Privatization tenders depend on “supplementary conditions”

Andriy Barabash, director of the normative-legal support and codification division, legal department of the State Property Fund, formulated week before last his agency’s formal stand in the case of the publicly held Northern Ore Mining and Processing Combine (Kryvy Rih). In fact, the SPF did not have much of a choice: either accept or contest the latest court ruling. Mr. Barabash said they were preparing an appeal and that “the leadership has made a decision in principle on the issue.”

The situation is very much like a computer system error, indicative of sizable gaps in both the practice and legal framework of the Ukrainian privatization process. Specifically, those “supplementary conditions” are present in practically every SPF tender selling the state interest in a given enterprise, long a process painful for everybody. These conditions are actually Ukrainian legal know-how that makes privatization largely dependent on bureaucratic whims. In practice, it means that bidders lacking such “supplementary conditions” tacked on by bureaucrats are certain to lose any such tender and then contest it in court. As a result, the privatization process is blocked. The case of NOMPE in Kryvy Rih is a good example.

An invitation to bidders appeared in the press last summer. The tender was supposed to sell the state interest in NOMPE (35.74%) managed by the SPF. Potential law-abiding bidders began preparing the supporting documents. Ukrainian bidding procedures are most democratic and transparent, on paper at least, and the tenders offered are not replaced by deals backstage.

There were nine potential bidders. The SPF may have been satisfied to have them; it was a reliable guarantee that the state would receive good money for its interest. Before long, however, most of them were perplexed, particularly by the third clause of the additional conditions, barring seven of the nine from the tender.

The third clause read that only those signing an agreement on amicable settlements in case of bankruptcy with the creditors holding over 50% of the NOMPE liabilities were eligible as bidders. Also, they had to provide approved readjustment plans.

The gist of that clause was that one of the potential bidders and his partners held the whapping sum of NOMPE debts, meaning that he was not likely to agree to a compromise with a buyer from outside. The SPF must have been aware of the situation. In addition, the holder of the debts (Kharkiv’s UkrSibbank) also happened to manage the NOMPE’s controlling interest (according to the Ukrainian Investment Gazette, September 17, 2002).

Under the “coincidental” circumstances, potential bidders found themselves on absolutely unequal terms and the SPF quickly took advantage of the situation, announcing that seven of them were not eligible.

Such situations are characteristic of Ukrainian privatization. SPF bureaucrats are free to introduce any clause in those supplementary conditions. In other words, every prospective bidder actually depends on such bureaucrats and forget about economic expediency or national interests (the latter are best served by the presence of many bidders: the more there are the higher such state property can sell for).

Naturally, participants in the privatization process (in this particular case, Manitoba Ltd., the Zaporizhzhia Assets Management Center, Sukha Balka Corporation), on finding themselves elbowed aside, refuse to play by such rules. In the NOMPE case they brought the issue to the Economic Court of Kyiv, which ordered the tender cancelled. The SPF did not like this and referred the matter to the Appellate Court which overruled the interdiction on September 5.

The initial claimants had no time to contest the ruling, as another tender was held the very next day, with just two bidders: Kharkiv’s UkrSibbank and the Ukrainian Metallurgical Company. The latter was successful.

The organizers of the tender did not risk selling the interest at the starting price. The difference between the starting and selling price was 2.5%. Experts believe it would be 25% if the tender were held fairly.

In view of all this, the SPF bureaucrats’ explanations why the privatization proceeds quotas are not fulfilled sound somewhat funny.

The bidders barred access to the tender made another attempt to restore justice and were suddenly supported by Ukraine’s Prosecutor General. The matter was again taken to court, this time by prosecutors acting in the interests of the cabinet . Both claims were associated and heard, whereupon the Economic Court ruled to void the tender and forbid any transactions involving the now notorious interest.

Regrettably, this was not the end of the legal marathon. The SPF once again contested the crystal clear decision, bringing it to the Appellate Court, but the latter sustained it on March 12. In other words, the tender was declared illegal and had to be held again, allowing for all the legal nuances, nullifying the NOMPE stock purchase agreement signed by the SPF and Ukrainian Metallurgical.

The SPF responded by preparing an appeal to the Supreme Economic Court, arguing that it is empowered to impose additional conditions with regard to any auctions and tenders. Deputy Prosecutor General Tetiana Korniakova believes that “the SPF acted against the law, imposing on the bidders additional conditions other than those determined by the legislation.” (Courtesy of the newspaper Business, September 23, 2002.)

Thus one will have to wait for at least one court hearing. With time the outcome will become clear, although one thing is already apparent: such “supplemental conditions,” serving as a loophole meant to benefit certain bidders, must be cancelled. The privatization process can be transparent and give an equal footing to all participants only in the presence of clearly formulated and truly competitive rules and procedures. Otherwise any tender will either fall apart or damage the state by selling state property for a song.