On the possible outcomes of endless disputes about the goals and methods of privatization during the sale of stocks of power generation companies

“On Thursday, April 7^th, the Parliament agreed to the appointment of Valentyna Semenik, member of the Socialist Party and People’s Deputy of three convocations, the Chair of State Privatization Fund. In this connection we congratulate all citizens of Ukraine with an end of all liberal reforms in the field of state property.”

…

“Yushchenko — Tymoshenko — Kinakh — Semeniuk.
The cadre chain for non-privatization has been built in Ukraine.

It seems the Minister of Finance is the only one who is unhappy. The new version of the 2005 state budget quotes the figure of UAH 6,9 billion earned from privatization as a record figure, that cannot be earned only by establishing the State Property Registrar.”

It turns out that you can not only re-read the “Dzerkalo Tyzhnia,” but also re-write it. Two quotations are from the article “Non-Privatization Model” written in April. Only it was April 2005.

Over the last three years, figures have changed. The scope of revenues expected from privatization rose to “no less that UAH 8,6 billion” (bearing in mind the additional UAH 12 billion necessary for the compensation of bank deposits.) The cadre chain is missing one name – the official is not in government anymore. But the overall effect of all efforts remains the same: privatization is broadly disputed, but no movement has been detected so far.

Of course, one can contradict — there are certain developments. For instance, on February 20, State Privatization Fund announced the sale on a competitive basis of 99,52% shares of Odessa Port Workshops (the initial price is UAH 3 billion), the sale to be organized as an auction. The sale on a competitive basis is to take place within 75 days after the announcement; currently dozens of potential buyers have expressed their interest. Yet, there are many doubts as to whether the Workshops will be sold. We lost track counting the previous promises of sales that did not take place.

At the end of March, State Privatization Fund (SPF) submitted just another draft privatization program for 2008 to the government. This document, presumably edited by SPF Deputy Chair Dmytro Parfenenko, is laconic, faceless and harmless. Yet, the neutrality and impartiality of the document does not guarantee that it will be adopted by the current Verkhovna Rada, nor that the fact of its adoption will put an end to the privatization stalemate in the state.

Why is it so important to adopt the privatization program? The short answer is: because Yulia Tymoshenko does not want to argue with Victor Yushchenko. For a longer answer, one has again to go deep under the troubled waters of political intrigues and to swim in the shallow waters of constructive decisions.

Remember about 2009!

The government, with Yulia Tymoshenko as its head, is interested in privatization most. It has to obtain a not just huge, but gigantic amount of privatization money in order to pay out the compensations for bank deposits — the initiative absolutely triumphant from the point of view of the 2009 election. The government needs money at any price now, in the near months. Accordingly, any schemes or approaches are encouraged, including those that are legally doubtful or economically unjustifiable.

Don’t ask a naive question: whether Victor Yushchenko is ready to share victory with a brighter and more charismatic candidate in 2009. In the President’s circles they don’t even dare think about it. Therefore, it is quite probable that the Cabinet of Ministers will be pushed towards paying compensations at any price, which will aggravate Cabinet’s position - already harmed by inflation - even further. Considering that by April the dynamics of payments are not as vivid as they were before.

We could be given different explanations: outdated legal basis (that is absolutely true!), a threat to the national interests and even a piece of iceberg cracked in the Antarctic — but beware, the genuine obstructions to privatization in Ukraine are the coming elections of 2009.

And who cares that following the Constitution, the President of Ukraine lost the authority to issue decrees on economic issues at the end of the previous century! Any minor privatization problem can be presented as a threat to national security and obtain support from the Council for National Security and Defence of Ukraine. State Privatization Fund is ruined and drained, with personnel gone. Nevertheless, who or what can prevent our fair Guarantor from supporting and comforting its Head and block any new appointments?

Today, the major argument of the President’s Secretariat is thorough preparation of privatization legal basis. Olexandr Paskhaver, a prominent scholar in the field of property who headed the working group for 2003 – 2008 privatization program (the group worked, but the program was not adopted) is well aware that drafting a conceptually novel document may take up to eight months. In other words, privatization sales in accordance with the newly developed and adopted program may start by summer 2009 at the soonest. They may or they may not remember the moratorium on the sale of land that is extended every year because of the lack of the necessary legislation…

Property wars that regularly break out between leading business groups— with endless litigations, significant financial resources involved and more or less successful PR events – add brightness and color to the privatization picture. It smells like money--big money that irritates the nostrils of our officials. Their performance falls to next to nothing, while their spines bend and twist, their whole posture meaning: “How can I help you?”

For a while, a business group that initiated and financed certain court decisions or bans becomes an alliance and partner to officials exercising authority. But I cannot remember a single case when such private-public partnership was for the benefit of the state.

What President requires

In general, except for selected messages exchanged between V. Yushchenko, V. Baloha and Y. Tymoshenko, the signals sent by the Secretariat of the President are correct from the methodological point of view. (Ignoring the fact that methodological considerations and other sophisticated arguments are resorted to when there is a need to conceal vested, and sometimes animal, interests.)

So, the President insists on conceptual modifications. It is not an itemized privatization (“what could we sell this time?”), or privatization to fill in the state budget that the state needs; the state needs a systemic privatization.

The working group headed by Olexandr Riabchenko, Director of the International Institute for Privatization, Property Management and Investments, met rather tough deadlines. It was established by the Decree of February 4, 2008; and by February 15, for the session of the Council for National Security and Defense of Ukraine the group came out with the “Conceptual Framework for Ensuring National Interests in the Field of Privatization.”

The Decree of the President №200/2008 of March 6^th summarized and legitimized the results of discussion during the Council for National Security and Defense session. Therefore, let’s look at them briefly.

Firstly, privatization, which was an endless process before, becomes a process with an end: it has to be completed over the next five years, by March 2013.

Secondly, privatization follows the logic of economic sectors restructuring. In other words, if the President had retained his right to interfere with his decrees into economic activities, we would have stopped using privatization to fill up our budget and instead would consider the effectiveness of different industries and sectors and take comprehensive steps, including privatization, change of the regulatory environment, technological restructuring and others, that would produce the maximum positive effect.

Thirdly, the powers of the government to use privatization money for social payments and allowances would be cut in half. 50% of revenues from privatization are to be targeted towards: 1) funding the projects for development of social-economic infrastructure, as well as priority innovation and R&D programs; 2) buying out shares issued during secondary emissions that the government is entitled to, and also 3) restoring solvency of indebted companies that belong to a strategically important industry.

The fourth point we have defined as “Better late than never.” Finally, it is time to start thinking about who we should not sell to. The Conceptual Framework formulates this in a rather confused way; nevertheless, there is a limit set for buyers, both Ukrainian and foreign, for participation in privatization of strategic companies with the government share exceeding 25%.

“In my opinion, the privatization program should specify that even resale of privatized companies that form the carcass of the security sector should only be authorized the by state. In other words, public authorities are to monitor and control the initial sale and resale,” comments O. Paskhaver. “You want examples? The USA did not allow buyers from the Arab world to buy American ports. Russia did not sell its oil company to China…”

Point five on the list of privatization innovations is comprised of very important procedural changes. For instance, the Sale-Purchase Agreement is to contain the full list of conditions to be fulfilled; in case of failure, the Agreement is annulled or not endorsed.

The general conceptual-cheerful atmosphere is spoiled by point six. Until the privatization program is adopted by Verkhovna Rada (the program has to be submitted to the Parliament within the next month), the Cabinet of Ministers (following point 4.4 of the Decree of March 6^th 2008) is not allowed to authorize privatization of companies of strategic importance for the economy and national security if privatization may result in a monopoly. (At the end of March, a joyful Valentyna Semeniuk declared that Odessa Port Workshops, following the conclusion of the Anti-Monopoly Committee of Ukraine, is a monopolist. Are we to assume that the announced sale won’t take place?)

Besides, fuel-and-energy and military-industrial complex, transport, utilities, as well as “other relevant sectors of the economy” (who knows which exactly and how many?) within a month are to be put on the list of companies whose privatization is to be “authorized and confirmed by development programs.” Without confirmation in a special program, the sale is not allowed (see point 4.3)!

Shall the Cabinet of Ministers obey?

Energy direction

The government did not obey. Promptly, it announced sales of energy companies.

In the morning of March 26^th, while Yulia Tymoshenko sang the praises of the government’s achievements during the first one hundred days in power, the Secretariat of the Cabinet of Ministers registered the letter by Victor Baloha, Head of the Presidential Secretariat dealing with privatization issues. Government decisions concerning the privatization of certain enterprises in 2008 were qualified as not meeting the requirement of existing legislation, untimely or ungrounded.

We will not comment on Victor Baloha’s remarks on privatization of Feodosia Company “More,” Kherson State Plant “Pallada,” or Kharkiv “Turboatom.” We would like to analyze and assess his position with regard to submission to the State Privatization Fund of the shares of Open Joint Stock Companies “Dniproenergo,” “Donbasenergo,” “Zapadenergo” and “Centrenergo” (meaning, in preparation of imminent privatization). After all, we are all energy-concerned.

It is clear from the letter that the Presidential Secretariat does not approve of privatization of energy generation companies. The intention to retain energy generation companies in the statutory fund of the National Joint-Stock Company «Energy Company of Ukraine» (NAK EKU) Victor Baloha justifies by the fact that without the above companies NAK EKU would bear economic losses, its solvency would worsen, and the company would be unable to meet its liabilities to the creditors and go bankrupt. And this is an economic threat to the state, because NAK EKU was established “in order to provide for the reliable and effective operation and development of the electric-energy complex” (we hope you admire the logic of a bureaucrat as much as we do).

Several hours later, the government considered the power generation issue during its session. Naturally, not to change its position in accordance with V. Baloha’s recommendations, but in order to take a decision on preparation for privatization and sale of 60% plus one share of the stock of the four energy generating companies. And what a surprise — this decision is supported by Oleksadnr Riabchenko and Olexandr Paskhaver, who only a month and a half ago prepared a privatization concept note for the Secretariat of the President.

Rumors are repeated: “Paskhaver himself has supported Tymoshenko’s position at the Cabinet of Ministers!”

We rather listen to the original source of information.

“We did not discuss plots and intrigues associated with property and ownership issues at these companies. No doubt it is an important factor, but we did not discuss it.It was not our problem,” says O. Paskhaver. “The major question was how these companies would be privatized — through legal and legitimate procedures or via shady schemes. And what answer could you expect from an expert who always spoke in favor of lawful privatization and against the illegal one?

Debates about whether to privatize or not are nostalgic – they started fifteen years ago. It is time to do something with the major industries and sectors. Restructuring (and not necessarily privatization) is required in order to provide for investment resources.

The major problem is that the whole sector of the economy is worn out and physically depreciated, while the government lacks money (and won’t have it in the near future) to upgrade and expand power stations. The above companies won’t last long if they remain in state property. Following the calculations prepared by the Ministry of Fuel and Energy for the Cabinet of Ministers’ session, the sector will collapse between 2012 and 2016, if the existing level of state funding remains and an investment component is not included in the tariffs.

However, power-generating companies should not be sold immediately like hot pies, as I emphasized at the Cabinet of Ministers’ session. Systemic steps are required. And first and foremost, it is necessary to test how government regulation mechanisms will behave once the owner is changed. The National Commission for Energy Market Regulation, as well as the energy market itself, has to adapt to the new conditions. Secondly, the tariff policy procedures have to be reviewed in order to include investment resources. Thirdly, a reliable operation and power generation company profile has to be ensured after the change of owners. All of the above requires a lot of time and effort.

Besides, one should not forget about the specifics of the Ukrainian mentality: any talk about the need for systemic reforms is used as a pretext to stop any reforms. We cannot survive without systemic reforms, but systemic reforms are not carried out (two examples are land privatization and “Ukrtelecom”). In order to bring together two incompatible things, I proposed including systemic changes in the pre-privatization preparatory plan for energy generating sector as a whole. Only in this case restructuring would be inevitable. Today, everybody is trying to omit it. But it is dangerous.

What was the government decision on March 26^th, we asked Olexandr Paskhaver. On Monday, the expert was absolutely confident that the government’s decision did not deal with privatization of specific companies, and was about amending the Strategy for Development of the Energy Sector. But on Wednesday the information agency “Ukrainian News” reported about the order of the Cabinet of Ministers №541-р—544-р of March 26^th, following which 60% plus one share of the stock of “Dniproenergo,” “Donbasenergo,” “Zapadenergo” and “Centrenergo” are placed for sale on a competitive basis, starting from March 26 to October 31 this year.

Small technological “joys”

So, for many years experts have been reiterating that legal privatization is much better than illegal. Had Ukraine stuck to this mode of thinking from the very beginning of the power sector privatization, many unacceptable phenomena could have been avoided. Probably, this type of privatization would have been more expensive for business, but much cheaper for the country.

If we can go back to the 1990-s, when after lengthy debates about privatization of power generation, the privileged subscription to the stocks of “Dniproenergo,” “Donbasenergo,” “Zapadenergo” and “Centrenergo” were launched. Privileged shareholders and managers of privatized companies received the share due to them – on the whole, between 14 and 20% of the statutory fund of each company.

What should have happened next, was the exemplary international tender for the sale of large stock of “Donbasenergo.” A Presidential Decree to this end was issued, but not supported by the Verkhovna Rada. Later, international tenders of a smaller scale were under preparation, but never happened, either due to external crises, or internal tensions.

But the wish of the business-groups came true in a form that was unfavorable for the country and “under the table.” For its debts, “Donbasenergo” was deprived of three out of five power stations (these three power stations became the core of the future Akhmetov’s “Vostokenergo,” which currently occupies 8% of Ukrainian power generation market). As for “Zapadenergo,” by some miracle its shares were placed on the last certificate auction, where 10% of its stock were sold for nothing.

After some calm, the operation to seize “Dniproenergo” for its debts started. It is not over yet, which is proved by judicial and media wars between two leading Ukrainian business groups. It is difficult to imagine how power generation – a very profitable business – can accumulate large debt. But in Ukraine, with its poor tariff policy, irresponsible and uncontrollable management and wrecked payments, everything is possible.

“ The power generation sector of Ukraine is under a high risk of illegal restitution because overall credit liability amounts to UAH 4150 million (USD 830 million),” stated the authors of the policy paper prepared by the Ministry of Fuel and Energy.

Ironically, the share of the frontline “Dniproenergo” is only UAH 100 million (USD 20 million). Non-privatization seizure of the company, its takeover from the state, had actually taken place, as a private person bought out all debt accumulated by this company. But the logic of the government is cunning: it claims that there is no debt, but does not admit the transfer of the shares. 60% plus one share of “Dniproenergo” stock, following the order of the Cabinet of Ministers of March 26^th, will be placed on the auction block and sold. If only the sale is not stuck in litigations.

The government was warned about this risk by the Minister of Justice. But this warning was ignored.

The Ministry of Economy was surprised by the inanity of the draft orders (developed by the State Privatization Fund). Why sell 60% plus one share of the stock, instead of the whole state stock — 70,10% of “Zapadenergo,” and 85,77 % of “Donbasenergo”? Probably to make it cheaper for a potential buyer. But in this case there is no need to grieve over state interests and weep about the fate of the budget. Or, are they so naïve that they expect to retain state influence over the company having 10% of its shares (like in the case of “Zapadenergo”)?

The sad truth is that during more than ten years of meek privatization of power generation companies, the government proved itself a poor owner. Having 70 percent of stock and even more, the government learnt to bring potentially profitable companies to bankruptcy, lose cases in court and be careless of technological innovations — in other words, behave like an interim owner.

Perhaps a private owner will be more careful of its assets. The rehabilitation of the Ukrainian power generation sector will require significant investments: USD 11,9 billion for technical restructuring and new construction up to the year 2018. And a private owner can only rely on himself and on a higher tariff (meaning higher payments for citizens).

—It is difficult to predict the price of power generation companies’ stocks, — says Olexandr Riabchenko, Director of International Institute for Privatization, Property Management and Investment. — But this is not the most important question. When I addressed the session of the Cabinet of Ministers, instead of selling power generation companies I proposed selling power stations, starting from the weakest, with the obligations of restructuring and modernization, with a clear, step-by-step plan of its rehabilitation and exploitation.

But Yulia Volodymyrivna did not approve of it, and Paskhaver supported her. He said it was not a bad idea, but we should have sold like this from the very beginning, and now it would only delay the restructuring of the sector. Yet, I think that my approach can be implemented. And the benefits of it are evident: Ukraine would manage to build a system for increasing power generation capacity. And besides, an itemized sale would warm up the market…

As a conclusion for a wrapping up

Currently, the ball is in the court of the Presidential Secretariat. Now that they have missed the ball in the form of six Oblenergo sales announced this week by SPF, the officials of the President’s circle would attempt to block the announcement of the sale of power generating companies. Once the sale is declared, it is impossible to annul it, except by the Ukrainian court …

And finally, a final word to the experts.

“Only those companies will be sold this year that are agreed upon by the government and President,” assumes Oleksadnr Riabchenko.

“I believe the authorities have to master the art of compromise — not only political, but technological as well. In my opinion, compromise is possible,” affirms Olexadnr Paskhaver.

And what do you think — isn’t it the major problem of today? And privatization is just a minor disclosure of the overall weakness of authorities--the weakness that reduces the price of Ukrainian assets and has a negative impact on the image of Ukraine.