New Round of Privatisations

Economic News

22 Jul 2010
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On January 18, the Ukrainian government published a list of 28 state-run companies slated for privatisation this year. The most notable companies to be sold are fixed-line telecoms monopoly Ukrtelecom, ammonia fertiliser producer Odessa Portside Plant, and six regional energy distribution companies.

Prime Minister Yulia Tymoshenko and the ministry of finance have set goals to sell $1.7bn of state assets. Viktor Pynzenyk, the minister of finance, promised that "significantly higher revenues than envisaged in the [2008] budget" would enter government coffers, with an upward target of earning $2.3bn. Privatisation receipts will finance the $1.4bn budget deficit. According to Kiev brokerage firm Dragon Capital, companies going up for auction are valued around $5bn.

This year's privatisation programme is a drastic shift of policy from the government of former prime minister Viktor Yanukovych. Last year's goal to divest $2.1bn of state assets was a spectacular disappointment, with snap elections, political turmoil, and legal intervention shelving targets to sell key state-controlled businesses. As a result, only a quarter of planned targets were sold.

This time around, the Tymoshenko government has outlined more reasonable and attainable targets. First, approval from the Verkhovna Rada on privatisation targets is not required. However, a new head of the State Property Fund must be chosen by parliament to proceed.
Second, bids will be considered via an open auction process and attract a host of foreign investors.

Foreign buyers are keen to purchase Ukrainian assets. Arcelor Mittal wants to consolidate its presence in Ukraine and will likely bid for the Kirovohrad Oxidized-Ore Mining and Enrichment Plant (KGOKOR), a $1.5b glasnost-era joint venture between Ukraine, Slovakia and Romania. Russia's Metalloinvest group, which has expressed interest in the past for buying KGOKOR, may also arrive at the bidding table.

The sale of six regional energy distribution companies in the Lviv, Odessa, Chernihiv, Poltava, Sumy and Prykarpatiya regions may fetch a total of $559m. Political difficulties and disagreements, however, may mar the sale of these strategic assets. Unlike Ms. Tymoshenko, President Viktor Yushchenko is against the sale of the regional distributors, citing concerns of a "threat to national security." In reality, regional electricity networks are the territory of local business groups. Since several regional distributors were auctioned off in 2000-02, numerous political conflicts arose between oligarchic interests and national energy regulators.

Ukrtelecom, which has been singled out for privatisation for a decade, is the jewel asset in Ukraine's crown. The 2006-07 Yanukovych government opted to sell only a 37% share in Ukrtelecom, dashing hopes that the company would draw a significant foreign investor. In December 2007, Minister of Transportation and Communications Yosip Vinsky declared that there was no need to sell Ukrtelecom. This statement was reversed with the unveiling of Ms. Tymoshenko's privitisation programme that places Ukrtelecom top on the agenda.

Under new targets, 67% of the company will be sold by the end of April, leaving 25% plus one 'golden' share in the hands of the State Property Fund. Undoubtedly, the sale of Ukrtelecom is needed to improve its corporate governance, level of competition domestically, and investments in new technologies.

With an estimated revenue of $1.55bn in 2007, Ukrtelecom is the sole UMTS 3G licensee and operator in the country. Its sale will certainly draw fierce competition. Aleksander Kleedorfer, the CEO of Telekom Austria, confirmed that his company would participate in the bidding process. The market leader on its home turf, Telekom Austria, recently finished a buying spree in Belarus and Macedonia last year, adding to its portfolio of Central and Eastern European telecom holdings.

Russian companies are likely to consider Ukrtelecom, but no announcements from Moscow have confirmed concrete plans. Russia's VimpelCom, whose daughter company owns a 44% share of the Kyivstar brand, strengthened its foothold in the Ukrainian market by sealing a $4.4b merger with Russia's Golden Telecom this month. However, Trond Moe of Norway's Telenor Ukraine (the 56% stakeholder in Kyivstar) announced that the company is not interested in acquiring the fixed-line carrier.

Russia's largest mobile operator MTS is a potential suitor. Six year ago, MTS bought 51% of Ukrtelecom's shares in Ukrainian Mobile Communications (UMC), a move that allowed it to fully take over UMC in 2003. The following year, the Kyiv arbitration court dismissed an appeal, which attempted to block the deal. Therefore, a move by MTS to buy Ukrtelecom may be met with suspicion, based on this past dispute.

More state-owned assets are in the pipeline, waiting to be purchased. If all goes well for the Tymoshenko government, her privatisation record will serve as a model for selloffs in future governments. In the meantime, a successful privatisation programme will signal Ukraine's commitment to attracting investment capital, undergoing transparent auctions, and reducing state intervention in the government.

The programme will also serve as a test for the development of corporate law in the new government. At present, legally sold companies can be reprivatised by court actions. Any signs that the government will reprivatise assets is certain to dent investor confidence. Ukraine needs to sort out its budget, however, and this is not to be expected. In addition, Ms. Tymoshenko must follow through with her election promise to pay back savings of Ukrainian citizens wiped out after the collapse of the Soviet financial system.

The $4bn sale of Krivorizhstal Steel Plant to Arcelor Mittal in 2005 marks Ukraine's most successful privatisation to date. Unfortunately, the sale has proven to be the exception, not the rule, to Ukraine's legacy of privatisation. Ukrtelecom will be the first test that Ms. Tymoshenko cannot afford to fail.

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