Privileged sale of controlling stake of Ukraine's leading metallurgy plant encounters roadblocks following initial approval
oadblocks after getting preliminary approval from parliament.
A bill on the privileged sale of a 50 percent stake in the Mariupol-based Illich plant to Illich-Stal, a closed joint stock company officially owned by the plant’s 40,000 workers, easily passed a first reading by lawmakers in early July.
Illich-Stal, which is primarily financed by plant dividends, already controls a 43 percent stake in Illich. If the sale goes through, Illich-Stal would effectively gain full control of the plant. The State Property Fund has appraised the state’s 50 percent share package in the plant at about $100 million.
The management of the plant lobbied hard last spring to avoid attempts by the State Property Fund to sell a 50 percent stake in Illich in a commercial tender, and eventually management gained government support.
But now the government is starting to ask questions about Illich-Stal and about the consequences of a non-competitive tender.
“With this we create a precedent. We place privatization in Ukraine today in doubt,” President Leonid Kuchma said recently. “To be honest, this would be the same as a collective farm. There would be no true owner.”
Meanwhile, tax authorities and the State Security Service have begun inspecting Illich-Stal, leading the Illich director and Illich-Stal chairman of the board, Volodymyr Boiko, to accuse the government of looking for “improprieties that do not exist.”
The results of the inspections have not been made public yet.
In another argument against the privileged sale of Illich shares, the daily Kievskie Vedomosti alleged in its Oct. 2 issue that after the sale, some shares could slip into the hands of unnamed foreign investors.
According to the article, a group of 24 foreign investors gave Illich-Stal $23 million to buy the original 43 percent stake in Illich. The newspaper alleged that if the new sale goes through, Illich-Stal will end up indebted to the investors who will then claim their debt by grabbing a significant stake in Illich.
Parliament deputy Serhy Matvienkov, the author of the bill on the privileged sale of the Illich stake and former deputy director of Illich, denied the allegations, saying that the investors where not “foreign” and were “partners who had worked with the plant for the last 15 years.”
He declined to name the investors.
“What do we want from privatization?” Matvienkov asked. “Budget revenues from one-time sales or new work places that lead to long-term budget revenues?”
Illich’s management has argued that the plant doesn’t need a foreign investor since it is already highly profitable and already pays significant taxes.
Illich earned $550 million in revenues and $40 million in profits in 1999, a significant increase from some $400 million in revenues and $13 million in profits in 1998.
But financial analysts say that while plant management has been doing a good job in running the company, the plant could be doing better and the consequences of a non-commercial tender violate the fundamental’s of the government’s privatization principles – sell for as much as possible to the most qualified bidder so as to increase revenues into an already under-funded budget devoid of IMF credits.
“If the sale to Illich goes through, the plant will probably end up being sold too cheaply,” said Valery Antonov, director of Alpha Capital’s research and analysis department. “And if you had Western management at this plant, profits would be even higher.”
Boiko, the plant’s director has said that if the sale falls apart, the plant’s workers would come to Kyiv in protest, but that Illich-Stal would not waste time buying a 25 percent stake in the plant via a commercial tender.
