“Foreign investors are alarmed by macro instability and political turbulence in Ukraine”

25 May 2016, 20:44

Interviewed by Tetiana Omelchenko

The State Property Fund of Ukraine (SPFU) is mainly associated with privatisation. But its role in managing state assets is no less important. How do you assess the balance between these two functions in recent years, including almost a year under your leadership?

The primary function, of course, is privatisation. More precisely, preparing facilities owned by the State Property Fund for privatisation. I'm talking about companies and shares that were transferred to us by various ministries and departments. During this preparation, we carry out corporate governance of certain portfolios. But that's a derivative function. In addition, there are two more: valuation and leasing of state property.

How much time does the SPFU spend to prepare facilities for privatisation?

A large company in the "G" group (strategic enterprises) takes six to nine months. Typically, transferred facilities are with us for a year, sometimes longer (more than 10 years for the Odesa Port Plant and Turboatom). But I don't like this policy and am going to insist that the transit period of our corporate management should decrease (because this function is temporary). What's more, the SPFU has a small staff, no resources and no expensive specialists. A budget of 20 million hryvnias (~$800,000) for the entire fund – to manage 402 companies – is ridiculous! Please note that half of them are involved in court cases, bankruptcy proceedings and so on. We do what we can and are working at a solid 7 out of 10 points at the moment. We're still a long way from the next level up and don't have the resources to get there. Where we can, we defend our positions, but we're not able to fight with the courts.

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As for the estimated value of the assets managed by the SPFU, what sort of numbers are we talking about?

The SPFU manages 352 joint-stock companies (from 0.1% to 100% of the shares). Only 69 of them presented their statements for 2015. Those where the state owns more than 50% are required to file these documents. Some were unable to do this because of the anti-terrorist operation, occupation, liquidation, bankruptcy, reorganisation and so on. The value of the assets of these 69 companies managed by the SPFU is 48.3 billion hryvnias (~$1.9b).

Generally, a company is valued by us for further lease or sale. In other cases, property valuation is not carried out, because it has a certain period of validity. Today, this period is less than a year, and the valuation can expire before the SPFU has finished the preparation of the facility. So we want to increase this period to at least 12 months. In addition, the valuation process becomes more expensive each year. We have recently changed the valuation method and our procedures for selecting evaluators, who now work according to international standards. Of course, you can value an asset based on its book value or the nominal value of its shares too. But why would you want to?

How much has the state budget received recently from assets leased by the SPFU?

Last year, we generated over 1.5 billion hryvnias (~$60m) for the state budget thanks to lease agreements. As of mid-April 2016, we have received 332.5 million hryvnias ($13m). The target for the year is 615 million hryvnias ($24m). Plan fulfilment is 54.06%. We monitor almost 20 thousand agreements (the register can be found in the public domain on the SPFU website in the Activity/Lease block).

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Do you see the potential to increase revenues? Which steps would be required for this?

They can definitely be increased. It is necessary to fundamentally restructure the system for managing state properties. In its regional offices, the SPFU has 1,200 employees, many of whom work on lease agreements, and for no good reason: the lease department looks for a lessee, concludes a contract… And the procedure takes months because everything is linked to the valuation, which has its own legal and bureaucratic formalities. I consider all this to be a vestige of the past. If we look at the total value of the SPFU's property, it is several times higher than Ukraine's sovereign debt (by conservative estimates). I think we should create a separate body or company (with assets amounting to billions of dollars) that will not only take care of leasing state property, but also buying, selling and developing it. State property is not just square metres of real estate in a certain class, but also a multitude of plots of land.

But this company should be managed based on tenders by professionals, who would receive fair remuneration for this (a percentage of revenue from leasing or profits). In this way, the state would have an effective manager for its property and get rid of various debts. All we need for this is some desire, political will and a small budget to start the process. In the future, this will pay off handsomely.

What is the ratio of profitable and unprofitable enterprises managed by the SPFU?

As of 1 January 2016, out of the 182 enterprises and companies with state ownership of more than 50% of the share capital that are managed by the SPFU: 38 are profitable (of which 14 worked “effectively” in accordance with our financial and business evaluation criteria and 25 – “satisfactorily”), 56 are inefficient and 68 were not evaluated (for various reasons). 384,950,000 hryvnias ($15m) was paid in dividends in 2015. State-owned enterprises managed by the SPFU have paid 55,800 hryvnias ($1,500) of net profit into the Ukrainian state budget since the beginning of 2016. That is to say, the overall picture is rather miserable. If not in terms of dividends, then surely in terms of the number of companies involved in bankruptcy proceedings: most of them are bankrupt one way or another and are in the process of liquidation or reorganisation. But there are often attempts to carry out the reorganisation procedure using obscure resources (without money). The SPFU does not like this, but we don’t have enough levers of influence to deal with such cases. And statistics show that many companies have been informally privatised in this way.

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What has changed in this respect under your leadership?

I wouldn't say that there has been a revolution in corporate governance during my tenure. But we're on our way there. We don't really monitor operating performance, because we only fulfil the role of a shareholder. So the SPFU's functions are usually limited to appointing a supervisory board, which then selects managers itself. Of course, we have to talk about profitability too, and low performance signifies a shortcoming in our work. But the main function of the SPFU is still privatisation. In contrast, pre-privatisation preparation and cleaning up the operational and financial life of the companies is a matter for the ministries that hand these enterprises over to us. We have companies that pay dividends: Turboatom, some regional power companies, representatives of the mining industry, but the condition of most facilities transferred to us does not stand up to criticism.

To what extent have privatisation plans been met in recent years? What are the main obstacles: the inadequacy of the plans themselves or some other contrived points during the denationalisation process?

The plans are not being implemented. My team and I were immediately faced with a huge problem: the legal and regulatory framework for privatisation is outdated (the last denationalisation was in summer 2005). Another obstacle is sabotage: the issue of transferring enterprises from the ministries to the SPFU. The respective resolution number 271 was adopted in May 2015, but to date only 12% of the more than 300 enterprises have been transferred to the fund. What can we put up for sale if we aren't given anything? And even when the facilities are handed over to us, they're without their statutory documents, immovable and movable property registers and so on. How can the SPFU sell them? This is a long established problem.

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When in August 2015 we approached the issue of selling the Odesa Port Plant (OPP) based on the valuation method formed back in 2003 (5% of the company for 39 million hryvnias), we realised it was time to change. As a result, privatisation of the OPP didn't take place last year. However, the law on privatisation and valuation methods was changed. Since July 2015, the SPFU has been preparing the OPP for sale: millions of dollars of donor funds have been spent and environmental audits have been conducted in accordance with Western standards. In May, we want to start the process of privatising the plant. And international corporations will come to us, I'm sure. Then there will be the denationalisation of regional power companies, Centrenergo and other small facilities (various central heating and power plants, a bank, the President Hotel in Kyiv). We are really looking forward to parliament approving a law that would lift the ban on selling so-called strategic companies that are not actually strategically important anymore  (Ukrspyrt, the producer of alcohol; Artemsil, an extractor of salt; machine-building enterprises, etc.).

How are you going to attract investors?

We consider as one of our achievements the possibility to include dispute resolution through international arbitration in the sale contracts. Generally, attracting investors is not only a problem for the SPFU. We spend a lot of time in negotiations with the National Bank and the other day its chairperson Valeria Hontareva finally made a statement on the partial removal of currency restrictions on dividends. Because it's impossible to sell something for hundreds of millions of dollars if you don't let the investor take any money out of the country.

You have said that the tender for the privatisation of the OPP should be closed by the end of July. Does the position of the SPFU match the attitude of the newly appointed government towards privatisation? Will it not be blocked by new ministers and representatives of various groups of influence? Maybe there have already been some attempts?

There is currently no resistance, and I am pleased that the ministers are planning to support the course towards privatisation that has already been set. The SPFU has done its bit, and I really hope for support. As for foreign investors, statements and words aren't enough for them – they want to see an official decision from the Cabinet. Now, the privatisation is at such a stage that it could only be cancelled by the Prime Minister or President.

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You previously said that ten investors were interested in the OPP, now five remain. Why did the rest lose interest?

No one has lost interest: negotiations are underway with nine potential investors. So far, only the overly bureaucratic Chinese have dropped out because there is no documented decision regarding the privatisation. Moreover, they start taking over markets with significant loans (mostly under government guarantees). Out of the nine companies that have shown interest in the OPP, some have already signed a confidentiality agreement, some are still thinking it over, others (the majority) are waiting for an official decision from the Cabinet, which is a kind of point of no return for them. And it is natural that investors who intend to mobilise hundreds of millions of dollars want to be sure of the Ukrainian government and president's serious intentions. I would like to mention that among investors there is an active interest in the OPP, although this is due to indirect factors (profitability, margins). Ukraine has problems that alarm foreigners: the macro instability of the state, political turbulence, the recent change of government and lack of leading positions in global commodity markets.

Where do the companies interested in the OPP come from and which fields do they specialise in? Are there any bidders for the company with Ukrainian capital?

There aren't any with Ukrainian capital. The main business of the bidders is the production or trade of mineral fertilizers (90% are producers). From the United States, the Netherlands, Morocco, Indonesia, Turkey and Brazil.

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Has procurement in state-owned enterprises been switched to the ProZorro system? Have you managed to do away with intermediaries when preparing companies for privatisation? If so, what economic effect has this provided?

The SPFU hasn't used the ProZorro system yet. Currently, the SPFU is working on a directive regarding the composition of the tender committee under the new procurement terms. The statutes and regulations of the Fund that will regulate the procedure for electronic purchases are also being prepared for approval. In addition, we are waiting for electronic signature certificates from the responsible people at the tax office.

As for the OPP, we are only beginning to switch it onto the ProZorro system. Moreover, the system is not normally used to buy energy sources: neither coal, nor gas (which are 90% of the plant's purchases). As for other companies, we are only providing training at the moment and recommend that they familiarise themselves with all the procedures. First and foremost, ProZorro was created for municipal and regional governments. Therefore, they should enter the system first, and only then state enterprises. I fully support the transfer of procurement in state enterprises onto ProZorro. I think that by the end of the year most of them will use it.

Many discussions are continuing on whether Ukraine should maintain economic relations with Russia in the current political situation. The Russian VS Energy group, whose shareholders include odious Russian MP and businessman Aleksandr Babakov, owns seven Ukrainian regional power companies. Not so long ago in our country, there was talk of possibly nationalising companies controlled by VS Energy, but it came to nothing. Does this create a risk for the state?

Not at all. I consider calls from certain people to nationalise companies under the control of VS Energy to be nothing but emotional outbursts. There must be objective reasons to reprivatise or nationalise a company. We can only make these sudden movements when there is clear evidence and court decisions. Otherwise, I oppose such developments and would advise steering clear of them. You need to be very careful with such calls to action, because they are a very negative factor for the investment image of our country. Today, assets will be taken away from Russians and tomorrow – from other foreigners. And then the day after tomorrow no one will want to invest in Ukraine any more.

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Speaking of VS Energy, they purchased the Ukrainian power companies officially. In 2013, the corporation legally bought the Kyiv and Rivne regional power companies, paying a lot of money into the state budget. I will mention that the Russians are rather efficient in managing their assets and use electronic systems. The SPFU is currently analysing Ukrainian regional power companies, and I have to admit that VS Energy, like any private owner, manages them much better than the state. The company is working on capitalisation, invests money and regularly pays salaries to our citizens. And I really want the new owner of the six power companies that we're putting up for privatisation to be just as good.


Ihor Bilous, born in 1978 in Ternopil, Western Ukraine, graduated from the Kyiv National Economic University with a major in International Business Management. He worked in various companies and organizations as financial analyst, director of corporate finance and head of project development departments. In 2014, Mr. Bilous was First Deputy Minister of Taxes and Revenues. In 2014-2015, he headed the State Fiscal Service of Ukraine. In May 25, 2015, he was appointed head of the State Property Fund. 

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Ihor Bilous

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