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What's wrong with big privatization of Ukrainian energy sector?

Author : Olena Holubeva

On March 19, the State Property Fund suddenly canceled the auction for the sale of a 25% stake in Odesaoblenergo a few hours before it was held. The Cabinet at the last moment stopped the sale of an interesting asset at a very low price. Experts were interested in the price of the asset - it is much lower than the estimated value of the company. The paradox is that in case of re-sale of this package, its price may fall even more. This is allowed by a new law on privatization in Ukraine
21:40, 21 March 2018

Read original article at 112.ua

112 Agency

Who wants to become a partner of Russians?

The tender for the sale of a 25% stake in Odesaoblenergo, which was to take place on the Ukrainian Exchange on March 20, caused serious stir in the expert environment yesterday. The price of the blocking stake in the company was reduced from UAH 631 million (at this price, the block of shares was put up for sale in the summer of 2017) to UAH 149 million. The price of a 25% stake in Sumyoblenergo, which was planned to be sold on the stock exchange on March 30, was also canceled. The price of this package was reduced from UAH 370.19 million last year to UAH 106.27 million now.

The State Property Fund explained that last year it was unable to sell the stake in Odesaoblenergo, since its price was "unreasonably high". In addition, potential buyers were allegedly repelled by the fact that the owner of a majority stake in energy company (68%), VS Energy, belonged to Russian shareholders. According to Ukrainian media, the beneficiaries of the company until recently were the State Duma deputy Alexander Babakov, who was included in the US sanctions list (he voted for the annexation of Crimea), as well as businessmen Yevgeny Giner (president of FC CSKA) and Mikhail Voevodin.

In March of last year, the Russians transferred control over the Dutch VS Energy International NV (100% owner of Energy International Ukraine) to German citizens Oleg Sizerman and Marina Yaroslavskaya, as well as to citizens of Latvia Vilis Dambins, Arturs Altbergs and Valts Vigants. It is interesting that the change of shareholders in the company occurred a year later as the Verkhovna Rada approved draft law No. 2319-d, which prohibits the participation in the Ukrainian privatization of Russian residents or related persons. Immediately after the adoption of this document, the media wrote that the VS Energy group, which claimed a number of energy companies in Ukraine, would suffer most as a result of this decision.

The fact that the Russians will not be allowed to participate in the large privatization in Ukraine, was noted among others by the president and the prime minister.

On March 1, 2017, the Antimonopoly Committee of Ukraine authorized " Energy International Ukraine" to concentrate more than 50% of the shares of "Chernivtsioblenergo". At that time, according to the disclosure system of the National Securities Commission, the company already owned a 45% stake in this energy company. In addition to Chernivtsioblenergo, VS Energy owned large blocks of shares in seven Ukrainian energy companies. These are Zhytomyroblenergo, Kirovogradoblenergo, Khersonoblenergo, Kyivoblenergo, Rivneoblenergo, Odesaoblenergo and Sevastopolenergo.

Note that in connection with the approval of the transaction to sell VS Energy a stake in Chernivtsioblenergo, MP Maxym Burbak (Narodnyi Front faction) asked the Security Service to check this decision. "During the war with Russia, giving one of the largest energy companies in the Chernivtsi region to the control of the Russian oligarch - it means having a great disregard for their state," he wrote on Facebook.

Experts do not believe that in the case of VS Energy there was a real change of shareholders. "Strange transfer of the majority shareholding of Odesaoblenergo to four EU citizens is very similar to the recent metamorphoses with Ukrainian assets of Rosneft or the sale of Lukoil's gas station network to Austrian pensioners who accidentally found at least $ 250 million on their accounts," said leading researcher of the National Institute for Strategic Studies Gennady Ryabtsev. It should be noted that the energy expert Andriy Gerus on Facebook wrote that despite the fact that the company's beneficiaries were formally replaced, according to media and market participants, the same Russian entrepreneurs, in particular Alexander Babakov, are staying behind the company.

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Only one company applied to participate in the auction for the purchase of 25% of Odesaoblenergo. About this reported at once two sources - in the State Property Fund and on the stock exchange. They refused to name the company. However, it's easy to guess that with a high degree of probability this company is from VS Energy's orbit.

Applications for participation in the auction for a 25% stake in Sumyoblenergo could be accepted until March 29. It is not known whether there were any willing companies, but today the owners of the majority stake in the company, according to market participants, are companies controlled by the oligarchs Kostyantyn Grygoryshyn and Igor Kolomoisky.

Sell 25 times cheaper than it costs

Another aspect that surprised experts is the desire to sell packages of energy company before the introduction of RAB-tariffs. The decision allowing starting RAB regulation from 1 April to profitability for energy companies (12.5% per annum for a new and old base) was made by National Commission for state regulation of the energy and utilities sectors in February. Companies, in respect of which it could apply, should be determined by the commission. Among the first contenders were also called Sumyoblenergo. Also Chernigivoblenergo, Lvivoblenergo and Prykarpattyaoblenergo were considered.

Odesaoblenergo on the eve of the possible introduction of RAB-tariffs was estimated at 15.4 billion UAH - 25.8 times higher than it was announced within the auction, writes Andriy Gerus. According to him, with a profitability of 12.5%, the company's net profit from the introduction of the tariff should have amounted to 1.925 billion UAH. "The owner of a 25% stake in the RAB tariff in the first year as a white dividend can take 241 million UAH, that is, with a possible dividend of 25% of shares for 1 year in the amount of 241 million UAH, the package is put up for privatization for 149 million UAH. "Tell me, did any of you sell your business at a price lower than it can bring in a year?" wrote Andriy Gerus. In his opinion, it would be rational to wait for the introduction of the RAB-tariff, which will increase the incomes and profits of energy companies, and then make the price and decide whether to sell or receive dividends (retaining influence over the company).

Gennady Ryabtsev agrees with this statement. According to him, the announced starting price of the Odesaoblenergo package is 25 times less than what it could be in the case of the introduction of RAB regulation. "This means that the investor will be able to return the funds invested in the asset in less than a year. Such privatization policy turns out to be strange, "he said.

It is noteworthy that earlier in an interview with 112.ua the deputy head of the State Property Fund Yuriy Nikitin said that the sale of state packages of shares in such companies is planned for August-September 2018 precisely because of the need to introduce RAB tariffs. This, he said, would help triple the proceeds from the sale of state-owned packages.

"In a new way" does not mean more profitable

On cancellation of the auction for the sale of packages of energy company it became known only on March 19, in the afternoon - a few hours before the first auction. At 15:30 the Ukrainian Exchange confirmed that they are ready to accredit a correspondent of 112.ua to monitor the bidding procedure, but at 18:30 they called back and said that the auction was canceled. "We received a scan of the order to cancel auctions for the sale of state-owned stakes in Odesaoblenergo and Sumyoblenergo," the representative of the exchange said.

In State Property Fund and on the stock exchange, a sudden decision was made to cancel the auctions along with decisions taken at a meeting of the working group on privatization under the leadership of the Minister of the Cabinet of Ministers, head of the Office of Reforms of the Cabinet of Ministers Oleksandr Sayenko. It is noteworthy that the group started work only on March 19. This is stated in the post of the Office of Reform of the Cabinet in Facebook. The meeting was attended by acting Head of the State Property Fund Vitaly Trubarov, Managing Director of the EBRD in Eastern Europe and the Caucasus Francis Malizh, representatives of the World Bank, the IMF, the International Finance Corporation, the United States Agency for International Development (USAID), the European Union.

The working group motivated the decision to cancel auctions for the sale of state-owned companies by that they should be sold in accordance with the new privatization law, which entered into force on March 7. This was also written in Facebook by Francis Malizh. "We need to work together to conduct future privatization in accordance with the new law, which creates the preconditions for more structured, better organized and transparent processes," wrote the EBRD Managing Director in Eastern Europe and the Caucasus.

But what a paradox - a new law on privatization creates opportunities for an even greater reduction in the price of state-owned shares, experts say. "The main message of the law is the creation of opportunities for a faster sale of state property at a lower price," said the lawyer, Berylstone partner Denys Fetisov.

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According to him, in particular, the document provides for the possibility that if no adviser (appraiser) can be found, the object can be put up for privatization at book value or at the minimum cost of shares, which the Cabinet approves. "The new privatization law also presumes the possibility of a discount of up to 50% of the starting price. In the absence of those wishing to participate in the bidding, the discount for large privatization objects (including energy companies) can be 25% of the starting price, then the price can be reduced further by 50%, but even if it is not possible to find those wishing to buy shares with such a significant discount, the document assumes that potentially interested parties who consider the price of privatization to be overvalued can offer their price. It should be not less than 50% of the cost from the starting price of the object at the last auction, "Fetisov said.

If RAB-regulation is not applied to Odesaoblenergo and Sumyoblenergo, then the starting price may be even lower than offered at the current auction, experts say. In this case, they said, unlike the current auction, process can be organized without a single clue to create a public resonance. "According to the new draft law, if only one participant entered the auction, then the bidding is considered to be invalid, but if two participants participated, one won, but did not give the money, the right to redeem shares (object) automatically passes to the second participant who must redeem them at the price offered by the first participant, "Fetisov said.

This creates a huge field for maneuvers with offshores. Interviewed experts unanimously assert that taking into account the peculiarities of Ukrainian legislation and the fact that most of the revenues and, accordingly, dividends of company, are in shadow, the owner of the 25% stake, not connected with the majority shareholder, will not be able to count neither on the possibility of participating in the management of the company, nor for money.

Tracing the logic in the decision to sell two packages of companies until April 1 is possible only we assume that it was accepted in the interests of certain specific persons. The experts noted the unexpected change in the course of the State Property Fund and the Cabinet in this matter. "I understand that the resonance that was raised influenced the decision," said Andriy Gerus. Gennady Ryabtsev agrees with him: "I think the auction attracted too much attention, so they decided to postpone it."

Now it remains only to find out in whose interests invisible directors acted. Perhaps, a lot will be revealed during the next auction, the date of which has not yet been approved.

And after all, the authorities declared to sell stakes in a number of state-owned energy companies. Probably, there we will see all the same problems.

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