Ukraine To Sell Off Utility Assets

Ukraine To Sell Off Utility Assets

September 01, 1999

Ukraine is expected to release details this fall for a planned selloff of 31 “voblast Energos,” or regional electric utilities. Ukrainian President Leonid Kuchma issued a decree (Decree No. 944/99) earlier this month directing four government bodies—the Ukrainian Property Fund, Securities Market Commission, Anti-monopoly Committee and Ministry of Energy—to come up jointly by September 2 with rules for the tender, including the makeup of the tender committee. In the meantime, the European Bank for Reconstruction and Development, or EBRD, announced in mid-August that it had approved funding to engage an investment bank to advise on the tender.

Presidential elections are scheduled in the Ukraine for October. This has made some outside observers skeptical about whether the selloff will actually take place. However, President Kuchma is expected to be re-elected, and the opposition to these privatization measures is not well organized, especially in view of Ukraine’s growing budget deficit.

The presidential decree orders other actions in addition to the September 2 deadline for a procedure for carrying out the tender. By early October, the Ministry of Energy and the National Commission for the Regulation of Electric Energy are supposed to issue new regulations on licensing generation, transmission and sale of electric power, as well as strengthening general regulatory oversight. The Ukrainian cabinet of ministers is also charged with producing a proposal for gradual elimination of subsidies for electric power for certain categories of consumers and for deciding how existing debts of the 31 companies will be restructured before the tender.

Of the 31 utilities involved in the tender, majority interests—50% plus one share—will be offered in seven, including the utility that serves the suburbs of Kiev, the Ukrainian capital. Five utilities will remain in government control with at least 50% plus one share remaining in government hands. The smallest stake on offer is 26% (in 12 of the utilities).

A successful bidder must have a plan to make improvements in the utility he is purchasing.

The privatization of regional utilities has been under consideration in Ukraine for several years. It began with the sale of between 35% to 40% shares in five regional utilities in 1998. Private ownership of these utilities is probably much larger today than the 35% to 40% sold initially due to sales of shares that were originally set aside for employees and management.

The deadlines in the presidential decree are aggressive, and it remains to be seen whether the government can actually meet them. To the extent that the presidential decree is politically motivated, the tender rules may be hastily drafted (as has happened elsewhere in the former Soviet Union) with the potential for inconsistent interpretation of applicable laws. Nevertheless, given the scale and urgency of the privatization, significant opportunities may emerge for astute investors.

by Laura M. Brank and Shane R. DeBeer, in Moscow