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Many parties interfered with the State Property Fund (SPF) efforts to carry out privatization in 1999. The endless audits of the Fund initiated by the public prosecutor's office, the Government and the President's decisions to suspend privatization of some strategic enterprises and especially, according to Alexander Bondar, the Head of the SPF, the activities of the National Corporate Rights Agency which stimulated the Government to retain in a long-term state ownership controlling and blocking stakes in the most attractive enterprises. It transferred them to the authorized ministries, institutions and private companies for management, and carried out a large-scale program to increase the value of fixed assets of the enterprises subject to privatization by the amount of indexation.
The last year has also brought about radical changes in the theories of privatization in Ukraine. The task to replenish the State Budget by proceeds from privatization and not simply increase the number of the sold (denationalized) objects has come to the forefront. Special stress was made on the “money-driven” privatization.
According to the results of the year, the SPF transferred to the budget UAH 694.6 million and thus fulfilled 86% of the projected target. The 1998 budget revenues from privatization amounted to only UAH 360.2 million against projections of UAH 1.5 billion.
According to official figures of the SPF in 1999 the total revenues from privatization of the state owned property amounted to UAH 764.1 million, including UAH 645.7 million collected by the SPF Central office. Proceeds from sales of blocks of shares through stock exchanges amounted to UAH 303.9 million and sales through specialized auctions raised UAH 11.4 million.
The targets of 1999 State Privatization Program for number of privatized entities were met in the various groups, as follows: Group A – 76.5%, Groups B, C, D — 69.7 % (317 entities), Group E — 124.1 % (499 entities), Group F — 179.8% (169 entities), Group G — 71.8% (239 entities).
The number of the denationalized entities by the groups are as follows: Group A — 694, Groups BCD — 257, Group E — 443, Group F — 166, Group G — 173. According to the privatization methods the largest number of assets were sold through auctions — 53%. In addition 21,6% of the assets were bought-out by the partnership of buyers, 7.3% were sold through commercial tenders and 1.2% — through noncommercial ones. The remainder were transferred by the other privatization methods, including leasing with buy-out.
In the previous year 629 blocks of shares (with the face value of UAH 264.2 million) were sold through stock exchanges and PFTS (over the counter trading system) for the amount of UAH 355.9 million. Out of 88 blocks of shares in the Group G objects (strategic enterprises) the selling price exceeded the face value in 54 cases.
According to the results of competitions/tenders initiated by the SPF's regional departments (180 tenders with the blocks initial price of UAH 249.8 million) 20 purchase agreements were closed for the sum of UAH 13.1 million and the agreed upon investments amounted to UAH 62,6 million and $ 1,6 million. The Central Office of the SPF announced 98 competitions/tenders with the initial price for the blocks of shares of UAH 1202.9 million that resulted in the closing of 25 agreements and the payments at closings in the amount of UAH 234.4 million. The closed agreements involved agreements to make future investments in the amount of UAH 742.3 million and $ 34 million.
The main document that regulates privatization is the Decree of the President of Ukraine # 1626 “On Urgent Measures Aimed to Accelerate Privatization in Ukraine”. The Decree states the state privatization policy for 2000—2002 and will provide the basis for all subsequent decisions of the Government and the SPF in the field of privatization. This Decree makes it possible for the SPF to carry out privatization “in a new way” until the Law “On Privatization Program for 2000” is approved by the Parliament.
Among its principal provisions special attention should be drawn to the following:
• to ensure the state budget revenues in amount equivalent to $ 3 billion, including $ 500 million — in 2000;
• to offer the sale of shares in the strategic and mo-nopoly enterprises to industrial investors without investment commitments and as single blocks of shares if possible is now a priority of the Pre-si-dent. The privatization of medium and large enterprises should be completed by using a flexible pricing policy and by simplifying the privatization plans for such enterprises;
• to restructure arrears of the enterprises under privatization and their debts on loans guaranteed by the state and to include these liabilities into the sales terms;
• to elaborate and submit for the approval by the Parliament the draft Laws on privatization of the state-owned company “Ukrtelecom” and on reducing the list of enterprises banned for privatization;
• to transfer to the SPF a list of at least 4 000 unfinished construction projects for the subsequent privatization;
• to approve a list of at least 4 000 plots of nonagricultural land to be subject to sale in 2000—2001.
In addition the SPF was committed:
• to publish every year, by January 15, the list of the enterprises whose blocks of shares (25% and more) are to be offered for sale in the year of publication stating the size of the blocks of shares retained in the state ownership (variation of any sale from the published data is prohibited);
• to ensure in 2000 the sale of state-owned blocks of shares (25 % and less) in the joint stock companies established before January 1, 2000 through the authorized agents and at the share market;
• to undertake actions, in cooperation with the government, aimed to minimize the number of the blocks of shares retained in the state ownership;
• to analyze, in cooperation with the Antimonopoly Committee, the efficiency of the state-owned holding and joint stock companies whose authorized funds are made up of the blocks of shares retained in the state ownership and to submit proposals regarding liquidation of inefficient companies with a subsequent sale of the blocks of shares transferred to such companies' authorized funds.
In addition to the issuing the Decree, the President committed the Cabinet of Ministers of Ukraine, for the purpose of accelerating privatization process, to submit a draft Law On Tax Amnesty and Legalization of Profits for consideration of the Parliament.
In execution of the President's Decree, on January 18, 2000 the Cabinet of Ministers adopted a decision to sell blocks of shares which had been retained in the state ownership in certain enterprises which were attractive for investments. It has also ordered the SPF to alter privatization plans of these enterprises in order to require the selling of all unsold shares as a single block including the shares that were retained the state ownership. Appropriate amendments have been introduced and secured by the respective resolutions and orders.
On the basis of the Decree Provisions the SPF has defined the principal objectives for the privatization agencies for 2000. These were announced by Yurii Hryshan, Deputy Chairman of the SPF:
1. To ensure favorable investment climate in Ukra-ine for the buyers of the enterprises that are of strategic importance to the economy and security of the state or national monopolists in the national market of res-pective goods and services by means of:
• attracting advisors (national and foreign) to provide assistance in search for investors and sale of controlling stakes;
• selling controlling stakes without investment commitments and other aggravating conditions;
• granting to the buyer of the controlling stakes the priority right to purchase the block of shares retained in the state ownership after the expiration of the term of retention provided that the buyer complies with its commitments stipulated in the sales and purchase agreement.
2. To annually approve a schedule for the selection of advisers providing services for the preparation of enterprises for privatization and assisting in the sales on the competitive basis of the blocks of shares during 2000—2002.
3. To increase economic efficiency of privatization by applying individual approaches to denationalization of the enterprises by:
• preparing the enterprises for privatization, taking into account their financial position and condition of the property, their shares of the respective markets for their products as well as the volume of their sales;
• analyzing the level of the demand for the enterprise on the part of potential buyers;
• selecting and applying the most reasonable privatization method.
4. To ensure sale of the controlling stakes in the enterprises in industries which are atttractive for investment. In addition, to denationalize 18 enterprises in the fuel and energy business, 61 enterprises in the engineering industry, 25 enterprises in the iron and steel industry and 52 entities in the agribusiness.
5. To revise and to the maximum extent reduce the number and the size of the blocks of shares in open joint stock companies (OJSC) retained in the state ownership.
6. Privatization agencies should include in the sale of the privatization entities the land on which the entities are located.
7. To make sure that the buyers comply with the terms and conditions of the purchase, particularly the investment commitments.
8. To enable the property to be concentrated so that management is unified and the responsibility of new owners is increased.
9. To sell as a single block the shares of the OJSCs that were unsold at the time the decision to privatize is made.
10. To improve the valuation procedure of priva-tization assets. To make sure that the valuation me-thods in privatization process determine the size of the authorized funds of OJSCs and are based on the prin-ciples of fair market value.
11. To establish national standards for the valuation of property, machinery and equipment, tangible assets and the business as a whole in order to provide legal framework to the above mentioned processes.
12. To pay off debts to the State Budget, the Pension Fund and arrears of wages, the pricing policy in privatization should include financial restructuring.
13. To carry out pre-privatization preparation of the enterprises in order to make privatization assets more attractive to the potential buyers.
14. To ensure restructuring of the enterprises, inclu-ding restructuring by splitting when the enterprise has a monopoly status in the national commodity market as well as when the enterprise has structural subdivisions that are not closely linked technologically to the basic production of the entity and accordingly may be sepa-rated into an independent enterprise.
15. To prevent inappropriate buyers from parti-cipation in competitions/tenders and auctions for the integral property complexes, for controlling stakes in OJSCs that are of strategic importance to the economy and security of the state. Such buyers are buyers who do not present sufficient information so that it is possible to identify all economic entities that will assu-me control over further activities of the OJSC.
16. To ensure openness and transparency of all privatization methods, to provide a wide circle of potential investors with the information on priva-ti-zation enterprises through national and international mass media prior to the invitation for bids by priva-tizing agencies.
17. To conduct demand research for privatization assets by publishing information (that will be in compliance with international standards) on the enter-prises in the national and international press and elec-tronic mass media, including Internet.
18. To ensure publicity and transparency of the procedure on taking economically justified decisions to temporarily retain blocks of shares in the state ownership.
19. To publish the results of all types of sales in the editions of the authorized state privatization agencies after the final results of sales are approved.
Comparing the previous years privatization process to the ambitious plans of the SPF for the future, one must question the feasibility of current plans and targets of the privatization agency.
It should be noted for sake of justice that Priva-ti-zation program for 2000 does not mention any auctions selling enterprises for certificates, though some depu-ties of the parliament still try to pass a decision to hold the last auction on enterprises privatization for compensation certificates in May of this year. They also try to stipulate this auction in the Law “On Privatization Program for 2000”, which is now scheduled for the second reading in the Parliament. The National Corporate Rights Agency has been closed down by the Presidential Decree on Administrative reform and the Agency's functions were transferred to the State Property Fund. It is expected that lack of interagency hold-ups would allow for the elimination of one of the major obstacles to the privatization competitions/tenders held in 1999.
A joint Order of the SPF, the Antimonopoly Committee and the Securities and Stock Market State Commission “On introducing amendments to the Regulations on the order of holding competitions/ tenders selling blocks of shares in the OJSCs established in the course of privatization” was registered with the Ministry of Justice of Ukraine on March 16, 2000. It has clarified the issues declared earlier both by the President and the Cabinet of Ministers but which had no clear legal definition. A definition of “an industrial investor” has been elaborated and issues concerning payments for acquired blocks of shares and investment commitments have been settled:
• “an industrial investor” is a legal entity which is recognized as a buyer in accordance with the Law of Ukraine “On Privatization of the State Property” and manufactures products ( carries out work, provides services) similar to the products (works and services) of the enterprise being privatized and has long-term interests in the development of the respective enterprise.
• if a tender is offered a block of shares in an enterprise that is of strategic importance to the economy or security of Ukraine or which holds monopolistic position in the nationwide market of the respective products (work, services) the sales terms and conditions for the block of shares of this enterprise do not impose investment commitments.
• payment for the acquired block of shares could be made solely by pecuniary means in national currency. Besides, it could be done in two stages: 50% of the block value to be paid within 30 days on sig-ning purchase and sale agreement whereas the rest — in accordance with the concluded agreement.
The long negotiating process between the SPF, the Antimonopoly Committee (AMC) and the Securities and Stock Market State Commission (SSMSC), which started back in 1999, has at last been marked with reaching an agreement on questions concerning the procedure of determining the winner of the privatization contest/tender. A draft of amendments to the Laws on protection of economic competition has been worked out. It envisages alterations in the procedure of control over competition, the basic element of which was the so-called silent approval, i.e. when the state or its authorized body does not react within a month to the request of an enterprise on interpretation of a certain action it is taken for granted that the declared action could be continued and is a legal one. The regulations that prevent possible investors with dishonest intentions from participation in tenders are clearly worded now. In addition the draft requires that the owner should stipulate in the purchase and sale agreement all his doubts about the future behavior of the investor as well as respective sanctions.
In February the SPF took the decision to start marketing support to “2000 Privatization Program” in Ukraine and on the international market. It is planned to organize a road-show of Ukrainian enterprises subject to privatization in Vienna, New York, Kuala Lumpur and Moscow during 2000. The firm “Visil Hubert & Partners” (Munich) has been chosen to be a contractor for this campaign. As a result of this road show the SPF expects to attract large Western investors to privatization of Ukrainian enterprises; their participation will ensure efficiency of these enterprises after privatization.
First of all, the transformation of the legislative base coincided with the beginning of the Privatization — 2000. Although starting from the summer of 1999 the SPF has been developing the main directions of the privatization process for this year, the decisions were taken at the beginning of 2000.
Alexander Bondar, the Head of the SPF, stated in January that the SPF appeared not ready to undertake privatization in such scales. Large-scale competitions/tenders to sell enterprises had not been announced. In addition a new method of selling blocks of shares has been introduced — the one of selling them to an industrial investor with participation of advisors. In this case results could be expected later than after ordinary tenders/contests. All those coincided in time, and failure of a number of tenders/contests at the end of the last year due to the transfer of the state-owned blocks of shares for administration to the other legal entities has worsened the situation. Among the weaknesses of the SPS we should mention its unprepared staff as well as lack of sufficient experience among the Fund's personnel to sell enterprises to foreign investors. In fact such sales were quite few in Ukraine. Therefore the President accentuated the need to use advisors in privatization. Another major problem, however, according to the Head of the SPF is that at the present time the Ukrainian market lacks sufficient quantity of buyers.
The results of the first quarter of the year, however, give optimism at least for the first half of the year.
It should be noted that the plan of the targeted budget revenues for the first quarter of 2000 was not accomplished. During the first quarter, the SPF transferred to the budget only UAH 385 million
In January—March the SPF put for sale through stock exchanges blocks of shares in 524 enterprises with the face value of UAH 509 million, out of which more than 140 blocks with the face value of UAH 143.69 million were sold. The cost of the sold blocks at the contract prices was more than UAH 266 million The rest of the sum was secured by selling blocks of shares through commercial contests/tenders.
The most successful sales during this period should be noted especially. The 9% block of shares in Zaporizhia metallurgic integrated works was sold on February 23, 2000 at the Ukrainian Interbank Currency Market for a record at that moment of Ukrainian privatization amount of UAH 91 million. The SPF has never received a bigger sum for one block. The selling price of the block exceeded the face value by 3.6 times. In addition, on that same day the SPF received UAH 16.28 million for the 31.14% block of shares in the OJSC “Ukrainian graphite”. And the selling price exceeded the face value of the block 46 (!) times. On March 16, 2000 the SPF was paid UAH 27.37 million for the 25% block of shares in the Sumy Research and Production Plant named after Frunze. The selling price of the block exceeded the face value 30.8-folds.
Recognizing “Ukrainian Aluminum”, Ltd. as the winner in the tender/contest for the 30% of the authorized fund of the OJSC “Mykolaiv alumina plant” became the main event in late March. “Ukrainian Aluminum” offered UAH 547.2 million for the block of shares in “Mykolaiv alumina plant”. This amount exceeded the initial price by five times. In addition, “Ukrainian aluminum” undertook obligations to build in Ukraine an aluminum plant that would eliminate a technological gap in “Mykolaiv aluminum plant”.
The funds for the purchase price of the acquired block of shares would be transferred to the SPF by the end of May 2000. Though money was not transferred to the budget, the deal was agreed upon and the winner was determined in March, i.e. in the first quarter of the year.
Because “Mykolaiv alumina plant” was not sold until the end of March the SPF did not report the fulfillment of the plan of privatization revenues. This is a “tribute” to the previous government, which blocked the privatization of the enterprise by all possible means and reflected the lobbying interests of companies of doubtful repute.
Regardless of this fact the sum of deals concluded by the SPF in the first quarter of 2000 well exceeded UAH 900 million And now, feeling no pressure of the plan of the budget revenues in the second quarter the SPF intends to calmly start preparation of the companies to privatization for the next period. A good base for the future is made. It seems like already no one has doubts that by the results of the second quarter the sum received by the State Property Fund from privatization would exceed “the cherished” (planned) UAH 1 billion
Making comments on the Fund's plans for the future its Head has stressed the point that for the second quarter the SPF plans to put up for tenders/contests only large consolidated blocks of shares as it is stipulated by the President's Decree of December. Only unsold remainders will be offered for sale through stock exchanges. Among the tenders/contests that have been announced by now one may single out the tenders/contest for the 76% block of shares in the OJSC “Khartsyz pipe manufacturing plant” that is a monopoly enterprise manufacturing gas pipes of the type that can be used in the conditions of “North” (starting price of the block is UAH 333.75 million), the 25.22 % block of shares in the OJSC “Turboatom” (UAH 56.84 million), the 75.01% block of shares in “Yuzhnyi electric machine engineering plant” (UAH 18.73 million), the 61.25% block of shares in the OJSC “Mine “Komsomolets Donbasa”” (UAH 51.28 million).
In the nearest future the SPF plans to settle the problem concerning privatization of two largest enterprises in Ukraine (which at the same time are the biggest State Budget debtors) — Lysychansk oil-processing plant (the offered block of shares amounts to 67% of the authorized fund) and Petrochemical concern “Oriana” (92.53%). These enterprises privatization has been already postponed for a long time. According to its preliminary plans the SPF intends to sell these enterprises for a symbolic price but payment of their outstanding debts to the budget and on foreign credits guaranteed by the state will be set forth as a fixed condition of tenders/contests. These enterprises' debts exceed UAH 1.6 billion. By the way the Government of Ukraine has already got proposals from the foreign investors interested in acquisition of these enterprises. Among those proposals one can mark out the proposal of Russian Tiumen oil company that offered to purchase both enterprises at the same time under the condition that their outstanding debts to the budget would be restructured.
In addition the SPF announced the tender for advisors invited to organize sale on the competition basis of the shares in the power companies “Kyivoblenergo”, “Rivneoblenergo”, “Zhytomyroblenergo”, “Sevasto-polmiskenergo”, “Mykolaivoblenergo”, “Khersonobl-energo”, “Kirovogradoblenergo” as well as hold open tenders for the shares in the following enterprises: Group I — Donetsk metallurgical works, Makeivka metallurgical integrated works, Stahaniv by-product coke plant, Dnipropetrovsk metallurgical works named after Petrovskyi; Group II — Slaviansk ceramic integrated factory, Lysychansk rubber technical products plant, JSC “Rivneazot”; Group III — Poltava gas discharge lamps manufacturing plant, Zakarpattia plant “Electroavtomatyka”, “Azovkabel”, Dnipropetrovsk railway-car repair and building plant, Research and Production Firm “Luhansk accumulators”.
The SPF plans to launch large-scale privatization of the regional power companies (oblenergo) at the end of the year. Though the plans of allocation of oblenergo shares that are controlled by the state (20 companies out of 27 existing ones) for the period up to 2004 had already been published at the end of 1999, the SPF elaborated and submitted to the President for approval draft Decree “On introducing amendments and supplements to the Decree of the President of Ukraine #944/99 of 08.02.99 “On Some Issues of Power Complex Enterprises Privatiza-tion””. According to this draft Decree it is proposed to introduce amendments concerning the sale of the blocks of shares in power companies that were retained in the state ownership and pursuant to the Decree of the President of Ukraine “On Urgent Measures to Accelerate Privatization in Ukraine” to form single blocks of shares for sale through tenders/contests to a strategic investor.
The SPF proposes, in the first place, to put for sale all blocks of shares in power companies that were retained in the state ownership and to consolidate them with the blocks of shares offered for sale through contest/tender. It will permit to significantly increase both the attractiveness of the objects of sale and strategic investors' interest in their acquisition. In addition this step will positively affect the results of negotiations with IMF.
At the present moment only the Law of Ukraine “On Privatization Program for 2000”, which is in the second reading in the Parliament of Ukraine, can really effect changes into the plans of the SPF. The general policy of the Program, i.e. the intention to sell controlling blocks of shares in the strategic enterprises to industrial investors without investment commitments, raised the principal objections of the parliamentarians.
As Deputy Chairman of the SPF Yuryi Hryshan said, if even 10% of amendments proposed to be introduced into the Program would be adopted, all efforts that were made in order “to push” the Privatization Program forward during several months would appear to be useless and respectively the SPF would have to introduce significant corrections into its plans, and one may not even dream to meet the targeted budget revenues envisaged by the Law on the State Budget 2000.
Table 2
**Privatized oblenergo.
Annex 1
List of the enterprises whose blocks of shares (25% and more) are to be sold in 2000 (extracts)
Schedule of sales of the blocks of shares of enterprises including those that are of strategic importance or monopolistic ones for 2000, approved by the SPF's Order #369 of 02.23.2000 (extracts)
** — open regional auctions for cash,
*** — specialized auctions for cash
Note. Material from daily “Window on Ukraine” issued by the Information Agency “Expressinform” in April are used in this article.
Copyright© 2000, The Ukrainian Economic Monitor
