COMMENT: Ukraine privatisation delays - glitches or real problems?

By bne IntelliNews April 29, 2008

Roman Zakharovof of Troika Dialog -

Privatization is seen as one of the key drivers for the Ukrainian stock market in 2008 and so developments in this sphere are watched closely by strategic and institutional investors, who use privatization as gauge of the country's economic and political stability. Here, I briefly canvass the events preceding privatization process in 2008 and our expectations. I then assess recent changes and offer my view on the likelihood that the government's privatization programme for 2008 will come to fruition.

Political storms rain on privatization parade

In 2007, the state's privatization plans were stalled by the political turbulence that ensued after President Viktor Yushchenko dissolved parliament on April 2 and called for early parliamentary elections. The drawn-out legal dispute over the legitimacy of the presidential decree delayed snap elections until September 30. The official results were announced on October 20, but it was not until December 18 that Yulia Tymoshenko was elected prime minister by a narrow majority of deputies. As a result, the government was able to privatize only a few low-profile companies, raising a mere UAH2.4bn (€317m) instead of the planned UAH10.6bn. The most anticipated sales - Ukrtelecom, Turboatom, Odesa Portside Plant and 12 power companies - did not take place.

Although the political noise hasn't abated, there have been no major stand-offs. As a result, the cabinet outlined its privatization programme for 2008 relatively quickly by issuing decree No 81-r on January 16, which approved a list of 19 companies for first-priority sale in 2008. On February 22, the cabinet followed up with another decree (No 367-r) approving an additional 383 companies for sale in 2008. However, although these decrees authorized privatization, the State Property Fund (SPF) is actually responsible for all aspects of transferring these companies into private ownership, pending cabinet approval of the terms and conditions of auctions.

While the list of companies approved by the cabinet for privatization includes 383 names, we focus on those of highest priority and interest to potential strategic or institutional investors.

Odesa Portside Plant: On February 11, the cabinet issued a decree approving the terms of privatization of a 99.5% stake in Odesa Portside Plant. The SPF officially announced the launch of the actual privatization tender on February 20. The decree stated that the plant would be sold via a tender with elements of an open auction. As per Ukrainian legislation, the privatization auction was set for 75 days after the announcement date. During these 75 days, the SPF was to examine the applications of interested bidders and determine if they met the necessary requirements. Only candidates meeting these requirements would be allowed to participate in the auction, which is set for May 5.

Ukrtelecom: The SPF announced on February 27 that it would involve potential buyers of Ukrtelecom in drafting the terms and conditions for the privatization of the state's 67.8% stake. On April 9, the cabinet preliminarily approved the terms and conditions. Final approval and official publication of the cabinet's decision is expected by mid-May.

Generating companies: The cabinet issued decree No 478-r on March 19, in which it made surprise revision to the list of power generators, or gencos, slated to be sold by end-2008 and included 60%+1 share stakes in Dniproenergo, Donbasenergo, Zakhidenergo and Centrenergo. That same day, the cabinet issued an additional decree (No 196) that transferred these gencos to the SPF's books, meaning that once everything is set, the only action necessary to the launch the privatization tender is an official announcement from the SPF. This suggests that 60%+1 share stakes in one or more of these gencos could be privatized as early as the second half of this year.

Oblenergos: On April 2, the SPF announced the privatization of 25%+1 share in six oblenergos (regulated tariff power suppliers). Unlike Odessa Portside Plant, the state's holdings in oblenergos will be sold in a simple open auction on various local stock exchanges. Potential bidders also do not have to meet rigorous requirements. This shortens preparation time considerably, with Ukrainian legislation stipulating that the actual auction can take place 30 days after the announcement.

Recent developments

The first glitch in the privatization process came on April 11, when President Yushchenko issued decree No. 316/2008, which halted the cabinet decree that added Zakhidenergo, Donbasenergo, Dniproenergo and Centrenergo to the privatization list for 2008 as well as the decree transferring the state's 60%+1 share stakes in these companies onto the SPF's books. On April 15, Yushchenko issued a second decree (No. 359/2008) suspending the cabinet decree approving the terms and conditions of Odesa Portside Plant's privatization. Although Yushchenko did not cancel the privatization of Odessa Portside Plant outright, he did put a halt to the process, citing threats to Ukraine's economic security as the main reason.

In our view, Yushchenko is attempting to weaken the image of the current government and Prime Minister Tymoshenko in the run-up to the presidential election scheduled for January 2010. While neither the official nor unofficial campaign has even begun, politicians are hard at work establishing the best platforms from which to launch their runs in 2009. We believe that Tymoshenko will put forth her candidacy for the presidential office, although she has yet to confirm. She enjoys the support of the widest electorate at the moment, which makes her a strong contender and tough opponent in the upcoming presidential race. Hence, lowering Tymoshenko's popularity would be favourable for other potential candidates, including Yushchenko or his allies.

Yushchenko's strategy to tarnish the current government's image by having them fail to deliver promised privatization proceeds may work, but is risky. Although political ambitions may support tension between the president and the cabinet, the fact of the matter is that privatization proceeds are among the key balancing items of the 2008 state budget. Furthermore, they are expected to comprise around 25% of FDI inflows in 2008, estimated at $10bn, which are crucial to offsetting the current account deficit for 2008 (estimated at $11bn), especially as debt markets are becoming increasingly tight and expensive. Moreover, acting Finance Minister Viktor Pynzenyk has a reputation of being reluctant to take on external debt. Finally, by hindering Tymoshenko on privatization, Yushchenko could easily be tainted in the eyes of the voting public as the culprit behind failed privatization. Given all of these risks, we believe current uncertainty and tension between the president and the cabinet over privatization is temporary and will likely be resolved by end third quarter.

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