanged for privatization securities. Blocks of shares for cash were sold through competitions (37.6% of the overall amount of cash receipts), stock exchanges (36.6%), specialized auctions (4%). Out of 300 competitions selling shares in OJSCs that were announced in 1998 only 51 competitions resulted in closing sales and purchase agreements. At the same time the relation between the price of sold shares and the face value of the sold blocks of shares in 1998 was as follows: at competitions it was the highest — 224%, at the stock exchange — 150%, at auctions — only 5%. It may be considered as advantage of competitions that in the course of competition, investment problems of enterprises were solved. The highest demand was for shares in power companies (54% of total receipts), enterprises of machine-building, metals working, chemical, petrochemical and food industries.

At the same time the projected privatization target was not met in 1998. Several factors contributed to this. In the first half-year in accordance with the decision of the Cabinet of Ministers of Ukraine the sale of investment attractive entities (power companies and large enterprises that were of strategic importance) was suspended. A significant amount of shares were excluded from privatization due to the formation of the National State Corporate Rights Agency of Ukraine. Its interests have not included the acceleration of privatization process.

In the course of privatization process the opportunity to attract investors by reducing the selling price of the privatization entities (stipulated by 1998 State Privatization Program) was not used. It became more profitable for investors to invest in government bonds with a high discount than into risk-associated securities of joint-stock companies.

The main advantage of money-driven privatization is that it is investment oriented both for enterprises (as the source to replenish current assets) and for the State Budget (as the source to repay its debts and as an instrument for the implementation of social programs). Application of competitive methods in money-driven privatization facilitates the transparency of privatization process, minimizes violation and below market selling prices. Money-driven privatization also encourages property concentration and formation of the efficient owner.

The main privatization goals in 1999 were the following: to establish favorable conditions for private owners who have long-term interests in enterprises being privatized, including investors on the international markets; to encourage increase in enterprise efficiency and to establish competitive environment; to facilitate receipts of UAH 800 million into the State Budget of Ukraine (budget revenues in 1998 were UAH 422 million).

Unlike the previous program, the Privatization Program for 1999 set forth small-scale privatization targets (5500 entities). As a rule these entities had to be created in the process of medium- and large-size enterprises restructuring according the programs worked out by the bodies authorized to manage property (ministries, institutions). It was also planned to sell 455 medium- and large-size enterprises (oil refining and machine building industries, transport and communications). Power companies were excluded from this list. Their privatization was suspended in 1998. 402 unfinished construction projects and 333 entity of social sphere have been preparing for privatization.

Since according to privatization program privatization of the entities was to be done on case-by-case basis a relatively small number of entities were privatized Taking into account numerous appeals of the citizens, the Verkhovna Rada extended the period for use of privatization ownership certificates to May 1, 1999 in the last time. The last certificate auction was held in order to make it possible to use them. At the same time privatization securities have been excluded from preferential subscriptions of all types by the Privatization program for 1999.. The aim was to minimize the fragmentation of share holding and to reach a certain level of completed privatizations. In 1999, 833 entities had to be privatized with privatization depth of less than 70%, 1000 entities had to reach privatization depth from 70% to 100% and 1631 entities had to be 100% privatized.

According to Privatization Program for 1999 the allocation of privatization receipts has been changed in the following way: 90% of the total receipts (80% in 1998) are to be transferred to the State Budget. Administration of privatization program and privatized enterprises development will receive 5% of receipts each.

According to the data of the SPF, 5477 entities changed their ownership form in 1999. More than two thirds of them were owned by the respective state administrations and local authorities. The rest were the state-owned entities. Municipally owned assets were mostly privatized through the buyout by the partnership of buyers (61.1%) while the state-owned entities were more often privatized through auctions.

In 1999 the number of entities that were selling shares in OJSC decreased almost twice (1.8 times) as compared to the previous year. This was the result of the suspension of privatization by a significant number of enterprises whose blocks of shares were temporarily retained under the state ownership. As a result, majority of small-size entities (Group A, Group G and a portion of Group E entities) were subject to privatization in this year. Their share was nearly 86%. Share of medium- and large-size entities (two thirds of them were unfinished construction projects and bankrupt enterprises) accounted for nearly 14%. In 1999 the number of “de-statized” integral property complexes nearly three times decreased as compared to the previous year. At the same time number of structural units that changed the ownership form increased by 1.2 times. In 1999 the share of structural units in the overall number of “de-statized” entities was 82.4%, the share of privatized integral property complexes was 9.2%, some others accounted for 8.4%.

This situation was a result of purposeful policy, that privatization was one of the components necessary for the establishment of the investment attractive climate. For this purpose the SPF in cooperation with the bodies authorized to manage state-owned property carried out pre-privatization restructuring of enterprises. Restructuring included package of measures aimed to adjust enterprises to market conditions, to increase market value and liquidity of entities.

Recently the State Property Fund carried out 925 transactions selling shares in open joint-stock companies to strategic investors under investment commitments. In each of these cases investor not only paid the cost of shares but also undertook investment commitment. For the period of 1995—2003 investment commitments totaled UAH 2242.9 million and $ 671.8 million. Every fifth agreement was closed for the enterprise that is of strategic importance to the economy and security of the state. During this period UAH 1811.2 million and $ 597.3 million are to be invested in these enterprises.

In fact, as of January 1, 2000 UAH 641.3 million and $ 368.2 million were invested. Shares of investments into strategic enterprises were 58.6% and 82.9% respectively.

Results of money-driven privatization in 1999 may be characterized by the following data:

In 1999 enterprises engaged in trade and public catering remained the priority of privatization (42.1% of the overall number of “de-statized enterprises”). Share of entities engaged in consumer services has reached 11.7% of the overall number of entities privatized this year. Privatized enterprises of public utilities accounted for the same share. Only 220 industrial enterprises were privatized (or 4.2% of the overall number of “de-statized” entities) that is nearly two times (1.9) less than in the previous year.

The results of the selling blocks of shares in open joint-stock companies (medium- and large-size enterprises) showed that the highest demand was for the enterprises of metallurgy industry (26% of the overall volume of sales), power industry (25% of the overall sales) and chemical and petrochemical industries (19% of total sales). The share of enterprises of machine-building and metal works was 8%; the share of other enterprises (wood-processing, construction, light and fuel industries) did not exceed 3%.

The largest amount of receipts (UAH 356.6 million) in 1999 was from privatization of power companies. In 5 power companies out of 31, the 50% + 1 share blocks were retained in the state ownership, in 1 power company the state owned the 51% block of shares and in the rest of these companies the 25% blocks of shares were passed into the state ownership. According to the SPF data the privatization depth varies from a minimum of 14.23% in the state-owned joint-stock company “Donbasenergo” to maximum of 72.98% in the state-owned joint-stock power company “Symyeoblenergo”. Privatization depth exceeded 60% of the authorized fund in only 7 power companies.

According to the 1999 data of the State Committee of Ukraine for Statistics in industrial sector, 55% of industrial outputs of Ukraine were produced by privatized enterprises. Production output of privatized enterprises exceeded output of their state-owned counterparts by 1.9 times in almost all industries (excluding power generating and fuel industries). It should be noted that the share of privatized enterprises in these very industries was the least and accounted for 16.2% of overall number of enterprises in these industries and 27.6% respectively)

The largest shares of privatized enterprises were in industrial output of ferrous industry — 78.2%, light industry — 77.3%, pharmaceutical — 75.9%, wood processing and pulp-and-paper — 74.2%, food industry — 73.3%, machine-building and metal works, non-ferrous metallurgy, chemical and petrochemical, glass, ceramic and earthenware industries, production of construction materials — 59—68%. Privatized enterprises of sugar industry, railroad machinery industry, machine-building for light, food processing and metallurgical industries, rubber and asbestos industry, cotton industry, manufacturing of home appliances and machinery, paint and varnish industry, manufacturing of technological equipment for food processing and production of compound animal foodstuff, production of artificial leather and filmlike materials, brewing industry, manufacturing of medical products from glass, ceramic and plastics, tobacco industry produced 91—99% of the total output and the output of privatized enterprise of silk and tire manufacturing industries totaled 100%.

In some regions of Ukraine, the amount of production by privatized enterprises exceeds the amount of production by privatized enterprises in industries in general. Thus, in Chernivtsi oblast privatized enterprises produced nearly 90% of the total volume of industrial production, in the oblasts of Zaporizhia, Cherkasy and Sumy — 73—78%, in the city of Kyiv, Kherson, Volyn, Zhytomyr and Donetsk oblasts — 61—68%.

In the first nine months of 1999 the general financial results of the privatized enterprises performance were positive and accounted for UAH 1440.3 million. This means that total income figures of profit-yielding privatized enterprises exceed the lack of profit of enterprises operating at a loss that have also changed the form of ownership. Out of total number of economic entities operating in the real sector of economy the highest budget revenues from taxation came from enterprises of nongovernmental sector of economy. In the first half of 1999 these revenues accounted for 74.1% (62% — in 1998) By the moment the article has been written the annual data on financial results of privatized enterprises was not available. . In addition, the amount of dividends transferred to the State Budget by joint-stock companies established in privatization process and in which the state owned blocks of shares, totaled to UAH 70 million.

Enterprises and organizations that had changed their ownership form intensified their investment activities. Rate of increase in capital investment in these enterprises was 119.5% and well exceeded the nationwide level as compared to 1998 (in general in Ukraine it was 102.5%). In 1999 the amount of capital investment in privatized enterprises was UAH 2577.5 million, that accounted for nearly 20% of total capital investment in Ukraine (for example, in 1996 this share was less than 12%).

The 88.6% of the overall number of enterprises that changed their ownership form directed investments in the production sphere (the share of enterprises and organizations of all ownership forms that made investments in production is 70.2%; 79% of state-owned entities also invested in production sphere). An especially big share of investment was directed into construction of enterprises that changed their ownership form in meat-and-dairy and food industries — 74% and 73.1% respectively of the overall investment in the development of these industries. This index is also high in oil extraction (69.8%) and printing (68.8%) industries, machine building (68.3%) and ferrous metallurgy (64.8%).

The above data shows the huge potential of the non-governmental sector of the economy. Privatized enterprises reconstruct their production facilities more intensively. Improvement of their performance and financial situation has become a general trend, which is supported by extensive research and by a comparison of public and non-governmental sector activities by industries and enterprises.

The fundamentals of this Program will remain unchangeable in the course of three years and this is its main characteristic feature. Throughout this period only some amendments concerning the sales time frame for some entities and the targeted budget revenues from privatization may be introduced.

Privatization Program fundamentals are based mostly on case-by-case approach to pre-privatization preparation of enterprises subject to privatization. In the first place, this concerns the assessment of the level of demand for a privatization entity with due regard to market conditions to identify privatization techniques taking into account basic performance of each privatizable enterprise (production, technology and financial position). These requirements will be implemented under stable legislation, integral property complexes will be sold through auctions or tenders and controlling stakes in profitable strategic enterprises are to be sold through open bids. This will ensure competitiveness and transparency of the selling process which in addition will be conducted without investment commitments set forth in advance. At last it became possible to change the stereotype that only the state, but not the strategic investor is capable of determining the amount and orientation of investment in an enterprise.

Strategic and monopoly enterprises are to be sold solely to industrial investors (national and foreign). According to 2000—2002 State Privatization Program industrial investors have to comply with the following requirements:

Financial intermediaries as well as the companies registered in offshore zones are not allowed to participate in privatization of strategic and monopoly entities. This requirement is purposeful. It is well known that recently the majority of winners at competitions/tenders were the offshore companies which directed financial flows of privatized enterprises to the accounts of offshore banks and not to the budget or to the enterprises.

Considering the fact that the biggest amount of privatization proceeds will be received from privatization of strategic entities and monopolistic enterprises the new privatization program stipulate two radical changes in their privatization. The first means more strict approach to the procedure of retention in the state-ownership of the controlling stakes. The process of retention of the block of shares in the state-ownership becomes public. It is necessary to prove the expediency of the retention of share blocks in the state ownership taking into account the proposals of the bodies authorized to manage the state property and those of the SPF, potential buyers, public prosecutor’s office. The second radical change is the simplification of the procedure of obtaining the consent of the Antimonopoly Committee of Ukraine (AMC) for the purchase of block of shares. This consent has to be received prior to the beginning of the sales of shares.

Principally new provisions are introduced into the Program in order to establish more favorable condition for activities of industrial investor. First, provided the industrial investor will comply with its commitments stipulated in the purchase and sales agreement it would be granted a right to purchase a share package retained in the state ownership, but not earlier than in three years after the purchase of the block of shares. Second, several blocks of technologically linked enterprises may be offered for sale with the aim of increasing the investor’s influence on the restructuring of the market. The purchase and sale agreements shall contain provisions on penalties for non-compliance of investor with its commitments to the purchased block of shares. In case of termination of a purchase and sale agreement on the basis of court/arbitration court decision through default on the part of the buyer on its contractual commitments the respective block of shares shall be transferred to the state ownership. Before the buyer fulfills in full volume the terms and conditions of the purchase and sale agreement, he will be prohibited to sell the share package by portions; additionally he will be prohibited to resell the share package unless the buyer assumes all the commitments specified by the terms and conditions of the tender, auction or buy out.

Summing up terms and procedure of privatization for the next years it may be said that the Government has carried out a significant work to meet State Privatization Program targets. First, number of enterprises prohibited from privatization was minimized. The prohibitive list included 6102 enterprises in 1994. As of January 1, 2000 only 1307 enterprises remained on the list. In addition over 300 enterprises that are not subject to privatization can be corporatized112 Corporatization means the process of state-owned enterprises transformation into joint-stock companies. At the same time 100% of shares are retained into the state ownership.2. Second, the Government has approved three lists of enterprises whose blocks of shares are to be offered for sale according to the new privatization program. The first list includes 254 most attractive enterprises. Enterprises of strategic importance to the economy and security of the state and monopoly enterprises do prevail in this list. Shares in 34 of these enterprises will be sold with the assistance of advisors. The second list includes 859 joint-stock companies whose blocks of shares (25% of the authorized fund and more) will be offered for sale in 2000. The third list includes 1013 joint-stock companies whose blocks of shares (less than 25% of the authorized fund) are subject to sale in 2000.

Characteristics of 147 most attractive enterprises of strategic industries to be privatized in the nearest future are given below (Table 4).

In addition, State Privatization Program stipulates extension of privatization field by:

Despite the significant positive changes in privatization process in Ukraine there are a number of unsolved problems. At the stage of case-by-case money-driven privatization it is especially important to concentrate efforts on completion of sales of partially privatized enterprises in order to provide them with possibility to efficiently operate. Privatization of strategic enterprises should be accelerated and these enterprises should be subsequently restructured in order to better adjust them to conditions of market economy.