As the financial turmoil puts the squeeze on Ukraine’s state coffers, attention is turning to a major source of untapped revenue – state companies.
As the financial turmoil puts the squeeze on Ukraine’s state coffers, attention is turning to a major source of untapped revenue – state companies.
The plan earlier this year was for the government to raise billions of dollars privatizing a handful of its last big assets, including fixed-line telephone company Ukrtelecom and Odesa Portside chemical plant. The sales, however, were frozen by President Victor Yushchenko, who feared his rival, Prime Minister Yulia Tymoshenko, would use the proceeds to win voter support via populist social handouts. But with the escalating worldwide cash crunch deepening and other sources of state revenue waning as steel prices fall and the economy slows, the president has given the green light for privatization to proceed.
And while it may not be the best time to sell, with global credit markets frozen and cash-tight, debt-laden corporations preparing for a recession, Ukraine has no choice now.
Both the president and government have agreed that proceeds from the sales, big or small, will be used to fill a new stabilization fund intended to bail out troubled banks and companies.
Experts have reacted skeptically, saying that the companies earmarked for privatization have declined hugely in value. They also worry that privatizations could face more delays as the political crack between the president and premier opens wider. Meanwhile, Orange Revolution allies are expected to square off for the presidency in a campaign that kicks off next year.
If the sales do proceed, “big volumes of sales are not possible in the near future” with the world financial and economic downturn still in high-gear, said Oleksandr Ryabchenko, president of the International Institute for Privatization, Property Rights and Investments.
Ryabchenko also warned that “privatization is a long process.” Thus far, only a few big state companies are ready to be sold off soon, including Ukrtelecom and Odesa Portside. Others, such as utility companies, are far from ready for sale.
In recent years, multinationals, Russian conglomerates and Ukrainian billionaires have expressed interest in snapping up such big assets. But they are today cut off from credit and bracing for world slowdown that will dent the profits of their steel mills, chemical factories and banks. It is uncertain who would bid for such assets. Some have said that companies in Asia, which have thus far been spared from the global economic troubles, could be cash-rich enough and interested in bidding.
Last week, Oleksandr Turchynov, the first deputy prime minister, announced that a number of investors, including Japanese companies, are interested in buying Ukrtelecom. There are also rumors that big Russian buyers could line up for the sale.
Peter Keller, a senior equity analyst and privatization specialist at Troika Dialog, said that the company was being wrested from the control of the State Property Fund by the cabinet of ministers, who are in favor of a sale, which makes privatization “likely.” Today, the fund is managed by socialist politician Valentyna Semenyuk-Samsonenko, who has opposed selling what she views as strategic state assets.
Unfortunately for Ukraine, the middle of a financial crisis is hardly the best time to conduct such large selloffs.
At its peak last year, Ukrtelecom was valued at $4-5 billion. Estimations of its worth have since dipped to under $1 billion.
“At the new price, money is not such a big issue,” said Keller, adding that the price looked cheap in light of where the company could be in two to three years’ time. “If it is sold too cheap, questions might be asked later about whether it was a good idea to sell,” he said.
Ukrtelecom’s major asset is the countrywide underground cable and cable drains infrastructure that private telecoms and cable TV companies also need for developing their networks. But Ukrtelecom’s own lines are in need of upgrade.
“We should never say it’s too late,” Ryabchenko said. “But its price is going down all the time. It needs a serious investor.”
As fixed-line revenues have fallen in the face of competition from newer communication technologies, Ukrtelecom has been very slow to develop a mobile network, despite holding the only license to provide third generation (3G) services.
The company reported a huge drop in net income in the third quarter to a loss of $40 million. “The deterioration in Ukrtelecom’s results is a further argument for privatization to take place as soon as possible,” wrote Oleh Yuzefovych, an analyst at Alfa Capital.
But despite the economic arguments, analysts say that a major sell-off is unlikely while the political crisis continues.
“It’s a question of politics rather than economics,” said Kyrylo Kulikov, a deputy from the pro-presidential bloc who sits on the parliamentary budget committee.
Political arguments have stalled the privatization process over the past two years. Sticking with her socialist views, Semenyuk-Samsonenko has stalled big sales that Tymoshenko pushed hard to kick-start privatization, starting with Ukrtelecom. Yushchenko successfully blocked these plans through presidential decrees.
Now, “it’s not a question anymore of whether to sell or not, but why and what to use the money for,” said Ryabchenko. “As long as Yushchenko and Tymoshenko have different approaches, there will be no significant privatization.”
With the dire consequences of the financial crisis pending, Tymoshenko and Yushchenko appear to have now found consensus. In the past, Tymoshenko has sought to use privatization proceeds for more immediate concerns, to fill budget gaps and boost social payments, much like Yushchenko did when he became a popular premier under President Leonid Kuchma.
Now that he is president and wary of an increasingly popular opponent for the presidential seat, Yushchenko has adopted a longer-term investment strategy.
Tymoshenko appears to have given in, agreeing to use proceeds for the newly formed stabilization fund.
“It’s an acute situation,” Kulikov said. “The stabilization fund has to take priority, as public debt is small, while corporate debt is high.”
Still, while there appears to be agreement on the surface, Kulikov said he does not see concrete preparations or a sense of political will to swiftly commence a series of privatization sales. “Nothing is happening. No one is working with investors,” he added.
