Ukraine keeps repeating the same mistakes over and over.
I happened to read a short interview with Simon Ford, the general director of Heinemann Duty-Free Kyiv, which outlined his company’s dispute with Kyiv Boryspil International Airport. (Focus #29 – 632, p. 35)
For background, Heinemann won a government tender to operate duty- free stores and restaurants at Boryspil in 2014. These concessions are considered highly lucrative since there is a guaranteed and captive audience of several million passengers each year passing through the airport, many of whom want a cup of coffee or meal want to buy a gift for themselves or family before a flight. Since Borispol is a government entity, in fact, it is a state commercial enterprise under the Ministry of Infrastructure, the contract was awarded in a competitive tender in 2014.
While the interview mainly covered details about the company’s work in the airport, there was a small comment made by Ford which caught my eye. It reminded me of the most famous and expensive case of corruption in Ukrainian history from 10 years ago.
To anyone who remembers the Leonid Kuchma years from 1994-2005, the privatization of Kryvorizhstal, the nation’s largest steel plant, in June 2004 was a watershed moment and helped spark the Orange Revolution a few months later.
During the last few months of the Kuchma presidency, the government hastily undertook to privatize several large companies in short order. Loyal members of his inner circle seemed intent on stealing everything they could before the election. The biggest prize was Kryvorizhstal in Kryvyi Rih, now known as ArcelorMittal.
In the year before the sale, the company earned over $400 million in EBITDA, and bankers were unanimous in their expectation of the company being sold for well over $2 billion. Sadly, the tender documents were carefully crafted which eliminated every foreign company, including the highest bid for $2.7 billion. As a result, the winning and only qualifying bid was a consortium owned by billionaire oligarchs Rinat Akhmetov and Victor Pinchuk, Kuchma’s son-in-law, who were able to purchase the company for $800 million.
Fortunately, for Ukraine and its treasury, the Orange Revolution followed shortly thereafter to block Viktor Yanukovych from gaining power in a rigged presidential election. Instead, Viktor Yushchenko was elected on Dec. 26, 2004, after the Ukrainian Supreme Court ordered a re-vote. In a moment of optimism for the country, the sale was reversed on a technicality and a new, open bidding process took place on live television.
This time, Arcelor and Mittal steel, two of the biggest foreign steel companies in the world, were able to take part alongside Ukrainian companies. With added competition, the final price exceeded $4.8 billion.
It is exceptionally rare that the true cost of corruption to society is ever revealed. At times, it is possible to understand the amount paid in corruption – a bribe paid, a gift given – but that is only a fraction of the true cost of corruption. But, in this case, Ukraine was clearly able to see that the rigged tender cost the country $4 billion, which would have not been paid to the treasury and, as a result of the bad tender, gifted directly to the balance sheet of Akhmetov and Pinchuk.
The key clause in the initial Kryvorizhstal tender disqualified any company which not been operating in Ukraine for the past three years. As a result, the joint bid by LNM Corp, the second-largest producer of steel in the world, and U.S. Steel, the 7th largest steel producer, for $2.7 billion was disqualified.
Oddly, despite the tangible proof of the corrupting cost of poor tenders documents, the 2014 tender for operating duty-free retail in Boryspol still had a clause willing to exclude foreign companies for not operating in Ukraine for three years.
As Ford alluded to in the interview, as a result of the tender conditions, Dufry, the world market leader in duty-free sales, an operator of 2,300 stores in six continents and $8.6 billion in revenue, was excluded since they lacked three years of experience in the Ukrainian market.
I am not suggesting in any way that the tender for duty-free in Borispol in 2014 was in, any way, corrupt or that Heinemann or Boryspil Airport or any persons involved have done anything corrupt. I know nothing about the tender nor any of the companies or individuals.
I am saying that it does not make a difference. The “corruption cost” to society of a poorly designed tender is the same whether any corruption or any payment for corruption happened. The only difference is the amount of profit received by the winning company. If there is a cost to add the clause, their profit is reduced. The loss to Ukrainian society is the same.
Simply by removing competition, the revenue earned on the tender has to be the same or lower than without these clauses. If you remove bidders, it is impossible for the revenue to be higher.
Perhaps, there are good reasons to demand that a company has three years of experience in Ukraine before taking part in a tender to buy a factory or operate duty-free. Perhaps, operating a retail store in Ukraine does require deep local knowledge that someone inside Boryspil airport spotted and, thus, included the key clause into the contract.
Hopefully, Ukraine is about to start another round of privatization and government tenders. It is worth remembering that any clause added to the tender documents – whether added by fair or foul means – can only reduce the amount earned by the Ukrainian treasury. In the best case, it is a case of a government employee limiting competition for a valid reason.
In the worst case, it is for a corrupt reason. In the end, the cost to society is the same. The cost of such additions is paid by Ukrainian citizens and a gift to the winning company.
