Large-scale privatisation relaunched in Ukraine. The SPF gains more powers, but it will only be able to attempt the sale of 12% of the assets
It is no longer about maximising the sale of assets; the priority task is to reduce budget spending on maintaining state ownership.
In Ukraine, large-scale privatisation, which was put on hold over a year ago due to russia's full-scale invasion, has officially been resumed. According to the adopted Law No. 8250 "On the State Property Fund of Ukraine," signed by President Zelensky, opportunities for selling oversized state assets are open again and should be partially realised this year.
However, while the economic situation in the country may appear undoubtedly more stable than a year ago, it has not become predictable. All investors and their representatives refer to the parameter of uncertainty until the active hostilities are completed, characterising the current investment strategy regarding Ukraine as "worth waiting for."
Why then was there an attempt to relaunch large-scale privatisation amidst still unfavourable conditions? Mind investigated.
What does the law signed by the president entail, and what changes will occur in the SPF? The law somewhat expands the State Property Fund’s jurisdiction. In particular, its head will get the right to independently appoint and dismiss his deputies. The agency’s management is also being centralised: the 12 regional branches, which are separate legal entities so far, will become structural units of the SPF.
As noted by Yaroslav Zhelezniak, the first deputy head of the Tax Committee of the Verkhovna Rada and co-author of the bill, this should result in clearer and more understandable accountability for the fund's work and the establishment of Key Performance Indicators (KPIs) for its units, as well as market salaries for employees. The requirement to coordinate the candidacies of heads of state-owned enterprises under the management of the SPF with local authorities is also going to be abolished.
The main changes, however, concern approaches to property management, particularly those recently acquired from sanctioned individuals. The fund will now have the authority to decide how to dispose of these assets: whether to privatise them, lease them, or retain them under management. Essentially, this is what should have been done but was not carried out by Asset Recovery and Management Agency for various reasons. All money received through the special fund will be channelled to financing Ukraine's reconstruction.
What is the scale of state ownership in Ukraine? Ukraine has around 3,500 state-owned enterprises in total. According to the Ministry of Economy, about 2,000 or nearly 60% of them are not operational. Even with this caveat, their number is record-breaking for any European country and unmanageable for Ukraine since even state-owned holding companies that are formally operational demonstrate negative balances and require budgetary support. According to Case Ukraine think tank, every third state-owned enterprise operates at a loss and poses a potential fiscal risk.
What has been the dynamics of destatisation? Ironically, it has been the opposite of the declared goal. The war has slowed down the initiated destatisation process. The nationalisation of assets belonging to russian citizens or entities equated to them has led to the state's share actually increasing, contrary to the adopted state programme that declares the opposite course. For example, in banking, the share of state banks has increased to almost 60% compared to 47.80% a year ago.
Moreover, the state often took on more than it could handle from the market. Zaporizhtransformator, Ukrnafta, AvtoKrAZ, Motor Sich – this is an incomplete list of nationalised giants, each of them requiring experience, knowledge of formal and informal industry peculiarities, and high competence in their management.
Why did the focus return to large-scale privatisation now? First, because the state is reducing any expenditures. Donors may understand the necessity of funding social payments, but not the need to maintain burdens from unprofitable enterprises, in other words, de facto bankruptcies. The need to close them was immediately realised by the Ukrainian government as soon as the question arose about forced reduction of state expenditures, including through its own means.
Secondl, Ukraine was made aware that it needs to strive to earn its own income rather than burden external partners with the main financial burden. Finance Minister Sergiy Marchenko, speaking at a conference in London, said that Ukraine had "initiated the process of mobilising resources for recovery."
By the way, the relaunch of large-scale privatisation was being prepared for this "donor forum" – to invite investors to Ukraine from the widest possible stage.
Are the results of Small Privatization promising? Small Privatisation was relaunched in September 2022. Its most significant object, the Ust-Danube Sea Trade Port, was sold to a Ukrainian investor for UAH 201 million. Distilleries and real estate properties are also actively being sold.
In the near future, the privatisation of peat enterprises, ethanol plants, a bread-baking complex, and 14 prosthetic and orthopaedic enterprises is planned.
What are the notable objects in the large-scale privatisation?
- Zaporizhzhia Titanium and Magnesium Refinery
- Zaporizhzhia Aluminium Works
- Demurynsky Ore Mining and Processing Plant
- Ocean Plaza Shopping Mall (66.65% stake)
- Mykolaiv Alumina Refinery
- United Mining and Chemical Company
Is there any interest in them from foreign investors? No, there isn't any foreign interest, but Ukrainian investors, who are generally more stress-resistant, may consider such an opportunity. However, for example, despite assumptions that businessman Vasyl Khmelnytsky might be interested in the privatisation of Ocean Plaza Shopping Mall, he himself dismisses such a possibility. "Today, the world is moving towards online sales and fast targeted delivery of goods. Large shopping centres are already a thing of the past," he stated in a comment to Mind.
How much is planned to be generated for the budget through the sale of enterprises? The law on the state budget for 2023 plans to receive UAH 6 billion from privatisation. This figure, like in previous years, is hypothetical and cannot serve as a benchmark.
In 2022 (since autumn), UAH 1.7 billion was received for the state budget from privatisation, with a target of UAH 8 billion.
What will happen to non-liquid state-owned assets? Bankrupt state enterprises will be liquidated.
Currently, the State Property Fund has 2,364 state-owned enterprises registered, of which only 288, or 12%, can be put up for sale. 134 are not subject to privatisation due to their strategic significance or social burden.
664 state-owned enterprises are located in occupied territories.
The rest are burdens that need to be eliminated: over half of them have no assets and exist only on paper. A total of 1,278 state-owned enterprises are subject to liquidation or bankruptcy. In 2023, the plan is to liquidate 347 enterprises, followed by 400 in 2024, and an additional 141 in 2025. According to the fund, this will reduce the budget's debt burden.
On the other hand, the liquidation and bankruptcy process entails paying the accumulated salary arrears to employees, which involves tens of thousands of people, decades of debts, and billions of hryvnias.
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