Under the hammer at rock-bottom price. How did privatisation restart in Ukraine?

Small privatisation which resumed in mid-September after an almost 7-month hiatus is bearing its fruit. According to a report of the State Property Fund of Ukraine, as of October 21, the state budget actually received more than UAH 220 million from privatisation. These are funds that were obtained from the sale of two distilleries, the Kobylovoloky and the Marylivka (both in Ternopil Oblast). Money has already been paid by the new owners.

However, these are not all the privatisation auctions conducted by the SPF. According to the Ministry of Economy, from September 19 to October 18, the Fund successfully sold 16 objects of small privatisation worth more than UAH 920 million.

"The results of the first online auctions demonstrate that businesses are ready to invest in the Ukrainian economy despite the war," said Yuliya Svyrydenko, Minister of Economy of Ukraine, commenting on the results.

Mind decided to find out how martial law affects privatisation auctions and what state lots are for sale.

How lots are prepared for privatization? Back in August, Law No. 2468-IX entered into force. The act regulates the small privatisation sales procedures under martial law. According to the legal requirements, the state-owned enterprise Prozorro.Sale – actually, the main privatisation platform – has developed an algorithm for conducting auctions to sell state-owned enterprises and other assets.

1. Privatsation bodies (State Property Fund, local self-government structures, etc.) gather applications from interested buyers who want to purchase a specific object from the privatisation list published on the SPF website.

2. The auction commission develops the terms of sale of the object and forms a package of documents considering the following features:

• upon privatisation of a single property complex, a list of assets – real estate and vehicles – on the balance sheet of such an enterprise must be drawn up;
• audit, environmental audit, inventory, evaluation of the object of privatisation (and of its components) are not done;
• when preparing assets for privatisation, privatisation bodies may involve third parties to prepare technical documentation and register property rights to immovable property.

3. Within three working days after the approval of the terms of sale, the privatisation body has to publish an information notice through the Prozorro.Sales system and on its official website, or on the website of the relevant territorial community.

4. The auction has to take place within 20-25 days after the message was posted. Before bidding, potential buyers have the right to inspect the object of privatisation and, as they say, "feel" it with their hands.

How privatisation auctions are conducted? Applicants for the acquisition of state-owned enterprises and assets can be both individuals and legal entities. To participate in the auction:

• legal entities submit a participation letter containing an identification code in accordance with the YeDRPOU (Unified State Register of Enterprises and Organisations of Ukraine), an application on familiarisation with the object of privatisation and a package of documents (excerpt from the Unified State Register of Legal Entities and Individual Entrepreneurs, information on beneficiaries, annual or quarterly financial statements);
• entrepreneurs (foreigners, as well) submit a participation letter, an application on the familiarisation with the object of privatisation and a copy of the passport (a copy of any identity document for non-residents).

Each registered participant must pay a guarantee fee. It makes 20% of the starting price of the lot. But there is a nuance. If two auctions for the sale of a specific object did not take place due to the disqualification of the winner, the guarantee fee is the greater of the following: either 50% of the starting price of the object of privatisation, or 30 minimum salaries as of January 1 of the current year.

The auction is held on the date indicated in the privatisation announcement on the Prozorro.Sale platform. Bidding takes place by increasing the price, and the winner is the bidder who offers the best terms. The minimum increment in price increasing must be specified in the sale terms.

The winner and the operator of the electronic site where the bidding took place sign the protocol on the results of the auction within 4 days.

Within 7 working days, the privatisation body checks the participation letter and the attached documents / information from the auction winner, as well as approves the protocol on the results of the auction.

If the privatisation auction does not occur, the object of privatisation is put up for sale again. Unsuccessful bidders receive their deposits back.

Changes in privatisation auctions since November. State enterprise Prozorro.Sale recently updated the procedures for the sale of small privatisation objects. This is because some regulations to the Final and Transitional Provisions of the Law "On the Privatization of State and Communal Property" entered into force on November 1.
The updated procedures include:

• reduction of the deadline for announcing an auction during martial law to 3 working days;
• reduction of the terms of lot placement in repeated auctions to 3–6 working days;
• announcement of a repeat auction within one working day;
• the possibility of conducting a repeated Dutch auction (the price is reduced until a buyer is found);
• If a participation letter for the auction is submitted from only one buyer, the decision about the object is made within 5 working days.

All auctions announced before October 31, 2022 will be held according to the terms valid before that date. All new auctions will be announced in accordance with the new procedures, valid since November 1.

What does the state sell as a small privatisation? The State Property Fund regularly updates the list of objects for privatisation. In the current version of this list, published on the official website, the following should be put up for sale by the end of 2022:

• 50 shares of state-owned companies and enterprises;
• 253 property complexes;
• 671 lots of various property and assets (buildings, garages, boiler rooms, etc.);
• 79 objects of unfinished construction;
• 58 objects of social and cultural purpose (administrative buildings, canteens, recreation centres).

In addition, the fund regularly publishes a digest that contains detailed information about the lots that will be privatised in the coming month.

In the first half of November, SPF plans to sell eight objects.

Privatisation object	Location	Description	Starting price	Date of the auction
Non-residential building of auto-tractor classes	Fastiv, Kyiv Oblast	Non-residential, 3-story building with basement, area – 458 sq m	467 000 UAH	November 4, 2022
Mechanization base of the motor vehicle workshop	Kamianske, Dnipropetrovsk Oblast	Administrative and production buildings, washing facilities, sewage treatment facilities, area – 2,1 ha	4,5 Mln UAH	November 9, 2022
A group of inventory objects	Velikiy Berezny vlaage, Zakarpatska Oblast	2-story administrative building, garages and a fire pit, area – 595 sq m	991 000 UAH	November 9, 2022
Canteen building #15	Kryvyi Rih, Dnipropetrovsk Oblast	1-story building with basement, area – 557 sq m	956 000 UAH	November 10, 2022
Office-laboratory building	Bilhorod-Dnistrovskyi, Odesa Oblast	3-story building with basement, area – 1193 sq m	126 000 UAH	November 14, 2022
Chernihiv Expert and Technical Center of State Labor Service	Chernihiv	1-story building with utilities, area – 1033 sq m	9 Mln UAH	November 14, 2022
Laboratory and experimental building	Kyiv	Object of unfinished construction: 9-story building and one-story workshop, area – 4100 sq m	9,1 Mln UAH	November 14, 2022
Center for certification and QA of oil and gas objects construction of the State Labor Service	Dnipro	A single property complex, with motor vehicles, technical equipment, and furniture	638 000 UAH	November 14, 2022

Who buys state property and for what? If we analyse the results of past auctions, working enterprises (for example, distilleries mentioned above) or enterprises that are not in business, but still have equipped production facilities, were in the greatest demand among buyers. This allows the buyer to quickly start work on the new site, saving on putting communications, building roads, etc. In other words, buying such objects is a good option for a business that needs relocation.

We should mention that under small privatiіation different assets, such as vehicles, stand-alone buildings, equipment, are sold quite well. Entrepreneurs who are interested in such lots are usually guided by the need to strengthen their technical basis, while not being able to spend a lot of money or not having desire to borrow money to update their property assets.