Archive for January 14th, 2018

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Unfulfilled budget lines – Privatisation

January 14, 2018

One of the trademarks of recent years has been the overly optimistic expectations of the Ukrainian leadership in relation to privatising State Owned Enterprises (SOEs) that have historically been grant and subsidy black holes, mismanaged, wasteful and overly bureaucratic, often hindered by minority shareholding oligarchs, or with supply chains overflowing with oligarch companies, many adding no value but rather acting as a siphon to extract funds.

A recipe for rampant corruption of course.

For example, for the fourth time, Odessa Port Side is scheduled for privatisation in February 2018.  All previous attempts have failed to attract any real interest – which is hardly surprising when there are issues of $527 million to oligarch in exile, Dmitry Firtash.  Even if such a debt was not prohibitive, there is perhaps the “association” issues for any buyer when in purchasing this industrial plant, of having paid such sums to Mr Firtash who is currently wanted by the US for corruption.

Further, to be blunt, this industrial plant probably has an “on the books” value less than that of the Firtash debt.  In the current global market place, a sale price of approximately $350 million is probably there or thereabouts – without any outstanding debts.

Who will buy it in February?  The circumstances surrounding the sale and the contractual conditions of sale have not changed from the numerous previous attempts to find a buyer.

Further, as Prime Minister Groisman acknowledges, there are legislative issues to swiftly resolve.  The Prime Minister expects the adoption of a relevant legislation on privatization that will “unfreeze” the process. “Now we are ready for a new step – the adoption of the law on privatisation.  I think that we have worked well with the parliamentary committee and have reached a balanced solution.  I very much hope that we will be able to make the necessary decisions within January, possibly next week.” 

The 2018 budget foresees a very ambitious UAH 22.5 billion from privatisation – particularly ambitious considering that the previous years privatisation revenues have not come anywhere close to achieving budgetary expectations.  How seamless the process will become after the adoption of any new legislation remains to be seen.

Whatever the case, the “star privatisation” from the schedule for 2018 and slated for June is probably Centrenergo.  78.3% of State shares are for sale.  What is worthy of note is that despite all the usual issues of a Ukrainian SOE, Centrenergo manages to be profitable.  Net profit January – September 2017 was reported as a little over UAH 2 billion.

Well at least it was profitable.

By the end of December 2017, the debt to the State was UAH 670 Million.

It would appear that since Centrenergo was slated for privatisation it has suddenly become one of the biggest State debtors.

A cynical reader may be (rightly) thinking that “vested interests” either do not want Centrenergo to be privatised, or that because it is actually a fairly attractive asset, “vested interests” would prefer to scare away foreign/external interest and capture this asset domestically.

If rumour be any guide, then Centrenergo will not be the only energy SOE to see mysteriously high indebtedness to the State, where once there was little or none.  Certain Oblast energy companies also slated for privatisation are likely to see the same phenomenon.

Those same rumours would suggest that the “vested interests” involved are the brothers Ihor and Hryhoriy Surkis, who are very much within the orbit of Ihor Kononenko – President Poroshenko’s parliamentary metaphorical “leg-breaker” and member of the president’s most trusted innermost conclave.  Mr Kononenko has appetites when it comes to energy assets.

To be very clear, the only effective way to “de-oligarch” the Ukrainian economy is to open it up to major foreign market entrants throughout the economic spheres that are currently captured by the oligarchs.

It is a matter of diluting the market place of their influence – for that oligarch influence will otherwise not be reduced.  None will go to jail, nor will any “asset reallocation” among the domestic elite release Ukraine from such an economy retarding situation.  Ergo, what prima facie appears to be deliberate and current attempt to capture, via preemptive “debt-ladening” attractive privatisation assets will have to be watched very carefully, and called out publicly for the sabotage that it appears to be – not only of the privatisation process itself, but sabotage of the national budget too.

 

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