THE FUTURE of Privatization
Boris
ACCORDING TO SOME Jorge Zukoski (Moderator: President,
Krasnyansky:
ESTIMATES, 60%-70% OF American Chamber of Commerce in
However you do it,
UKRAINE'S GDP COMES Ukraine): Gentlemen, all of you around the
privatization is not
FROM THE PRIVATE table today have had extensive
necessarily fair, but
SECTOR. IN 2006 THE experience with privatization in Ukraine
there is no better
COUNTRY'S GOVERNMENT and in some cases in other countries as
way to improve an
PLANS TO PRIVATIZE well. That experience comes from both
economy. And so
MORE OF ITS MAJOR purchasing assets for your organization or
that is what has to
ASSETS. PROFESSIONALS rendering services to those investors who
Boris happen. The
EXPERIENCED WITH THE have successfully been involved in the Krasnyansky, question at this
PROCESS DISCUSS THE privatization process. That being said, in Managing Partner, stage must be: How
CHALLENGES OF general terms, what is your attitude toward PricewaterhouseC should it be done?
PRIVATIZATION IN THE privatization? oopers,
What methods
NEW UKRAINE Chamber Board
George Logush: Member should be used to
It is hard to privatize large
imagine anywhere enterprises in
in the world today Ukraine? And the answers depend on the
where you would objectives of privatization.
want to have
James Hitch: I
State enterprises,
think the problem is
except in some
in how privatization
George Logush,
unusual
is carried out.
Managing Director, situations. Where
People were not
Kraft Foods Ukraine, do you get new
concerned with who
Chamber Board technologies that
ended up with
Member are not freely
Kryvorizhstal, but
available, that
how they got it and
come along with strategic investors? How
how much they
do you get openings into markets and so James Hitch,
paid. Up until now, Managing Partner,
on? Clearly, these are all reasons why you
the privatization Baker &
want to have as many of your enterprises
process has not McKenzie,
privatized as possible - so that they can do
been very good, Chamber Board
what they are supposed to do with all the Member
particularly for
strengths that privatization and investment
foreign investors
can bring, and the government can do
looking to spend
what it is supposed to do, which is provide
millions of dollars. Due diligence is not
for roads and schools. I do not think for
allowed. The State Property Fund gives
Ukraine the question is whether we should
you a six-page standard contract and you
privatize or not, but how far privatization
cannot make any changes in it. There are
should go, and what should be left in the
no representations and warranties. You do
State domain.
not get much advance notice of a tender,
John usually only thirty days. I think there are
Richardson: many shortcomings in the current system
Our company that need to be changed before the
would classify government can expect multimillion dollar
Ukraine as an acquisitions by world class multinational
emerging corporations. These companies would
market. In lots of bring benefits not only to themselves, but
markets in to Ukraine. The government is not
John
Eastern Europe, Richardson, handling privatization in a way that is
not only was General Manager, attractive to foreign investors, and that
there a large British American should be changed.
number of State Tobacco,
bodies, but most Chamber Board Tomas Fiala: I
of what we would Member believe the companies
classify as the that have been
private sector was also held by the State. acquired by Western
These assets, when privatized, allowed strategic investors are
the investor to refresh them in a manner growing faster than
that met the needs of the consumer. their sectors, and they
Privatization has been an effective way of have reported much
bringing expertise, technology and training higher profits and
Tomas Fiala,
into the market, and is a necessary form of Managing have been paying
investment in an emerging market. The Director, more taxes. There
question is how far you take it. Dragon Capital has been a clear fiscal
THE FUTURE of Privatization
benefit to Ukraine from FDI and privatization. which to run a business, and this brings the best benefits
for consumers and the state.
Alexander Pisaruk: I think
the efficiency of privatization is
Jorge Zukoski: I would like to add that the government
also confirmed by the
should also ensure that privatization tenders do not
experience of the countries in
exclude certain entities, especially foreign investors,
Central Europe. For example,
from participating. That said, is Ukraine's current pri-
there have been banking
vatization policy clear?
sector privatizations in the
Czech Republic, Poland and Tomas Fiala: I do not think it has been set. We do not
Hungary, and in virtually every know what is going to happen this year, what companies
case, the efficiency of the will be privatized and under what terms. We can just
institutions privatized Alexander Pisaruk,
General Manager,
guess that privatizations will proceed in a fashion similar
increased. to the privatization of Kryvorizhstal: there will be open
ING Bank Ukraine
John Richardson: The easy tenders with people sitting in the same room and raising
part of privatization is determining the price. The most their hands. That will probably be the case for the largest
difficult part is understanding what the underlying companies, like Ukrtelecom and the Odessa Port Plant.
liabilities and obligations are. Most of our difficulties or
successes stem from what happens after the Boris Krasnyansky: The government has never clearly
privatization, in other words, a thorough understanding articulated the objectives of privatization. Different
of the obligations of the parties. This could include taxes, messages were coming from different levels of the
investment concessions, or obligations under the government. Nobody, especially in the parliament, can
charter. This is where we have had to invest the most assess whether the government's privatization program
effort - after the privatization. is good or bad, nobody knows why some companies are
on the list and why others are not. I think the first stage
James Hitch: Actually, the preconditions have been a of privatization has been completed: Ukraine is getting
big problem with many of the past privatizations. The market economy status. To do that, it was necessary to
conditions that determined an investor's eligibility for create a critical mass of private business in the country.
privatizations were not always rational. Post-pri- Even when that was the goal, there was no measuring
vatization-acquisition conditions are also a problem. stick. The State Property Fund did not track what
Some contracts include obligations that prevent you from percentage of GDP came from the private sector. At that
firing workers, or from firing workers for three years. stage of development, certain methods were used to
Those conditions are not economically viable. The privatize state assets, and you can argue whether they
conditions should not be unilaterally imposed by the were good or bad. Now two benchmarks have been
State Property Fund, but rather negotiated with the crossed: Ukraine is receiving market economy status,
investor. and Mittal Steel has purchased Kryvorizhstal. Having
Boris Krasnyansky: These conditions, however, did not reached that benchmark, every single privatization
stop Arcelor or Mittal from bidding for Kryvorizhstal. The should be done in a way that maximizes value to the
State, as any owner, may put any conditions it wants on state and to the economy. The methods and rules of
a property up for privatization - if you do not like them, privatization have to change in order to achieve that
do not buy it. It would be nice, though, if all those goal.
conditions were the only conditions, and none were
added later. That is where the trouble starts. After Alexander Pisaruk: It is important to realize that when
investors buy, sometimes they start to experience the government makes statements about privatizations
enormous difficulties with the local authorities, with the of certain companies, but never implements them, it
tax authorities - things they were not aware of when they hurts the credibility of the government and the valuation
bought the property. of the company itself. I do not think statements should
be made before a consistent privatization policy is
George Logush: Setting conditions reduces the number developed.
of participants in a tender, and it lowers the price of the
property. If the State wants to get the most possible Jorge Zukoski: In your opinion, what measures should
money from a tender, it should make the tender as clear betaken in regards to disputed past privatizations?
and transparent as possible, and it should minimize the
burden on the investors. Not only will the government George Logush: On one side, the government could go
get more money from the tender, but the asset will be through the thousands of murky privatizations that may
run better and more efficiently, bringing a larger benefit have involved a loss for the state. The gains would be
to the treasury in the long run. Transparency, an even not only moral and ethical, but economic. If owners have
playing field, time to respond to a tender - violation of gained their enterprises on a competitive basis, they will
these simple principles is the classic blunder that in the probably be more efficient as managers, and create
end hurts the state. In the case of Kryvorizhstal, these more income and tax revenue than owners who use
mistakes cost the State four billion dollars. This should them to pump up VAT accounts or to hide profits. The
be the main argument of the investment community, other side says: do not do anything, because if you do,
both domestic and foreign: it is to our and the State's you will disturb the investment climate and scare away
benefit that a tender be transparent. Every investor investors from Ukraine. This is a pragmatic point of view:
wants to see an economy that is developing and forget about what happened in the past and make sure
prospering, because that is the best environment in everything is clean in the future. It is hard to determine
where to fall on this spectrum. This issue is often painted
Commerce, Issue 3, JAN/FEB 2006 2
THE FUTURE of Privatization
in very clear colors, but it is pretty complicated. Even if
Jorge Zukoski: So what does the government of
the government undertakes a lot of re-privatization, it will
Ukraine need to do to improve the privatization process?
not stop the flow of investment. It will change the kind of
investment that comes in. On the other hand, if the Tomas Fiala: It is fair to judge the government for the
government gives up on re-privatization, and kills the last year. They have done some things wrong, and have
negative buzz around Ukraine, it will probably see a lot succeeded in other things. Overall, the new government
more of a certain type of investment, but not into those has been very positive for business. We and our clients
industries that were badly privatized. This might be a are very happy with what has happened in Ukraine over
problem in the long run. the last twelve months, both politically and economically.
There has been basically no privatization over the last
Tomas Fiala: At the beginning of last year I said: it
year except for Kryvorizhstal. What we would like to see
would be fair to re-privatize certain companies that were
in 2006 is more privatization in a variety of sectors. In
sold to insiders under corrupt circumstances over the
terms of the method of privatization, the precedent set
previous year and a half, but that the list should be
by the Kryvorizhstal privatization is very positive and
announced by the end of March and should be limited to
hopefully will be followed in the future.
30 companies, and that the re-privatization should be
completed by June at the latest. Otherwise, the process Boris Krasnyansky: There is no rush to privatize now,
would damage not so much the investment environment, as there was in the early 1990s. The government should
but GDP growth. Unfortunately, the negative scenario prepare well before they privatize Ukrtelecom or any
came about - the list was never announced and the other large company. And if it takes years to prepare, it
process has been dragged out. This is not the only is still more beneficial for the country to do it
reason GDP growth slowed down, but it is one of the professionally, as any private owner would do, in order
factors. to maximize the benefits for the entire economy.
Alexander Pisaruk: For those few assets that are being George Logush: Ukraine has the potential to grow very
considered for re-privatization, I think the best solution is rapidly and have a very dynamic market. The more
an amicable settlement with the government. But even if investors come in, the more privatizations are done, the
such a settlement is not attainable, it is crucially quicker Ukraine will fulfill that potential. The business
important that the process is carried out in an entirely community should emphasize this at all times.
legal way. This is crucial for maintaining the
government's credibility and a positive investment John Richardson: In other markets, governments have
climate. set up professional privatization agencies and laid out
clearly how that agency will operate and how
James Hitch: I think that "the rule of law" is much more privatization will progress - a system that has worked
important than re-privatization. The old government well.
privatized certain properties, and the new government
does not have the right to undo them. Now that the new Alexander Pisaruk: Kryvorizhstal is a successful
government has missed the window of opportunity to re- example of how privatization can be properly done in
privatize assets, it is up to the courts. It is up to private Ukraine. Public auctions probably bring the highest
individuals to bring legal suits against bad privatizations, revenue to the government, and should be the main
not up to the government. It no longer has that authority. method of privatization in the near future. But the
Most of the beneficiaries of bad privatization are selling government may need to consider the sale of minority
off those privatized assets now. They cannot compete. stakes on the domestic market to domestic investors.
And Western investors are picking up these assets. This would bring more liquidity to the equity market and
They will come in and pay the market value for these build up the domestic investor base. A combination of
assets. I do not think the threat of thousands of re- public tenders and the sale of some minority stakes is
privatizations is what Ukraine needs. probably the best way to go forward.
Boris Krasnyansky: I think there must not be any more James Hitch: The process is just a important as the
re-privatizations. Either there are no re-privatizations, or product. There will not be privatizations that people are
you open the door to hundreds of re-privatizations. It is proud of without a clear, fair, transparent process. We
an either-or situation. If you re-privatize one asset, you can not have a game in which players do not know the
show no respect for private property, and after that, rules.
where do you stop? If short-term investors see any sort
of instability or threat, they will strip their assets and take Jorge Zukoski: Gentlemen, thank you f sharing your
their money out of the country. insights on privatization Ukraine. The Chamber
continues to advocate for the development of a clear at
John Richardson: This government is struggling to transparent privatization plan that allows both domestic
implement its agenda, and I question whether it has the and foreign investors to compete on a level playing field.
political capital to carry through with re-privatization. We From what heard during this Round Table everyone
now have a market economy in Ukraine, hence the seems to agree.
government has a great opportunity to receive significant
value from its assets, and needs to set out a clear
agenda for privatization.
Commerce, Issue 3, JAN/FEB 2006 3