Take and Divide: the Government Wants to Sell Almost All of its Assets by 2014

23 December 2011, 15:00

The sale of KyivEnergo, yet another privatization tender, turned once again into a merely nominal transfer of an object from one pair of hands to another. The two competitors involved are both powerful players on the market. One is Rinat Akhmetov’s DTEK and the other is PoltavaOblEnergo which is linked to Ihor Kolomoisky and Kostiantyn Hryhoryshyn. Initially, the second participant bid UAH 432.305mn (USD 54.038 mn) which was the start price for 25% of KyivEnergo shares. Then, DTEK actually bought the lot for UAH 432.5mn which was only just a little higher than the initial price set by the State Property Fund. This outcome was easy to foresee though. Before the tender, Rinat Akhmetov owned 46.82% of KyivEnergo shares and DTEK managers announced in late September 2011 that they would take part in the privatization of other energy supply assets. “We own shares in a group of companies,” said Maksym Tymchenko, DTEK Director General, supposedly meaning ZakhidEnergy (WestEnergo), DniproEnergo, KyivEnergo and DonetskOblEnergo. “We are definitely interested in increasing our blocks.”


On 25 November this year, DTEK was the only bidder standing in line to buy WestEnergo. It offered UAH 1.9321bn (nearly USD 241bn), which was only UAH 0.1mn more than the starting price. The Ukrtelecom privatization stirred no big rush either. As a result, the State Program for Privatization for 2011-2014, which was approved by the Government on 23 November and submitted to the Verkhovna Rada for consideration, raised many eyebrows. The 2011 tenders look like the first wave of infrastructure object sales.

“We would like to bring all state-owned assets into play,” says Oleksandr Riabchenko, State Property Fund Chairman.  “The objects we have right now are standing idle. This is wrong. Everything must work; everything must have its investor.”  And President Viktor Yanukovych seems to like the idea. He claims the government should own a limited number of entities to ensure that the state performs its key functions and guarantees national and economic security. Under the privatization program, the projected income from selling and running government-owned assets will amount to UAH 50-70bn or nearly USD 6.25-8.75bn. Meanwhile, the state-owned sector in the economy is supposed to shrink to 25-30% of GDP compared to 37% estimated by the State Property Fund for 2010.

One way to facilitate privatization is to simplify preparation procedures and ways to sell companies. The plan for unattractive stocks is to split them, remove the price floor and sell the stocks on a stock exchange with no set start price. The buyers that are going to purchase over 50% of stocks in strategic entities will face special requirements for the purchase procedure and the post-privatization exploitation of the entities.  On the one hand, this seems like a reasonable approach. On the other hand though, it is one of the well-tested ways in Ukraine to kick out unwanted candidates at the stage when the tender is first announced. But the lack of competition leaves the country without a lot of budget revenues. Also, the government is expected to keep controlling stakes in strategic companies and sell the rest in small blocks on stock exchanges.

2012 LOTS

Which entities is the government going to put up for sale in 2012? This remains unknown. The Ministry of Economy is actually in charge of approving the final list. However, the only obvious thing now is that the real decisions will be made somewhere other than the Economy Ministry. In spring 2011, Oleksandr Riabchenko, whose power to affect the processes should not be overestimated, claimed the sale of the Kharkiv-based Turboatom, one of the largest turbine construction plants in the world, was not reasonable as the government owns 75% of it, many investors are interested in it, the plant is operating seamlessly, has a good client portfolio and sustainable markets. Thus, the sale did not take place.  

Earlier, the government proposed a ban on the privatization of NAK Naftogaz Ukrayiny, DAK Tytan Ukrayiny, ChornomorNaftogaz, UkrTransNafta, UkrHydroEnergo, DAKhK Topaz, and a series of aircraft industry entities and railway equipment producers. Yet, a miracle happened on 1 November 2011. The Verkhovna Rada refused to consider the draft law. This made some experts claim that the real purpose behind the initiative was to build a platform from which to sell the assets, rather than keep them government-owned.

According to the data currently available, the first in line for privatization are Dnipro, Ternopil, Vinnytsia, Donetsk, Zakarpattia, Cherkasy and Chernivtsi Oblast Energy Supply Companies, as well as KrymEnergo and DniproEnergo. As far as we understand, energy assets are within DTEK’s interest range. Other objects, such as Odesa Port Plant, as well as nearly 50 city and oblast gas supply entities, also have one key potential buyer. His name is Dmytro Firtash. He has already consolidated a large portion of the fertilizer production industry in his hands. He needs Odesa Port Plant to take over the export arena and gain a monopoly over the market. Gas supply chains will allow him to build a large vertically integrated holding that will control the entire process from purchasing gas to selling it to the ultimate consumers. The stakes of city and oblast gas companies put on sale range from 0.71% to 26.04%, yet they are unlikely to lure strategic investors. Moreover, the government was not going to sell these assets anytime soon, yet it can now go for it in order to write off unprofitable entities from Naftogaz’s balance sheets.


Other candidates to buy the assets are banks which were nationalized during the crisis. On 7 December, the Verkhovna Rada passed a bill in its first reading that sets forth the procedure to sell stakes in statutory capitals of banks capitalized by the government. One of the key messages is to prevent former owners from purchasing these shares. “The entities that owned significant stakes in such banks during capitalization cannot be strategic investors,” the bill says. In 2012, potential objects for sale might include UkrGazBank and Kyiv bank. Rodovid will be turned into a remedial bank for troubled assets, thus it will not be on the list in 2012. Since the government has no cash to keep rehabilitating such banks, selling the subsidized objects looks like a fairly reasonable idea. Yet, the transparency of cash flow distribution raises doubts, including the abovementioned refinancing for banks.  

Maybe surprisingly the government has already over-fulfilled its 2011 privatization plan. The state-owned assets which have been sold have brought more than UAH 11bn; or 110% of the expected amount to the public budget over the past 10 months. In fact, though, the lion’s share of revenues came from the sale of 92.79% of Ukrtelecom for UAH 10.575bn (USD 1.322bn). In 2012, the government expects to earn UAH 10bn (USD 1.25bn) on privatization, and once again spend the cash to cover the deficit, or in other words, it will all be eaten up. But, determining the real value of most large objects is a difficult task as their shares are not traded on the stock exchange. Therefore more indirect ways must be used to evaluate them. Another portion of state-owned assets are illiquid unattractive enterprises which hardly have any chance of luring buyers, especially in the current crisis. It looks likely that the government will not even earn half of their real price even if it sells all assets. 

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