Rada adopts new draft bill to improve privatization

10 November 2017

Ukraine's parliament, the Verhkovna Rada, approved on Nov. 9 in the first reading legislation to stimulate privatization of state assets. The new bill simplifies the privatization process by eliminating certain preparation procedures and other bureaucratic impediments. It simplifies the division of state companies by separating them into two groups only (small and large, with their threshold being the book value of total assets at UAH 0.25 bln). The bill simplifies the procedure of privatizing small enterprises, which should be sold via electronic auctions, with the starting price set as the net book value of a company’s assets.

 

Large companies will be sold at privatization auctions with the option of hiring advisors to lead the M&A process. Their starting prices will be approved by the Cabinet based on the evaluation results of an advisor or a study of potential bids. It also grants authority to the Cabinet to choose whether to sell a company to a single contender, or to set a new auction in case the first one fails. The starting price can be lowered by 25% and 50% at the second and third auction.

 

Alexander Paraschiy: Besides simplified procedures, this legislation creates more flexibility in setting starting prices at privatization tenders, whereas starting price discounts hadn't been allowed for large companies. The legislaton also grants the Cabinet authority to transfer ownership rights of a privatization candidate from any state entity to the State Property Fund (whereas beforehand, a state entity owning a company was able to ignore such transfers). So, in theory, the new draft privatization law (if fully approved) makes the preparation and selling process simpler and faster.

 

However, in our view, the failure of the government to conduct large-scale privatization has not been with poorly written laws regulation, but lack of political will. For instance, Ukraine had already adopted a “progressive” law on privatization in February 2016, which allowed for involving advisors and applying international legislation to sale-purchase agreements. The government and analysts were very enthusiastic about those changes, and the Fund promised to initiate massive privatization, but nothing has been sold from that time except a dozen of small assets and 25% stakes in five large assets.

 

So this new legislation can't overcome the main problem, which is the lack of political will. Moreover, in our view, it grants too much power to the Cabinet to intrude in and control the process, which may become an additional impediment. All in all, we expect the parliament will approve the new bill in full by the end of this year, but this will not necessarily lead to large privatizations next year, particularly those being requested by the IMF.