Buy While Cheap?

On February 19 the Cabinet of Ministers freed up the state-owned shares in another twenty-six companies to be offered for sale this year. They include twelve regional electric companies (Vinnytsiaoblenerho, Ternopil, Chernivtsi, Zaporizhzhia, Donetsk, Volyn, Zakarpattia, Kharkiv, Dnipro, Cherkasy, Khmelnytsky, and Krymenerho) as well as a number of enterprises the controlling or corporate owner of which is the state. “The nominal value of these enterprises is UAH 1,160 million [$218 million], and we expect to receive 2 billion [$380 million] from their sale,” Acting Chairman of the State Property Fund (SPF) Mikhail Chechetov told The Day on February 20, stressing that this year the government expects to receive a total of UAH 5.8 billion [$1.1 billion] of revenues from privatization (of over a hundred enterprises — Author).

It should be recalled in this connection that revenues from the privatization of state property were not directly included in the revenue section of the deficit budget for 2002. Experts of The Day have suggested that it is this privatization reserve that will be used by the government as a magic wand in making the fulfillment of the 2002 budget more realistic. As Oleksandr Riabchenko, chairman of the Verkhovna Rada Special Oversight Commission for Privatization told The Day, a number of enterprises (the Pivdenotrubny Pipe Factory in Nikopol, the Rosava Tire Factory in Bila Tserkva, and others) are offered for sale just “to be on the list,” because a number of joint ventures are already operating there and the state is not the majority shareholder in them.

“The plan of revenues from privatization won’t be fulfilled,” Riabchenko predicted. In his opinion, privatization should start not with approving the list of individual entities, but with studying the market of investment demand for certain enterprises. “It’s time to get used to the fact that the results of privatization are determined by buyers, not sellers. If there is no buyer, the seller can decide whatever he likes,” Riabchenko said.

But in this country the terms of privatization (potential investors’ number one concern) are traditionally worked out only after it is determined what entities are to be sold. As it became clear from Chechetov’s statement, this year’s privatization process will be no exception. “As a result of the likely absence of demand, there will be a single buyer, so the purchasing price of an enterprise won’t be much higher than the initial one,” Riabchenko concluded noting that “local bodies of government have far less possibilities for abuse in the privatization process than central ones.”

And considering the fact admitted by Chechetov that the loan arrears of enterprises (including those offered for privatization) exceed the country’s annual GDP, one should not really expect the auction price to be close to the real one. Naturally, no sound-minded investor will agree to put money in enterprises with serious liabilities but sold at market price.

“The SPF has to act as the actual circumstances dictate. The privatization program has to be changed, sale has to be made more transparent and less vulnerable to lawsuits,” according to Chechetov.

“Technically, there are a host of means for shadow privatization.” It’s no secret that “the state itself is involved. Government officials abet it by signing papers and so on. It looks like such things will be done this year also,” Riabchenko said.

Chechetov’s optimistic statement that there is no need to revise the rules of the privatization game does not sound that reassuring. “Privatization will involve exclusively industrial investors. Privatization commissions are set up for each enterprise. They include two representatives of the SPF, representatives of the regional administration, municipal authorities, the relevant ministry, etc. who jointly work out the terms of sale,” declared Chechetov. Good luck to them all. Only the enterprises planned for privatization must have a tender first. The examples of Rosava, Donbasenerho, and Eksimnaftoprodukt say almost with certainty that they will not.