One Year Following the Restart of Privatization: Significant Developments and Outcomes

After the start of a full-scale invasion, privatization in Ukraine almost stopped. Auctions were held here and there, sometimes even successfully. State-owned assets were not offered for sale due to the substantial risks associated with delayed or failed payments for the acquired objects.

However, Ukraine quickly recovered from the first shock. Businesses resumed their work, and companies began to relocate to safer regions. Privatization could have contributed to the search for new sites, but its rules had to be adapted to the challenges of wartime.

In early June 2022, the draft law No. 7451 was registered with the Parliament which aimed to simplify and speed up privatization processes. TI Ukraine urged the Verkhovna Rada to support that project, taking into account the recommendations that offset its risks.

We were convinced that in the face of falling economic privatization could mitigate the impact of the war on the budget. And this applies not only to one-time fundings from sales to partially cover the deficit and meet defense needs. In the future, private proprietors will reshape assets, generating consistent revenue and catalyzing the economic progress of the country.

After all the law came into force on August 19, and:

• simplified the preparation procedure for privatization objects;
• reduced the timing of auctions;
• allowed to submit documents for participation in the auction and conclude a protocol on its results in electronic form;
• changed the procedures for settlements and conclusion of privatization agreements (agreement comes after payment);
• allowed to automatically reissue licenses and permits for buyers, as well as alienate encumbered property;
• provided for holding electronic auctions of large-scale privatization in the Prozorro.Sale system.

We also managed to dissuade MPs from the idea of hiding all information about bidders, winners, protocols and e-sale contracts in order to preserve the transparency of the processes. Thus, all data pertaining to auction progress and outcomes remains accessible and transparent, allowing every citizen to ascertain the details of privatization, including who, when, at what price, and which object was privatized.

A year has passed since the full resumption of small-scale privatization. Let’s recall the most remarkable events and results.

Note. Data from bi.prozorro.sale and DashboardSPFU as of August 28, 2023 was used.

SEPTEMBER 2022

Maryliv SE “Ukrspyrt”

After the resumption of privatization, the State Property Fund announced the first seven auctions under the new rules. They managed to finally find private investors for two plants of SE “Ukrspyrt”, which they could not sell earlier. That privatization, including VAT, brought to the budget UAH 264 million.

On September 19, the property of the Kobylovolotsky distillery was sold for more than UAH 70 million, which is almost three times the starting price. The next day, the Maryliv distillery was sold at auction at a three times higher price than planned. The buyer paid UAH 150 million to the state budget. The buyer also undertook to repay company’s debts, including payroll, for more than UAH 54 million.

In addition to these and a number of other alcohol assets, SPFU planned to put about 150 other objects to the auction by the end of 2022, from movable and immovable property to non-working factories.

At the local level, in the first month of launching privatization under the new rules, a slight revival was recorded. Local governments announced 95 auctions, which brought almost UAH 60 million.

OCTOBER 2022

Lviv Jewelry Factory

In October, the privatization of state property significantly increased the pace. 99 auctions were announced. 6 more distilleries, 3 jewelry factories, recreation centers, and property complexes of research institutes were put up for sale.

According to the results of 40 successful auctions, the income from privatization amounted to more than UAH 680 million. Lviv jewelry factory investor purchased for UAH 185 million, and the price for the Uzlovskiy distillery increased more than 5 times and amounted to 130 million UAH.

October also marked a record. 83 bidders competed for Trembita Recreation Center, and the auction lasted almost 13 hours. In general, despite criticism of possible low competition diring the war, 321 investors competed for privatization of state property and the average number of participants increased to almost 5 people per auction.

In contrast to the state ones, local privatization authorities announced 64 auctions that almost a third less than in September. Relatively safe regions of Transcarpathian (Zakarpattia) and Ternopil announced only 1 auction each per month. And none in Volynia.

NOVEMBER 2022

Crystal Vinnytsia Plant 

November was remembered for the sale of two large jewelry companies: the Vinnytsia factory “Crystal” and “Burshtyn Ukraine”. Along with the privatization of the Stadnytsia distillery, Moriak Hotel in Chornomorsk, Electrovazhkhimproekt Institute in Dnipro, and other objects, the state budget managed to raise more than UAH 287 million.

It is noteworthy that the best dynamics of price increase was demonstrated by objects with a low book value. It determines their starting price at the auction. The cost of a complex of buildings of the State Food and Consumer Service in the Mykolaiiv Oblast in the final round increased more than 400 times to UAH 1.5 million, and the administrative building in Zhashkiv was sold for 226 times more than the starting price (from UAH 22 thousand to UAH 5 million). Such cases demonstrate that business determines the fair market price of an asset through competition at open and transparent electronic auctions.

After the resumption of privatization, the Parliament continued to make the necessary amendments to the relevant legislation. In November the Law was adopted allowing the privatization of state and municipal enterprises with property in a tax lien without the consent of the tax authorities if the buyer pays the debt. Those amendments have unblocked privatizing more than 40 objects with a total value of more than UAH 1 billion.

DECEMBER 2022

Privatized church building, Nizhyn

At the end of 2022, the State Property Fund continued to successfully sell the assets of the alcohol industry, recreation centers, and even the church in Nizhyn, which brought an additional UAH 235 million.

In just 4 months after the restart of small-scale privatization, the state and local budgets managed to raise UAH 1.64 billion.

Most of this sum comprises the sale of state assets, totaling UAH 1.4 billion. Average per-object price increased almost 2.3 times. The privatization of municipal property showed much more modest results — only UAH 214 million and an increase in the starting price by an average of 74%.

However, it’s crucial to highlight that the renewed privatization initiative successfully achieved its primary objective of facilitating business relocation. According to Prozorro.Sale, more than half of the objects privatized in the system are located in the western regions of Ukraine, where entrepreneurs were looking for real estate to resume their activities.

JANUARY 2023

Ust-Danube Seaport 

At the onset of the new year, a significant event in the history of Ukrainian privatization occurred. Ust-Danube commercial sea port was put on sale for the first time. The initial lot price, set at UAH 60 million, had a more than threefold increase during the auction. The winning bidder Elixir Ukraine bought the port for UAH 201 million and paid an additional UAH 40 million in VAT.

The investor planned a large-scale upgrade, increasing production capacity and creating new jobs at the port. In April, the investor paid for the property, but could not receive it then. In some cases, in order to purchase an object, a winner must obtain concentration permission from the Antimonopoly Committee. That prevents monopolies or limited competition. And in this case, the AMCU found potential risks related to the port’s privatization. The property complex was still transferred to the investor in the late August.

Similar situation occurred to Vlasta Hotel in Lviv sold in January this year. At the auction, which was attended by 23 investors, the object price increased from UAH 7 to UAH 115 million. However, after the privatization was completed, the prosecutor’s office, at the request of local activists, opened criminal proceedings regarding a possible underestimation of the hotel price. In their opinion, the starting price of the asset should have been set at the level of the value determined by the expert evaluation. However, according to the law, the initial price of an object is set at the level of its book value.

Despite the difficulties, more than UAH 513 million was raised to the state budget from privatization, and little more than UAH 24 million came to local budgets.

FEBRUARY 2023

Cherkasy Plant of Telegraph Equipment

In February, the state was unable to offer investors attractive assets for privatization — the average price increase fell from 260% to 65%. For the first, and for the last time so far, after the resumption of privatization, income from the sale of municipal property (17.6 million) exceeded the indicator of revenues to the state budget (12.5 million).

However, important developments have occurred primarily in legislative regulation. First, the government adopted the decision to assign the State Property Fund the functions of selling confiscated russian assets. They will be sold at electronic auctions on Prozorro.Sale under the procedures of small-scale privatization. Funds from the sale will go to the special fund of the state budget for the elimination of the consequences of the armed aggression of the russian federation.

Later, the Cabinet of Ministers took another step towards transferring large-scale privatization to an electronic format and approved the procedure for holding electronic auctions for the sale of those objects. In order to resume large-scale privatization, it was still necessary to amend the relevant law.

MARCH 2023

Bilhorod-Dnistrovskyi Commercial Seaport

In March we expected the privatization of several lots at once.

The first was another seaport, Bilhorod-Dnistrovskyi. In contrast to the Ust-Danube Port, the situation was aggravated by a substantial debt exceeding UAH 104 million and the dry port status, a result of being blocked by russian troops. The starting price was set at UAH 187.6 million.

The second lot was Quartz Non-Metallic Mines Quarry in Druzhba, with a starting price of UAH 4.8 million.

While the last asset found its new owner on the second attempt, Bilhorod-Dnistrovskyi Port has not been privatized even in eight auctions. Four times investors failed to appear, three times the auction was cancelled, and after a single auction that was finally held, the winner refused to pay its UAH 220 million bid.

However, the sale of Ukroboronoresursy which price grew 12 times up to UAH 210 million, the state budget received UAH 902 million for privatization in Q1 2023, which is the highest number in the past decade.

APRIL 2023

Odesa Special Research and Design Institute

In April, an unprecedented 362 bidders competed for public assets, averaging over 8 bidders per auction. However, with the growth of competition, the share of disrupted trades also increased. Nearly one-third of the scheduled auctions were canceled because of unscrupulous winners who declined to sign the auction protocol, pay their final proposals, or enter into purchase contracts for the objects. As a result, winning bids totaling half a billion hryvnias ultimately became a mere 61 million hryvnias in budget revenue.

A revival of participation was also observed locally with over 3 investors taking part in auctions for the sale of municipal property. And unlike the sale of state assets, they were effective and brought more than UAH 60 million to local budgets.

MAY 2023

Hermitage Hotel building

In May, the auction recorded the highest amount since the resumption of privatization. The building of Hermitage Hotel in the capital center initially listed at UAH 21 million and attracting competition from 39 bidders, the investor ultimately bought for UAH 311 million and contributed an additional 62 million in taxes.

Another legendary object, Electronmash in Kyiv will also be able to get a second chance. The plant’s privatization encountered two interruptions by the auction winners, and it was only on the fifth attempt that it was successfully sold for twice the initial price, reaching UAH 120 million.

Remarkable accomplishments are achieved not only by state privatization authorities but also by local ones. Lviv became the first city to earn money billion hryvnias on small-scale privatization (from August 2018 to May 2023). After a full-scale invasion, auctions continued to be organized there, which brought more than UAH 90 million to the budget.

JUNE 2023

Prozorro.Sale 5th Anniversary of Small-Scale Privatization

The small-scale privatization reform in Ukraine turned 5. It was in June 2018 when the legislative framework was established, ushering in the practice of auctions for the sale of state and municipal property via Prozorro.Sale. This simplified the sales procedure and, more importantly, made it open, transparent, and competitive.

Since the implementation of the reform, over 9 thousand participants have exercised their right to bid on state or municipal property. They purchased almost 5 thousand objects both the state and communities managed to earn UAH 13.6 billion. Most of these funds, amounting to 9.8 billion, were allocated to the state budget, while 3.8 billion contributed to local budgets.

Another important event was entry into force by the Law allowing to resume large-scale privatization. It also provides for the transfer of sanctioned assets to the State Property Fund, in particular for further privatization. It is important for the agency to receive new assets, because it has only 288 companies left for sale.

In general, funds raised in the first half of 2023 from the privatization of state property amounted to UAH 1.82 billion — another record for the last 10 years.

JULY 2023

Rivnetorf 

The state and local budgets managed to raise UAH 400 million in July by selling several alcohol assets and Rivnetorf which price quadrupled to UAH 205 million.

However, the government became the key newsmaker. First, they approved the procedure for creating a pool of enterprises subject to privatization, which involves consolidating multiple businesses typically operating in the same industry into a unified lot for subsequent sale. This mechanism will allow investors to acquire a full-cycle business and bring large revenues from those sales to the budget.

In addition, the Cabinet of Ministers adopted amendments that must reduce the number of dishonest participants, which disrupt privatization auctions. The auction participant who secured the second position at the end of the auction will not be entitled to decline waiting for a decision regarding the first-place winner. If unscrupulous entrepreneurs who took first and second place refuse to pay the amount for the asset, the budget will receive their guarantee contributions amounting to almost 40% of the starting object price. 

In July, the government also decided on the requirements for electronic platforms to start large-scale privatization through the Prozorro.Sale system. According to the Chairman of the SPFU, it should begin no later than Q3 2023. 

AUGUST 2023

InvestAgro Agricultural Firm 

The key event in August privatization was supposed to be the first auction for the sale of sanctioned property — InvestAgro Agricultural Firm, which was owned by the russian oligarch Mikhail Shelkov, close to the leadership of the russian federation.

However, the asset has not been sold. No investors showed up for the first auction. The SPFU explained that by UAH 17.2 million of the company’s debts and significant accounts receivable (i.e., counterparty debts to the enterprise), which were taken into account when determining the starting price.

After the failure, repeated auction was automatically announced with a 50% reduction in the starting price, that is, up to UAH 27.5 million. Nevertheless, the State Property Fund revoked it, citing the need to achieve privatization objectives and secure revenues for the state budget as the justification.

Obviously, the agency will look for additional ways to increase the investment attractiveness of the asset, from reducing the debt burden of the enterprise before the sale, to the possible creation of a privatization pool with Demurinsky Mining and Processing Plant, another confiscated asset of Shelkov.

SUMMARY

Privatization met expectations after the resumption at the end of last summer. It not only enabled investors to discover new locations for business and production relocation but also generated a consistent income of up to UAH 3.6 billion for the state budget as the result of the average threefold rise in asset prices.

Thanks to the participation of more than 3 thousand investors, whose number on average increased to almost 4 per auction, revenues from the privatization of state and municipal property for different periods of the year after the restoration became record and exceeded the numbers for the last decade.

896 objects of state and municipal property have got new owners. Privatization will help ensure their further transformation — according to statistics, for every Hryvnia paid, the value of an asset accounts for an average of UAH 4-6 of investment in development. In addition, only for 2023, buyers returned 684 million debts of state-owned enterprises to employees and the budget.

Unfortunately, so far there are negative trends in privatization at the local level. The number of announced auctions, even in most Western, safe regions of the country, is extremely low. 40 auctions were announced in Ternopil Oblast, 29 in Volynia, and only 15 in Zakarpattia. For comparison, 113 auctions were announced in the Dnipropetrovsk Oblast, 138 in the Kirovohrad Oblast, and 197 in the Lviv Oblast for the same period. As a result, the total income from privatization for local budgets was just over 650 million but more than a third of them are revenues from the budgets of Lviv and Kyiv.

What’s next?

The resumption of large-scale privatization, one of the most anticipated event in the industry is upcoming. The Chairman of the SPFU believes that in the best-case scenario, large-scale privatization can bring the state budget about $400 million, that is, UAH 15 billion. However, considering our past encounters with selling such assets, even preceding a full-scale invasion, our expectations are now more cautious. The biggest challenge now is to work properly with potential foreign investors. After all, their absence was the reason that United Mining and Chemical Company was not sold three times in 2021. Furthermore, the question of providing investors with assurances amid the conflict remains a pressing concern.

Another equally important matter is further privatization of confiscated russian assets. Despite the unsuccessful first attempt, the State Property Fund needs to continue announcing new auctions. It is essential to consider any mistakes made during the preparation of assets to ensure the highest possible economic benefit from privatization and channel the proceeds toward the country’s recovery. 

This publication was prepared by Transparency International Ukraine with the financial support of Sweden.