Transparency International Ukraine urges the President to veto draft law No. 12089 on strengthening protections for bona fide acquirers, adopted by the Verkhovna Rada last week. It limits the ability of the state or territorial communities to reclaim property that was unlawfully alienated if 10 years have passed since its sale to a bona fide acquirer (a person unaware of the asset’s dubious background).

First and foremost, this restriction effectively legalizes the unlawful alienation of state or community property through fraudulent schemes and official misconduct. If these changes take effect, reclaiming such property will be difficult even through the courts.

In addition, the draft law modifies the approach to calculating the statute of limitations in property recovery disputes, setting it from the date of transfer to a bona fide acquirer or the state registration of ownership rights. In practice, this will reduce the period for the state or territorial community to reclaim property from 10 years to 3. Had these rules been in place earlier, the Kyiv community would not have been able to reclaim the land around the Pyrohovo Museum, and the state could not have recovered the Tereshchenko Manor in Zhytomyr region, which housed a UOC-MP monastery.

If property is reclaimed, the state or community will have to compensate the new owner for its value before pursuing a claim against the responsible party. This imposes an additional financial burden, which may be especially significant for local budgets.

Finally, the draft law’s provisions limiting the period for reclaiming property will apply retroactively, violating the constitutional principle of the non-retroactivity of laws.

Transparency International Ukraine calls on the President to veto draft law No. 12089 and urges all concerned citizens to sign the relevant petition.

Effective municipal property management is an important tool for supporting local budgets and stimulating the economic development of communities. However, with the onset of the full-scale invasion, this field faced unprecedented challenges.

Since 2022, the activity of local privatization processes has decreased by more than a third. This resulted in a significant reduction in revenues to local budgets. Revenues from privatization auctions decreased by almost 70% compared to pre-war 2021.

Under such conditions, it was necessary to adapt legislation and procedures to the conditions of martial law to restore and intensify the processes of municipal property privatization, ensure stable revenues to local budgets, as well as maintain transparency and efficiency of municipal resource management in times of a crisis.

This report provides a comparative analysis of the state of municipal property privatization since 2021. Particular attention is paid to changes in legislation, the level of competition in the market, the results achieved, the impact on the implementation of local budgets and ensuring transparency of procedures. The study allows assessing how wartime challenges have affected the efficiency of municipal property disposal, and which steps have been taken to minimize the negative consequences.

Transparency International Ukraine calls on MPs to support draft law No. 12230, which should solve this problem.

According to the results of a study by Transparency International Ukraine, since 2019, more than a third of municipal property objects in 82 cities under study were privatized not through auctions, but through a lessee redemption mechanism.

The law allows lessees to obtain the right for redemption of their leased property without an auction. To do this, it is necessary to carry out its integral improvements (for example, reconstruction or extension), the cost of which will be at least 25% of the market value of this property and apply to the local council for permission for redemption. 

In at least 19 cities, including Kropyvnytskyi, Uzhhorod, Zaporizhzhia, Sumy, Odesa, and Dnipro, redemptions were preferred over auctions—the percentage of municipal property objects sold in this way exceeded half of the total number of those that were privatized. In 3 cities (Horishni Plavni, Svitlovodsk, Chornomorsk), all objects were privatized in this way.

In cities where both mechanisms were used, on average, the cost of objects purchased on a competitive basis exceeded the price of objects sold through redemption by 45%. 

Considering the indicator of the difference in value, the budgets of cities that used the redemption mechanism could have potentially lost more than UAH 552 million in the sale of assets in a non-competitive way since 2019.

In addition, lessees who bought property from communities mostly improved it in the minimum amount (25%) of the market value of the object. This suggests that such “improvements” were aimed at obtaining the right to purchase the property, rather than real improvement of the leased property. The application of the redemption mechanism also contains a corruption component due to possible abuses with the valuation of property, which directly affects its sale price. 

Considering such conclusions, we are convinced that the redemption of leased property requires an alternative. On the one hand, it shall ensure transparency and growth of revenues to local budgets, and on the other hand, it shall take into account the interests of lessees who invest in leased property.

Such an alternative may be found in auctions, using the lessee’s preemptive right to purchase the property at the highest price that was offered during such an auction. This practice is already used in land auctions and auctions for the lease of state and municipal property. Recently, the parliament registered a draft law No. 12230, which proposes to implement such a mechanism in privatization. TI Ukraine supports its adoption by the parliament to ensure more effective management of municipal property. 

Since the launch of online auctions on Prozorro.Sales in 2018, local budget revenue from the sale of municipal property has surpassed UAH 5 billion. This result was achieved after more than 4,200 tenders were held, with an average of nearly three participants per tender. Due to increased competition, the value of property sold by communities has risen by more than 1.5 times the starting price.

However, not all procedures for the sale of municipal property are transparent or competitive. The relevant legislation allows for the privatization of leased municipal property through a buyout by a tenant (hereinafter referred to as “buyout”). That mechanism may be implemented: 

• outside the auction; 
• at the price determined by the evaluation results; 
• provided that a tenant makes integral improvements to the leased property in the amount of at least 25% of the market value of the property.

According to the analytics module of Prozorro.Sales, since 2018, more than 1,200 municipal property items have been purchased through buyout for a total of UAH 2.1 billion. These statistics make buyout the second most popular method of privatizing municipal property, after auctions. In a number of communities, including large cities such as Dnipro, Odesa, Sumy, and Zhytomyr, buyout is the preferred method. 

The sale of a property item at auction begins with setting its starting price based on the book value, with the final price determined by the auction results. In the case of a buyout, the starting sale price is determined based on a property assessment and does not increase thereafter. Given this contrasting approach, TI Ukraine decided to compare the quantitative and financial indicators of the two main mechanisms for selling municipal property to assess their effectiveness in terms of filling local budgets.

We contacted 105 local self-government bodies with requests for information on the results of municipal property privatization from January 2019 to October/November 2024. For the analysis, we used data from 82 local authorities in areas where at least one municipal property item was privatized during this period.

In its latest report on Ukraine, the European Commission, despite the achievements and recommendations in the fight against corruption, touched upon the management of state-owned companies. 

Key events in this area and recommendations were not singled out separately, instead they were included in the section on the functioning of the market economy in Ukraine.

What the experts noticed

EC experts noted that the full-scale war increased the state’s influence on the economy. In 2022, the relative share of the public administration and defense sector jumped to 24% of GDP (in 2021 it was 7.2%), while the share of public spending more than doubled to 38.2% of GDP. The importance of many state-owned companies, such as Ukrzaliznytsia, Ukrposhta, or energy suppliers, has increased due to their crucial role in responding to the consequences of the full-scale invasion.

Despite the growing role of SOEs in certain areas of the economy, their overall efficiency remains at an extremely low level. According to the Ministry of Economy, as of the end of 2022, out of more than 3,000 state-owned companies, one in two is idle and only one in six is profitable. As a result, they completed the previous year with losses of UAH 91 bln. The heads of SOEs remain anti-leaders in the abuses uncovered by the National Anti-Corruption Bureau of Ukraine.

The problem of growth of the state’s share in the economy was also deepened by the use of mechanisms for the forced seizure and confiscation of Russian assets belonging to the aggressor or its supporters. Since September last year, the court has recovered shares or stakes in more than 50 enterprises, as a result of which they were effectively transferred to the management of the state. Since then, the only attempt to sell such assets failed. The State Property Fund, which manages confiscated assets, also complained about the transfer of enterprises to it without working capital, which shifts the obligations to repay their debts to employees and counterparties to the state. 

Therefore, the continuation of SOE corporate governance reform and privatization remain significant challenges for our economic policy, and we agree with this conclusion of the European Commission.

The EC experts assessed the results of small-scale privatization through Prozorro as quite successful(probably they were referring to Prozorro.Sale) before the full-scale invasion. 

The report also noted the adoption by the Parliament in July 2022 of the law on simplification of small-scale privatization procedures; TI Ukraine experts joined the improvement of its provisions. However, the European Commission was rather reserved in its assessment of the effect the resumption of privatization had: it noted that investors were interested in two ports, several distilleries, and other small real estate objects. 

But such an assessment is not entirely correct. After its resumption in September 2022, revenues from the privatization of state property for various periods (for example, for the first half of 2023, which includes the report) were record-high for the last 10 years. After the restoration, small-scale privatization brought UAH 4.6 bln to the national budget, contributed to the repayment of at least UAH 680 mln of SOE debts to employees and the budget, and private investors received ownership of 460 state property objects. Therefore, privatization after restoration is effective not only in terms of income, but also in terms of reducing the state’s share in the economy.

The report also drew attention to significant changes in the management of confiscated sanctioned (pro-)Russian assets. 

For a long time, the law did not give a clear answer as to who exercised such powers on a permanent basis, but instead gave the government the right to select a temporary manager of such assets among public authorities, military administrations, or state-owned enterprises. However, this approach proved ineffective, as the government delayed the adoption of relevant decisions. Some of the assets are still in limbo. The government has not been able to select a manager for Deripaska’s former assets for more than four months, even despite the SPFU’s appeal, and for more than seven months — in the case of the First Investment Bank of Russian oligarch Giner.

The Verkhovna Rada then adopted a law that assigned the functions of managing confiscated assets to the State Property Fund. But at the same time, the legislator put their implementation at risk, which was not mentioned in the EC report.

The European Commission also noted some progress in the reform of corporate governance of state-owned enterprises, which, however, still does not comply with the principles of the Organization for Economic Cooperation and Development to ensure depoliticized, professional, and transparent governance. The OECD Guidelines on Corporate Governance of State-Owned Enterprises is an internationally agreed standard for public administration bodies to ensure the effective functioning of state-owned enterprises in a market economy.

The factors that cause ineffective management of state-owned enterprises include:

–       the lack of an approved comprehensive national property policy;

–       corporatization of less than 10% of public sector business entities;

–       decentralization of ownership functions (more than 80 state bodies and departments manage state-owned enterprises);

–       the limited role of supervisory boards and the nominal independence of their members.

On November 9, after two months under the leadership of the interim head, the State Property Fund finally gets a new head — Vitalii Koval, the head of the Rivne Regional Military Administration. The candidacy submitted by the Prime Minister was supported by 279 MPs. 

For the first time since 2014, the election of the SPFU Head was held in accordance with the requirements of the Constitution. The head of the agency used to be appointed by the President with the consent of the Parliament, which was contrary to the provisions of the Fundamental Law. 

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.

In early February, draft law No. 8250 was registered in the parliament. Its primary goal was to optimize the structure of the State Property Fund of Ukraine.

The need for structural changes in the Fund coincided with the need to resolve the issue of the management of confiscated russian assets. The specialized Law “On Sanctions” does not give a clear answer as to who exercises such powers on a permanent basis, but gives the government an opportunity to choose a temporary manager of such assets among the authorities and state enterprises.

Given that the measures for the temporary management of the recovered assets were mainly entrusted to the SPFU, the draft law proposed to assign such powers to the agency on a permanent basis.

TI Ukraine analyzed the draft law in the final version proposed by the Main Committee at that time, and in general did not object to the transfer of sanctioned assets to the State Property Fund for their management and sale.

In addition, given the variety of types of assets that can be recovered, it seemed appropriate for the government to retain the authority to determine another responsible management body — on condition of proper regulation of this procedure at the by-law level.

But, as it turned out, in the best traditions of the Ukrainian legislative procedure, on the day of voting, the specialized committee introduced a proposal with a new wording of amendments to the Law “On Sanctions” for consideration by the parliament and immediately considered it.They clarified the provision that the Fund would be able to sell only the assets belonging to residents of states that carried out armed aggression against Ukraine.

As a result, the Verkhovna Rada adopted the draft law in an updated version, and the prospectsfor the sale of sanctioned assets were threatened. Let’s find out why this happened.

What risks the adopted amendments carry?

In the previous version, the draft law provided for the transfer of the assets, recovered into the state’s income, to the SPFU for management, including through their sale. In the voted text of the Law, this provision was allegedly clarified, determining the possibility of the Fund to sale only those assets that belonged to residents of states that carried out armed aggression against Ukraine.

But such changes jeopardize the sale of confiscated assets for at least two reasons.

• The asset is no longer owned by a resident

Although the issue of the transfer of ownership of assets recovered by the court into the state’s income is not directly regulated by the Law “On Sanctions,” in this aspect, attention should be paid to the provision of Art. 346 of the Civil Code. It provides for the termination of ownership, in particular in the case of recognition of assets as unjustified and their collection into the state income. Considering that in case of application of the sanction, the assets are also collected into the state’s income, we believe that, by analogy with civil forfeiture, the ownership of such assets by previous owners ceases at the moment when the court decision enters into force.

Thus, the amendments adopted by the legislator will make it impossible for the State Property Fund to comply with the requirements of the law and to sell sanctioned assets in general. After all, after the case is considered by the court, the assets no longer belong to the residents of the aggressor states.

• Not only resident

The sanction in the form of recovery of assets in the state’s income may be applied to natural persons or legal entities, including residents who, by their actions, have created a significant threat to the national security, sovereignty, or territorial integrity of Ukraine or contributed (including through financing) to the commission of such actions by other persons.

The term “resident” in the Law “On Sanctions” is used in the meaning provided by another Law of Ukraine — “On the Basic Principles of Forcible Seizure of Objects of Property Rights of the Russian Federation and its Residents.” It defines residents solely as legal entities carrying out their activities in accordance with the legislation of Ukraine on its territory, whose founder (participant, shareholder) or beneficiary is directly or indirectly russia.

Applying the term “resident,” the Verkhovna Rada significantly limits the range of entities whose confiscated assets can be sold, in particular:

• companies that are not related to russia in terms of their ownership structure, but contributed to the creation of a threat to the national security, sovereignty, or territorial integrity of Ukraine;
• any natural persons in respect of whom sanctions are applied in the form of recovery of assets into the state’s income.

According to our information, out of 23 cases of asset recovery, sanctions were applied specifically to natural persons in 21 cases. It is not only about russians, but also about the citizens of Ukraine who contribute to the aggressor. In particular, the HACC has alreadycollected the assets of fugitive President Viktor Yanukovych, Kherson collaborator Saldo, and deputy head of the so-called “Public Chamber of the Donetsk People’s Republic” Kateryna Martyanova, who is also a citizen of Ukraine.

As a result, after the entry into force of amendments to the Law “On Sanctions,” confiscated assets, including such valuable objects as, for example, the Mykolaiv Alumina Plant of Oleg Deripaska (UAH 6.5 bln*), the Demurinsky Mining and Processing Plant (UAH 0.5 bln*) of Mikhail Shelkov and others, will get stuck in the state management without the possibility of further sale. The state already has enough unprofitable assets that it cannot effectively manage.

* value of assets as of 2022 according to YouControl 

It is unknown for certain what justification MPs provided regarding such changes. They might relate to the interest of individual Ukrainian citizens and companies in avoiding the risk of applying sanctions against them and recovering their assets in the future.

But first of all, Ukrainians who faced the consequences of the war will suffer from such legislative activity. After all, the funds received from the sale of confiscated assets are allocated to the Fund for the Elimination of the Consequences of Armed Aggression, at the expense of which the country’s recovery needs are covered. Therefore, the less russian property will be sold, the less destroyed homes, schools, and hospitals we will be able to rebuild.

Separately, attention should be paid to depriving the government of the authority to determine other entities managing confiscated assets. Among various kinds of movable and immovable property, shares or stakes of enterprises in the authorized capital, there are already cases of recovery of assets into the state income, the management of which is not characteristic of, and sometimes inappropriate, for the State Property Fund. We are talking, in particular, about works of art and monetary assets. That is why it is important to preserve the right of the Cabinet of Ministers to transfer such assets to another manager.

What’s next?

The amendments concerning the mandatory ownership of confiscated assets by residents of the aggressor states for their sale obviously need to be excluded. Moreover, the Cabinet of Ministers should retain the right to determine another management body for such assets at the relevant request of the State Property Fund.

As we know, some MPs and the SPFU have already started consultations on possible ways to resolve the current situation. But the options are scarce.

On June 20, the President signed Law No. 3137-IX, which was adopted following the consideration of draft law No. 8250 by the parliament. Thus, the option of vetoing, that is, returning the law to the Verkhovna Rada for reconsideration, cannot be implemented.

On the positive side, the changes related to the management and sale of sanctioned assets will take effect only in three months. There is still time to address the risks.

The most obvious and simple option is to remove the provisions that have not yet entered into force from the adopted law. A similar case has already happened in our legislative practice, when the Verkhovna Rada adopted a law that excluded Article 286-1 “Driving Vehicles in a State of Alcohol, Drug, or Other Intoxication or under the Influence of Pharmaceuticals that Reduce the Attention and Speed of Reaction” of the Criminal Code before it entered into force.

But such a mechanism for introducing amendments is contrary to the law. The Law “On the Rules of Procedure of the Verkhovna Rada of Ukraine” establishes the possibility of amending only the text of the primary legislative act, and not the law on amending this legislative act.

Therefore, from the perspective of the legislative procedure, the option of introducing new amendments to the Law “On Sanctions” will be correct. They can become the basis for a new draft law or can be submitted in the form of proposals for legislative initiatives that are already under consideration in the parliament and whose subject of regulation concerns the improvement of sanctions legislation or the work of the State Property Fund.

Parliamentarians need to pay attention to the following:

1. The law, with appropriate amendments, should be adopted before the end of the three-month period. This will allow avoiding the risks regarding the impossibility for the SPFU to sell sanctioned assets.
2. The entry into force of such amendments cannot take place before the entry into force of the provisions of Law No. 3137-IX.

We hope that the parliament will correct the mistakes in time, and the assets of the aggressor and its supporters will be channelled to the restoration of the country.

Author: Andrii Shvadchak, legal advisor at TI Ukraine

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

It was in June 2018 that the legislative framework was formed, according to which auctions for the sale of public and municipal property began to be held through Prozorro.Sale. This simplified the sales procedure and, more importantly, made it open, transparent, and competitive.

The Prozorro.Sale system is built on the “everyone sees everything” principle. Data on lots, conditions of their sale, the course of electronic auctions, their participants and winners, concluded contracts — all this information is publicly available. Anyone can choose an object to their liking and try to buy it at an auction.

Key achievements

Equal access to bidding and transparency of privatization procedures contributed to the active participation of private investors. Since the introduction of the reform, more than 9,000 participants have competed for the right to purchase public or municipal property — an average of 3 at each auction. Such competition helped form a market price for objects — according to the results of auctions, the starting price of the sold objects increased more than twofold.

Among the successful cases of privatization are the sale of the Dnipro hotel (UAH 1.1 bln), the Kalush CHPP (UAH 801 mln), and the Lviv penal colony (UAH 377 mln), as well as alcohol industry facilities (more than UAH 2.3 bln).

The launch of the reform intensified the sale of not only public, but also municipal property. Of the nearly 5,000 successful tenders, more than 3,000 were announced by local self-government bodies. Notably, it was the communities that were the first to put their objects up for sale in the Prozorro.Sale system.

As a result, since the introduction of the reform, private investors have acquired almost 5,000 public and municipal property objects, as a result of which the state and communities managed to earn UAH 13.6 bln. The lion’s share of these funds — UAH 9.8 bln — were channelled to the state budget, and UAH 3.8 bln comprised the revenues of local budgets.

“Prozorro.Sale is one of the revolutionary initiatives and an example of how you can simultaneously improve the economic situation and reduce the space for corruption. Transparency International Ukraine joined the creation of this project, and after its transfer to the state, continued to support it systematically. We are pleased to have participated in the reform of small-scale privatization in this way,” said Ivan Lakhtionov, Deputy Executive Director of TI Ukraine for Innovative Projects.

Small-scale privatization during the war

Unfortunately, the full-scale invasion has affected the plans to implement the reform — the privatization was suspended. In July 2022, TI Ukraine called on the parliament to resume and simplify privatization, which could mitigate the impact of the war on the budget in the face of falling economic activity and a rapid decline in GDP.

Finally, in September last year, small-scale privatization was resumed under new, simplified rules — and the results met the expectations.

The figure of UAH 900 mln attracted to the national budget in the first quarter of 2023 was a record for the last 10 years. In just 10 months, small-scale privatization brought UAH 2.8 bln to the national and local budgets. At the same time, not only did the average number of participants in auctions for the sale of public property increase, but also the price — up to an average of two and a half times.

In addition, Ukraine sold a seaport for the first time for more than UAH 200 mln. The auction for the Hermitage hotel in the center of Kyiv caused a real stir. 39 participants took part in them, as a result of which the starting price increased almost 15 times and amounted to UAH 311 mln — a record figure since the resumption of small-scale privatization.

“Calling on the parliament to resume privatization, we were convinced that it could become an additional source of revenues. This applies not only to one-time injections from sales into the budget to partially cover the deficit and meet defense needs. Privatization provides further transformation of assets that will generate a constant income and stimulate the economic development of the country,” explains Andrii Shvadchak, legal advisor to TI Ukraine.

The success of privatization has shown that business has adapted to the realities of war and continues to seek for new opportunities. More than 3,200 enterprises remain in state ownership, of which every second is unprofitable or economically inactive. They do not generate income for the state, but debts to creditors, the budget, and employees and are a source of corruption. Therefore, TI Ukraine is convinced that despite the war, privatization should continue and benefit the restoration of the country.

 

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

On the second attempt, an auction was held for the privatization of the Bilhorod-Dnistrovskyi Seaport. 

The first auction for the privatization of this object did not take place due to the lack of participants. This time, three companies participated in the auction, and the winner was LLC Ukrdoninvest, which is part of the same group of companies mainly operating in the energy sector. According to YouControl, their owner is Vitalii Kropachov. 

The final offer is just over UAH 220 mln, and now the winner has 20 working days to pay the proposed price. 

The privatization of the Bilhorod-Dnistrovskyi port is the second case of the sale of a seaport. Recently, the Ust-Dunaisk seaport was sold for more than UAH 201 mln. Compared to this result, where the initial sale price of the lot more than tripled, the result of the sale of the Bilhorod-Dnistrovskyi port is more modest. The cost increased by slightly more than 17% — the initial sale price at the first auction was UAH 187 mln. But there were relevant prerequisites for this. 

First of all, due to the full-scale invasion, the Bilhorod-Dnistrovskyi port is blocked from the sea. Only since May last year, did the company begin to work in the “dry port” mode — a transshipment of metal products and grain cargoes for the Danube ports takes place there.

Secondly, the proposed price was influenced by the unprofitability of the port and the amount of its debt. In 2021, the company transshipped only 2,000 tons of cargo and ended up with a negative result of UAH 28 mln. In 2022, the company’s revenues increased, but for 9 months of operation, the port again ended up with UAH 2.9 mln of losses. The amount of the debt of the state-owned enterprise is also considerable: as of September last year, it amounted to more than UAH 104 mln, of which more than UAH 13 mln is for wages.

So, in total, according to the terms of sale, the buyer will be obliged to pay not only the price offered by them, considering 20% VAT, but also to repay the company’s debts on wages and to the budget in the amount of at least UAH 73 mln.

In addition, the SPFU notes that the resumption of full-fledged activities of the port is possible only with attracting significant investments for the modernization of equipment, the construction of modern logistics facilities, and dredging. This will prompt the development of the enterprise and the creation of new jobs. 

Let us remind you that the total winning price at auctions for the privatization of public property since the beginning of the year has already exceeded the mark of UAH 1 bln. 

This publication was prepared within the framework of the program on institutional development of the organization, which is carried out with the financial support of Sweden.
Opinions, conclusions, or recommendations are those of the authors and do not necessarily reflect the views of the Government of Sweden. The authors are solely responsible for the content of the publication.

The total winning price at auctions for the privatization of public property since the beginning of the year exceeded UAH 1 bln. This amount was offered by the winners of more than 80 tenders, in which 468 entrepreneurs competed.

The most expensive lots were:

1. Single property complex of SE “Ukroboronresursy” — UAH 210,6 mln;
2. Ust-Dunaisk seaport — UAH 201 mln;
3. Storonybabskyi distillery — UAH 142 mln
4. “Vlasta” hotel in Lviv — UAH 115 mln;
5. Greenhouse farm in Ivano-Frankivsk region — UAH 70 mln

65% of the funds have already been received in the state budget and can be used to strengthen the country’s defense capability.

The total starting price of the proposed lots increased 6 times. This confirms the interest of entrepreneurs to invest in the acquisition and development of non-core or unprofitable state assets in wartime.

In total, in 2023, due to privatization, the state budget is planned to be replenished by UAH 6 bln, so now the dynamics of revenues is kept at the expected level.

Already in March, it is planned to privatize a number of facilities, including the Bilhorod-Dnistrovskyi Seaport with a total starting price of UAH 230 mln. Moreover, this year, it is planned to sell 28 distilleries, 8 peat-producing enterprises, 5 bakery plants, as well as 6 quarries and mining enterprises. Large-scale privatization is also to start— the government approved the procedure for conducting electronic auctions, and @Prozorro.Sale confirmed the technical readiness to conduct them.

We expect that privatization will continue throughout 2023, and its results will help mitigate the impact of the war on the country. After all, privatization is important not only as a one-time injection into the budget to partially cover the deficit and meet defense needs. It also ensures the further transformation of assets that will generate a constant income and stimulate the economic development of the country.

This publication was prepared within the framework of the program on institutional development of the organization, which is carried out with the financial support of Sweden.
Opinions, conclusions, or recommendations are those of the authors and do not necessarily reflect the views of the Government of Sweden. The authors are solely responsible for the content of the publication.

UPD. Ust-Dunaisk Port sold for UAH 201 million. Vinnytsia company “Elixir Ukraine,” engaged in the sale of mineral fertilizers since 2016, won the auction for the sale of the port. The beneficial owner is Vikhrenko Valerii, the owner of the company “Vimeksim,” which exports grain to Europe, Africa, the Middle East, and Asia.

 

The State Property Fund put up the commercial seaport for privatization for the first time.

On January 17, a unique event in the field of privatization of public property will take place. For the first time in the history of domestic privatization, the seaport “Ust-Dunaisk” is put up for sale.

What do we know about the object?

Ust-Dunaisk Port was established in 1978 in the Danube Delta to serve the lighter transportation system. Due to the successful location at the junction of sea and river routes in the 80s, the port became the base for the transshipment of large-tonnage cargoes and the only deep-water port on the Danube. In 1989, the volume of cargo transshipment increased to 3.7 million tons per year.

Today, the company is going through difficult times: in 2013, the port’s cargo turnover was 900,000 tons, in 2019 — 71,000 tons, in 2021 even less — 64,300 tons. The income of the enterprise is mainly provided by the cost of renting the port’s capacities and its floating facilities. At the end of 2021, almost all cargo traffic (94%) was processed by one private company — Craneship LLC. This situation affected the financial results of the enterprise — the SE ended the last four years (2018-2021) with losses.

With the beginning of the full-scale invasion, the port was blocked because it is too close to Snake Island, but it was one of the first to resume work — on April 1. Since then, export and import cargoes have been processed at Ust-Dunaisk, thanks to which for 9 months of 2022, the SE received a minimum net profit of UAH 848,000.

Today, the single property complex of the enterprise includes three main assets in Odesa Oblast:

• port in Vylkove;
• port point “Kiliya”;
• maintenance base for special light carrier vessels on Shabash Island.

The company also has 15 vessels, 4 floating berths, and 6 vehicles.

Privatization history and terms of sale

Interestingly, the decision to privatize the port was made at the end of 2019. Then, the Ministry of Infrastructure, whose sphere of management included SE, abandoned the idea of transferring the object to a concession due to the unprofitability of the enterprise.

For a long time, Ust-Dunaisk was preparing for sale and only in June 2021 was it included in the list of privatization objects. The State Property Fund then reported its readiness to hold an auction in October 2021, but due to the overload of lawsuits and seizure of property, the preparation of the object for the auction was delayed.  The amendments to the legislation adopted in July 2022, which allowed the privatization of encumbered property, helped solve this problem.

The starting price of the object was determined at UAH 60 million. At the same time, the buyer of the single property complex of the Ust-Dunaisk port will be obliged to repay the debts of the enterprise from wages and to the budget within six months, as well as prevent the dismissal of employees of the enterprise.

Expectations of privatization

Obviously, the results of the first privatization of the seaport in Ukraine will be illustrative. First of all, on their basis, it will be possible to assess the prospects for the sale of such objects in the future because before that, Ukrainian ports or their parts were transferred exclusively to a concession or lease, that is, remained in state ownership.

But for the proper functioning of ports, significant investments are needed, which the state is currently unable to provide. Therefore, the transition to an effective private owner will help raise funds to modernize and launch regional ports at full capacity, which is particularly important in the context of the implementation of the so-called “grain deal.” Accordingly, revenues to the national budget will also increase.

At the same time, let us note that in the list of objects to be privatized, there are two more sea trade ports — Bilhorod-Dnistrovskyi and Skadovskyi.

Perhaps, they will be able to repeat the success of distilleries, the final cost of which at privatization auctions in 2022 doubled on average. This enabled the state to earn UAH 556 million for the sale of six plants. Secondly, the SPFU reported on the interest of European companies to participate in this auction. Therefore, the first sale of the seaport will make it possible to identify the level of interest of foreign investors in privatization facilities in Ukraine now, in the context of the war, and will make it possible to predict how much such interest may increase further in the course of Ukraine’s European integration.

 

This publication was prepared within the framework of the program on institutional development of the organization, which is carried out with the financial support of Sweden.
Opinions, conclusions, or recommendations are those of the authors and do not necessarily reflect the views of the Government of Sweden. The authors are solely responsible for the content of the publication.

The Cabinet of Ministers can now transfer assets to the management of the State Property Fund without the approval of their previous management bodies. What it means, and how it will help counter corruption.

Previously, without the approval of the management bodies, it was not possible to transfer their assets to the State Property Fund. However, in early September, the government made significant changes to the procedure for transferring state-owned enterprises to the SPFU. In accordance with them, such approval is no longer mandatory. Moreover, not only the management bodies but also the Cabinet of Ministers, the Ministry of Economy, and the State Property Fund can initiate the transfer of objects.

Such a decision made it possible to transfer the assets of inefficient state-owned enterprises, as well as of defendants in criminal cases, to the SPFU.

Augean Stables of Academies of Sciences

The most vivid example is the assets of the National Academy of Agrarian Sciences. According to the analytical report of the SPFU, in the first half of 2022, the NAAS refused to grant 90% of the claims of potential buyers that wanted to privatize its property. At the same time, an audit of the Accounting Chamber in 2020 showed that the Academy did not dispose of its assets very effectively:

• out of almost 1.1 million sq. m of total area, 772,000 sq. m are in unusable condition;
• another 284,000 sq. m are serviceable, but are not used;
• in the State Land Cadastre, there is no information about almost 145,000 hectares of land, which is in the use of the Academy.

At the same time, according to the former Prosecutor General Iryna Venediktova, as of 2020, the National Academy of Agrarian Sciences was one of the record holders in terms of the number of proceedings regarding its activities. The prosecutor’s office carried out procedural guidance in 110 criminal proceedings on the facts of unlawful use of the property of the National Academy of Agrarian Sciences of Ukraine.

56 objects of the National Academy of Agrarian Sciences have already been transferred to the management of the SPFU.

The situation with the National Academy of Sciences of Ukraine is similar. In 2019, the State Audit Service checked the implementation of the budget programs of the National Academy of Sciences of Ukraine since 2016 and established violations in the amount of UAH 865 million. The auditors noticed that the NASU did not receive funds from rent, the property was being destroyed, and subordinate institutions duplicated each other’s functions — the state paid twice. At the end of July, more than 50 objects of the National Academy of Sciences of Ukraine were transferred to the SPFU management. In October — 96 more.

State Monopolist with Corrupt Executives

One of the most attractive assets for investors, from among those that got under the management of the Fund in October, is the operator of liquid ammonia transportation “Ukrkhimtransamiak.” It has two structural units: the Prydniprovske and Mykolaivske departments of the main ammonia pipeline. The enterprise annually transports more than 2.5 million tons of ammonia, and its income for 2020 amounted to UAH 1.7 billion. The value of assets is also significant — UAH 1.8 billion.

At the same time, Ukrkhimtransamiak regularly gets into corruption scandals, and its leaders appear in the materials of criminal proceedings regarding abuse of office, misappropriation, and embezzlement of funds of the state enterprise.

In 2017, the NABU detained the former acting director of Ukrkhimtransamiak on suspicion of taking over the company’s funds in the amount of more than UAH 40 million, which were intended to re-equip the notification systems for the population living next to the ammonia pipeline section. The case is still being considered by the High Anti-Corruption Court. But within the framework of its investigation, the Bureau detectives established the facts of abuse and causing losses to the enterprise in 2017 in the amount of more than UAH 42.5 million already by another ex-head of the SE, who is now wanted.

The total amount of losses incurred by the company in all episodes of embezzlement of funds exceeded UAH 700 million. But new facts of abuse continue to emerge — at the end of 2021, the SBI prevented the withdrawal of UAH 55 million through non-transparent procurement, and in July 2022, the prosecutor’s office served the ex-director of the SE with charges of professional negligence, which led to causing damage to the state for USD 1.5 million.

Endangered Horse Breeding of Ukraine

The land bank of tens of thousands of hectares, 10 horse ranches, and a racetrack in Odesa — according to the financial statements for 2020, the value of the assets of “Horse Breeding of Ukraine” was estimated at UAH 541 million, and income amounted to UAH 396 million.

At the same time, the enterprise is now actually fighting for its existence in the courts. It was driven to bankruptcy, concluding loss-making contracts so that an artificial debt of more than UAH 150 million was formed. Of course, with the assistance of the then senior management of the company, which, with controlled legal entities, intended to get the SE’s attractive assets for peanuts: 13 property complexes of horse ranches and according to various estimates — from 43,000 to more than 50,000 hectares of land.

The bankruptcy case of “Horse Breeding of Ukraine” was initiated back in 2015, but the Ministry of Economy of Ukraine continues to contest the disputable agreements of the SE in court. So, there is still hope that the enterprise will restore solvency.

In 2020, Yevhen Veretiuk was appointed acting director of the enterprise. According to the media, before working in the State Enterprise “Horse Breeding of Ukraine,” he worked as a director of the “Metalist” plant in the occupied Makiivka and in 2016 personally participated in its opening along with the so-called “officials” of the DPR. According to YouControl, Yevhen Veretiuk remains the current head of both enterprises.

With the change in management, the financial results of the company improved. According to the results of work in the first half of 2021, “Horse Breeding of Ukraine” received profit of more than UAH 65 mln. However, the State Audit Service revealed violations and shortcomings in the activities of the SE for 2017-2020 in the amount of almost UAH 3 billion.

The enterprise could have been privatized as early as 2016. However, it was impossible to alienate it because its branches (horse ranches) were among the objects that were not subject to privatization. In 2019, the law that defined this list became invalid. So now the assets of the enterprise can be sold to the private owner.

Agrarian Fund Draining Its Assets

The “Agrarian Fund” enterprise was created in 2013 to support agricultural producers. It buys grain at minimum prices and then sells either it or the already processed flour to consumers when prices go up to the maximum. This is how they ensure a balance in the market in lean years. Today, “Agrarian Fund” takes up 20% of the domestic market of food grain, and its assets in 2020 were estimated at UAH 1.6 billion with an income of 2.2 billion.

Since its creation, “Agrarian Fund” has been generously funded by the national budget — the company received more than UAH 7 billion in 2013 alone. But as we know, where there is a lot of money (especially budget money), there are ways of its embezzlement.

In February 2014, “Agrarian Fund,” contrary to the charter and without the permission of the Ministry of Agrarian Policy, placed more than UAH 2 billion on the deposit accounts of Brokbusinessbank, which belonged to the infamous Serhii Kurchenko. A few weeks after that, the bank went bankrupt. According to the investigation, officials of Brokbusinessbank spent the obtained UAH 2 billion to pay off fictitious debts. So, the SE lost assets — because the bank allegedly could not return them.

In the criminal proceedings, the senior officials were responsible for these facts: First Deputy Head of the NBU, Chair of the Board of “Agrarian Fund,” Chair of the Supervisory Board of Brokbusinessbank. The case is still being considered by the Darnytskyi District Court of Kyiv. As for Kurchenko himself, the pre-trial investigation of criminal proceedings on suspicion of his misappropriation and further legalization of property and funds of a number of state-owned enterprises, including “Agrarian Fund,” has been completed; until December 1, familiarization with the materials will take place.

The audit of the company for the period 2018-2019 showed other financial violations, and it ended 2020 with a loss of UAH 197 million.

Opaque Procurement of Coal Mining SEs

According to the NABU, the largest corruption among all spheres of the state economy is at the enterprises of the fuel and energy complex. In particular, due to the number of persons involved in corruption schemes and the amount of losses.

In April last year, the NABU and the SAPO completed a pre-trial investigation on the fact of abuse of office by employees of SE “Pervomaiskvuhillia.” One of its mines in Luhansk region was on the verge of a man-made disaster. In 2018, the Cabinet of Ministers allocated funds to finance work at the mine. However, the heads of the state enterprise and its subdivision conspired to conduct procurement without a tender and chose a contractor according to independently determined criteria. But the winner and the subcontractor company, instead of performing the work, turned to the mine employees, and they performed all the necessary work on their own. As a result, more than UAH 14 mln was overpaid for mediation. The former acting head of the SE was taken into custody, and in June this year, the SAPO referred the case to the High Anti-Corruption Court.

In 2020, the scheme of UAH 51 mln of damage to coal-mining state-owned enterprises was exposed, among them was “Selydivvuhillia.” During 2016-2018, a group of officials practically established control over public procurement of these enterprises. Every time, they awarded the same private company and did not allow other participants because of intentionally created obstacles. For almost three years, they purchased various equipment, materials, and other goods at inflated prices for a total amount of almost UAH 174.5 million, while illegally overpaying more than UAH 51.17 million. At the end of 2021, the case was referred to court.

Both of these SOEs were transferred to the management of the SPFU.

Large-scale abuses turned state-owned enterprises into hotbeds of corruption that deplete the country’s economy. This is confirmed by statistics. In 2021-2022 alone, the NABU reimbursed the SOEs more than UAH 2.6 billion of damages caused. And over the entire period of the Bureau’s activity, more than 100 heads of enterprises in which the share of state or municipal property exceeds 50% were served with charges of committing corruption offenses, which is a quarter of all charges served. As of the end of the previous year, every sixth case referred by the NABU and the SAPO to court concerned corruption at these enterprises. However vigilant the control of law enforcement agencies over abuses in enterprises may be, they will remain a sweet spot for corrupt officials.

Therefore, privatization is a great solution. On the one hand, it replenishes the budget. On the other hand, it allows the state to focus on managing only strategically important enterprises and assets and not to spend resources on thousands of different objects, whose effective control and development at the same time is simply impossible. At the same time, reducing the number of state-owned enterprises will simply reduce the number of opportunities to steal.

UPD. The draft law was approved with 250 votes.

Transparency International Ukraine recommends supporting draft law No. 8045 to accelerate the sale of public and municipal assets in tax lien.

The authors of the draft law propose to allow the sale of property complexes of state-owned and municipal enterprises without the consent of tax authorities if the buyer pays off the tax debt.

Transparency International Ukraine has called for finalization of the draft law before the second reading in order to eliminate inconsistencies and define a clear order of interaction between tax authorities and privatization authorities.

The Committee of the Verkhovna Rada of Ukraine on Finance, Tax, and Customs Policy supported part of TI Ukraine’s recommendations.

During the war, revenues from privatization are needed more than ever. Therefore, despite the fact that some amendments were not made to the draft law, Transparency International Ukraine still recommends that the MPs adopt draft law No. 8045. This will speed up the privatization of state-owned and municipal companies with tax liens and ensure that funds flow in to cover their tax debts.

Privatization of non-core and unprofitable assets is crucial now so that the worn-down Ukrainian economy would receive double support: by getting rid of the burden and by receiving infusions into the budgets.