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Ukraine - Privatization

The State Property Fund oversees the privatization process in Ukraine. Privatization rules generally apply to both foreign and domestic investors, and, in theory, a relatively level playing field exists. Observers claim, however, that a common abuse of privatization laws is the adjustment of the terms of a privatization contest to fit the characteristics of a certain, pre-selected bidder. The methods chosen for economic privatization, coupled with the government’s inability to exercise state control during reforms, served to create both a vacuum of public control and general apathy towards what has become known as the “economic theft of Ukraine.” The result of this exploitation of state weaknesses during economic restructuring was a redistribution of state property that benefitted criminal, bureaucratic, and corporate entities and considerably undermined the industrial potential of Ukraine.

As Ukraine acquired independence in 1991, one of the main objectives for the new government became the prevention of further decline ot Ukraine's Soviet-style economy. Ukrainian society and the Government of Ukraine became aware that the state had exhausted its resources in supporting giant industrial enterprises, as well as collective farms. The only workable solution appeared to be fast privatization. However, the progress of privatization was extremely slow.` According to the Ukrainian Center for Market Reforms, there were initially several distinct stages of privatization of non-agricultural state property.

l. Initial (1992-1994) This period is characterized by the leasing and buy-out of state property by enterprise employees. There were a total of 1,200 non-agricultural enterprises privatized in this Way (with at least 70 percent of the charter capital privatized). Company managers were usually the initiators of privatization. Conipany capital was not divisible, and shares were not tradable. There was no capital market infrastructure at that time.

2. Mass privatization (1995-1997) The privatization process proceeded with a "mass privatization" in 1995, when all Ukrainian citizens obtained privatization certificates. These certificates could then be exchanged for shares in state companies via privatization certificate tenders. Another type of paper, which gave rights for shares in state-owned enterprises, was the "compensatory certificate." These were given to cover the "losses" incurred by holders of deposits in the State Savings Bank during the period of hyper-inflation of l99l-1995. As a result, 2,600 enterprises were privatized. At the same time, thousands of small ventures and properties were sold through auctions directly to new private owners.

The capital market infrastructure (eg. security depositories, traders, and exchanges) developed in parallel to the privatization process. Company capital became divisible, and shares tradable. However, mass privatization brought into Ukraine a very small fraction of much hoped~for investments, including investments from abroad. New minority shareholders -- Ukrainian citizens were unable to invest into privatized enterprises for a variety of reasons: lack of market infrastructure, unawareness otY capital market rules, and low levels of investable income. According to the study of the Ukrainian Center for Market Reforms, privatization in 1992-1997 did not involve real investors, who would be ready to invest cash into companies. Although newly-privatized enterprises (with at least 70 percent of the charter capital privatized) did increase productivity and achieve improved ñnancial performance, it usually took an average of two years after privatization to achieve better resultsm. In addition, Old technologies used at those companies required restructuring, which could take one to six years.

3. Privatization for cash (1997-2000) Shares in medium and large companies were privatized in large blocks at tenders or at stock exchanges for cash. By 2000, about 500 enterprises had been privatized for cash. This process was initiated in order to increase state budget revenues. In agriculture, ownership rights in 1,230 state farms were transformed to collective agricultural enterprises. The capital of the enterprises was not divisible, and the shares in these companies were not tradable. Fifty percent of capital in approximately 4,000 food processing companies was transferred to employees of collective agricultural enterprises.

According to the State Property Fund, in 1992-1999, a total of 50,000 enterprises were privatized. These companies employ 3.5 million people, or 24.2 percent of Ukraine’s employed population. The term "privatized enterprise" does not always mean that the company is actually privatized, according to the `Ukrainian Center for Market Reforms. For example, the average privatized fraction of the companies' capital is 56 percent among medium and small enterprises privatized in 1992-1999. In the energy, metallurgy, chemical, and oil industry sectors, this portion is only 25 percent. As of 2000, the total charter capital of state companies is 54 percent of the total charter capital of all companies, Whereas the total charter capital of privatized companies (with at least 70 percent of a company privatized) was 14 percent of the total charter capital of all companies. In 1999, the state still owned shares in 6,500 companies, or S8 percent nf all incorporated companies.

Few major new privatizations had been conducted since the privatization rush of 2004. The country made modest progress in combating corruption during 2004. For example, the 2004 sale of the massive Kryvorizhstal steel works to government-connected insiders was invalidated by the courts. The Krivorizhstal steel factory had been sold to a group of domestic investors for $800 million. The government re-privatized the company during the year in an open and transparent process, whose proceedings were broadcast live on national television channels. The world's largest steel company, Mittal, acquired Kryvorizhstal for $4.8 billion (UAH 24 billion), $4 billion (UAH 20 billion) more than the "insiders" consortium (headed by President Kuchma's son-in-law) paid in the rigged 2004 privatization. The sale in a fair tender to Mittal Steel was generally viewed as Ukraine's most transparent major privatization to date.

By 2012 the State Property Fund had a multi-year plan to privatize 90% of all remaining state assets between 2011 and 2014, with estimated revenues of UAH 70 - UAH 80 billion ($8.75-10 billion). The most prominent privatization of 2011 involved Ukrtelekom (Ukraine's monopoly state telecommunications operator), which was privatized following a non-transparent and controversial tender process. Although an Austrian investment firm won the single-bid tender, the true ownership and motivations of the winning bidder remain a mystery and the future of the company remains in doubt. A number of power sector assets were also privatized in 2011. The government has identified a large chemical producer (Odessa Portside Plant), more energy generation companies, the Kryvorizhskiy Ore Mining and Processing Plant, regional power plants, and a producer of turbines for power plants Turboatom as priorities for future privatization.

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Page last modified: 02-10-2021 18:04:31 ZULU