Up to 2018, purchasing or renting state property in our country was historically considered the privilege of the elite — oligarchs, top directors and people close to power.

However, in 2018, a turning point came — the Rada adopted the new Law “On Privatization of State and Municipal Property” which introduced transparent rules of the game. From now on, anyone who takes part in electronic auctions can become the owner of state property. One just needs to understand how they function and be well-prepared.

Privatization in a new way

The new Law has significantly simplified the legislation and classification of assets for privatization: 2 types of privatization were introduced — large-scale and small-scale, with clear sets of procedures.

Small-scale privatization objects are enterprises and property whose value does not exceed UAH 250 mln. Since August 2018, small-scale privatization has been taking place through ProZorro.Sale, the state electronic trading system.

Accordingly, large-scale privatization is the sale of state and municipal property which costs more than UAH 250 mln. The sale of large-scale privatization objects takes place with the involvement of advisors who prepare the object for privatization and look for potential investors to hold an auction. Usually, large consulting, audit, and investment companies become consultants.

Note that there is a so-called division of public property into state and municipal property. Depending on the type of property, there are various privatization bodies represented by the State Property Fund of Ukraine (SPFU) and its regional branches, or local self-government bodies, their executive bodies, etc.

For more information on what state and municipal property is and who manages it, see our educational material.

What does the process of privatization of small-scale objects look like?

The legislation establishes a clear sequence of stages in this procedure:

  • Approval of the List of Objects of Privatization

The list of objects of state property that will be put up for sale is approved by the order of the SPFU. The list can be found at the official website of the Fund or on the specialized page on privatization issues.

The list of municipal property sold by local self-government bodies is approved by decisions of the local council and published on its official website as is the list of municipal property of Kyiv.

Inclusion of new objects in such a list is carried out by making a separate decision on each object of municipal property.

  • What objects can be privatized?

Property that may be objects of sale is listed in the list of Article 4 of the Law “On Privatization of State and Municipal Property.”

Please note that not all property can be put up for sale. For example, state-owned enterprises and objects that are necessary for the state to perform its main functions, to ensure the state’s defense capability, objects of property rights of the Ukrainian people, and property that forms the material basis of Ukraine’s sovereignty cannot be put up for sale. In particular, these are mineral resources, natural resources, property of law enforcement, tax, and customs authorities that are necessary for these bodies to perform the tasks established by the law. This also includes the property of healthcare institutions, emergency medical care systems, military property, archaeological sites, museum property, and so on.

Before including an object in the draft list of privatization, the privatization authorities are required to check the presence or absence of prohibitions established by law.

  • Publication of the List in the ProZorro.Sale electronic trading system

Publication of information on the decision to privatize objects is carried out within 5 working days from the date of publication by the state privatization body or decision-making by the local council on their official websites and in the  ProZorro.Sale system.

Objects can be sorted by region, bid organizer, auction status, and so on.

  • Publication of the terms of sale approved by the auction commission

Determining the terms of sale is an important part of the process. It is at this stage that it is decided whether the auction will be held, what the starting price of the asset will be, whether the buyer should reimburse certain costs to the organizer (for example, asset valuation), and so on.

The terms of sale of state and municipal property can be found in the information ad on ProZorro.Sale.

Interesting objects of state property can also be found on a special map. After selecting a specific asset, one can go to its tab which contains not only general information but also a special presentation. Here is the tab of the Dnipro hotel, currently the most successful case of small-scale privatization. The hotel was auctioned off for UAH 1.1 bln at an initial price of UAH 80.92 mln.

  • Conducting an auction and awarding or conducting privatization by redemption.

After the announcement of small-scale privatization of property is made public, an electronic auction is held no later than 20 and no earlier than 35 working days.

The lot announcement sets a deadline for submitting offers from potential procuring entities. If applications for participation are submitted by two or more participants, the system activates the auction and the participant receives a link to participate in the auction in the electronic cabinet. Further, the auction is held in an electronic trading system in real time when each of the participants has the right to increase their price. The lot announcement also indicates the minimum step by which the participant can raise the price.

How are the auctions held?

An auction for the sale of a single object can take place in 3 stages:

At the first stage, the property is put up for auction at 100% value. Potential procuring entities must submit their price offers by the day of bidding, i.e., information on for how much they are willing to purchase the property, pay warranty and registration fees. Bids with price offers are closed in general and are disclosed only when the auction starts.

If the first auction did not take place (for example, there were no interested buyers or the buyer who won the auction refused to buy), then the announcement is made about the second stage. At this auction, the property is offered already with a 50% discount.

If the second auction did not take place, the third stage, the so-called Dutch auction is launched. The property is put up, as at the previous stage, with a 50% discount, but the electronic system automatically gradually reduces its value even more, until one of the participants clicks “buy.” Subsequently, other procuring entities, if they wish, can offer a larger amount, and then the process takes place in reverse order, as in a normal auction — the winner is the one who offered the largest bid.

It should be noted that the auction winner who refuses to sign the auction protocol or the purchase and sale agreement is deprived of the right to participate in further auctions for the sale of the same object.

At the end of the auction, guarantee fees are returned to participants who were not awarded within 10 working days from the date of approval of the auction protocol.

If the auction winner refuses to sign the contract for the purchase of the object, then their guarantee fee is not refunded and is credited to the corresponding budget of the organizer.

  • Redemption procedure

Although most often the property is still sold at auction, when the highest bid wins, however, there are cases when one person buys the objects. This is possible if a procuring entity leases the property at the time of redemption and repairs it, for example, making inherent improvements exceeding 25% of its market value.

The redemption option is also activated when only one participant applies to the auction. In this case, the privatization body decides to privatize such an object through the redemption directly to this procuring entity at the price offered by them but not lower than the starting price.

  • Conclusion and publication of the agreement

Based on the results of the auction or redemption procedure, a purchase and sale agreement is concluded which must be published in the ProZorro.Sale system. At the same time, the property itself will not belong to the procuring entity until they fully pay for the item. Thirty days are provided for payments. If a procuring entity does not make a payment within a certain period of time, a penalty fee is charged and an additional 30 days are granted. If this time was not enough for the procuring entity to pay for the purchase of state property, then the contract is terminated through legal action.

  • Deciding on the completion of privatization

When a procuring entity pays the entire amount due, the body responsible for the sale of the property issues a decision on the completion of the object privatization which is published in the electronic trading system.

Who organizes the auction?

If the property is state-owned, the auction is organized by the State Property Fund and its regional branches. Municipal property departments and departments of local councils are most often responsible for the sale of municipal property.

Who can participate in auctions and be awarded?

Procuring entities can be both ordinary people and private entrepreneurs or businesses. However, there are certain limitations. Employees of the SPFU and its regional branches, persons and enterprises of the aggressor country, or those who have been sanctioned by Ukraine cannot be buyers of state property. In addition, those persons with whom a privatization agreement had been previously concluded which was then terminated due to their violation of the terms, as well as related persons, cannot be buyers.

How can a participant protect their rights during privatization?

Litigation can be a long process, but when the amounts reach billions of hryvnias, applying to the courts is a necessary step. One can also appeal to the Commission on Selection, Connection of Operators of Electronic Platforms, and Complaints (Appeals) Consideration regarding the conduct of electronic auctions in the ProZorro.Sale electronic trading system.

Based on the results of the complaint consideration, the Commission can make the following decisions:

  • provide recommendations to the state enterprise ProZorro.Sale regarding the satisfaction or refusal to satisfy the complaint;
  • provide recommendations to the state enterprise ProZorro.Sale regarding the results of reviewing the appeal, preparing a response based on such results, taking certain measures, in particular, to eliminate technical failures in the electronic system.

Based on the results of consideration of the Commission’s recommendations, SE ProZorro.Sale can send a request to the auction organizer. In any case, the decision will only be of a recommendatory nature.

We will dwell upon the sale of large-scale privatization objects in detail in the second part of the educational material.

This material was prepared by Transparency International Ukraine with the support of the USAID Project Economic Development, Management and Growth of Entrepreneurship (EDGE) State-Owned Enterprises Rapid Response Activity (SOERR). The authors’ views expressed in this article do not necessarily reflect those of the United States Agency for International Development or the United States government.