Rada adopts new draft bill to improve privatization

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.