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To Centrenergo or not to Centrenergo? – That is the question

June 24, 2015

That the Ukrainian government plans to privatise, and thus shift a lot of loss making, or subsidies taking, State controlled assets from the government books is no secret.

Amongst the headline ticket items for privatisation are assets (or liabilities) such as Odessa Port Side (cue oligarch’s Kolomoisky and Firtash), and Centrenergo.

Odessa Port Side is indeed worth buying.  It makes nitrogen fertilisers and has sales in US$ hundreds of millions.  If a Kolomoisky-Firtash show down occurs over what really is a decent asset, Ihor Kolomoisky would be favourite to win – this for two reasons.  Firstly because he has far better cash flow than Mr Firtash currently, and secondly due to his influence within Prime Minister Yatseniuk’s party which he backed heavily.  However, with this asset there is likely to be some foreign interest too, simply due to it being a very decent asset amongst what is otherwise a whole host of governmental liabilities going up for sale.

There is but one cloud in an otherwise blue sky surrounding the privatisation of Odessa Port Side.  That cloud relates to an on-going dispute between Odessa Port Side and РГК Трейдинга (RGK Traiding), a company owned by Dmitry Firtash, that for many years held the contract to supply Odessa Port Side with gas.  That contract ended just after his pursuit by the US for corruption began and thus his being marooned in Austria.

During those first months Odessa Port Side switched gas suppliers from Mr Firtash’s РГК Трейдинга (RGK Traiding) to the German company Eon.  РГК Трейдинга (RGK Traiding) subsequently submitted a claim for UAH 1.39 billion against Odessa Port Side relating to unpaid gas bills between April and June, to Odessa Regional Economic Court.  The actual debt for gas claimed is UAH 1.237 billion in relation to 217 million cubic meters of gas.  The remainder of the claim relating to to penalties incurred.  Odessa Port Side refutes those claims.  As yet it appears that this issue remains unsettled.

One naturally hopes that a foreign company would be successful over the Ukrainian oligarchy for reasons of internal and external messaging, and the limiting rather than expansion of the oligarchical power over the domestic economy.  There is far more to consider with privatisation than simply who will pay the most money, no differently to awarding a tender to a bidder cannot fail to consider far more than the price submitted.

With regard to Centrenergo, yesterday Prime Minsiter Yatseniuk stated “The Cabinet of Ministers has decided to involve an advisor in the privatization of power generating company PJSC Centrenergo.

Would that be a “Ukrainian advisor” or a reputable advisor?

Quite why Centrenergo is deserving of a “an advisor” whilst Odessa Port Side is not may be due to several reasons.  Firstly, there may be a grubby agreement between Ihor Kolomoisky and the Prime Minister that he will get Odessa Port Side – so why involve an external advisor who will be ignored and may then go public with matters that some would prefer to remain behind the curtain.

Odessa Port Side is also a money making and not subsidy taking entity.  It is therefore an easier sell (unless a buyer is looking for a currently loss making entity for tax reasons), so it may be deemed there is no need for “an advisor“.

Another obvious reason is that Odessa is not a war zone – an issue that cannot be ignored with the production units of Centrenergo.

Centrenergo is the second largest thermal generator by capacity in Ukraine at about 7550 MW – but its generation sites are spread across Kyiv, Kharkiv and Donetsk.  Two of these production sites were built in the 1970s to burn anthracitic coal which is mined in The (occupied) Donbas.  There happens to be a war occurring in Donetsk and the wider Donbas.

That said, anthractic coal can be imported.  Costly conversions to exiting industrial plant infrastructure can be made if the purchase price reflects such required modernisation investment.  Rinat Akhmetov and his SCM vehicle seem highly unlikely to buy despite this being very much “up his ally”.  He, like Mr Firtash, currently has cash flow issues.

So who?

There is rumour that the French GDF Suez, and a few other foreigners, are interested, so perhaps the issues listed above are not enough to put off serious investors.

Indeed what is most likely to put off most serious investors is the absence of reform in the Ukrainian energy sector as a whole.   The government will need to reform and transform the energy sector to allow new owners the room to turn these entities around and make a profit under sound management and market conditions.

Quite what value the Cabinet of Ministers puts on its 78.3% share of Centrenergo remains to be seen.  It may well be that the value of the 78.3% State share is perceived as less than the costs of subsidies/loses.

Perhaps “an advisor” is required to justify selling Centrenergo for UAH 1, just to get it and its subsidies/loses off of the governmental balance sheet?  A matter of “We took advice, and that was the advice given – the buck doesn’t stop here!”

There are some very hard political and economic choices to be made when selling off State assets that have relied on subsidies/made loses consistently.  To get such subsidy eating/loss making entities off of the government balance sheet is probably more important than the revenue income from the actual sales  – the news headlines will not be kind and the existing monopolies will provide robust resistance.

Will the government have the political will to do what is necessary?  Centrenergo is going to be something of an energy bellwether, not so much in its actual privatisation (if it happens), but what need happen around its sale to turn it into an asset worth buying as a business with a potentially profitable future.

So, to Centrenergo or not to Centrenergo? – That is the question, for it is a question about far more than simply flogging off a State asset to any/the highest bidder.

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