Sergei Kuznetsov in Kyiv -

Desperate to raise money, the Ukrainian government is determined to start a massive privatisation campaign before the end of this year. A total of 345 companies are on the list, including some of the state’s most attractive assets. But will there be any buyers? The economy is in meltdown and there is war in the east of the country. The risk appetite of a potential purchaser will have to be very high or the price on the assets very low if the gavel is to fall on any deals at all.

Some buyers will certainly be tempted, as there are very attractive assets on the list that includes power plants, ports, coalmines, agricultural firms, and horse- and fish-breeding farms. The authorities are ready to sell 302 of the companies straight away, while the remaining 43 will be sold after the parliament approves amendments to relevant Ukrainian laws.

“The government is [too] focused on managing these enterprises and not on more important things like improving the [country's] business climate or creating necessary regulations – that is why we want to sell controlling stakes in these companies,” Adomas Audickas, a Lithuanian-born senior advisor to the Ministry of Economic Development and Trade, who previously helped manage state property reforms in his country, tells bne IntelliNews.

Ukraine already has a petty good track record of privatising state property since the collapse of the Soviet Union in 1991. The trouble was that many assets ended up in the hands of the country's oligarchs, in particular the energy and steel industries, with the inevitable accompanying corruption scandals. Today, the Ukrainian state still owns more than 1,800 active companies, many of which are operating at a loss: in 2014, state-run companies posted a combined net loss of UAH115.4bn ($5.26bn), according to official statistics.

“We want to conduct a very transparent privatisation [programme],” Audickas tells bne Intellinews in an exclusive interview, adding that the country’s State Property Fund, the body responsible for privatisation, intends to hire international advisors for the sales of the largest assets. The caveat is that the main strategic companies, including the oil and gas network operators and the railway network, will stay in government hands.

The International Monetary Fund (IMF) has thrown its weight behind the “ambitious privatisation and restructuring agenda” unveiled by Ukraine’s government. “Following the preparation of a priority-privatisation list of 10 state-owned companies and respective privatisation action plans, the authorities will seek adoption, by cabinet resolution, of the action plans for five companies by end-September 2015,” the IMF said in its country report published in August.

Jewels in the crown

Ivan Dzvinka of Kyiv-based Eavex Capital tells bne IntelliNews that the companies set for privatisation are a bit of a mixed bag. According to him, there are companies for which there will be “considerable competition”, in particular Odesa Portside Plant and the chemical fertiliser producer Sumykhimprom, but others “that would be difficult to give away for nothing, such as the [unprofitable coal] mines.”

The State Property Fund wants to sell Odesa Portside Plant as soon as possible, Audickas says, adding that such a “sizeable asset in the region” is already well known to potential investors. “We expect that we will have strong competition for such kinds of assets,” he believes. According to the marketing materials of the economy ministry, Odesa Portside Plant is a major chemical production company accounting for 17% of Ukraine’s ammonium nitrate capacity and 19% of urea production capacity.

Due to its strategic location and connections to the chemical transportation infrastructure, the plant is export-oriented: export sales constitute up to 85% of the output, while the major export destinations are the EU and US.

The starting price for the 94.5% stake held by the state in Odesa Portside Plant will be no less than $500mn, the head of the property fund, Ihor Bilous, told a meeting of the plant supervisory council on August 18. Bilous added that ten potential investors have already expressed interest in Odesa Portside Plant, while the authorities plan to attract a global investment bank as the advisor for the privatisation by the end of August, while a road show for investors will begin in September.

Ukraine’s second largest thermal power generator Centrenergo is considered another choice asset in the upcoming privatisation programme. However, Audickas underlines that the privatisation of the utility, which operates three power plants in the Kyiv, Kharkiv and Donetsk regions and has its own repair services company Remenergo, might be postponed. “Currently, the energy ministry is considering different options concerning what to do with this asset,” he explains.

Not the best of times

Audickas says the authorities are relying on heavy participation by foreign investors in the privatisation campaign, and that the government intends to create the necessary conditions for competition to be as fierce as possible for these assets – something that was singularly lacking in previous rigged tenders. “In this way, we will be able to get fair prices for these assets in the current circumstances,” he says.

Audickas talks a good game, but it still remains unclear if there will be any competition at all for the bulk of the names on the list, let alone a fierce fight. Given the current financial crisis and the military conflict in the Donbas region in the east, investors will likely offer lowball prices in what could end up becoming a fire sale of assets.

“It is not the best time [to privatise assets],” says Alexander Paraschiy of Kyiv-based Concorde Capital. “During wartime, interest from foreign investors is limited. An example is the Roshen group, controlled by [President Petro] Poroshenko. He promised to sell it a year ago, but wasn’t able to do so, because nobody offered a good price.”

Paraschiy also believes that the problem of the inefficiency of these state companies, the result of poor management and high corruption, could be resolved by passing these assets to private management companies, but keeping ownership with the state for the meantime. “Perhaps this could even be a foreign company with experience in asset management,” he suggests.

While the government argues that it has no spare resources to modernise these state-owned companies and improve their attractiveness before putting them on the block, Paraschiy points out that such arguments are at odds with the government's stated desire to strengthen its position in the oil and gas field by merging assets under the management of the state. “It appears that in some aspects the state is an inefficient owner, but at the same time it could become an efficient one,” Paraschiy says.

Meanwhile, Eavex Capital’s Dzvinka says that the successful sale of state-owned enterprises will only work under certain conditions. “The privatisation should be fair and transparent, while the winner should not necessarily be the bidder who offers the maximum price, but the bidder who provides a plan for the company’s reorganisation and development. Such a blueprint may include investment for modernisation and plans for output growth,” he underlines.

Dzvinka also believes that it would be wise to have independent (preferably Western) experts conduct regular monitoring of the fulfilment of the privatisation agreements. “In case of failure to meet obligations without grounded reasons, the enterprise can be re-privatised,” Dzvinka says.

No Russian money, please

The one pool of investors that the Ukrainian authorities are definitely not chasing are also some of the richest and most experienced in Ukraine: Russian investors. In April, President Poroshenko urged the leaders of the parliamentary coalition factions to “limit participation by beneficiaries of Russian origin”.

Russia is considered an aggressor state by Ukraine given its annexation of Crimea and support for the rebels in the east, and the Ukrainian government has prepared a law that bans the participation of Russian capital in the privatisation process, Audickas explains. “If the law is approved by parliament, companies that represent the aggressor country will not be able to buy assets. We hope that the law will be passed soon,” he says.

However, Paraschiy points out that imposing restrictions on participants from any particular country of origin is not a simple task. “It’s possible to register any holding in Europe today,” he says. “However, it is possible to limit the share of direct or indirect participation by a given state. For example, earlier there were limits on admission to the competitions, according to which the potential investor could not belong to any government by more than 25%.”

Another thorny issue is making good on the promises made by politicians to limit the involvement of Ukrainian oligarchs keen to expand their empires during privatisations. Poroshenko has launched a campaign to defang the oligarchs and already openly clashed with some of them, such as Ihor Kolomoisky and Dmitry Firtash. Allowing these industrialists to further concentrate more of the country’s best assets in their hands would certainly raise money quickly, but is unlikely to be healthy for Ukraine’s long-term development. “This is a more complicated issue – it will be difficult to create a law that discriminates against local investors,” Audickas notes.

Paraschiy warns that the government’s intention to sell state-owned minority stakes in many energy distribution and generation companies would provide an opportunity for oligarchs “to concentrate the final stakes” in those companies already in their hands. “But probably this is the right thing to do, as these packages do not add anything for the state,” he says.

In general, Paraschiy believes that any plan to prevent certain local investors from participating in the privatisation process sound “very strange”. “Firstly, who will participate if there are no foreign investors? Secondly, it is unclear how exactly the oligarchs will be screened in the competition. It is not a Western practice. In any case, there is an Anti-Monopoly Committee, which, as in any other country, must give the green light for any transaction to be finalised. This body should examine all the possible risks of concentration and monopolisation,” Paraschiy explains.

Ultimately, the need by the government to raise a lot of cash quickly could trump all other considerations. With an economy in free fall, debt rising above 100% of annual GDP, and recalcitrant creditors unwilling to write off some of that debt, a healthy dose of money from selling assets would be a huge help in stopping the rot.