Analysis of «Odesa sea port Plant» privatization process
22.10.2009 16:21
«Odesa sea port Plant» (OPP) is a large Ukrainian manufacturer of nitrogen fertilizers which enjoys monopolistic position on the market of ammonia transshipment services. About 90% of its production is produced for export. The OPP made net profit of 787 million hryvnas in 2008, whereas its losses for the first 6 months of 2009 were 38, 26 million hryvnas.
12/3/2008 the Cabinet of Ministers issued an order ¹ 1517-r «About the approval of lists of economic societies and holding companies, state shareholdings (shares) subject to sale, state enterprises, holding companies and open corporations subject to preparation for sale in 2009» which has defined that state shareholding of the public corporation «Odesa sea port Plant» was to be sold in 2009.
15/7/2009 the announcement by State Property Fund of Ukraine (SPF) on decision to carry out competition on privatization of 99,567% of OPP state shareholding was published.
The starting price of the holding of shares has been defined at the level of 4 billion hryvnas (524,171 million dollars at National Bank official rate that day). The potential buyer was obliged to keep existing kinds of OPP economic activities, contribute 35% of net profit in 2009 to the state budget, and modernize some of the aggregates in main factory departments in 2010-2014. The competition was to be held in 75 days after its announcement, that is - 29/9/2009.
From our point of view, the OPP privatization competition was accompanied by outstanding (even for
So, 17/9/2009 the President of Ukraine V.Yushchenko has signed a Decree ¹747/2009 «About the suspension of order of the Cabinet of Ministers ¹1517-r dated 3/12/2008», regarding the determination of OPP state shareholding subject to sale in 2009: "To suspend the order of the Cabinet of Ministers ¹1517-r dated 3/12/2008 «About the approval of lists of economic societies and holding companies, state shareholdings (shares) subject to sale, state enterprises, holding companies and open corporations subject to preparation for sale in 2009» regarding the determination of OPP state shareholding subject to sale in 2009», - was said in the Decree of the President of Ukraine.
In V.Yushchenko's opinion, the decision on privatization of state shareholding of the OPP - the enterprise of strategic value for state economy and security, in the absence of state privatization program adequate to the modern level of development of social relations, is not equitable to interests of national security in sphere of privatization and makes maintenance of comprehensive economic security of Ukraine impossible. At the same time, the President has directed an appeal to the Constitutional Court of Ukraine about an assessment of compliance with the Constitution of Ukraine of the abovementioned order ¹ 1517-r of the Cabinet of Ministers.
However, representatives of the executive authority of Ukraine had different point of view – while commenting on the Decree of President Yushchenko, Prime-Minister Yulia Timoshenko declared that privatization of the «Odesa sea port Plant» will be held on the 29th of September 2009. She said: “Privatization will take place in terms defined by the State property Fund of Ukraine. Nothing will prevent it, because all the procedure is established not on the basis of governmental decisions, but according to the State Property Fund resolutions, which one cannot put a veto on, abolish, stop or suspend”. It should be noted that Ukrainian legislation is characterized by “blurriness” of wording and allows various interpretation of similar norms. Indeed, position of the Prime-Minister looks absolutely flawless from the legal point of view (at least, at the moment of its announcement), as according to the Constitution of Ukraine the President has a right to suspend orders of the Cabinet of Ministers in order to ascertain their conformity with constitutional norms (it is one of the functions of the Constitutional Court of Ukraine).
At the same time, it is necessary to note, that the head of the Cabinet of Ministers may have acted on the basis of Ministry of Justice’s elucidations, according to which the Decree of the President ¹747/2009 may not stop the process of OPP privatization launched by the State Property Fund, because in accordance with Article 7 of the Law of Ukraine “About privatization of the state property” it is the State Property Fund that carries out state policy in a sphere of privatization. Its departments constitute an integrated system of national privatization bodies, responsible for independent realization of ownership powers with regard to the state property in the process of privatization.
The conclusion of the Ministry of Justice, published on the 18th of September 2009 emphasized that abovementioned law does not stipulate the dependence on whether the governmental decision on adoption of the list on objects subject to privatization has been passed or not. That law does not also stipulate dependence on the ability of SPF to carry out its legal powers.
21/9/2009 was the last day when applications to participate in privatization biddings on 99,567% of a state shareholding in the public corporation «Odesa sea port Plant» were to be submitted. Three companies applied to take part in the biddings in the given period: Limited liability company “Azot-Service” (Russia), Limited liability company “Frunze-Flora” (Ukraine) and Limited liability company “Nortima” (Ukraine).
All three companies have transferred to the SPF’s account a tender guarantee (10% of the starting price of a state shareholding in the OPP).
However, the very next day the situation changed drastically. Thus, 22/9/2009 the District administrative court of Kiev suspended competition on sale of the OPP by an action of mineral fertilizers manufacturer public corporation "Dniproazot". This enterprise gave reason for having brought an action: a number of infringements of the legislation of Ukraine took place during preparation of the OPP privatization, namely, while carrying out an ecological examination, publication of the enterprise reporting and studying the demand for it.
Besides, the application for participation in competition was made by the company "Azot-Service”, more than 30% in the authorized capital of which belongs to the foreign state, which also contradicts to the legislation (paragraph 3 of article 7 of the Law of Ukraine « About privatization of the state property»). «Dniproazot» asked the court to forbid participation of "Azot-Service" in competition. The court has satisfied the claim of «Dniproazot».
Till the 24th of September 2009 the State Property Fund of Ukraine had been denying the fact that the abovementioned injunction of District administrative court of Kiev dated 22/9/2009 had ever been received by them.
However, in the evening of that day press-service of the SPF confirmed the fact of having received the court injunction, which was forbiding the competition on sale of 99,567% of state shareholding in OPP.
«The SPF lawyers are now working with this injunction», - the State Property Fund press-service informed. Later, on the 25th of September 2009 the SPF inquired Ministry of Justice of Ukraine to provide interpretation about how the court injunction about the prohibition of OPP privatization should be dealt with.
Perhaps, there is no use in citing a number of controversial statements made by the President of Ukraine and the prime-minister: it is clear, that their opinions on the OPP privatization were opposite. We shall continue with strict statement of facts. On the 29th of September 2009 just before competition started the acting chairman of the SPF D.Parfenenko, while answering to the questions of participants, stated that there were no legislative obstacles for carrying out competition on sale of 99,567% of state shareholdings in the «Odesa sea port Plant».
Apparently, he had grounds for such a statement. As it came up to light later, on the eve of competition, in the evening of 28th of September 2009, the SPF received a formal letter from the Constitutional Court of Ukraine, in which it was said that the Constitutional Court of Ukraine had refused to start legal procedure concerning the action brought by the President about the compliance with the Constitution of Ukraine of the OPP privatization process. We shall note that the Constitutional Court of Ukraine used to refuse to start legal procedure on similar questions earlier. Its representatives explained that such questions were beyond the jurisdiction of the Constitutional Court of Ukraine. It should be noted that in accordance with paragraph 15 of article 106 of the Constitution of Ukraine the President may suspend bills of the Cabinet of Ministers for reason of their supposed contradiction to the constitutional norms. He should simultaneously address the Constitutional Court of Ukraine in order to find out whether the abovementioned bills conform to the Constitution of Ukraine. Indeed, the Presidential decree had not been annulled the day competition took place. However, taking into consideration that the Constitutional Court of Ukraine refused to start legal procedure, it may be concluded that the Presidential decree would not have made a sufficient reason for the suspension of competition anyway.
As regards the injunction of the District administrative court of Kiev dated 9/22/2009 situation was the following: while answering questions of the competitors about whether that document interfered with carrying out the competition, chairman of the contest commission E.Belotserkovets stated that the abovementioned legal decision did not interfere with carrying out privatization competition on sale of state shareholding in the OPP.E.Belotserkovets justified his position as follows - firstly, there were interpretations of the Ministry of Justice of Ukraine affirming that there were no obstacles for carrying out privatization competition, and secondly, by the start of competition itself, the state executive service (bailiff service) has not started legal procedure on the injunction of District administrative court of Kiev of 22/9/2009. Hence, the given judicial document did not interfere with carrying out competition on privatization of the «Odesa sea port Plant».
Moreover, the acting chairman of SPF D.Parfenenko declared earlier that SPF had received interpretation of the Ministry of Justice in accordance with which there were no legislative obstacles for the competition connected with abovementioned decision.
Thus, participants of competition have received from the authorized body - SPF - all necessary assurances in absolute absence of any legal obstacles for carrying out privatization competition on sale of 99,567% of state shareholding in the OPP.
On the 29th of September the competition on sale of the «Odesa sea port Plant» took place. There were 19 auction steps taken in a course of auction (50 million hryvnas each). As a result Limited liability company “Nortima” became a winner, having offered 5 billion hryvnas for the plant (we shall remind that the starting price was 4 billion hryvnas; the price growth made 25%). However, as the bidding verged towards end inexplicable events took place.
Instead of declaring the winner, the members of the competition commission, in defiance of the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» withdrew to the room for consultations.
Let’s emphasize that from the very beginning of the auction and up to the moment of final declaration of winner by the host, all actions of the commission, participants and the host complied with requirements laid down in «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations». Even when the host declared that the plant was “Sold” to the participant ¹ 2 (Limited liability company “Nortima”) for 5 billion hryvnas everything went according to the legal requirements. After that, the chairman of the commission declared the end of the auction and suggested having a break in order to “prepare the minutes of this competition commission and have the winner sign it” (competition commission chairman Mr Belotserkovets’ quotation).
Thus, there was no even say that the competition commission was to leave to determine the winner, as the matter was exclusively to prepare the minutes, nothing more, which would correspond to the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» (it is fixed there, that the same day as competition takes place all member of the competition commission and the winner should sign the minutes). Moreover, the chairman of the commission had identified the legal status of a competitor, who had offered the highest price – “Winner”, - which also was in accordance with the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations».
The “Regulations” directly specify that the winner is to be declared by host, not by the commission, and this fact is just to be fixed in the minutes. Thus, from the legal point of view, the competition winner – Limited liability company “Nortima” was actually determined. Here are some citations from the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations»:
- “if after the host has declared the last price three times the participants offer no higher price, the host announces “Sold” with a simultaneous stroke of hammer, names the number of participant who offered the highest price and declares him a winner” (Art. 8.20).
- «During competition the secretary of the commission keeps the minutes, in which such data are specified:
- Initial cost of a shareholding;
- Offers of participants of competition;
- Result of competition.
The minutes must be signed by all members of a commission and the buyer the same day as the competition is held and then the minutes must be approved by the privatization body” (Art. 8.22).
«Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» do not stipulate the right or duty of the competition commission, while carrying out auction with an open offer of price, to withdraw to the room for consultations in order to choose a winner. The winner, according to paragraph 20 of the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» is declared by the host, and the secretary of commission has only to fix the given fact in the minutes.
Thus, actions of the competition commission did not comply with the statutory acts, since the moment when members of the commission declared after a break, that Limited liability company “Nortima” shall not be recognized as a winner, which contradicted the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations» (this very document is to guide officials in a course of carrying out privatization competition), as the commission abused its power.
There are reasons to claim that the winner of bidding for 99,567 % of a state shareholding in the OPP was clearly declared. The Limited liability company “Nortima” has become one. So, the competition on sale of the «Odesa sea port Plant» resulted in the victory of “Nortima” which bought it for 5 billion hryvnas. However, we shall remind that half an hour later the privatization commission of SPF refused to recognize the results of competition.
“One could see the conspiracy in the actions of the participants, the final price turned out to be considerably lower than real cost of the OPP. That’s why the commission refused to recognize it as legitimate” – said the acting chairman of SPF D. Parfenenko upon conclusion of the competition. This story becomes even more interesting due to the fact that even before the above-cited statement was made by Parfenenko, the site of the Cabinet of Ministers had published a statement by Yuliya Timoshenko, in which she stated that in her opinion “instead of transparent and open competition during the sale of OPP there was a conspiracyamong three participants in order to wreck the competition” (citation from the statement made by Timoshenko).
Unfortunately, as it is a “rule” in Ukraine, neither Timoshenko nor Parfenenko provided no proofs whatsoever for their accusations. As a result, a precedent has been made to cancel the declared legitimate results of privatization competitions.
Limited liability company “Nortima” in turn, has announced intentions to dispute in court the SPF’s claim that competition of OPP sale was illegal. Taking into consideration that judicial bodies while making decisions are to be guided by the «Regulations about the procedure of carrying out competitions on sale of shareholdings of open corporations», “Nortima” has considerably good chances to have its claims as against SPF to be satisfied.
However, numerous comments of the Ukrainian economic experts boil down to the idea that from now on investors will prefer to avoid privatization competitions in
For further information please contact:
Vyacheslav Butko
Economic programmes director
tel.¹ +38044 490-04-12
Olga Zbitnyeva
Assistant
tel.¹ +380503873242
