Ukraine’s interim government wants to place two of its largest owned monopolies in private hands: oil and gas behemoth Naftogaz Ukraine and railway company Ukrzaliznytsia.
On March 3, interim Prime Minister Arseniy Yatseniuk said that Naftogaz should be sold in a transparent auction. Ukraine “should get rid of state property… it is used inefficiently, (money) is always stolen and it’s always an enclave of corruption,” Yatseniuk said.
According to him, Naftogaz is a non-transparent monster that controls billions of dollars of cash flow and which is, in fact, a “quasi-ministry of finance.”
Talks have persisted at the highest levels for at least two years to privatize the oil and gas money pit – a constant headache for the state that needs to give the state agencies regular subsidies to stay afloat. But no action has been taken.
Naftogaz Ukraine, one of the country’s biggest companies with nearly 180,000 employees, controls oil and gas transportation and storage, as well as most oil and gas extraction in Ukraine. It is part of the Ministry of Fuel and Energy of Ukraine.
The company published an unconsolidated, unaudited net loss of $1.4 billion for 2013, leaving it $200 million more in the red than in 2012. It made 25 percent less in revenue last year than in 2012, generating $9 billion in sales.
Apart from that, Naftogaz is famous for its issues with Gazprom, Russia’s gas monopolist and Ukraine’s long-term supplier. The high price of Russian gas, which has ranged from $269 to more than $400 per cubic meters over the years, but which was on the lower end of the spectrum under former President Viktor Yanukovych to keep him loyal to his Russian counterpart Vladimir Putin, has pushed Ukraine to diversify on energy. Historically, one of the principal reasons why Naftogaz chronically is in the red is that local public utilities buy gas from it at rock-bottom prices.
Besides, several gas trade companies like RosUkrEnergo, EurotransGas, Itera contributed a lot to widening Naftogaz’s deficit. Greatly narrowing the oil and gas company’s deficit has been a major prerequisite for funding by the International Monetary Fund.
Privatization of Naftogaz may be preceded by separating company’s subsidiaries into profitable and unprofitable ones. Under these conditions, the gas storage and transportation system would be a key moneymaker.
But privatizing such a lucrative and strategic asset raises energy security risks, including the possibility of unjustified gas price increases for local customers.
Markiyan Varyvoda, a legal consultant and MF-lawyers association partner, thinks that Naftogaz has liquid assets that are profitable, so its privatization is “purposeless, although the international audit, which will provide information about the entity’s condition, is a necessary thing to do.”
Varyvoda added that the state has plenty of regulatory tools at its disposal for impeding any threats that a privatized Naftogaz might pose the nation’s energy security. Current legislation doesn’t allow for the privatization of Naftogaz, but in order to do that, there should be a “clear legal framework for the activity of Naftogaz,” Varyvoda said.
“The new law on privatization should be developed when the oil and gas market will set clear rules for running the business, punishments for violations etc. Analyzing past events, one can conclude that the idea of Naftogaz privatization came with the view of gaining control over the hidden important asset of Ukraine, namely the (gas pipeline and storage) system. Therefore, there should be conditions that would make privatization impossible for non-core investors,” Varyvoda said.
Another problem of privatizing the energy giant is its debts, although some specialists say that it is a common practice to bankrupt a company so that it could be sold cheaper to an insider. If the new owner will have no agreements with the creditors, he may refuse to repay economically inexpedient loans, Varyvoda said.
Leonid Antonenko, counselor for Sayenko Kharenko law firm, said that “the issue of privatization lies within a political line.”
Antonenko said that he is certain privatization will inevitably bring higher prices for services, as the new owner will see the newly acquired business as a cash cow as it should be. “As for me, I am ready to pay the market price for gas and railway transport services. But when this issue is considered by politicians, they have to think about all categories of citizens, of those who are financially well-off and of those who live in depressed areas,” Antonenko said. “They count on these people’s support and their votes.”
Railway company Ukrzaliznytsia, which employs around 400,000 people, is also a natural monopoly. Unlike Naftogaz, it is usually a profitable entity. It earned $282 million for the first half of 2013, three times less compared to 2012.
Rail transportation in Ukraine gets less competition from aviation than in more developed countries due to substantially cheaper prices. Ukrzaliznytsia’s privatization has been widely discussed, though the government has not made a decision on this issue. The company is considered a strategically important venture. Varyvoda thinks Ukzaliznytsia needs to be restructured as passenger service quality is really low and requires fundamental changes.
“A full audit should be conducted of Ukrzaliznytsia as well as of Naftogaz, involving relevant experts for making a decision on restructuring and changing their management,” the expert added.
