Ukraine continues large-scale privatization which was put on pause in March 2020 due to economic uncertainty caused by the coronavirus pandemic. The law on holding auctions for large-scale privatization has already entered into force, which means that all 23 state-owned enterprises can be put for sale by the State Property Fund and have a chance to find an investor and start a new life without government leadership. The Fund awaits not only replenishment of the state treasury by UAH 12 bln from privatization, but also an increase in foreign investment, new technologies, and job opportunities.
What prevents Ukraine from successfully selling state-owned enterprises?
The objects of large-scale privatization include state property and enterprises that do not perform critical functions for the state and whose book value exceeds UAH 250 mln. Its main difference from small-scale privatization is that the procedure does not pass through an electronic auction and involves investment advisors who prepare the object for sale and look for potential investors.
However, Ukraine has developed a negative image of privatization. Only 22% of Ukrainians support the sale of large state-owned enterprises. Especially distrustful of privatization are the elderly, who remember the infamous “voucher privatization” of the 90s, when strategic objects, such as metallurgical plants Ilyich Iron and Steel Works and Azovstal (Mariupol), Avdiivka Coke Plant, Nikopol Ferroalloy Plant, Ukrrudprom (Kryvyi Rih), Kryvyi Rih Iron Ore Combine, were sold for peanuts which resulted in the emergence of a class of “Ukrainian oligarchs.”
In general, since independence, the public sector in the country’s economy diminished to 11.5%. Since 1992, almost 133,000 objects have been “denationalized” in Ukraine which brought the budget only UAH 70 bln (more than USD 11 bln in terms of the average annual exchange rate of the hryvnia to the dollar). The sale of the Kryvorizhstal Iron and Steel Works for UAH 24.2 bln (with an initial price of UAH 10 bln) in 2005, to the multinational corporation ArcelorMittal is still the only successful case of large-scale privatization.
Since 2015, state budgets expected to receive more than UAH 100 bln of revenues from privatization, but every time the sale of objects was postponed, and the hole in the state budget was filled with expensive borrowing. The country’s leaders named different obstacles to transparent privatization: unfavorable conditions on the world market, geopolitical risks, debt and legal problems of enterprises that forced the State Property Fund to cancel auctions and Ukraine’s international partners — the IMF and the World Bank — once again to remind that delay only worsens the problem.
In 2021, Ukraine again got the opportunity to resume the process of large-scale privatization with transparent terms of participation and competition. The mechanism was worked out during a successful small-scale privatization campaign, which last year brought in UAH 2.5 bln of revenues instead of the planned UAH 500 mln.
Read more on why each of us should be interested in successful large-scale privatization in our educational material.
Privatization of Centrenergo: attempt 4
Special attention during privatization will be focused on one of the largest state-owned energy companies, Centrenergo, which has always raised many questions in the media regarding fuel procurement and the sale of electricity. The state has been trying to sell Centrenergo for 8 years. This is the last state-owned power generating company that operates 23 units (18 pulverized coal and 5 gas-oil ones) at Vuhlehirska, Zmiivska, and Trypilska TPPs.
The first attempt to privatize the object took place in 2013, but it was prevented by an accident at the Vuhlehirska TPP. Therefore, the competition was canceled the following year. The last attempt to privatize the enterprise was in December 2018. 78.3% of the state-owned stake in the company with a starting price of almost UAH 6 bln was put up for sale. 5 participants submitted their applications:
- Balans Hrup (headed by the ex-MP Dmytro Kriuchkov who was suspected in embezzlement of hundreds of millions of hryvnias in “Zaporizhzhiaoblenergo”);
- Forbes And Manhattan Ukraine (the company is associated with Valerii Tarasiuk, head of the NEURC who in his declarations for 2018 indicated the income received from the company and the corporate rights to its founding company from Cyprus “DILAK INVESTMENTS LIMITED.” The declaration for 2019 also showed revenue from Forbes And Manhattan Ukraine which is now headed by his brother Artem;
- Georgian International Energy Corporation (one of the largest energy companies in Georgia, a subsidiary of the country’s largest holding group Georgian Industrial Group, CEO Oleksii Vilkhovyi);
- Ukrdoninvest (headed by Vitalii Kropachov whom the media called “Centrenergo’s underboss” and Kolomoiskyi’s opponent in the interest in the enterprise);
- Petroleum and Bitumen Plant, owned by the largest private Belarusian oil trader Interservice.
Of all the applicants, only 2 companies — Petroleum and Bitumen Plant and Ukrdoninvest — made a mandatory payment for participation. However, two days before the auction, the Working Group for checking the tender documentation disqualified both participants. And here’s why.
The SBU connected the Petroleum and Bitumen Plant from Belarus with the state-owned company of the aggressor country — Rosneft. But disqualification of Ukrdoninvest raises a lot of questions, and it led to a two-year litigation.
The participant was refused on the basis of failure to submit 2 documents — a certificate of inclusion in the Unified State Register of Enterprises and Organizations of Ukraine, as well as an extract from the Unified State Register of Legal Entities and Individual Entrepreneurs. However, at the time of the auction, the first document that was required by the SPFU, due to the name change, was actually canceled at the level of legislation, which means that the court quite rightly ruled in favor of the procuring entity about the late bringing of the Fund’s acts in accordance with the current legislation. As for the extract from the Unified State Register of Legal Entities and Individual Entrepreneurs, the participant instead submitted an extract from the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations which is identical in content, and therefore, according to the court’s decision, can replace the extract.
As the case of the disqualification of Ukrdoninvest has shown, excessive formalism and literalism, untimely reaction to changes in legislation can cost the state almost UAH 6 bln of budget shortfalls which is equal to half of the annual budget revenues of Dnipro, the city of one million citizens, and almost two annual budgets of Poltava. The appeal of court decisions in the case of privatization of Centrenergo continues until now. All court costs in this case have so far been paid from the budget.
Centrenergo — is a source of corruption
According to the investigation of the journalists from Bihus.info, over the past two years, Centrenergo has bled UAH 3.5 bln from the budget through corrupt procurement schemes for the supply of fuel and energy resources. In addition, in the period from July 2019 to April 2020, companies controlled by Ihor Kolomoiskyi delivered 1.5 mln tons of coal to Centrenergo from Russian companies which, in turn, produced this coal in the temporarily occupied territories of Donetsk and Luhansk regions. Even the fact that Centrenergo switched its units from anthracite coal to Ukrainian gas coal did not stop this scheme. According to journalists’ calculations, such a scheme brought the interested parties at least another UAH 300 mln.
The Kolomoiskyi era in Centrenergo began in July 2019, when Volodymyr Potapenko was appointed the head of the enterprise whom Kolomoiskyi characterized as a person “he understood.” In June 2020, Centrenergo had a new head — Oleksandr Korchynskyi. It is important to note that the change of the head involved litigation. In February 2021, the head of the SPFU Dmytro Sennychenko again had to change company’s leadership. This time it involved special forces.
Corruption schemes that taxpayers pay for has existed in the company for many years. The change of power only led to a change in the composition of beneficiaries. So, during the presidency of Viktor Yanukovych his family was earning from the enterprise, during the cadence of Petro Poroshenko, Centrenergo was controlled by Ihor Kononenko, who was close to the president, while Vitalii Kropachov, businessman and owner of Ukrdoninvest was getting money from deliveries, and some MPs were receiving large orders for coal supplies without a tender.
Not by coal alone. In 2016, companies associated with the MP of the 7th convocation and member of the Verkhovna Rada Committee on Transport and Infrastructure Ruslan Solvar, conducted two tenders for the transportation of imported coal for Centrenergo, and then the winning company hired the competing company in the tender to perform the work. Total amount of agreements signed based on the results of the tender amounted to UAH 281 mln.
Will Centrenergo be sold?
Not only the courts and schematosis cause concern regarding Centrenergo before auctions for its privatization.
In October 2020, the Cabinet of Ministers approved an action plan for the establishment of a Joint-Stock Company (JSC) involving state-owned mines and Centrenergo. A JSC can be created already in the first half of 2021. If this happens, the privatization of Centrenergo will probably be postponed once again, since, then the privatization will concern the newly created Joint-Stock Company, which will unite several enterprises. This means re-launching the privatization process with a new assessment of the object, preparation for the auction, and search for investors.
At the same time, such an association of mines and Centrenergo can be linked with the interests of another oligarch — Rinat Akhmetov. Akhmetov’s DTEK brought back outdated state-owned mines “Dobropilliavuhillia” from the lease. However, according to the expert opinion, the technological complex of the Dobropilska mine cannot ensure the shipment of extracted coal by rail or road, bypassing the processing plant of the PJSC DTEK Dobropilska CCP. This, by the way, was the basis for holding non-competitive procurement procedure to purchase services on coal refining of this mine in January of this year in the amount of more than UAH 200 mln.
We hope that the Cabinet of Ministers, the State Property Fund, and other stakeholders of the process will take into account the mistakes of the past and prevent them during the new wave of large-scale privatization.
Centrenergo appears in criminal proceedings from year to year. Remaining in state ownership, the company will continue to be a source of corrupt profits and lose the value of its assets without sufficient investment in modernization.
Privatization of Centrenergo is necessary because there is a risk that due to further delay in a few years, there will simply be nothing to sell. Financial statements with clear indicators of profitability of the enterprise, transparent procurement of fuel, sales of electricity on a market basis will certainly increase the investment attractiveness of the object before privatization. And we will all feel the positive effect of such a step for the whole country very soon.
Authors: Khrystyna Zelinska, Mariia Poloz
This material was prepared by Transparency International Ukraine with the support of the USAID project Economic Development, Management and Growth of Entrepreneurship (EDGE) and State-Owned Enterprises Rapid Response Activity (SOERR).