Privatization was called to draw in all of the branches of Ukraine’s economy. The biggest share of potential enterprises for privatization were concentrated within the branches with the highest impact on consumer, market development such as trade, public catering service, household services, food and light industry and processing of agriculture products. Also to be privatized were enterprises impeding economic growth such as loss-making enterprise in all the branches, unfinished construction sites etc.

The goal of rapid privatization has automatically excluded resorting to a classic model of privatization (through sales made at the real estate and stock markets). In a country without private capital and market infrastructure and no public confidence in the institute of private ownership, privatization could only be implemented as an artificial process. Implementation of voucher privatization model has facilitated resolution for this problem in the Czech Republic, Slovakia, Russia and Lithuania. The voucher model was also approved for Ukraine. Apart from pure technological advantages, while envisioning attraction of the entire population of Ukraine through assigning each citizen with an equal amount of “privatization money”, the voucher model has also met the social expectations. Attraction of the entire population into privatization was a good way to enlighten people about both the investment process and the risks it is accompanied with.

Legislation defining voucher model has undergone a substantial change (distortion) due to political (bureaucratic) and social compromise. This, on the one hand, has allowed starting the process immediately; however, on the other hand, it caused some negative ramifications for the entire privatization process.

First, Ukrainian voucher — privatization certificates did not have free circulation. They were inscription certificates and initially existed as deposit accounts; then the paper form was introduced in 1995. Later illegal forms of free circulation of vouchers which contributed to substantial promotion of the shadow economy.

Second, no scheme of the vouchers’ use that would provide for delimitation between the monetary and voucher circulation by object and method of privatization was devised. Bureaucrats were in charge of these decisions. The spirit of compromise permeated the entire privatization legislation. Privileges to enterprise employees, restrictions on the investors’ activity and bureaucratization of the privatization process are three main types of deviations from a liberal model of voucher privatization.

Main privileges to enterprise employees:

Bureaucratization of the privatization process:

It should be underscored that all those years have seen privatization process as a field for a violent political battle. Initially, the battle was to restrict the privatization process. Later, with acceptance of its irreversibility the campaign against privatization has been transformed into a battle aimed at using privatization in the interests of the political pressure groups.

The most important episodes of this battle are:

Therefore, the SPF was deprived of monopoly right to represent the state as proprietor in the privatization process. Further on, the executive and legislative branches are in a steady battle aimed at preclusion of the SPF’s special status, which has initially ensured its (SPF’s) relative independence from other bodies of the executive branch in its privatization policy.

In the period between 1992 and 1998, the State Property Fund has three times changed its subordination from the Verkhovna Rada to the Cabinet of Ministers of Ukraine.

The Constitutional Court of Ukraine Constitutional Court. Decision as of July1, 1998 # 9-ÐÏ. ruled out the SPF’s subordination to the Verkhovna Rada as unconstitutional. In full compliance to this decision, the Decree of the President of Ukraine established that, being a central organ of executive branch, SPF is to be in subordination of the Cabinet of Ministers of Ukraine Decree of the President of Ukraine “On changes in the system of central bodies of the executive branch of Ukraine” as of March 13, 1999 # 250/99. .

The Verkhovna Rada was particularly active in extension of the sphere of employees’ privatization. 50 legislative and subsequent normative acts alone were devoted to the issues of lease and lease with right to purchase. As of 1992, 7 legislative acts restricted and renewed the special rights of the lessees to purchase out the leased objects. It is not until 1997 that, by adoption of a new version of the Law of Ukraine “On privatization of the government property,”7 buying out were ultimately eliminated as a method of privatization, which entitled the lessee to special rights in purchasing the leased object. Leased objects are privatized according to privatization legislation. Additional privileges for middle — size enterprises have been introduced. Managers received the primary purchase right for 5 and later 10% of shares in their enterprises.

The most radical step in imposing privatization to agroindustrial complex enterprises (AIC) The number of state enterprises in AIC, before privatization, amounted to 9 thousand, including 2.5 thousand of the state agricultural enterprises. was made in 1993. The relevant law envisioned the following:

Numerous efforts to privatize non-agricultural land proved unsuccessful. Initially the plan was to sell the land concurrently with unfinished construction sites and gas stations Decree of the President of Ukraine as of October 14, 1993 # 456/93 “On privatization of the unfinished construction sites.”. However, due to the Verkhovna Rada’s failure to effectuate the document authorizing the right for private ownership for non-agricultural, land these objects have been sold without land.

Only a small portion of land plots was privatized on the basis of the Presidential Decree “On privatization and lease of non-agricultural land plots for entrepreneurial activity. Decree of the President of Ukraine as of July12, 1995 # 608/95 “On privatization and lease of non-agricultural land plots for entrepreneurial activity.” ” Privatization was actually blocked by the local self-governance bodies.

A new Decree of the President issued in 1999 launched a new attempt to privatize the land plots under enterprises and unfinished construction sites privatized according to Ukrainian legislation Decree of the President of Ukraine as of January 19, 1999 # 32/99 “On the sale of non agricultural land plots.”.

The plan is to sell roughly 500 thousand hectars of land (less than 1% of the entire Ukrainian lands), whose value is estimated as 40 billion UAH. It is assumed that the different level budgets will receive up to 1 bln. UAH during the first year following the decree’s implementation. The government budget received 8 mln. UAH, and privatized 105 land plots with an average price of 100 thousand UAH per hectar during the first month since effectuation of the Decree of the President on March 4, 1999.

Considering rather high prices for the plots of land, and that the proceeds from their sales may for a rather short time replenish the local budgets (provided that the budget policy is tight), makes it possible to assume that the local bodies will not block the process.

As of 1993 the idea to use privatization to cover the budget deficit has become a foundation of the government’s policy. The share of revenues to the budget has been increasing from 50% in 1993 to 90% in 1999. Intentions to use these proceeds to carry out post — privatization restructuring of enterprises have been postponed until the better days in the future.

A nåw means of payment for privatization objects — compensation certificates — were introduced into circulation in 1994. The government intended to use the compensation certificates as citizens’ compensation for the inflation-eroded money that was placed on accounts of the state bank and state insurance company Decree of the President of Ukraine as of November 24, 1994 # 698/94 “On compensation of the citizens of Ukraine for the losses of their savings placed in the establishments of the Savings Bank and Ukrhosstrakh.”. Injections of this new type of “privatization money” into the effective mechanism of privatization, along with the Verkhovna Rada’s removal of a considerable number of objects from the privatization list, have destroyed the balance between the privatizable property and the value of all privatization papers. The latter have suffered depreciation. According to Presidential Decree, the nominal value of a compensation certificate amounted to 10 Hryvnyas (roughly 2.5 of USD); whereas the market value was 4–5 times lower.

However, introduction of compensation certificates was positive in terms of the privatization’s rate and depth. Legislatively imposed restrictions on circulation of privatization certificates did not apply to compensation certificates. Compensation certificates were issued as entitled to free circulation; the auctions with the use of compensation certificates contributed to formation of equilibrium demand-offer prices. This, actually, allowed for the sale of a large group of poor liquidity objects. The circulation of compensation certificates was suspended in 1998.

Absence of rigid algorithms for privatization has distorted its results in favor of influential social groups (enterprise managers and regional bureaucracy).

The predominate role of bureaucracy in the decision making process led to the following:

This regularity characterizes all of the privatization procedures.

i. Pre-privatization stage (1988–1992);

ii. Individual technologies stage (1992–1994);

iii. Mass privatization stage (1995–1998); and

iv. Stage of individual money privatization (since the beginning of 1999).

The first stage started in 1988 within the former Soviet Union, actually allowing private businesship in a form of co-operatives. In 1991, a number of laws were passed in Ukraine to create legislative grounds for businesship. Given weak government control, every business agent developed both legal and shadow activities. Small capital attempted to create niches for themselves in the underdeveloped consumer market, while middle and large capital (on the Ukrainian scale) benefited from the non-equivalent exchange between the state sector and private sector of the economy. In 1991–1993, the process developed into a semi-legal activity. Thousands of so-called “small businesses” were arranged in a form of subsidiary firms of the large state-owned enterprises and departments; moreover, top managers, through dummies, established some small businesses. Previously created co-operatives have also contributed to this process. Profits were channeled through these “small businesses”, trade monopolies and financial firms of mixed (state-owned and private) form of ownership, but also state property. In 1993, the process entirely shifted to the shadow sector because of changes in legislation. However, the described scheme of initial accumulation of capital still remains significant for the accumulation of large private capital in Ukraine.

Basing on the underdeveloped rental legislation, the collectivist approaches to privatization have received wide acceptance. Managers pioneered w îrêårs’ buy out of large enterprises by the funds of these enterprises. At that time, a conflict between the legislation on renting and legislation on privatization arose; the possibility to overcome the conflict at the expense of the latter occurred at the stage of mass privatization.

At the second stage, 11 thousand enterprises were privatized; however, the government has failed reaching the pace of privatization targeted in the first Privatization Program. The structure of the privatization process, — the ratio between mass and large privatization in particular-has been distorted. In the course of the stage, middle and large enterprises constituted a majority of those enterprises shifted to the non-government sector of the economy. The privatization process started embodying unusual forms. In contrast with other countries, Ukrainian trade, services and public catering were not transformed into the spheres of immediate privatization. Instead, the industrial giants and monopolistic enterprises (usually those documented as the enterprises on lease with right to purchase) became the main privatization units although they belonged to those industries, which should have been privatized later – when the matured market environment.

The substitution of the privatization certificates (which were not issued in a form of paper certificates) with deposit accounts hampered the development of the securities market.

The privatization process was slack and passive. The process was pioneered from below and conditioned by work collectives. The transformation of ownership occurred in a form of “spot privatization” of occasional units. Chaotic shrinkage of the public sector destroyed technological and economic connections, deteriorating into crisis.

In 1994, the government attempted to impart a mass character on privatization. For this purpose, the technology of “two waves” of privatization was developed. The technology aimed at an uninterrupted and regular privatization procedure: while one group of enterprises was privatizing, the next group was in the process of preparation to privatization (i.e. in the transition to a form of join-stock companies) so as to ensure a continuous process of mass privatization of enterprises. However, this idea was not implemented because of lack of its legislative base. One more reason was that the ministries (departments) have failed to reach the targets of enterprise corporatization.

At the stage of mass privatization, the average annual pace of privatization increased by more than 2.5 times. During 1995–1998, some 50,000 units were privatized.

International organizations took a great deal of assistance arranging mass privatization. The International Financial Corporation – an independent member of the World Bank Group – participated in the small privatization project. The small enterprise privatization was intensified at the end of 1994 at the beginning of 1995, with several of the Presidential Decrees on the acceleration of privatization process.

The Decrees embodied the following measures:

As a result, more than 90% of all the enterprises engaged in trade, services and public catering were transformed into private enterprises.

Average annual pace of small-scale privatization for that period increased by 2.8 times. In 1995–1998, 40.4 thousand small enterprises have changed the form of ownership.

“PriceWaterhouse”, an international consulting firm financed by USAID, contributed greatly to the development of privatization legislation and technical assistance in implementation of the Mass Privatization Program for the large and middle enterprises.

The firm helped establish the network of certification auction centers throughout Ukraine (including 25 oblasts and cities of Kyiv and Sevastopol). In a period of four years, the shares of more than 8,000 enterprises were listed at the certificate auctions, and more than 33 million of citizens (or 66% of those entitled to have the certificates) used the possibility to obtain a share of state property.

These measures opened up possibilities to increase the average annual pace of privatization almost by two times; i.e., 8.1 thousand of enterprises have been privatized within the period.

At the beginning of 1999, when the Fourth State Privatization Program was approved, privatization entered its fourth stage of primarily individual money privatization Decree of the President of Ukraine “On the State Privatization Program for 1999” #209/99 from 02/24/99..

There were the following reasons to shift to money privatization:

In 1999, the new large engineering, transport, telecommunication, oil and gas processing complexes will be subject to privatization.

It is suggested to use an individual approach to privatization aimed at increasing attractiveness of privatization units and liquidity of emitted securities due to the restructuring of enterprises and their debts.

As extended range of financial organizations involved in the sales of privatization units became the new feature of privatization. Beside the traditional sales on the stock exchanges, auctions and tenders, there are some additional ways to sell the shares:

It is projected to sell 5500 small objects (primarily those established upon restructuring of the large enterprises). At the same time, the privatization of electric power enterprises, the sales of which gave the main revenues in 1998, is not planned.

Five oblasts of Ukraine (Donetsk, Lviv, Dnipropetrovsk, Kharkiv, and Odessa) and the city of Kyiv are among the leaders of privatization. They cover 45.2% of total number of the privatized units.

Non-competitive ways of sale of a property (buy-out by company of purchasers and rent with a right to buy out) dominated the other ways during the process. As of 01/01/99, the percentage of non-competitive and competitive (tenders, auctions and sale of shares) ways of privatization accounted for 62.5% and 37.5%, respectively.

The process of transformation of ownership was especially intensive in trade and public catering (27.776 units, or 45% of the total number of the privatized units), household services (11.256 units, or 18%), industry (6760 units, or 11%), construction (3181 units, or 5%), agriculture (2956, units or 5%), and housing/communal sphere (25 to 32 units, or 4%).

Sale of shares of join stock companies became the principal way of privatization in industry (61% of total number of the privatized units in the branch of industry). This indicator was even higher in certain industries: 80.8% in electric power, 72.2% in engineering, 70.5% in ferrous metallurgy and 70.2% in food industry.

The buy-out by the companies of purchasers (primarily by insiders) dominated in the course of privatization of cultural establishments (77.6%), household services (56.1%), trade, and public catering (46.4%).

The research conducted on the IFC survey has shown that the prevailing number of small enterprises (73.9%) has increased their volume of sales and services as well as the number of their clients. The methods of privatization precipitated the differences in post-privatization performance of enterprises. Enterprises that were privatized on the basis of competition are more efficient than those purchased by the worker collectives.

While making assessments of medium-size and large enterprises, the following should be considered:

As of 1997, the initial signs of differences in the efficiency of the government and corporate economy sectors have started to emerge. Comparison in the branches with no government regulation of prices shows that, the general decrease in volume in-dicators being the same, non-state enterprises have better used labor and capital and thus achieved better profitability J. Szyrmer, V. Dubrovskyj., T. Shigaeva “Non-government sector works better”// ISPC press, 1999, #1 p.49..

Six-and a half years of privatization resulted in creation of a large non-government sector in the economy. Reduction in the share of state ownership in the production sector to 50 percent over a period of 3 to 4 years was determined as the most immediate task in 1992. According to the reformers, this would insure the irreversibility of the new market system. In 1997, the government shares in assets of the production sector decreased from 81.4 percent (1990) to 55.7 percent. In number of employees (excluding collective farms and small enterprises), government share decreased from 82.9 percent (1992) to 60.6 percent. In profits (excluding agriculture), government share slid to 29.7 percent. (Sources: Statistical Yearbook of Ukraine 1996, p. 345–346; “Ukrainian Encyclopedia” publishing house Statistical Yearbook of Ukraine 1977, p.313–314, “Ukrainian Encyclopedia” publishing house 1999.) Privatization of large enterprises was a distinct feature of privatization in 1998. Extrapolation of the above-mentioned rates provides a basis to state that the government share in the capital assets of the economy’s production sector has further decreased to 50 percent, and to 55–58 percent in the number of employees.

Absence of an efficient proprietor at privatized enterprises is the cost of politization, socialization, and a fast rate of privatization with little private capital. Now, the economic goal of formation of a stratum of efficient proprietors must be implemented simulta-neously with other privatization measures during the post-privatization period.

Initially, privatization was envisioned as an element of a market system that would be accompanied by parallel rapid development of new private capital. New private capital would attract experienced proprietors, new management, and the funds for reconstruction and development. New private capital would, as well, con-vert formal legal privatization into tangible economic transformation. It was planned that consolidation of industry and formation of the stratum of efficient proprietors would occur on the secondary market of securities and in real estate.

It would be incorrect to claim that strategic plans for interaction between privatized enterprises and new private capital have entirely failed. Real privatization has been in progress for three years (since 1995). The process of consolidation of proprietary rights (integration of packages) has been significant for an inchoate market economy. 1997 witnessed major differences in the performance of state and non-state (collectively owned) enterprises. Comparison of performance of the two branches shows that, volume indicators being the same, non-state enterprises’ use of labor and capital was more effective than state-owned. Accordingly, non-state enterprises were also more profitable.

However, the minimal scale of positive change may not affect generally negative economic dynamics. Needless to say, post-privatization transformation has only begun. The following characteristics of national capital development may seriously interfere with the development of positive tendencies in post priva-tization processes:

From its very start a new government machine was constructed as a concentration of economic power, which is not as an instrument of the public power, but as its subject. The reformers underestimated the government machine’s potentials for self-development in meeting its internal bureaucratic interests. This resulted in distortions of Ukraine’s economic development, which was biased according to the interests of bureaucracy and the social groups that are the closest to it, such as the high managers of large government and privatized enterprises. Organizational structure of the government machine, production sector administration technology, structure of private capital, and reforms’ development graphically demonstrate these distortions.

The government machine’s attributes are: undefined and imperfect ownership rights, over-regulation in the economy, artificial monopolization of markets, soft budget policy aimed at selected support of individual branches and enterprises, weak proprietary responsibility of economic subjects that are closely related to the government, and the practice of selected punitive measures. These are responsible for private capital dependence on the bureaucracy and its selection in this direction. Actually, this is not an invention to meet the needs of Ukrainian bureaucracy, but a result of creative transformation in socialist economy attributes.

Elimination of political goal setting precipitated a principal increase in bureaucracy’s status. In Soviet days, the Communist party performed this role. Total party control has actually set up the algorithm for the bureaucracy’s behavior, including the forms and boundaries of accepted corruption. Ukraine has failed to briskly create a democratic alternative to the Communist Party as the higher goal-setting and controlling block of the government machine. This, however, has its own objective causes. Democratic countries have been developing this block in the course of their historical development. Therefore, its structure is very complicated and includes: mechanisms of party and parliamentary democracy, independent judicial supervision, control on the part of the mass media and non-governmental organizations. This system of goal setting and control on the part of society requires an accomplished structure, political maturity and active involvement of the society at large.

Fast establishment of more or less efficient socio-political goal-setting mechanisms in the East European countries and in the Baltic’s Republics and a failure to do so in Ukraine, Russia and Bilarus clearly demonstrates the differences in the political maturity of society.

In the absence of such mechanisms, the recreated government machine in Ukraine has kept the staff, values and administration technologies inherited from the Soviet economic system. A weak mechanism of socio-public control has allowed the bureaucracy to substantially distort the economic reformation processes for its own benefit. Having become entirely incompetent in the new economic environment, to implement its interests the bureaucracy has chosen the only familiar technology. It is feasible to assume that the competent bureaucracy, with a similar status and corruption level, would have implemented the other economy model that would be more logical, efficient and market oriented.

On the other hand, the Ukrainian reform experience has continuously demonstrated that lack of competence even in combination with the most sincere intentions to make the efficient decisions is leading to a mutually destructive mixture of both market and anti-market measures.

The above presented cause and effect scheme of post communist development of the state and economy calls for a new emphasis to be introduced into reform strategy in Ukraine. Most important of them are enhancement of policy, aimed at formation of civic society and streamlining of administrative reform, while privatization is called to stimulate creation of an influential government- independent sector of private capital.

Search for a large investor who would be willing to engage in an equal, responsible dialog with the government is to be made a core of privatization strategy. Hence, the conditions of tender are to restrict the number of bidders to big international producers in a certain field. The winner in the tender is to receive a major stock package with minimum number of non-price requirements. In the overwhelming number of these cases (exceptions are possible), a producer is undertaking a profound restructuring of the purchased enterprise. It should be underscored that this kind of reconstruction is considerably more efficient than implementation of the official bureaucrats’ deliberated investment requirements.

Following the above given procedure, the largest Ukrainian enterprises will go into the hands of big foreign capital, which is neither legally nor through the shadow connected to new Ukrainian capital. The negative factor – a potential threat for national security is to be eliminated through a well thought out system of market regulation by the government. Therefore, improvement of this system based on liberal economy experiences is both an important prerequisite and component of the current stage of privatization, as well as a significant component of administrative reform. Positive consequences of mass expansion of foreign capital are obvious. Given that this stage of privatization is accomplished quickly enough (between 3 and 4 years), the critical mass of private production capital will be formed in Ukraine. This capital will be:

There is a hope that big foreign business will both successfully compete with domestic bureaucratic capital and shrink the field of its shadow transactions. Therefore, the choice of this trend of privatization will inevitably lead to allegations of a lack of patriotism, infringement on Ukraine’s security, and neglecting the interests of domestic producers. However, Ukraine will benefit from everything that could contribute to removal of shadow transactions. At the same time, emergence of bureaucracy-independent competitive market will only contribute to development of domestic production capital.

Copyright© 2000, The Ukrainian Economic Monitor