EBRD: Privatisation in Ukraine has failed, but there is room for optimism

During the past two years, the process of privatising state-owned property in Ukraine has not significantly moved forward. Not a single big enterprise has been privatized. The main obstacle of this has been the country’s oligarchs, who are the current de-facto owners of these enterprises. The European Bank for Reconstruction and Development (EBRD) also recognises the privatisation process in Ukraine as having been unsuccessful. However, there is hope in the shape of the new law on privatisation. On the eve of the Eastern European Partnership Summit in Brussels, Francis Malige, EBRD's Managing Director for Ukraine, Belarus, Moldova, Georgia, Azerbaijan and Armenia, explains the details.

What were the main mistakes of the privatisation process in Ukraine? There are a lot of things that are wrong with the privatisation process as it is in Ukraine. It is actually designed not to privatise anything. It is a classic case of a bureaucratic process where people who need to take decisions are liable for the decisions and are not liable for not taking any decisions. As long as I do not decide, I do not make any mistakes. Another issues is evaluation which does not correspond to the methodologies that investors use these days. If you have the methodology that says this cheque is worth one hundred million dollars, the investor says that he is willing to pay a hundred dollars for it but you insist on a hundred dollars, no one is going to come. So we have not had any successful transparent privatisation in the past few years. But where I take optimism from is a new privatisation law that has been approved in parliament at first reading. So it needs to go to its second reading and be approved by the president. But that law, if it is passed, gives Ukraine a much more modern framework for privatisation. And I hope that once that law is passed we can actually bring more companies in a better way towards privatisation in the future. We were involved in the preparation of this law together with colleagues from the World Bank and the IMF. UASAID also had some input. There was a very good level of cooperation with the Ukrainian authorities and yes, we do like this law. You were saying that the State Property Fund should be given more powers. At the same time don't you think that all these problems which existed with the privatisation are related to the fact that the State Property Fund is involved in corruption and works for the interests of particular oligarchs who control state enterprises in Ukraine?

Even though a lot of these companies are state owned, their cash flows were privatised a long time ago. So if you privatise them you have to expect resistance from the people who are currently holding this money. The State Property Fund needs strong management and it needs strong independence. This is the reason why the head of the State Property Fund is approved by the Parliament. It has to be an independent person. But you need people in a position to make decisions to have the courage to make these decisions. If the governor of the central bank does not have the courage to close banks that need to be closed, it does not matter if he or she is independent. How to avoid situations where people who control enterprises deliberately bankrupt them so they can be privatised very cheaply - and as these processes are not transparent, as a result the same oligarchs would grab these properties? In order to avoid this, you have one basic thing which is needed – political will. The second thing is that you have to make sure that your privatisation process is transparent, that people can come and compete. So if you have this oligarch who has made his company worth very little, I can come and compete. I hear sometimes people say that it is all transparent, it is on TV. I don't think that's enough. If you want to privatise something, you need 3 transparencies:

First: to know who the buyer is. By which I mean this is not just knowing that it is owned by a Cyprus-based company represented by some lawyer. You need to know who owns this company.

Second: transparency of the asset. Everyone needs to understand what is in this company. There needs to be sufficient information.

Third: transparency of the process. Not the last stage, when cameras come and you can bid, but the whole process.

If you have these transparencies, the oligarchs who want to buy up on the cheap will be taken out of the market. What were the main problems in the privatisation process of Odesa Port Factory? In this case one of the ways we tried to ensure transparency was to insist that privatisation could not take place unless there were two bidders out of which one was a genuine strategic investor and not an unknown party. That was the rule. And because no bids came, the privatisation was unsuccessful. So every big company has some local investors, what we are trying is to make sure that these people pay the right price.