Ukraine’s economy is suffering enormous losses from russian aggression. And as the war moves into a protracted phase, prospects become increasingly gloomy. Every day, the state spends approximately UAH 2 bln on the army. We are losing the same amount because of the economic consequences of the war.

According to the estimates of the Ministry of Economy and KSE, at the beginning of June, the direct losses of the Ukrainian economy exceeded USD 103 bln, and the total losses due to the decline in GDP, the suspension of investments, the outflow of labor, additional expenses for protection and social support amounted to more than half a trillion dollars.

If in March, the IMF predicted a 10% drop in Ukraine’s economy this year, then in April, this percentage increased to 35.

What should Ukraine do in this complex, multifaceted situation to survive the imminent economic crisis — how to fill the budget?

Of course, the first source of compensation for losses should be the confiscated assets of the rf in Ukraine and the world — the aggressor should literally pay for the crimes committed. Currently, a group of specialists formed by the President with the engagement of TI Ukraine experts are developing proposals for legal instruments to compensate for losses. However, obviously, the main source of funds for economic recovery will be international financial assistance. World leaders are already discussing the idea of developing a new “Marshall Plan” for Ukraine, and several countries have offered to help rebuild some of the affected regions.

However, external support will not always be provided. We must identify internal points of resistance for recovery. These can include the recovery and activity of small and medium-sized businesses, relocation, the establishment of production of products with high added value, exports, and preferential business conditions. Another stable source of income should be privatization. In particular, privatization of non-strategic enterprises was identified as one of the items of the government program “Reconstruction of Ukraine.”

Long before the full-scale invasion, the government presented a number of state-owned companies for large-scale privatization. However, due to the unfavorable investment climate, the influence of Ukrainian oligarchs, and the war in the east of Ukraine, investors did not rush to such auctions, in particular, the sale of the UMCC. Some assets were never put up for sale. And in May of this year, one of the most attractive objects — the President-Hotel — was completely removed from privatization and returned to the State Management of Affairs.

In response to our request, the Ministry of Economy justified such a decision with the martial law and the need to ensure the effective operation of the hotel in the conditions of war. However, is it necessary to have another large hotel in the center of Kyiv to perform the tasks and functions assigned to the SMA? And will the State Management of Affairs ensure the effective management of this object and, most importantly, the income from the hotel?

Privatization of the President-Hotel: history and prospects

For ten years, there have been attempts to sell the 4-star President-Hotel. Each year, PrAT shares were included in the list for privatization, but in vain. The lessees blocked the sale through the court, the buyers did not come. Over time, the hotel got dilapidated, but retained its investment attractiveness because it:

• is located in the central business district of the capital;
• has a significant number of rooms and the largest area of conference infrastructure among the main business hotels of Kyiv;
• is profitable (except for quarantine years) and has no tax debts.

Although the state owns 100% of the shares of the hotel, since 2009, the private company has gained actual control over it — the complex was transferred for long-term lease until 2034. Interestingly, at the time of the conclusion of the agreement, the hotel was under the management of the State Management of Affairs.

The privatization advisor recommended that the lease be terminated, as this would help to increase the value of the asset. However, the tenant did not intend to terminate the relationship voluntarily, so the need arose to go to court. There was a reason for this — the tenant repeatedly violated the terms of the agreement: did not always pay the rent on time and in full. Despite this, the courts of first and appellate instances illegally denied the claims.

However, recently, the Supreme Court has sided with the plaintiffs: terminated the lease agreement and ordered TOV “BK KVADR” to return the hotel premises to the lessor. This is a key decision that definitively returns the control over the hotel complex to the state. Accordingly, this asset may now be of interest to investors who have previously left it out due to a long-term lease relationship.

It is unreasonable and unprofitable to keep the President-Hotel in state ownership. It requires significant investments for modernization. The hotel is a typical non-core and non-strategic asset for the state. It should be owned and effectively managed by the private owner, which will ensure tax revenues to the budget and create new jobs. Not the SMA, whose main function is to ensure the activities of the President, Parliament, Cabinet of Ministers, and other state bodies. In addition, given the recent financial results, it can be argued that the costs of maintaining another non-core asset of the SMA will fall on the pockets of taxpayers.

That is why it is critically important that after the martial law is lifted, the government resumes the privatization of the President-Hotel and attracts as many sales funds as Ukraine will need to rebuild its economy in the post-war period.

How to sell what is unnecessary and raise as much money as possible?

New legislation may contribute to this. Recently, the Verkhovna Rada has adopted as a basis a draft law that provides for electronic auctions of large-scale privatization. Such auctions are well proven, in particular in small-scale privatization and leasing. For example, hotel “Dnipro” was sold in this way for UAH 1.1 bln — the price 13 times higher than the initial one. So, the state can get a mechanism that will ensure a transparent sale of non-core assets with real competition at a market price.

But along with legislative changes, the country’s policy on the management of state assets needs to be changed. Due to inefficient management and corruption risks, the state loses hundreds of millions of hryvnias every year. Ukraine should only own strategic objects: natural monopolies, military enterprises, and companies that provide exclusively social functions. The remaining state-owned enterprises that have been out of business for decades and have become a source of corruption should be presented for privatization or liquidated if their value is less than debts and other obligations.

According to the SPFU, as of April, there are more than 3,300 state-owned enterprises in Ukraine. At the same time, as of October last year, there were less than 1,400 of them functioning, and only 862 were profitable. The war has probably only made things worse. Consequently, most of the SOEs are currently burdening the budget instead of making a profit.

The sale of unprofitable and non-core assets can bring the state not only significant income to the budget, but, more importantly, additional investments. According to the analytics module of Prozorro.Sale, on average, the growth in the value of assets during small-scale privatization auctions is more than 117%. According to statistics, for each hryvnia of the property value, new owners invest from UAH 4 to 6 in modernization: they create jobs, pay taxes, and generate more value added.

Foreign investment will also help to maximize the economic effect of privatization. Studies have shown that the productivity of enterprises acquired by foreigners was 17-33% higher compared to enterprises acquired by domestic owners. This is due to the fact that foreign investors have business experience in other countries and understand how to develop the acquired assets. In addition, foreign direct investment affects GDP growth and contributes to the country’s economic growth.

State-owned enterprises, instead of burdening our economy, can instead become a source of revenue for it. At the same time, the government itself, during the presentation of the country’s reconstruction plan at the conference in Lugano, defined its vector of state property management to strengthen Ukraine’s institutional capacity. The management of strategic enterprises must become more effective. Instead, all non-strategic assets need to be privatized. We in TI Ukraine will see to it that the authorities do not change course after the war, and large-scale privatization take place efficiently and transparently.

The material was created in co-authorship with Andrii Shvadchak, TI Ukraine’s legal advisor.