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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Foreign Investor Crowds Out Ukrainian Rivals

13 November, 2012 - 00:00

Verkhovna Rada has appointed an ad hoc commission to investigate the performance in Ukraine of France's Credit Commercial de France (CCF) Bank and the Lafarge Company in privatizing the government interest in the Mykolaiv Cement Plant.

For the duration of the inspection Parliament banned any operations with blocks of shares held by Ukrainian stockholders and the disputable interest acquired by Lafarge. The committee charges the firm with numerous violations of Ukrainian laws.

The first of the planned series of transport corridors will start being built in 1999. In the next ten years a total of 3,375 kilometers of modern highways will be constructed, linking various parts of the world. Eurasia Invest Consulting (Germany) predicts that road construction in Ukraine will increase by 800% and the output of cement by 300%. In a word, Ukraine is about to experience a road construction boom.

These transport corridors exist in rough drafts so far, but all hell has already broken loose, with cement serving as the casus belli. One of the experts called Mykolaiv, a district center in Lviv oblast, the "Ukrainian Borodino," for here French and domestic investors' interests clashed viciously over the local cement works. And the stakes are high; the winner will control Eurasian thruways, collecting good tools from all those traveling for business and pleasure. The Ministry of Transport experts believe that Ukraine could annually receive $6-7 billion worth of transit duties. But will it?

In its previous issues The Day described the conflict, mainly from the standpoint of Lafarge which is a multinational company, but the information we had later proved far from complete, so this article may well turn out but one more in a series.

COINCIDENCES

Privatization at Mykolaiv Cement coincided with the Ukrainian President's visit to France. Shortly afterward he put in an appearance at the cement works. The latter is one of 15 such enterprises in Ukraine, ranking third by output capacity. Before long the State Property Fund resolved to put up for auction a 28% share of its stock. The cement works was officially qualified as a small business, with attendant adjustments in the bidding procedures for the benefit of foreign investors. Yaroslav Mukha, Chairman of the Public Oversight Committee monitoring the privatization, told The Day that President Kuchma had strongly recommended management find a reliable strategic partner and the latter was eventually located.

Lafarge, the world's second cement producer, emerged on the scene with the clear intention of buying that 28% blocking interest in Mykolaiv Cement. Ukrainian investors told this author that Lafarge had taken a fancy to the cement works back in 1994, but the law barred foreigners from privatization at the time. The French tried to buy out 11% of the interest owned by Hradobank which was then having problems, offering $8.5 million, but the bank declined, seeing the transaction as anything but profitable.

Another coincidence: the Supreme Arbitration Court of Ukraine prohibited domestic stockholders to perform any operations with their property, freezing their stocks and suspending this year's investment program stipulating Hr 6 million worth of state subsidies for the enterprise's development. Domestic investors tried counterclaims, but all they managed was that Lafarge was forbidden to increase Mykolaiv Cement's statutory fund by another million dollars (otherwise the French would automatically own an 89% interest, at the expense of the other stockholders, without any general meetings and resolutions).

WERE THE NEWCOMERS OUT TO EJECT THEIR RIVALS?

Getting back to the February tender won by Lafarge, the sale was appointed on a date which made it impossible for other potential bidders to apply because they had no international audit reports confirming their eligibility as per 1997 financial results (which is a strict requirement) and could not get them at such short notice. Another coincidence? Because of this formality Mykolaiv Cement's old Polish partner Cementownja Chelm was barred from the bidding, and it could have offered a good price for that 28% interest. As it was, Lafarge got it for Hr 3,100,000 after a starting price of Hr 3 million. The other bidder, Kyiv Cement, had been admitted simply to make the whole affair look legitimate; no one considered it a serious rival.

Incidentally, Lafarge paid $35 million for a 33% interest in the Polish cement mill Cementownja Malgoszcz with 1.5 less production capacity than its Mykolaiv counterpart. Is this what we call our Ukrainian inferiority complex? As a result, experts say a ton of Ukrainian cement sells 8, 14, and 28 times lower than in Russia, Poland, and the world average respectively.

So what? Mykolaiv Cement will be in good and strong hands. Lafarge says over and over again that in ten years its investment will reach $150 million. Maybe. And maybe not...

Be it as it may, there is the sad experience of Ukraine's close neighbors. Foreign investors bought a couple of cement mills in former East Germany and what is now the Czech Republic and then, using dumping techniques, felled the others, whereupon they bought the best there was at laughable prices, turning into monopolists.

As for the "progressive technology" project at Mykolaiv Cement, envisaging replacement of natural gas with low-grade coal and worn tires, the ecologists say it is hazardous. In Poland which is about to enter the European Community, with the attendant ecological requirements, such modernization of three cement works would cost between 18 and 30 million dollars. Ukraine is not likely to follow suit, not in the near future. Here ecological standards remain rather "liberal." Except probably that Mykolaiv Cement being located close to Truskavets, should worry the Ukrainian President, as Mr. Kuchma favors the spa, but this may well be referred to as production costs.

PROSPECTS

The next Ukrainian generation will live in a new postindustrial Europe, with 10 European transport corridors linking this country to the rest of the civilized world. Four of them will traverse Ukraine, as resolved by the EC Cretan Conference, relying on British studies saying that Ukraine has Europe's highest transit ratio: 3:1 (compared to Poland's 2:92, for example).

This is where Ukrainian building contractors may receive staggering revenues, provided there will be any domestic contractors left. Concessions being formed to build these transport corridors will include not only – and so much – the traditional "moneybags," classical investors, but also – and as importantly – companies specializing and research and development, construction, and relevant materials. These companies will divide among themselves $17 billion (pro rata their actual involvement), for such the estimated minimum cost of these for transport arteries. The returns due the Ukrainian – sorry, French from now on – cement works from these construction projects of the century will, of course, leave Ukraine. After building modern highways the French owners will collect tolls to cover their expenditures. And the rates will be high: the European average is identical to the cost of petrol consumed by a car over the distance for which the toll is collected. If the investors were domestic their revenues could be used not only for social needs (via taxes payable by concessionaires), but also for reinvestment in the nation's economy. But the newcomer will be able to do as he pleases.

Photo:

Where will the Lafarge auto fumes go?

 

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