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Privatization: Why does Ukraine need it?

Author : Olexandr Honcharov

It is expected that long investment money would ensure capitalization of modern technologies and production growth of the privatized enterprises, and it would also provide money for balancing the state budget-2018
09:00, 17 April 2018

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It is expected that long investment money would ensure capitalization of modern technologies and production growth of the privatized enterprises, and it would also provide money for balancing the state budget-2018. And still the main thing now is how to reach these goals in order not to repeat the failure of the last year of 2017, when revenues from privatization were planned at the level of 17.1 billion USD, but in fact, only 130 million USD went to the state budget.

Without a real competitive environment and without the denationalization of a number of holdings and enterprises, we will not be able to achieve this. Moreover, large-scale privatization can intensify structural changes in the Ukrainian economy and solve a number of issues (for example, debt in the corporate sector). Therefore, the choice of potentially competitive enterprises subject to privatization is a promising anti-crisis strategy for long-term investments. Especially with the current situation, when the external environment has become tougher, the price environment is worse, and the accumulated reserves are much depleted.

Related: Two of Ukrainian banks seek merger

Perhaps privatization would help the government to deal with the unemployment and reduce labor migration. It did not happen earlier, because ministers and people's deputies first of all supported commercial banks, and not the real sector of the economy. Now legislators and major officials are trying to somehow correct this imbalance by selling state property objects that are subject to privatization. Of course, it is very difficult to do this, but let us see how at what price and in what terms state enterprises would be exhibited for sale.

Against this background, a rather disturbing statement was made by the recent acting head of the State Property Fund of Ukraine Vitaly Trubarov: "We have analyzed the number of the state enterprises, there are 3500 such entities. Unfortunately, of these 3,500 enterprises, 1255 are usually "chop shops", that is, they will be subject to liquidation. The country did nothing to these enterprises, and we lost them." Yes, there is an objective impossibility in this process and not the subjective inability of Groysman’s Cabinet of Ministers and the State Property Fund to prepare and effectively carry out large-scale privatization of 2018-2020. At the same time, the policy of our authorities should encourage the work of state enterprises by selling already existing products, and preferably without huge accounts payable.

Related: Every third state-run enterprise in Ukraine is subject to liquidation

But what should we do in this situation? First of all, I would advise the specialists of the State Property Fund of Ukraine to focus on the operational marketing. Let me remind you that in the sphere of interests of a number of Ukrainian corporations and large companies there are such state assets that supplement their production chains or successfully fit into vertical integration strategies. Therefore, they are interested in buying the state property subject to privatization. However, if the prices for these assets are close to fair market values, although it is much more difficult to acquire them than it was in the middle and late 90s.

Therefore, in this area, it is necessary to improve the legal base more quickly, to implement one of the main objectives of the new Ukraine’s law on privatization that simplifies the process of denationalization. Methodology for assessing the state enterprise subject to privatization is a great challenge here. In this regard, the most urgent is overcoming the price gap as a result of the economic crisis, when the State Property Fund hopes for a small discount, and buyers expect that highly depreciated state assets will be put up for sale.

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How to find the golden mean here? After all, the Ministry of Finance has made revenues from privatization in the 2018 state budget at the level of 0,8 billion USD! And, accordingly, the State Property Fund should privatize more than 900 state-owned enterprises. This is a huge job and a huge workload. Finally, will this year's prices for privatization tend to be close to fair market values? The question remains open.

Proceeding from the tasks of filling the state budget-2018, the State Property Fund would try to put up as many state-owned objects as possible for tenders and auctions. Ministry of Finance needs specific amounts of money to balance the budget. And, of course, it is difficult for the Cabinet to combine these two key areas (stimulating the economy and keeping the balanced state budget for 2018). Some experts see significant risks here, for example, high inflation and volatility of the hryvnia exchange rate.

Related: Ukraine is serious about privatization this time

During business meetings of the investors and Ukraine’s State Property Fund representatives, I frequently note this disturbing effect of the transfer of the hryvnia's weakness to the inflationary indicator. Therefore, according to the estimates of domestic and foreign experts, the National Bank of Ukraine will resume the trend of lowering the discount rate only if hryvnia stabilizes or if it starts to strengthen in the foreign exchange market (as we might see it over the past few weeks). By the way, on April 12, 2018, the National Bank still left the discount rate unchanged at 17% per annum.

Actually, we will see, how many objects will be sent before 2019, and how much money will come for balancing the state budget-2018.

Related: Ukraine’s State Property Fund to sell 600 small-scale businesses

 This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners

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