Large-scale privatization continues in Ukraine during the war: first results

In 2022, privatization brought UAH 1.7 billion to the state budget against a plan of UAH 8 billion

Despite the war, the process of privatization continues in Ukraine. It was suspended after the start of a full-scale war, and in September 2022, small-scale privatization was restarted. Now the State Property Fund (SPF) is waiting for the conditions for the continuation of large-scale privatization. However, in times of war, the chance of attracting strategic investors is extremely low.

New start

Since last September, small-scale privatization has resumed in Ukraine, which had been suspended since the beginning of the full-scale invasion of the Russian Federation. In almost four months, the state and local budgets received more than UAH 1.4 billion. Total last year privatization brought to the state budget UAH 1.7 billion under the plan 8 billion UAH.

Among the most popular lots for small-scale privatization are distilleries, individual property complexes, recreational facilities, assets of machine-building enterprises, non-residential premises and construction in progress.

Among the large lots that have been sold since September:

• Marilovskiy distillery (Ternopil region) – UAH 150 million;
• The property of one of the subdivisions of SE Ukrspirt (Ternopil region) – UAH 70.3 million;
• Research Institute Erothorn (Lviv) – UAH 55 million;
• Jewelery plant Kristall (Vinnitsa) – UAH 45 million.

Already this year SPF expects adoption of draft law №8250, which is aimed at modernizing the management structure of the SPFU. It contains a condition on unblocking large-scale privatization in order to resume it in the II-III quarter of this year.

According to the Prime Minister Denys Shmyhal, this year the government will implement such measures:

• transfer of the majority of state-owned enterprises to the management of the State Property Fund;
• after analyzing their activities, they will either be privatized or receive a new level of management according to OECD standards;
• resuming large-scale privatization to stimulate investment;
• acceleration of liquidation of illiquid enterprises;
• updating the list of strategic enterprises not subject to privatization;
• development of a management strategy for enterprises that were confiscated from sanctioned persons;
• optimization of the structure of the State Property Fund.

Among the facilities that are or will be prepared for privatization:

• Zaporizhzhia Titanium and Magnesium Combine (ZTMK),
• Zaporizhzhia Aluminum Production Plant (ZaLK),
• Demurinsky Mining,
• Ocean Plaza shopping center (66.65% of shares),
• Nikolaev Alumina Plant (NGZ).

A number of those listed are still being transferred to the State Property Fund or proceedings in the courts. It is expected that in the future other Russian assets will be transferred for privatization, which will be confiscated in court.

It will be quite difficult to sell these large objects now, not only because of military risks, high cost, but also the fact of nationalization, which makes the assets vulnerable to lengthy litigation. On the other hand, the authorities are obviously not going to implement the ideas voiced before the war of creating a vertically integrated titanium holding based on ZTMK and the United Mining and Chemical Company, or an aluminum holding based on ZaLK and NGZ.

In general, in the law on the state budget for 2023, revenues from privatization are planned in the amount of UAH 6 billion. However, the plan for the privatization of state property has not been impleme nted in recent years.

The state is an inefficient owner

One of the main theses that accompanies privatization is that the state a priori cannot be an effective owner. The Ukrainian Union of Industrialists and Entrepreneurs (UUIE) associates the low efficiency of hundreds of state-owned enterprises with the crisis of state management, because in recent years the government has not talked at all about modernizing or searching for markets for these industries. As an example – the Odessa Port Plant. At the end of 2022, only a third of state-owned companies were profitable, while there is no thorough analysis of the reasons for this situation.

“The withdrawal of the state from non-strategic assets and the search for an effective owner for them, capable of improving the activities of enterprises, creating new jobs, increasing the competitiveness of products and services is one of the key tasks identified by the Recovery Plan of Ukraine,” informs Danylo Getmantsev, head of the Verkhovna Rada committee on finance, tax and customs policy.

Another side of the coin is that the government agencies involved in privatization or management of nationalized assets – the State Property Fund and ARMA – have recently been publicly accused of corruption, which does not contribute to transparency in the privatization process.

“If the state has objects for which there is a demand, then it needs to be sold, and the proceeds from the sale should be directed to military needs. The big privatization should have been carried out 30 years ago. State property is burdensome, and in times of war, especially in terms of compensation for losses, corruption, etc. And the recent events around the former management of the State Property Fund only emphasize the need to continue privatization,” notes Oleksiy Movchan, People’s Deputy of Ukraine, Deputy Chairman of the Committee on Economic Development.

Difficulties of privatization

On the one hand, the state needs money to fill the state budget. On the other hand, selling an attractive asset to a strategic Western investor in a war is an extremely difficult task. For example, in January, the commercial seaport Ust-Dunaysk was sold for UAH 201 million to a domestic investor. Several auctions were also held for the Bilgorod-Dnistrovskyi Sea Port, but the buyer did not pay UAH 220 million for the facility, so a third auction is expected soon.

These are the first ports that were put up for privatization. In the future, the authorities may put up for sale larger port facilities, for which there is already a demand. In particular, the Metinvest Group may be interested in the privatization of deep-water ports that are capable of receiving large vessels.

“If we are going to think about buying ports, they should be big. Those that can receive vessels of 20–40 thousand tons or 120–180 thousand tons. Vessels of the Panamax or Capesize type. In Ukraine, there is only one port that can receive ships capable of transporting 180 thousand tons – this is Pivdenny. Therefore, it may be interesting, but these should be ports that can receive large ships. Small ports are not suitable for steel products,” previously told CEO of Metinvest Yuriy Ryzhenkov.

Experts note that the issue of the sale price of an asset during privatization in a war may not be the key issue, the main thing is to start production.

“During the war, having damage or loss of premises/equipment, etc., the cost of such enterprises/objects will be lower than the market value. But again, you need to look at the future: if an investor enters a conditional plant that has not worked for years with the conditions for continuing core production, creating new jobs, etc., this will be a benefit for the state, and not the one-time amount that he will pay,” says Anatoliy Kinakh, UUIE President.

To attract Western strategic investors, insurance against war risks is essential. Also, once again, investors will not even show interest in the assets of a country where hostilities are taking place over a large area.

“It is very important to have a clear mechanism for insurance against military risks. For example, the German government did this for German investors in Ukraine, and we know about a large company that has begun construction of the second plant in our country. Despite the war. Therefore, such an insurance mechanism should be developed by the Cabinet of Ministers together with the Verkhovna Rada and international partners, financial organizations,” explains the president of the UUIE.

In the conditions of martial law, Ukraine needs quick, but well-considered decisions. Therefore, the assessment of the value of assets should be transparent, and if this is an enterprise capable of producing technological products/processing, etc., then privatization should be subject to the continuation of professional activities and the preservation of jobs. As with relocation, a separate business plan is required for each case.

“Since the unblocking of small privatization last August, we are seeing incredible results. Since August last year, 650 auctions have been held, from which the state has received 26% of privatization revenues over the past 5 years. This emphasizes that even in the conditions of war there is a demand for privatization objects, and it is even greater than before the war,” Movchan emphasizes.

Key enterprises of the military-industrial complex, critical infrastructure, the energy sector, and mechanical engineering, which form national security, must remain in state ownership.

“Large strategic objects should be considered for privatization through the prism of national interests, analysis of the impact on security, defense capability, economic structure, competitiveness in the domestic and foreign markets, clear technical and economic calculations and forecasts of consequences,” sums up Kinakh.