Privatization will not be a cure for all problems

KOZAK Prywatyzacja nie będzie lekiem na całe zło JAMNIK

According to the experts, the mass privatization of state-owned enterprises that has been launched in Ukraine, will not fulfill the hopes for a revival of the Ukrainian economy. Meanwhile, such a revival is badly needed.

„Thanks to privatization, the Ukrainian economy will grow at a rate of 6-7 per cent per year, which will enable us to create new jobs and to raise the standard of living of our citizens,” stated the President of Ukraine Petro Poroshenko during a meeting of the National Reform Council last year.

According to the Ukrainian Prime Minister Volodymyr Groysman, the state should retain control of one hundred companies at the most, while the remaining ones — about 3 thousand state-owned entities — should either be sold or leased out.

„We cannot delay this process any further. We’ve already waited 26 years. But if we proceed with these changes within several months, then I am certain, that it will be possible to put the economy on a path of rapid growth,” said the Prime Minister, echoing Mr. Poroshenko’s words.

The Ukrainian government ultimately approved the list of state-owned enterprises designated for the so-called „large privatization” in May 2018.  The list included 26 large companies such as the energy company „Centrenergo”, which accounts for 10 per cent of the Ukrainian electricity production, the chemical industry giant Odessa Port Plant, as well as the „Turboatom”, company that produces equipment for the needs of the Ukrainian nuclear power plants. The privatization process is supposed to generate revenues of UAH21.3bn (USD800m).

„Our goal is to sell, within the market competition, all the companies that are not of strategic importance for Ukraine. Companies of strategic importance will remain the property of the state, while all the other entities should be sold in a transparent procedure, and should find efficient private owners who will start modernizing these enterprises, creating new jobs, and producing higher quality products than at present,” commented the Ukrainian Prime Minister.

Higher electricity tariffs

According to data from the Ministry of Economic Development, in the first quarter of this year the public sector’s share in Ukraine’s economy was 14.4 per cent. At the same time, the State Property Fund of Ukraine, which manages the state-owned enterprises, has announced its „small privatizations” list, under which it plans to sell 749 state-owned companies.

However, at this point even the government itself is not certain about the financial results of privatization. As the news agencies have reported, already at the end of July the Mr. Groysman allowed for some deviation from the projected privatization revenues of UAH21.3bn, which were planned in the budget. This shouldn’t be surprising. In 2016, the government only managed to obtain UAH190m from privatization, instead of planned UAH17.1bn. In the last year the results were slightly better — the government planned for privatization revenues of UAH17.1bn and an amount of UAH3.4bn was ultimately obtained.

Andriy Gerus, a former member of the National Commission for the Regulation of Energy and Public Utilities, presented an analysis of the impact of privatization on the Ukrainian energy sector. The analysis indicates that privatization in this sector only led to increases in the tariffs for the customers, and did not in any way improve the quality of the services.

„I am a firm believer in the free market, but I’m forced to admit that in the Ukrainian energy sector we are observing a simple regularity — private ownership leads to an increase in tariffs. Thanks to their ownership of the mass media, their loyal politicians and public officials, as well as their huge financial resources, the Ukrainian private owners of the companies operating in the sector are able to very aggressive and effectively lobby for increases in tariffs,” stated Mr. Gerus in an interview with the national news agency Ukrinform.

According to Yuri Karolchuk from the Energy Strategies Foundation, the planned privatization of the „Centrenergo” energy group also carries more risks than potential benefits. The expert indicates, that if the company is taken over by local players instead of a foreign investor with appropriate capital reserves, this could lead to a breakdown in its operations, because the local oligarchs simply will not have enough resources to develop the energy giant which currently operates three power plants.

Take all you can

According to the chairman of the Committee of Economists of Ukraine Andriy Novak, the renewed privatization campaign, which has been launched once again by the government, doesn’t really have a lot to do with the condition of the economy.

„The country’s current leadership understands that it will not remain in power after the elections. That is why at the end of their term in office they decided to privatize the remaining most attractive state-owned enterprises for next to nothing,” said Mr. Novak in an interview with the television station ZIK. „All this talk about ‚fair market prices’ is pure bluff,” he argued and cited the example of last year’s privatization of three state-owned local energy distribution companies.

Volodymyr Torchynskiy, from the Public Audit organization, which monitors the state’s activities in the sphere of the economy, draws attention to another problem. The funds obtained from the sale of state property are not earmarked in any way and are transferred to the general state budget. As a result they will be quickly wasted. „These funds will be used entirely for patching holes in the budget before the elections. In order to fulfill the state’s obligations in the social sphere, it is necessary to sell something, because there is no other source of funds available,” believes Mr. Torchynskiy.

The example of Ukrpapirprom, the first company that was put up for sale as a part of the so-called „small privatization”, confirms the validity of the questions raised by Ukrainian experts in relation to the privatization process. Already in 2015, the company’s bank accounts were frozen by the authorities, which paralyzed its operations. This happened at a time when Ukrpapirprom, together with the Ministry of Economy and the Ministry of Education, was preparing to launch the production of printing paper in Ukraine, which the country currently imports. The implementation of these plans would clearly increase the company’s value, and, as its representatives argued in court, the freezing of the bank accounts torpedoed these plans and consequently reduced the company’s market value.

Due to a suspicion of abuse in the preparation of Ukrpapirprom’s privatization, in autumn 2017, at the request of the prosecutor’s office, the court in Kiev issued a ban on the disposal of the company’s shares. Following an appeal, the ban was lifted in March in rather strange circumstances — the prosecutor failed to appear at the court hearing, and the company was ultimately put up for sale.

This is one of the reasons that a draft law was submitted to the parliament, which would introduce a ban on the privatization of a number of strategic companies in the energy sector. The authors of the proposed legislation argue, that „the adoption of the law is justified by the need to respond to threats to Ukraine’s international and internal security”

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