Ukraine’s State Companies Rot As Politicians Squabble Over Sale

Kiev, Ukraine -- At Kyivenergo’s facility No. 5, which supplies half of Kiev’s heating needs, workers scurry along scaffolding and crawl into rusty boilers with blowtorches trying to keep the plant in the Ukrainian capital running.

A Kyivenergo facility plant.

Their efforts might be in vain. Without the $1 billion needed to replace worn-out Soviet-made turbines, antiquated electrical equipment and heat-exchange tubing, the 10-story state-controlled utility may be forced to shut within five years, said Chairman Eduard Sokolovsky.

“In the past two years, we haven’t gotten a cent of investment,” Sokolovsky said in his office in central Kiev. “This kind of policy will lead to our demise.”

Ukraine has a population almost five times Portugal’s, yet an economy still half the size and one dependent on Russia and the International Monetary Fund. The country has dawdled behind the rest of former communist Europe in attracting foreign investment because of political wrangling over state assets.

Hundreds of the former Soviet republic’s companies risk financial collapse as the government starves them of cash amid budget cuts and indecision on their sale. The country’s biggest companies were sold mainly to local millionaires or remain in government control while neighbors Hungary and Poland sold theirs to foreign investors in the 1990s.

“The privatization process was a hostage to vested interests,” said Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev. “If it had been speedier, we would have been closer to the economic development of the countries of central and eastern Europe.”

Telecom Delay

The Ukrainian government on Sept. 28 said it aimed to sell phone company VAT Ukrtelecom by the end of this year. The previous administration said the same in 2009.

While in state hands, firms are also unable to lure private investment to modernize facilities at a time when banks are unwilling to extend loans after a credit crunch, analysts said.

For this year, the government received 514 million hryvnia ($64.7 million) of revenue from selling state assets as of Sept. 23, or 8.1 percent of the planned target of 6.35 billion hryvnia, the State Property Fund said on its website.

“The government’s privatization policy simply doesn’t exist,” said Alexander Paraschiy, an analyst at BG Capital investment bank in Kiev.

Pressure Builds

Financial pressure is building on state plants such as Kyivenergo as the International Monetary Fund demands Ukraine trim the budget deficit to 3.5 percent of gross domestic product next year from a projected 5.5 percent this year.

Without private or public financing, a large segment of the $116 billion economy can’t support jobs, foiling budget-cutting efforts further by reducing tax collection and boosting spending on social benefits. Kyivenergo is counting on mimicking other countries in the region by relying on outside money.

“Our neighbors and colleagues in Poland managed to achieve serious success and our starting conditions were quite similar,” said Sokolovsky. “I see the privatization as an opportunity for the company to attract investments.”

The Polish government has targeted 25 billion zloty ($8.8 billion) in asset sales this year, of which it has 20 billion zloty of stakes either sold or committed so far.

President Viktor Yanukovych’s seven-month-old administration is the latest of a string of governments that have presided over Ukraine’s stop-start privatization program.

Kuchma’s Legacy

Beginning with former President Leonid Kuchma, who was accused by the European Union and the U.S. of selling state properties to family and business partners, investors have grown wary of sales on concern they aren’t transparent enough, said Iryna Piontkivska, an economist at Troika Dialog in Kiev.

“We have to understand that people who came to power and many politicians of the previous governments made their fortunes out of privatization,” said Piontkivska.

Kuchma was president from 1994 until January 2005, the longest-serving head of state since Ukraine declared independence from the Soviet Union in 1991. He denied any wrongdoing. He was replaced after the so-called Orange Revolution that swept President Viktor Yushchenko and Prime Minister Yulia Tymoshenko to power.

Tymoshenko took steps to renationalize some assets after she took office in 2005 because she deemed they were sold under questionable conditions or without an open tender.

Squabbles between Yushchenko and Tymoshenko halted other announced sales of coal mines, energy companies and VAT Odeskyi Pryportovy Zavod, Ukraine’s second-biggest ammonia producer.

Latest Promise

Since then, Yanukovych’s Cabinet, in office since March, has failed to move ahead with campaign promises to embark on the sale of companies including Ukrtelecom, the main phone company in the country of 46 million people.

Ukraine, which owns almost 93 percent of Ukrtelecom, has put off its sale for more than a decade because of disputes between state agencies. The most recent sale was scheduled for December 2009.

Ukrtelecom lost 456.4 million hryvnia in 2009. The company agreed in March to defer a payment on a $500 million loan for three months after its financial condition “deteriorated.”

It needs cash to develop mobile and Internet services as it battles for clients with rivals including ZAT Kyivstar and Russia’s largest mobile-phone company, OAO Mobile TeleSystems.

“Ukrtelecom, as it exists now, doesn’t have many prospects,” Oleksandr Ryabchenko, chairman of the Ukraine State Property Fund, said in a Sept. 3 interview. “It should offer something new, new services.”

Mittal Purchase

Successful sales, like VAT Kryvorizhstal, the country’s largest steel mill, to ArcelorMittal in 2005 for $4.8 billion, are overshadowed by inaction in other assets.

ArcelorMittal, the world’s biggest steelmaker, since has been waiting to buy coal mines and the Kryvyi Rih iron-ore enriching mill, whose construction was started by the Soviet Union, Romania, and Slovakia in 1985 and was never completed.

At Kyivenergo, the banging of hammers and sharp hiss of metal saws echoes around the cavernous heating plant, piercing the din of the whirring generators. Some workers, dressed in blue overalls and white hard hats, crawl in and out of a worn- out boiler, while others were wrestling carpet-sized insulation.

“We have plans for replacement, but the National Energy Commission has yet to confirm them,” said Vitaliy Beshun, the plant’s chief engineer. “All the technicians understand that the equipment is past its usefulness. That size of a task has never yet been performed in Ukraine.”

Source: Bloomberg