Gov­ern­ment sells stakes in oli­garch-dom­i­nated sec­tor

Kyiv Post - - Business Focus - BY BERMET TALANT [email protected] The pri­va­ti­za­tion drive in Ukraine has kicked off in an un­usual way -- the sale of state shares in elec­tric­ity-gen­er­at­ing com­pa­nies pre­dom­i­nately owned by Ukraine’s oli­garchs.-

In a bid to un­lock Ukraine’s $17.5 bil­lion loan pro­gram from the In­ter­na­tional Mone­tary Fund, the gov­ern­ment has started sell­ing its stakes in elec­tric­ity dis­tri­bu­tion com­pa­nies.

The stakes, how­ever, are likely to be bought by the coun­try’s oli­garchs, leav­ing the en­ergy util­ity sec­tor en­tirely un­der their con­trol.

In mid-Au­gust, the State Prop­erty Fund­sol­d25per­centstakes­in­fivere­gional com­pa­nies — Donet­skoblenerg­o, Dniproen­ergo, Dniprooble­nergo, Zahi­den­ergo, and Kyiven­ergo — which sup­ply elec­tric power and heat­ing to cit­i­zens of Kyiv, Lviv and east­ern Ukraine. Stakes in three more com­pa­nies failed to sell.

All five lots were bought out for Hr 3.5 bil­lion ($1.3 mil­lion) by the Cyprus-reg­is­tered Ornex Lim­ited, which be­longs to Ri­nat Akhme­tov’s Sys­tem Cap­i­tal Man­age­ment hold­ing. The oli­garch’s DTEK Hold­ing had al­ready held the ma­jor­ity stakes in those com­pa­nies.

Yuriy Nik­itin, deputy head of the State Prop­erty Fund, called the mi­nor­ity stakes “donut holes” that nei­ther brought any div­i­dends to the state nor gave it de­ci­sion-mak­ing power in cor­po­rate af­fairs. By sell­ing off the stakes, the gov­ern­ment was happy to get rid of illiq­uid as­sets, earn some cash and please the IMF.

The World Bank, how­ever, ex­pressed con­cern with the lack of trans­parency in the sales.

“The Au­gust sales (…) didn’t pro­vide con­fi­dence to the mar­ket play­ers and in­ter­na­tional in­vestors that the pri­va­ti­za­tion is go­ing to pro­ceed the way they ex­pected,” Satu Kahko­nen, the World Bank’s coun­try direc­tor for Ukraine, Be­larus and Moldova, told the Kyiv Post on Oct. 3.

Pub­lic or­ga­ni­za­tions, such as the Fed­er­a­tion of Trade Unions of Ukraine, protested against the com- plete ac­qui­si­tion of re­gional en­ergy dis­tri­bu­tion com­pa­nies, or oblener­gos, by pri­vate com­pa­nies, fear­ing in­creases in elec­tric­ity tar­iffs.

At the mo­ment, the mar­ket of 26 elec­tric­ity dis­tri­bu­tion com­pa­nies is di­vided be­tween the gov­ern­ment and com­pa­nies af­fil­i­ated with the oli­garchs Ihor Kolo­moisky, Yuriy Boyko, Ri­nat Akhme­tov, Ihor Surkis, Kostyantin Gry­go­ryshyn and Alexan­der Babakov.

Nik­itin doesn’t see there be­ing a prob­lem. “The gov­ern­ment fi­nally be­gan to sell illiq­uid — from the cor­po­rate gov­er­nance point of view — as­sets. The goal wasn’t to at­tract new in­vestors, and we un­der­stood that the mi­nor­ity stakes would be mainly in­ter­est­ing to the ma­jor­ity stake­hold­ers,” he said on Oct. 4.

Nik­itin ad­mit­ted that the pri­va­ti­za­tions hap­pened quickly be­cause of bud­get and IMF con­sid­er­a­tions. Voli­no­blenergo Pri­va­ti­za­tion of state-owned en­ter­prises is one of the key re­quire­ments of the in­ter­na­tional lender.

“Ex­cept for those five mi­nor­ity pack­ages, we didn’t have any other items that could have been put up for sale im­me­di­ately,” Nik­itin said.

In mid-Novem­ber, the fund will try again to sell 25 per­cent stakes in the three oblener­gos that didn’t at­tract any bid­ders at the Au­gust auc­tion. It’s not clear who the po­ten­tial buy­ers might be.

The gov­ern­ment has banned Rus­sian firms and cit­i­zens from tak­ing part in pri­va­ti­za­tions. The ma­jor­ity stake­holder of Ode­saoblenerg­o is VS En­ergy, which be­longs to Rus­sian oli­garch Ev­geniy Giner and mem­ber of the Rus­sian par­lia­ment Alexan­der Babakov. The ma­jor­ity stake­hold­ers of Sumy­oblenergo are two Cyprus com­pa­nies owned by oli­garchs Gry­go­ryshyn, a cit­i­zen of Rus­sia, and Kolo­moisky.

The value of Don­basen­ergo, ma­jor­ity owned by Nether­lands-reg­is­tered En­er­goin­vest Hold­ing B. V., has dropped since it lost con­trol over its main as­set, Starobeshi­v­ska ther­mal power plant, sit­u­ated in the Rus­sian-oc­cu­pied Donetsk Oblast. En­er­goin­vest is owned by White­bridge Re­sources Lim­ited, Lvivoblene­rgo Prykarpatt­yaoblenerg­o Za­por­izhzhyaobl­energo Don­basen­ergo which is owned by Igor Gu­menyuk, a busi­ness ally of oli­garch Ri­nat Akhme­tov.

There are hopes that the in­tro­duc­tion of RAB (reg­u­la­tory as­set based) tar­iffs from April 2018 will en­cour­age in­vest­ment in the elec­tri­cal power sec­tor. Ac­cord­ing to the ini­tia­tor, the Na­tional Com­mis­sion for State Reg­u­la­tion of En­ergy and Pub­lic Util­i­ties, the con­sumer tar­iffs for oblener­gos will in­clude op­er­a­tional costs for mod­ern­iza­tion. Ef­fec­tively, the more a com­pany in­vests into its as­sets, the more prof­its it will make. The Cab­i­net of Min­is­ters called the scheme “un­fair” and “non-trans­par­ent.”

For 2018, the State Prop­erty Fund des­ig­nated for pri­or­ity pri­va­ti­za­tion a 78 per­cent stake at Cen­teren­ergo and state-owned ma­jor­ity stakes in six re­gional elec­tric­ity dis­tri­bu­tion com­pa­nies.

The fund hired an in­de­pen­dent ad­viser, the con­sor­tium of EY, Baker McKen­zie and SARS con­sult­ing firms, to help with the sale of the stake in Cen­teren­ergo. The auc­tion is ex­pected to take place in May. The same pro­ce­dure will be used for the six oblener­gos.

An em­ployee at the 5th Kyiven­ergo ther­mal power plant checks equip­ment on Oct. 8, 2014. (Volodymyr Petrov)

Yuriy Boyko, Dmytro Fir­tash

Ihor Surkis

Ihor Gu­menyuk

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