COMMENT: Privatizing the Odessa Port Plant - how to make it happen

By bne IntelliNews November 5, 2007

International Centre for Policy Studies in Kyiv -

One of the key government decisions in October was to suspend the privatization of Odessa Port Plant. The plant has become hostage to political circumstances because there are powerful interest groups in this sector and each of them has its own vision of the plant's future. On this issue, Ukraine, for the umpteenth time, has proved incapable of bringing together various interests to develop the optimal policy. The International Centre for Policy Studies in Kyiv (ICPS) takes a look at the various policy options regarding this enterprise

The Odessa Port Plant is one of the biggest ammonia and urea producers in Ukraine. Standing at the end of an ammonia pipeline that goes all the way to Togliatti, a car-making centre in Russia on the Volga, this plant is unique. The plant has its own port infrastructure that is used to further ship ammonia and nitrogen fertilizers produced by Ukrainian and Russian companies.

The Odessa Port Plant is also one of the most state-of-the-art chemical enterprises producing nitrogen and nitrogen derivatives in the CIS. Its technology is also relatively efficient in terms of gas consumption, making its positions potentially stronger than those of other Ukrainian enterprises in view of an expected increase in the price for imported natural gas.

Empty discussions yield zero results

The Odessa Port Plant was supposed to be sold in October, the fourth attempt to do so. Its privatization history began back in September 1993, when the State Property Fund adopted a decree on the privatization of this enterprise. However, each attempt to sell off this enterprise came to nought.

There have been active disputes and debates around this privatization, top officials of the Cabinet of Ministers and the State Property Fund have been shuffled, yet the process has not gone anywhere. Sometimes, the positions of various participants in this process have even changed 180 degrees. In addition, arguments in favour of one or another decision regarding the fate of the company always had a lot of holes.

Supporters of the status quo spoke about the strategic nature of the plant, while supporters of privatization spoke about revenues from the privatization sale. Yet, there was no objective assessment of what government policy regarding Odessa Port Plant, and the domestic nitrogen sector as a whole, should be.

Meanwhile, other enterprises in this sector were taken into private ownership. Still, nobody answered the question, how Ukraine saw the future of the Odessa Port Plant. The enterprise was developing independently, with practically no state support.

New challenges

Today, the situation is changing. The production of nitrogen fertilizers depends critically on gas, so its competitiveness depends on the price for this form of energy. Clearly, the price for Ukraine's imported gas is about to grow further as Russia raises prices. ICPS economists reckon that by 2012, the price for imported gas will reach European levels, except for the difference in transportation costs.

In addition, there will be a surplus of ammonia and urea stocks worldwide over the next few years, which will put downward pressure on prices. As a result, Ukrainian enterprises will be faced with shrinking profits. It is quite possible that for Ukrainian enterprises, producing ammonia will become a losing proposition.

For the Odessa Port Plant, the solution is modernization. For example, geographically-close European markets are interested in the plant, not so much for the urea as ammonium nitrates, including calcium ammonium nitrate (CAN), and complex fertilizers (NPKs). Moreover, there is growing demand worldwide for granulated urea, which is easier to apply. These products could help improve the bottom line.

The plant could also invest in further increasing the energy efficiency of its production. Cutting gas costs per product unit would reduce costs and make products manufactured by the Odessa Port Plant more competitive on the global market.

Who should finance OPZ's development?

To finance such a large undertaking, the enterprise needs major capital. At the moment, it will be practically impossible to find it. Firstly, changes in the world market will mean shrinking profits. Secondly, the state has not been allocating budget funds to develop the Ukraine's nitrogen industry. This means the only way out for the plant is to attract an investor who will support its development. Given the current political competition, the government has been ignoring this need.

Nor do Ukraine's other manufacturers of nitrogen fertilizers support the idea of developing the Odessa Port Plant's production capacities. While they are interested in using its port infrastructure, as a manufacturer the plant is a major competitor for them. Thus, Odessa Port Plant has been left on its own with its problems.

Monopoly: criticized, but not dealt with

The main argument against privatizing the Odessa Port Plant is that the new owner will have monopoly status in the shipment of ammonia and nitrogen fertilizers. They argue that the new owner would be able to raise docking and loading fees for other enterprises without justification. However, the plant was, is and will likely remain a monopolist for the foreseeable future. The country could have begun to resolve the issue of monopoly many years ago. After all, there is no fundamental difference between a state monopoly and a private monopoly, in terms of abuse of monopolist position.

Current proposals regarding the regulation of Odessa Port Plant's activity call for these functions to be handled by the Ministry of Industrial Policy. However, this institution cannot be a regulator, as it does not meet the key criteria of independence and impartiality in regulating. Firstly, the ministry is part of the executive branch of government, while any regulator should be an independent institution. Secondly, UkrKhimTransAmiak, a state-owned company and one of the key parties interested in transportation, is directly subordinate to the ministry. This would clearly present a conflict of interests between regulatory and management functions. Thus, the plant has become hostage to a problem that nobody has dared to resolve.

Certainly, the Odessa Port Plant itself cannot resolve the issue of regulating its activity instead of the state. However, precious time, when global prices are still high and natural gas is not so expensive, is slipping away.

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