Large-scale privatisation at launch: Four large state-owned enterprises to be sold by the end of 2023
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Large-scale privatisation at launch: Four large state-owned enterprises to be sold by the end of 2023

How the Cabinet of Ministers changed the rules of auctions, and why it is necessary

Large-scale privatisation at launch: Four large state-owned enterprises to be sold by the end of 2023

The Cabinet of Ministers has finalised the preparations for the large-scale privatisation resumption in Ukraine. During the meeting on 18 July, the government approved the technical changes necessary to initiate the process of large-scale privatisation through the Prozorro.Sales system.

These changes are outlined in Decree No. 723, which establishes the procedure for conducting electronic auctions, requirements for platforms (including their operators) where privatisation takes place, and modifications to the auction algorithm itself. These modifications aim to minimise the risk of disruptions caused by dishonest participants.

"In the near future, we plan to launch the process of large-scale privatisation, which will significantly increase revenues to the state budget. It will also have a positive impact on recovery and economic growth through efficient property management, improvement of the business climate, and attracting investments," commented Oleksiy Sobolev, Deputy Minister of Economy, on the Cabinet's decision.

According to him, there are currently over 40 accredited marketplaces in the Prozorro.Sales system (exact number as of 24 July 2023 – 42). However, only those platforms that successfully undergo accreditation according to the new requirements set by the Cabinet will be eligible to participate in the large-scale privatisation.

Mind has examined which objects will be put up for sale in the first round as well as the algorithm that will be used.

What is the situation with privatisation in Ukraine? After the introduction of martial law on 24 February, 2022, there were frequent reports in the media that privatisation was halted due to the war. This was partly because all state electronic registries were temporarily blocked, making it impossible to register and notarise any property alienation transactions.

However, the war only affected small-scale privatisation – the sale of assets worth up to 250 million UAH. Large-scale privatisation was effectively suspended in March 2020 due to the COVID-19 pandemic quarantine.

At the end of the summer of 2022, Prime Minister Denys Shmyhal announced that small-scale privatisation would resume in the autumn. Consequently, as Illia Mykhaylov, Chairman of the Supervisory Board of Prozorro.Sales, told Mind in an interview, over 2.5 billion UAH was received from the sale of state-owned assets since the resumption of small-scale privatisation until mid-summer 2023.

As for large-scale privatisation, the Cabinet of Ministers and the State Property Fund representatives discussed its restart a year ago. In July 2022, Olha Batova, who was then acting Chairman of the State Property Fund, revealed that the fund expected the prompt adoption of an updated privatisation law that would transfer large-scale privatisation to Prozorro.

Read also: 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

In July 2022, the parliament indeed passed bill No. 7451 (now law No. 2468-IX), which, among other things, involved the abandonment of privatisation advisors and allowed for the conduct of privatisation of large-scale assets in electronic format. However, the law did not lift the ban on selling large state-owned enterprises.

At the end of May 2023, Verkhovna Rada adopted another privatisation bill, bill No. 8250 (now law number 3137-IX). As reported by the State Property Fund's press service, citing Rustem Umerov, the current chairman of the fund, this law is intended to facilitate the resumption of large-scale privatisation.

What requirements did the Cabinet of Ministers set for electronic platforms? Decree No. 723 contains the following key criteria that electronic platform operators must meet to participate in large-scale privatisation:

  • to have the status of an authorised platform for conducting electronic auctions for the sale of small-scale privatisation objects continuously for two years;
  • to conclude purchase and sale agreements for small-scale privatisation objects with auction winners for a total amount of not less than 10 million UAH;
  • to have at least three concluded purchase and sale agreements with winners within the framework of small-scale privatisation auctions for a total amount of at least 7.5 million UAH in the last two years.

Additionally, the government has changed the testing fee for electronic platforms that wish to connect to the Prozorro system. Initially, the fee was set at 51,000 UAH (3,000 non-taxable minimum incomes of citizens). Now, the fee cannot be less than 85,000 UAH (5,000 non-taxable minimum incomes), but it cannot exceed 170,000 UAH (10,000 non-taxable minimum incomes).

The selection and authorisation period for an operator has been increased from 60 to 95 working days, and the testing period for the electronic platform they manage has been extended from 40 to 75 working days.

An electronic platform operator, once approved to organise large-scale privatisation auctions, must sign a contract with the administrator (referring to Prozorro). Additionally, the operator is required to sign a confidentiality agreement with the auction organiser. Importantly, a separate confidentiality agreement must be signed for each privatisation object.

What will change in privatisation auctions? Additional changes, stipulated in resolution No. 723, are related to the elimination of manipulations during the auctions. The Cabinet of Ministers has determined that:

1. A participant in an electronic auction who takes second place at the end of the bidding will not have the right to refuse to await the decision regarding the winner (the decision on recognising their victory or disqualification).

2. If the participants who took first or second place refuse to pay for the acquired object, their security deposits will not be returned but will be used to replenish the state budget. The total amount of these two deposits is almost 40% of the initial price of the object.

According to the Ministry of Economy's explanation, these conditions will help reduce the number of privatisation auctions that are recognised as not having taken place.

What large objects can be privatised and when? The list of large-scale privatisation objects was approved by the Cabinet of Ministers in its resolution No. 36-r of 16 January 2019. It has been amended more than a dozen times over the past four years, but the document has not lost its force.

According to this order, the following objects should (potentially) be put up for sale:

  • Centrenergo;
  • United Mining and Chemical Company;
  • Krasnolymanska Coal Company;
  • Azovmash;
  • First Kyiv Machine-Building Plant;
  • Dnipro Electric Locomotive Plant;
  • Electrovazhmash;
  • Ukrainian Power Machines;
  • Sumykhimprom;
  • Odesa Portside Plant;
  • Oriana Chemical Plant;
  • Zaporizhzhia Titanium and Magnesium Plant;
  • Aluminium Foil Plant;
  • Indar Insulin plant;
  • Ukragroleasing;
  • Uman Distillery Plant.

The sale of these enterprises will be phased, as expected. Among the priority assets subject to privatisation now are Odesa Portside Plant, Centrenergo, United Mining and Chemical Company, and Zaporizhzhia Titanium and Magnesium Plant. This list was announced by Rustem Umerov in an interview with Bloomberg. According to him, privatisation should begin no later than the third quarter. Otherwise, if the privatisation plan is not implemented by the end of 2023, the enterprises will suffer significant losses in value.

Umerov estimates that the large-scale privatisation in 2023 could bring around 15 billion UAH (approximately $400 million) to the state budget. However, the budget law foresees revenues from privatisation (including small-scale) amounting to 6 billion UAH.

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