Five Losers

The June 12 cabinet meeting dealt with the sore subject of investments. Of course, working out an action plan to help implement the 2002- 10 investment program (adopted by the government on December 28, 2001) comes first. Now that the foreign investment influx least of all addresses the needs of domestic economic growth and the privatization program (botched last year, with 37.4% of anticipated proceeds actually received) may well fail this year too (UAH 336.57 million proceeds available, compared to UAH 5.8 billion planned), the problem becomes the highest priority. In the action plan considerable emphasis is placed on the restructuring of debts of enterprises being privatized. Such liabilities make the very idea of privatization questionable, so the cabinet also considered a package of privatization instruments, including measures to coordinate the share placement projects for Lvivoblenerho (26.98%), Prykarpattiaoblenerho, Poltavaoblenerho, Sumyoblenerho, Chernihivoblenerho (25% each, bringing the nominal total to UAH 51.9 million) regional electric companies. This proposal was twice considered by the cabinet’s fuel-and-energy and economy committees and failed to pass scrutiny each time. Finally, a privatization task force led by Premier Anatoly Kinakh supported the State Property Fund’s proposal of five oblenerho regional electric companies. The cabinet approved this at its meeting. The privatization program was sent for revision, and the problem was solved the hard way. The proposed exchange sale of oblenerho shares is possible only after restructuring their debts, currently exceeding UAH 5.3 billion. SPF Chairman Oleksandr Bondar says the task force spent the better part of its two-hour meeting discussing such restructuring, and that the sale schedule will be determined in each case, because summer, in his opinion, is not the best auction time. Yet the point is most likely different. The Ukrainian government seems inclined to restructure oblenerho debts with the aid of a separate law. This option could cause a privatization delay, because pushing the bill through parliament, with internal interests being at odds, might take quite some time. According to Fuel and Energy Minister Vitaly Haiduk, Ukraine wants to set tariffs for prospective buyers, when privatizing the next nine oblenerhos, that will secure 17% yields.

Will investors buy this? President Leonid Kuchma declared in March that passing a reprivatization bill must be a top priority for the new Ukrainian parliament. The head of state believes that there should be no sales now that the world economy is suffering a recession, so there is no sense in stepping up privatization. His directives have been taken into consideration, in a very special way. Valentyna Semeniuk, Socialist chairperson of the Verkhovna Rada special privatization oversight committee, recently submitted a bill, On the Reprivatization of Property in Ukraine. Although the document lists guarantees of compensation for reprivatized property and of investors’ interests among the underlying principles, it also raises many questions. In fact, Dmytro Tabachnyk, chairman of the parliamentary foreign affairs committee, pointed out that a bill infringing on private owner’s rights, envisaging confiscation of property, or even a block of shares, would not be passed by the new parliament.

For this reason the biggest question is whether investors will show interest in any of the Ukrainian privatizable oblenerhos. This is hard to answer in so many words, because the input data often prove controversial. Most Ukrainian energy distribution companies are in the red (only three show some profit). Electricity retail costs for consumers went down in May by an average 1.4%, while in April it was 3.5-5.5%. Simultaneously, payments improved, expected by Enerhorynok to reach UAH 991 million (90-93%) in May. The percentage and the sum are quite impressive, so investors are likely to appear — unless, of course, frightened off by some of our controversial innovations, because of which the privatization campaign in Ukraine either bungles or follows a hurried course.