Why did privatization work in warring Ukraine?

The privatization plan in Ukraine for 2023 has been completed by almost 50% - as it turned out, investors are buying state-owned property in our country, despite the military risks. The editorial journalists looked into who and what are now buying at privatization auctions, whether the government is doing the right thing by offering state property for sale during the war, and also under what conditions strategic investors will finally come to Ukraine.

War is not a hindrance

According to the State Property Fund of Ukraine (SPFU), in 2023, 335 successful auctions for the privatization of state property have already been held. These auctions attracted 1,725 ​​bidders (meaning, on average, more than five potential buyers competed for each property). About 2.7 billion hryvnia were received for the assets put up for sale.

Also, according to the State Property Fund, another 188 auctions are planned to be held by the end of the year, so privatization rates should increase even more.

This result turned out to be somewhat paradoxical, since the current privatization rates are a record for the last ten years, eight of which were in peacetime.

In general, in Ukraine the process of privatization, primarily the so-called large one, has traditionally proceeded rather sluggishly. The government annually budgeted a certain amount from the sale of state property (usually in the range of 15-20 billion hryvnia), and every year it spectacularly failed to implement its own plans.

For example, in 2015 and 2016, it was possible to gain only 200 million hryvnia from privatization, which was about 1.1% of the planned 17 billion. Things went somewhat better in 2017, when the plan was fulfilled by almost 20% - 3.4 billion out of the planned 17.1, but it is difficult to call this a success.

The highest rate of implementation of privatization programs over the past decade was demonstrated in 2021. Then, with a plan of 12 billion hryvnia, the revenue was 5.1 billion (42.5% of the plan).

This year, the government did not set itself exorbitant goals - budget revenues from privatization are expected to amount to only 6 billion hryvnia. And 45% of this plan has already been fulfilled, which is a record figure (of course, not in absolute numbers). And by the end of the year this figure has a chance to grow even more.

Thus, a full-scale war did not become an obstacle to the privatization of state property, despite the fact that the risks for business and investors increased manifold. Rather, it looks like it, on the contrary, has become an incentive for privatization processes.

Relocation demand

One of the main reasons for the acceleration of privatization during the war is that the process of selling government assets was improved.

“In 2022-2023, changes were made to the regulatory framework, which facilitated the holding of auctions and unblocked privatization,” Oleg Getman, coordinator of the expert groups of the Economic Expert Platform, told the publication. — Also important for the success of privatization was the abolition of the state monopoly on alcohol production and permission to privatize distilleries. It was these enterprises that provided a significant part of the proceeds from privatization, since they arouse great interest among investors” (the privatization of distilleries began even before the war, but continues now - “Apostrophe”).

In addition, privatization was directly influenced by military actions, which radically changed the situation in the country.

“After a full-scale invasion, a significant number of enterprises from front-line regions carried out relocation,” Ilya Neskhodovsky, head of the analytical department of the ANTS network, explained in a commentary to Apostrophe. “And in order to settle in a new location, they needed premises. This has significantly increased the demand for production facilities in the western regions. And entrepreneurs willingly buy them at privatization auctions.”

In addition, in many rear regions the population has increased, and this has created additional demand for everyday goods. “Therefore, businesses producing food products and providing services have intensified. And entrepreneurs are willing to buy properties that can be used for shops, bakeries, cafes, restaurants, and so on,” says Ilya Neskhodovsky.

In addition to the demographic situation, the war radically broke the logistics of Ukraine: “The occupation of part of the ports and the closure of sea routes led to the fact that transport flows turned towards the western border. Therefore, the demand for road transport has increased sharply. Many companies that carry them out today are expanding their business and purchasing additional cars. And they create additional demand for facilities that can be used as garages and warehouses.”

“If the usual 17 billion in income from privatization had been included in the budget, then the proceeds of 2.7 billion would have given a much lower percentage of the plan,” Boris Kushniruk, head of the expert and analytical council of the Ukrainian Analytical Center, said in a commentary to Apostrophe. “And since this time the government assessed its own capabilities more realistically, the implementation of the plan became more successful.”

Privatization by and large

Of course, successes in privatization provoke discussions in society about whether it is advisable to sell state property during war. Some believe that in an environment of high and uncertain risks, it is difficult to obtain a high price for objects.

However, most experts agree that privatization is a useful process.

“Most state-owned enterprises are unprofitable,” says Oleg Getman. “And since the state cannot provide effective management, they decline further and further. Therefore, delaying privatization will only lead to increased losses for the state and a decrease in the value of assets. Ukraine has long needed to carry out large-scale privatization and rid the state of most of the property except for 20-30 truly strategic enterprises.”

This year, Ukraine is limiting itself to small-scale privatization, offering small objects at auction for which domestic investors are competing. However, the government plans to resume large-scale privatization next year. And this will entail additional risks.

“If major privatization is resumed, society will have to closely monitor the holding of relevant competitions,” emphasizes Boris Kushniruk. — We have extensive experience when the conditions of competitions are prescribed for specific buyers in such a way that only the “right people” can purchase objects. And pressure is needed on the authorities in order to ensure equal conditions for all investors.”

How to attract foreigners

For large objects, military risks directly increase. After all, for a large enterprise, the likelihood of becoming a target for a Russian missile or suicide bomb is much higher.

At the same time, there are much fewer potential buyers of enterprises worth billions than applicants for small objects. And if, fearing war risks, international investors do not come to the competitions, then the only buyers for large-scale privatization projects may be Ukrainian oligarchs. And this will definitely not contribute to de-oligarchization.

Therefore, before putting large enterprises up for auction, the government will have to solve the problem of leveling military risks in order to attract the maximum number of potential buyers to competitions.

“This problem can be solved,” says Oleg Getman. – To do this, the state must offer potential investors war risk insurance. Moreover, the funds should be guaranteed not by the state itself, but by reputable international insurance groups, and the government would only pay the appropriate contributions. Then, in the event that the enterprise gets involved, investors will be compensated for the full amount of losses, which will allow them to consider the risks minimal, and they will be more willing to acquire Ukrainian enterprises.”

On behalf of the government, the State Property Fund has already prepared 15 enterprises for large-scale privatization. Among them, in particular, the Odessa Port Plant (producer of ammonia and other chemical products), Centerenergo (a company that owns three large thermal power plants), the United Mining and Chemical Company (producer of titanium raw materials), the Zaporozhye Titanium-Magnesium Plant, Indar "(insulin manufacturer), Uman Distillery.

Some of these objects had previously been proposed for privatization, but each time the matter ended in vain, including due to high-profile corruption scandals. Therefore, the government will have to make efforts not only to insure the risks of potential investors, but also to convince them that this time the competitions will be held openly and subject to the same conditions for all.

By the way, next year the implementation of the privatization plan may be even more successful than this year, since the 2024 budget includes revenues from the sale of state property in the amount of only 4 billion hryvnia.