Of around 3,500 state-owned enterprises in Ukraine, only few are profitable. It is widely accepted that private-run companies are potentially more efficient than those operated by the state. There are multiple reasons for that - historically inflated headcount, excessively bureaucratic and inefficient decision-making and loopholes for corrupt officials, to name just a few.

It is hard to argue that certain sectors and enterprises should remain state-owned due to their strategic significance for Ukraine, but certainly there is no need to keep thousands of smaller, outdated enterprises on the state’s balance sheet without a good economic reason.

Ukraine’s government was not the last to realize it, and there were numerous attempts in the past to boost privatization of the state-owned enterprises, including those having strategic significance for the state. However, over the latest years the privatization process significantly slowed down mainly due to drawbacks in applicable privatization regulations, stagnation of the investment activity and political instability – all exacerbated by the country’s permeating corruption.

Recent Ukrainian legislation amendments

Aimed at remedying a number of drawbacks in applicable privatization regulations and bringing them in line with the current Ukraine’s macroeconomic and political reality, the Law of Ukraine “On amending certain legislative acts of Ukraine regarding improvement of privatization process” (Law on Privatization Process Improvement) was adopted by the Ukrainian parliament (Verkhovna Rada of Ukraine),came into effect on 6 March 2016 and provided for several noticeable changes in the privatization procedure as outlined below.

"No" to aggressor - Ban on investments originating from the Russian Federation

Law on Privatization Process Improvement bars representatives of aggressor states from partaking in privatization of the Ukrainian state-owned enterprises. The Ukrainian parliament may declare a certain state engaged in hostile activities against Ukraine to be an “aggressor state”.

As of 2016, there is only one state on this list - namely, the Russian Federation. It means that (1) Russian citizens and companies, (2) other entities controlled either directly or indirectly by Russian companies or individuals, and/or (3) their affiliates, are not allowed to act as purchasers in Ukraine’s privatization process.

National security-related reasons for such prohibitive measures are obvious and sound, but it remains to be seen whether the Ukrainian competent authorities (including the State Property Fund of Ukraine, the Antimonopoly Committee of Ukraine and others involved) will have all the necessary tools to ensure in practice effective compliance with such prohibition by any potential bidders. Monitoring and ensuring such compliance might become even more complicated in view of any post-privatization transfers of respective targets/assets at a secondary market.

"No" to pre-privatization sales - Preventing oligarchs from getting their feet in the door

The purchase price is not the last issue to deal with when conducting privatization of an asset. Oftentimes it is really difficult to get an objective market valuation for such asset. For this reason, Ukrainian legislation historically provided for a mandatory sale of 5-10% of shares of a state-owned company at a local stock exchange prior to the main privatization tender.

However, such system proved to be ineffective – primarily, due to underdevelopment of Ukraine’s domestic stock market. As a result, such pre-privatization sales often decreased the actual purchase price instead of establishing a true market valuation and/or allowed bad faith investors (often – local oligarchs or thuggish middle man-type politicians) to get their feet in the door of any future privatization opportunities.

So the Law on Privatization Process Improvement abandoned this controversial requirement. Now the asset’s value shall be determined exclusively by independent appraisers to be appointed in each particular case. They are in turn expected to be selected and managed by independent ‘lead managers’, as further described below.

"Yes" to lead managers – Professional advisors now welcome on sell-side too

The Law on Privatization Process Improvement introduces the concept of privatization lead managers – third party professionals responsible for sale of the state’s assets in an efficient, timely manner, acting with the aim to maximize profit for the state.

Such lead managers are expected to be chosen for each asset to be sold, and their duties would include managing due diligence process, improving the investment attractiveness of an asset, searching for investors, contacting potential bidders that may have little knowledge of Ukraine, and supporting the Ukrainian state in preparing the tender documentation and within the sale process. The idea of this amendment is to provide state authorities with an independent source of advice and support in the course of privatization procedure. The initiative will be sponsored by the state and / or international organizations.

Large scale privatization looming – 2016

The State Property Fund of Ukraine (SPF) approved the list of state-owned enterprises to be sold in the course of privatization in 2016 by adopting the Order “On approval of the list of objects of groups B and G to be privatized in 2016” as of 30 December 2015 No. 2064 (2016 SPF Privatization Order).

2016 SPF Privatization Order enlists almost 90 state-owned enterprises to be sold this year, with the state’s stake offered varying from 0.004% to 100%.

No doubt, there are attractive assets inserted in 2016 SPF Privatization Order, which would include entities in the energy and chemicals sectors, as well as port infrastructure. Few examples include regional energy generation companies in Kherson, Mykolaiv, Odessa, Dniprodzerzhynsk and electricity distribution companies in Kharkiv, Khmelnytsky, Mykolayiv, Zaporizhzhya.

However, there are two noticeable leaders, expected to be the most attractive for strategic investors - namely Centrenergo and Odessa Port Plant.


Centrenergo is Ukraine’s 2nd largest thermal power generator currently 80% owned by the state. Centrenergo structure comprises three thermal power plants – Vuglegirska TPP (Donetsk region, close to Eastern Ukraine’s anti-terrorist operations (ATO) zone), Zmiivska TPP (Kharkiv region) and Trypilska TPP (Kyiv region) whose total design capacity reaches 7600 MW being equal to ca. 14 % of the total capacity of the Ukrainian power plants.

Centrenergo’s headcount is approx. 8,000 employees. According to the Ukrainian stock exchange data as of 22 February 2016, capitalization of Centrenergo amounted to approx. UAH 1,66 bn. The main activities of Centrenergo are electric power production, thermal energy production, transportation of thermal energy via the main and local (distributing) thermal networks and electric power supply as per unregulated tariff.

This potentially interesting privatization target is nevertheless still plagued by several risks, including those related to physical security (Vuglegirska TPP), huge upgrade capital expenditures needs and lack of ultimate clarity with tariff trends in Ukraine’s still under-reformed energy market, all of which would require an extremely solid and proactive strategic investor to become fully engaged both at the tender and post-privatization phases with Ukraine’s competent authorities for a successful commercial outcome.

Odessa Port Plant

Odessa Portside Plant (OPP) is Ukraine’s major chemical company producing 17% of ammonia nitrate and 19% of urea in the country, as well as operating the country’s exclusive marine chemicals transshipment terminal.

OPP production facilities consist of two ammonia production units with a design capacity of 450 000 MT/year each, two urea production units with a design capacity of 330 000 MT/year each, an ammonia transshipment terminal with a capacity of 4 300 000 MT/year having storage facilities for 120 000 MT, urea transshipment terminal with a capacity of 5 000 000 MT/year having storage facilities for 80 000 MT and other production, repair units. According to the public information, the starting price of the Odessa Port Plant is expected by the government to be at least USD 500 million.

While this is not the first attempt to privatize OPP (the previous ones having failed largely for political reasons), the current privatization auction is sought to be more transparent and commercially-driven, as Ukraine remains in the dire need of foreign capital and subject to the IMF and the EU close scrutiny in the privatization process.

Way Forward – Key Expectations

Assuming Ukraine’s government and parliament consolidated position on privatization plans for 2016, key expectations from the large scale privatization would be achieved, and privatization would be successful, if the following conditions are met:

  • the tenders are transparent, open to foreign investors with minimal prequalification criteria for potential bidders which would minimize possibilities for manipulations in the course of privatization process;
  • professional financial advisors will be actively involved by the SPF in the privatization procedure, so that the respective amendments are not merely declaratory;
  • the tender committees are formed independently, and no direct or indirect interference will occur;
  • privatization should not be motivated solely by rapid cash inflow to the state budget, and in case any preparatory actions are required to increase the starting price of the privatization target such measures shall be taken.