Cancellation of «Odesa sea port Plant» Privatization Tender: Implications Analysis
22.10.2009 16:26

Results of privatization competition on sale of 99,567 % of state shareholding in the public corporation «Odesa sea port Plant» became the talk of the town amidst Ukrainian experts and general public.

Legal aspect of the problem was covered minutely in the document “Information bulletin on «Odesa sea port Plant» (based on the statutory act «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» which regulates open price contests, namely auctions).  

   It is necessary to note, that the opinion of economic experts seriously differs from that of government officials and representatives of the State Property Fund. According to latter, results of the OPP privatization were cancelled due to allegedly low price offered by winner of the contest – limited liability company “Nortima”.

      From our point of view it is difficult to call such justification reasonable, as well as treat it seriously at all. Most likely, the Prime-Minister of Ukraine Y.Timoshenko and acting Chairman of the SPF D.Parfenenko try to influence public opinion by putting forward a catchy but false point in order to create favorable (for them) opinion about the past privatization of public corporation «Odesa sea port Plant». The price assessment of any object should be based not on personal subjective judgments (even if they are made by representatives of executive authority) but on professional analytical research. Not claiming to be absolutely objective, we shall try to analyze the price paid by winner of privatization contest – “Nortima” – for the OPP.

We shall remind, that it made 5 billion hryvnas or 624, 22 million dollars (at National Bank official rate that day).

Firstly, we shall assess the OPP production market prospects, namely those of mineral fertilizers ammonia and a carbamide. In Ukraine nitrogen fertilizers are produced by six enterprises: public corporation “Stirol Concern” Gorlovka; public corporation «Odesa sea port Plant» , public corporation “AZOT” Cherkassy, “Severodonetskiy AZOT”, public corporation “RovnoAzot” and public corporation “DneproAzot”. 

Historically, the given sector of economy was generally export-oriented. All Ukrainian producers are involved in so-called “game of exporters”, Ukraine is able to control only supply of the given commodity group. In fact, it completely depends on fluctuation of the prices on foreign markets.

      Such competent structures as the Food and Agricultural Organization of the United Nations (FAO) and the International Fertilizer (Industry) Association (IFA) in their analytical reports claim that after an all-time big corn crop in 2008/2009 marketing year (2,225 million metric tons) one should expect a 1,5-2% decrease in grain production  in 2009/2010 marketing year (compared to the last year record level).

With the world economic recession in view, even if grain consumption will grow in 2009/10 and 2010/11 marketing years, the growth will be insignificant, and grain production volumes will manage to satisfy world demand. It guarantees preservation of grain stores. Full restoration of the world agricultural market is expected not earlier than in 2012.

  Deep economic recession in most countries of the world may affect consumption of fertilizers as follows: decrease in world demand for grain and meat, inaccessibility of credits for producers of fertilizers and of agricultural products, large stocks of fertilizers purchased in previous years do not create any preconditions for increase in demand and the price for carbamide and ammonia. For example, the Head of Investment and Banking Department in the Concorde Capital investment company Vitaly Strukov agrees with the abovementioned. According to him in the beginning of the last year world prices for mineral fertilizers reached maximum, and assessment multipliers for chemical concerns were the highest in last decade. However, the situation is completely different now.

« Today the prices for mineral fertilizers have dropped, and multipliers have decreased more than 40%», - said Mr. Strukov.

http://economics.unian.net/rus/detail/17241

Other leading share market analysts in Ukraine have similar opinion. As said Peter Keller, senior analyst of investment company “Dragon Capital Ukraine”, «we expect no essential rise in prices on fertilizers of nitrogen group next year. Because during the world crisis consumer activity decreases. Current prices for nitrogen fertilizers have virtually dropped to the level of 2007. These are adequate market prices for the period of crisis. I would even call them “optimistic”. They may grow slightly in 2010, but the growth won’t be serious, as there are no grounds for it». Tamara Levchenko, analyst of investment company “Dragon Capital” generally holds with him:

«In 2010 we expect growth of the mid-annual prices for fertilizers of nitrogen group within the limits of 10% considering the fact that oil prices will not grow substantially and the basic commodity markets are expected to show just moderate growth after they have virtually dropped to zero». So, one can tell that the myth about imaginary "well-being" and a priori «happy future» of Ukranian chemical industry is dispelled once and for all.

On the one hand, decreased demand for mineral fertilizers (ammonia is the basic component for their production) in the developed countries and build-up of an export potential in rich with resources developing countries, has brought about cut-throat competition and significant redistribution of power in the world market.

http://eizvestia.com/markets/full/4183234

On the other hand, unreasonably high natural gas prices for Ukraine, total rise in cost of services provided by natural monopolies, prolonged political crisis in the country and so forth have weakened competitiveness of Ukrainian producers. It facilitated drop in production and its stagnation. Thus, it is safe to say, that investment in production of fertilizers - even in countries with low prices for raw materials or those with accessible financial resources – is expensive and risky, considering the cyclical nature of market. Anyway, Ukraine belongs neither to first, nor to second state categories.

      Concerning the cost of gas which constitutes 80-90 % of the cost price of ammonia and carbamide production, attention should be paid to the following: according to experts, gas price for Ukraine, calculated under the formula of the January contract with "Gazprom", will make about $292 per thousand cubic meters in the first three months of the next year. It will be $308 in the second quarter, $304 - in the third and $306 - in the fourth (we shall notice, that the given calculations are true only provided that cost of oil in following year will not exceed $70 per barrel. Otherwise Ukraine will have to pay for gas even more). 

If we add to the gas cost on Ukrainian-Russian border its delivery cost in Ukrainian territory (about 15 dollars), “Naftogaz Ukraini” earnings (5-10 dollars) and VAT (20%) cost of the most important raw material for the Ukrainian chemical enterprises will grow to $379 per thousand cubic meters in the first quarter of 2010. Moreover, it is expected to grow even higher (400 dollars) in 2-4 quarters.

   Thus, in following year natural gas for the enterprises of Ukrainian chemical industry may grow twice more expensive (55%). Presently, gas price for the OPP is not higher than $243 per thousand cubic meters, because in August the Government established a reduced price for chemical enterprises - 1584,4 hryvnas per thousand cubic meters. A present reduced price is actually granted by “Naftogaz Ukraini” from its own funds. To preserve the abovementioned reduced price in future will be difficult, because it is not stipulated by draft budget for 2010. There is no point in further dilating on disastrous financial situation of “Naftogaz Unraini” – this topic has been sufficiently covered by foreign mass-media. So, nowadays Ukraine is bound to pay for gas more than most countries of the European Union, and the difference in price will increase even more in the following year.

From our point of view, it seriously reduces appeal of the Ukrainian chemical assets (including the OPP), for owners of which 2010 is unlikely to become a year of successful sale.

Thus, it is difficult to understand: what economic reasoning do Y.Timoshenko and D.Parfenenko have to claim that the price for «Odesa sea port Plant» should be higher than that offered by winner of privatization competition? It doesn’t correspond with real market situation and prospects of Ukrainian ammonia and carbamide producers. Judging soberly about ammonia and carbamide market prospects and taking into consideration the opinion of investment analysts, one may conclude that 2010 is not the best period to sell plants which produce fertilizers, namely the «Odesa sea port Plant» . The Cabinet of Ministers and State Property Fund are looking forward to “try again” to sell OPP exactly the following year.

But if the government tries to repeatedly sell OPP it will probably gain less than 5 billion hryvnas, because of the jump of gas prices and increasingly detrimental work of chemical enterprises. “If SPF nevertheless tries to sell the plant in 2010, it will probably gain not more than 5 billion hryvnas. It is highly possible, that they will be bound to sell it for price even less than that. So the present price may be considered good”, - said analyst of the investment company “Dragon Capital” Tamara Levchenko. She supposes that OPP assets cost no more than $250-300 million.

http://eizvestia.com/markets/full/4183422

“The price offered for the OPP (5 billion hryvnas) includes, according to our estimations, assets control premium and is close to maximum possible price for the enterprise in present conditions”, - said analyst of the investment group “TASK” Vadim Yemets.

http://minprom.ua/news/26822.html

Tamara Levchenko, analyst of investment company “Dragon Capital” believes that limited liability company “Nortima”, the winner of privatization competition on sale of public corporation «Odesa sea port Plant», has strong legal position. Considering this fact, it is highly possible that judicial bodies will satisfy the announced claims of “Nortima” to force the SPF to make a contract with the latter on sale of 99,567% of state shareholding in the OPP: «I think, privatization of the OPP is unlikely to take place the following year, because there was too much politics in the sale and the SPF decision will be long examined by courts. Most likely, the claimant - «Nortima» - has all chances to defend the object».

Let’s also note the following important fact: from our point of view, the state form of management in the OPP slows down the development of many business-processed in this enterprise. This affects its competitiveness and may lead to further decrease of investment appeal of the company in the nearest future. The OPP is yet to decide what to do: sell ammonia and carbamide at the unprofitable price or involve investments, modernize production and organize new chemical products output. That’s why it is extremely important to attract effective proprietor-investor, capable of supplying natural gas at economically sound prices. Sale of the OPP to powerful commercial structure will enable it to work profitably. It is difficult to understand the reason why the Cabinet of Ministers has refused to recognize results of the competition on privatization of OPP.

One should also underline the negative effects for Ukrainian investment climate in consequence of cancellation of the sale results. The notion “investment climate” defines how favorable the situation is in a certain country concerning potential investments. The assessment of an investment climate is based on analysis of the factors defining an investment climate. As a rule one uses output parameters of investment climate in a country (capital inflow and outflow, a rate of inflation and interest rates, a share of savings in gross national product) and also input parameters defining the meaning of output ones which characterize county’s potential to develop investments and risk of their realization. Among these are:      

- A level of development and availability of objects of infrastructure;

- Political stability and predictability, probability of occurrence of force-majeure circumstances;

- Macroeconomic stability: a state of the budget, the balance of payments, state debt including the foreign debt;

- Quality of government, the policy of central and local authorities;

- The legislation, its completeness and quality as concerns the way of regulation of economic life;

- Quality of tax system and a level of tax burden;

- Quality of bank system and other financial institutions; availability of crediting;

- A level of law observance;

- Protection of the property rights;

As concerns the infrastructure in Ukraine, it is generally seen as an explicit weakness. Absence of a modern infrastructure considerably increases the size of necessary initial expenses. Political instability and unpredictability has been one of the weakest spots of the Ukrainian investment climate in recent years. Unreliability of bank system, especially after crisis of 2008-2009, which has not finished yet create serious obstacles for investments. Tax system is admitted to be inadequate, first of all as an instrument of tax collection and what concerns protection of the rights of tax bearers. However, as situation with the OPP privatization shows, investment climate in Ukraine is also influenced by weakness of the Ukrainian state, inefficiency of its efforts to protect property rights, and (in case of sale of the OPP state shareholding) infringement of the rights of investors.

 The legal nihilism shown by the executive authority during privatization of the OPP undermines investment appeal of Ukraine, which is already very low.

Since the middle of 2008, net-outflow of foreign investments has been observed in Ukraine.

Actions of the Cabinet of Ministers and of the SPF, expressed in groundless cancellation of results of privatization competition on sale of 99,567 % of state shareholding in the OPP, make for its further increase. One may put a rhetorical question: how much will it cost to ‘repair” the image of Ukraine after such actions on the part of executive authority?

To sum up, we would like to underline that by the Government has not returned tender guarantee to two out of three participants of competition on privatization of the OPP – “Nortima” and “Frunze-Flora” (400 million hryvnas are to be paid to each).

      The Ukrainian government officials and economic analysts state that actions of the government against participants of competition are unprecedented. «As an official I cannot explain such behaviour. As a citizen I consider, that the present government copies in the state management the experience taken from the times of primary accumulation of capital by non-return of debts and so-called “bunko”. Proceedings on this may drag on for years, while all the money will be spent: partially – on financing the election campaign”, - said assistant Secretary of the National Security and Defense Council Dmitry Vydrin.

In turn, the president of the Center for economic development Alexander Paskhaver regards the present situation as contempt of law on the part of authority: «This case has shown again that profitability is more important than the law in our country».

    The partner of the legal company «Master and partners» Sergey Vlasenko considers that in such situation participants of competition have a strong legal position. «If the non-return will prove to be illegitimate, the companies will be able to defend in court the right to indemnification of direct and indirect losses brought about by actions of authority», - he said.

    It is clear, that abovementioned does not add prestige to the government of Ukraine, as well as it reduces investment appeal of the «Odesa sea port Plant».

For further information please contact:

Vyacheslav Butko

Economic programmes director

tel.? +38044 490-04-12

 

Olga Zbitnyeva

Assistant

tel.? +380503873242