Privatization in Ukraine: A locomotive of sustainable development or a dead end?

Author : Mykyta Sinitsyn

Zelensky encourages the European Investment Bank to join the implementation of infrastructural projects in Ukraine
15:53, 1 November 2019

October 28, the press service of the President of Ukraine announced a meeting between Head of State Volodymyr Zelensky and Vice President of the European Investment Bank (EIB) Vazil Hudak. The president invited the financial institution to join the implementation of infrastructure projects.

In order not to be unfounded and to stimulate a potential investor, Zelensky announced plans for economic development, which are much higher than 3.7%, which are indicated in the draft state budget for 2020.

The head of state also named the factors that, in his opinion, would contribute to this - laws on concessions, deregulation and the provision of a green light for the privatization of state enterprises.

The optimism of the president, who represents privatization as one of the “three pillars” of Ukraine’s future economic breakthrough, is surprising because, in recent years, domestic privatization has been plagued by a series of constant failures.

Related: Why privatization in Ukraine failed again

For the period 2014-2018, the plan for privatization revenues was completed only in 2014, but this was done more likely due to manipulations with the plan. So, if at the beginning of the year the revenues were planned at the level of 680 million USD, it was really possible to attract only 14,7 million USD, but due to the reduction of the plan in December to 14,6 million USD, the latter was supposedly even slightly exceeded.

Then there was a complete failure in 2015, when the revenue plan was implemented only 0.9% - UAH 6,1 million instead of 680 million USD. In 2016, with the previous plan, it was possible to sell state property for 13,3 million USD, of which only 7,6 million were received in the treasury by the end of the year.

In 2018, the Verkhovna Rada adopted a new law on the privatization of state property, which established new rules for the state to sell its property. Now privatization was divided into a small one - the sale of state property worth up to 1 million USD and "large" in excess of this amount.

Despite the fact that it was proposed to conduct privatization as openly as possible, including through electronic trading and attracting advisers, the sale of state property in 2018 was waiting for another failure - only 12 million USD of revenues instead of the ambitious 858 million USD.

What does unlocking of the privatization of state-owned enterprises mean? This is about the law on recognizing as invalid the law of Ukraine "On the list of objects of state property rights that are not subject to privatization" No. 145-IX, which was signed by the head of state in mid-October.

As Yulia Kovaliv, the deputy head of the Presidential Office, said, the process of large-scale privatization in Ukraine was unblocked, stressing that in the fall the president ordered the Cabinet of Ministers to transfer 500 state enterprises to "small privatization."

Related: Large-scale privatization 2019 in Ukraine: Huge problems remain

After the adoption of the law, the first five enterprises were transferred for privatization, another 12 are in line.

The document proposes changes to the procedure for the reorganization and bankruptcy of enterprises in which the state owns more than 50% of the property. In particular, the law prohibits the alienation of property during the reorganization of enterprises with a part of state ownership of more than 50%, except in cases stipulated by the reorganization plan.

In other words, we cannot talk about the complete denationalization of property, rather, instead of a complete ban on transferring to private hands the shares and shares in the ownership of strategic enterprises, it is proposed to transfer to the private owners a share in the ownership of strategic enterprises, while maintaining general control in the hands of the state.

Back in 2018, Maksym Nefiodov, the then Deputy Minister of Economic Development and Trade of Ukraine, estimated state assets at about 15.8% in the national economy and 3,500 enterprises, 900 of which should have been sold “now”, and 1,250 did not work, but had various kinds of assets.

Related: How to solve problems that block process of big privatization in Ukraine?

So, according to Danylo Monin, the economic expert of the Ukrainian Institute of the Future, the domestic public sector is out of the investors’ interest due to the deterioration of funds and a small balance of assets. 30 strategic enterprises remaining in state ownership account for 95% of the cost of the latter.

Economic expert Oleskiy Kushch believes that Zelensky’s statement on the role of privatization as a catalyst for GDP growth seems overly exaggerated and optimistic.

Of course, when selling state-owned enterprises and raising funds to the budget, the economy will somehow get a boost, the expert emphasizes because part of the funds will be spent on various infrastructure projects, which require materials and jobs.

Related: Ukraine should focus on land reform and privatization, - IMF

“Due to the lack of interest of system investors from abroad, it can be expected that attractive state-owned enterprises may not even sell, but simply concession to domestic financial and industrial groups and political influence groups under the president. As a result, companies will simply remove the foam in private hands, and the economy will not get anything from this, or even suffer damage,” the expert summarizes.

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