Read the original text at epravda.com.ua.
The government has not yet elaborated a privatization strategy aimed at creating the maximum value for the economy: increasing GDP, creating companies and workplaces. Instead, the government is preparing an annual plan for selling assets with the sole aim: getting funds to fill the annual budget.
There are about 3,500 state-owned enterprises owned by Ukraine’s State Property Fund (SPF). Every year a company sales plan is being developed and every year these plans are not implemented.
For example, in 2016, SPF planned to earn UAH 17.1 billion from the sale of shares and other assets, while actual sales amounted to only UAH 192 million. The plan for 2017 also envisages receiving UAH 17.1 billion from privatization sales, but this is also unlikely to be achieved.
Failure to fulfill plans is often explained by various political actions and motives of those who were in power at a certain time. The sincerity of the intention of the government to sell or not to sell certain companies, as well as the lack of transparent or competitive sales process cause quite legitimate questions. At the same time, little attention is paid to the economic, financial, and legal obstacles that exist in many state-owned companies and hinder their sale.
Little attention is devoted to the key question: "And what exactly is sold?".
Given the economic, financial or legal factors that make it impossible to sign agreements, many companies mentioned in the current privatization plan are extremely difficult to sell or at least do it at a mutually beneficial price, and this is not an exaggeration.
There is a big difference between the sale of ownership of a viable or potentially viable company and the sale of property rights to the ruins. If a company is viable, it affects the price.
When the position and intentions of the seller are fundamentally different from the buyer's position and intentions, conflicts are flaring up and failures occur. All these obstacles on the way to privatization are evident in the current efforts of the State Property Fund for the second time to sell the stake of Zaporizhzhya Industrial Aluminum Plant (ZIAP) at a rate of 68%. The economic, financial, and legal issues that led to the bankruptcy of the company and complicated privatization underline the many problems associated with the viability and potential sales of all state-owned companies.
SPF has sold the first stake (68%) in 2004.
The sales agreement contained a requirement that buyer No.1 (Russian company AvtoVaz Invest – Ed.) should repay a loan of $ 75 million, taken by the state at the Ukrainian Export and Import Bank under government guarantees to buy an aluminum foil production line.
The government was not lucky: when a state company was corporatized for the purpose of selling, the newly formed statutory fund did not include either the debt for repayment of the loan or assets purchased for the loan. They were just not mentioned in the balance sheet of the new company.
By acquiring 68% of the shares of the ZIAP, the buyer No.1 became proportional to the owner of the company's balance sheet, that is, an official list of assets and liabilities owned by the company. Thanks to this, the buyer No.1 has made the Ukrainian court to reject the requirement to repay this loan. The loan was issued under a third-party obligation - the Ministry of Finance, acting as the guarantor of the loan, and not the ZIAP. Acquired assets have never been used, they have been lying for 20 years in stock. This is an example of incredible illiteracy, the consequences of which are felt to this day.
In 2007, buyer No.1 hassold his stake to buyer No.2 (Cypriot Velbay Holdings Limited, which is associated with Russian "RusAl" by Oleg Deripaska – Ed.). Buyer No.2 has exploited the plant for several years, and in 2011 stopped manufacturing in response to falling prices for aluminum and rising electricity costs.
The government, as the owner of the power plants, could have developed risk sharing agreements similar to those used in other countries, but decided not to do so. Instead, it sued against the buyer No.2 for non-payment of a loan of $ 75 million to Ukreximbank and won the case.
So the government has returned the ownership of 68% of the shares. Although one of the Ukrainian courts previously ruled that buyer No.1 was not responsible for this loan, the second court ruled that buyer No.2 is responsible for the initial privatization agreement between the ZIAP and buyer No.1 and must transfer the ownership of the stake to the government in the form of compensation.
What would the potential buyer No.3 actually get if he bought those 68% of the shares? Primary aluminum is currently not produced - there is only a small production of aluminum wires using purchased ingots and recycled scrap. Production was started only in 2017, and sales are currently insignificant.
In order to resume production of primary aluminum, at least $ 250 million of investment are required to replace the production assets that the buyer No.2 has lost, and the modernization of production assets. Then the plant would be able to become competitive.
The statistics on aluminum production suggest that ZIAP bas consumed 25% more kilowatt hours of electricity to produce one ton of aluminum ingots compared to the world average. As the cost of electricity is usually 30-40% of the total cost of production, ZIAP is in a disadvantageous competitive position as a relatively expensive producer in an unstable market, where all producers take a price determined by the market and profitability depends on the cost of production.
This is the main reason why the ZIAP eventually stopped manufacturing, and why many companies in the world have concluded electricity supply agreements, according to which electricity tariffs are tied to aluminum prices.
As already mentioned, buying shares means obtaining proportional ownership and liability for the assets and liabilities of the company indicated on its balance sheet. In the situation with the ZIAP on December 31, 2016, the total value of all tangible assets and all intangible assets amounted to UAH 241 million. The company has huge liabilities that are "balanced" with assets through a cumulative "unallocated loss" of 6.7 billion UAH. This is a terrific evidence of the complete economic downturn.
Even more alarming are the commitments that will go to the buyer: 176 million UAH of unpaid taxes and payments to the Pension Fund, 680 million UAH payables, 1,98 billion UAH of "other" liabilities and 3.6 billion UAH of debt with interest to companies, which belong to the buyer No.2.
Firstly, the potential buyer No.3 will not be the sole owner of the ZIAP. A stake of 30% is owned by a Cypriot company that might be linked to a former buyer No.2.
Secondly, significant legal risks include unfinished legal disputes between the government and buyer No.2, which in 2016 seized ownership with dubious substantiation, as well as potential lawsuits against buyer No.3 from buyer No.2 or owner of a block of shares at the rate of 30 %. Who needs these extra worries?
Third, to restore the production of primary aluminum will have to solve the problem of providing affordable and reliable electricity. However, this goes beyond the authority of the SPF, it is interested only in the sale of shares.
Buying a stake and then trying to solve the problem of electricity means to take a serious risk. Therefore, it is unlikely that a buyer No. 3 who will buy a ZIAP would ever appear and make such a large investment.
Given the catastrophic situation in which the company appeared, it is unlikely to be purchased for any other purpose than liquidation, provided that it avoids legal risks and financial obligations described above.
Such a scenario will not affect economic growth: it will not create jobs, will not promote business development, will not stimulate the local economy.
A buyer who would want to produce electrical wiring could save the necessary assets and eliminate or lease unnecessary assets, hold a small state and thus make a small contribution to the local economy. However, the scale of accumulated risks and debts make this option unlikely.
The buyer, who plans to resume production of primary aluminum, will not only face these costs and risks, but will have to make substantial investments and solve the problem of electricity tariffs.
Perhaps the only way to get out of this situation is to develop a government strategy for privatization. This decision might look like this: the government initiates bankruptcy of the company to eliminate all liabilities, including equity and all assets.
First of all, the government has claims about unpaid taxes and claims to cover liabilities to the Pension Fund. It would be possible to gather a single package of assets (and not shares) necessary for the production of primary aluminum, and sell it, concurrently concluding an agreement on electricity supply and tariffs. Or, useful assets could be arranged in the form of viable asset packages to support, for example, the production of electrical wires. The government could offset its debt through the sale of assets, while the cancellation of debt and capital would eliminate legal risks and financial liabilities.