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O.V. Ryabchenko

Head, Special Supervisory
Commission

on Privatization

Supreme Council of Ukraine

Privatization of the Ukrainian Power Sector

In the
economy of any country, power industry serves as one of the key sectors
whose efficient performance assures stable functioning of the entire
economic system.  Of particular urgency in this context are the
issues of denationalization of the Ukrainian power sector.

The Ukrainian power sector
is currently going through hard times.  Such phenomena as 
power outages, financial constraints of power companies, lack of working
capital, misappropriation and corruption have become a part of everyday
life.  The power sector finds itself in a serious crisis of non-payments. 
The debt for electric power consumption keeps on growing: as of May
19, 2000, it has reached the level of 9.6 billion grivnas (including
2,894.376 million gr. due to privatized Oblenergos; 640.659 million gr. due to Oblenergos under the control of the local administration; and
6,080.253 million gr. due to state-owned Oblenergos.) The situation is exacerbated by the low level
of cash payments for the consumed power resources.  Thus, in April
of 2000, the average collection of cash payments amounted to merely
20.8% of consumed power.  In addition, the technical condition
of key generation facilities dramatically declined in the previous year.

The government lacks adequate
financial resources needed to take the sector out of the crisis. Therefore,
far-reaching denationalization and privatization of power utilities,
along with further development of market mechanisms and modern management
approaches, are seen as the primary path towards the rehabilitation
of the Ukrainian power complex.

The starting point in
the Ukrainian power sector privatization was defined by the Presidential
Decree, On Ukrainian Power Complex Restructuring, dated April 4, 1995,
on the basis of which 33 public utilities were established (27 power
supply companies and 6 generating companies), and by the November 15,
1995 Resolution by the Cabinet of Ministers of Ukraine No. 911, On
Priority Measures in the Implementation of the Program of Action by
the Cabinet of Ministers of Ukraine for 1995 1996, which provided
for the beginning of partial privatization of power companies in 1996
(with the government retaining the controlling interest in the privatized
companies).

The process of power sector
companies privatization can be conditionally broken down into three
phases.  The first and most active phase lasted through April 1998
and was characterized by a relatively high interest toward the stock
offered for sale.  During this period, the State Property Fund
sold a total of 22 share packages to portfolio and strategic investors
at stock exchanges and PFTS, which amounted to 99.1 million gr.  The mean factor
by which the selling price exceeded the offering price was 1.54.

In the course of the privileged
privatization which took place during the first phase, the employees
of power utilities acquired from 10 to 34% of their shares in exchange
for privatization certificates and for cash.  These privileged
sales yielded 88.8 million gr.

In 1997, 18 commercial
tenders for power utilities share packages were announced.  Only
9 tenders were actually held, resulting in the execution of share purchase
and sale agreements worth 191,941 thousand gr.  In addition, the
new owners took upon themselves an obligation to invest by 2003 a total
amount of 324.8 million gr. and 13.3 million dollars.  The selling
price exceeded the offering price by a factor of 1.63.

The total amount of cash
proceeds from the privatization of power companies into the off-budget
privatization fund was 379.8 million gr., or 36.9% of the overall inflow
of privatization revenues into the off-budget State Privatization Fund
in the 1992 1999 period.

By combining the shares
purchased through tenders and in the secondary market, private owners
have obtained a controlling interest in seven power distribution companies
and a blocking interest in two additional distribution companies.

In their preparations
for the sale of the corresponding share packages in O<span class="Normal--Char" style=" font-style: italic;
">blenergos, governmental authorities were counting, first and
foremost, on the participation in the process of established industrial
investors, with power industry operations background and adequate financial
resources for resolving the existing problems.

The actual experience
has shown, however, that within a short period of time, the share packages
which had been sold turned up in the hands of a number of affiliated
offshore companies, so that instead of interacting with industrial investors,
the government had to develop the tactics of dealing with financial
investors.

Correspondingly, the approaches
to interacting with investors had to be somewhat modified.  The
majority of issues to be addressed were related to the mechanisms of
payments on the Power Market, to payment procedures, and to rate development,
whereas the issues of technological upgrading, rehabilitation of power
facilities, increased power supply self-sufficiency of Ukraine and reduced
dependence on imports of inputs and processed materials were forced
in the background.

The main cause for this
state of affairs was the unwillingness on the part of the government
to sell its controlling interest in Oblenergos through tenders.  The new owners of the stock
purchased through tenders were not responsible for the performance of
the enterprises, even in situations when they managed to secure the
controlling interest via the secondary market.  In this setting,
the government did not perceive the privatization process to be either
transparent or sufficiently effective.

The second phase of power
companies privatization was commenced in June of 1998.  The guidelines
related to the privatization of power facilities in 1998 were established
by the April 18, 1998 Resolution by the Cabinet of Ministers of Ukraine
No. 508, On the Approval of the Plan of Financial Revitalization of
the Ukrainian Power Sector, which specifically provided for the completion
in 1998 of the privileged sales process and for the execution by January
1, 1999 of tender sales of shares in 15 Oblenergos.

As a result, the State
Property Fund made plans for the sale of 16 share packages in power
distribution companies, with the overall par value of 39.9 million gr. 
However, the Cabinet of Ministers of Ukraine (CMU), in view of the financial
crisis and the corresponding decline in the market value of the shares
offered for sale, suspended the sale (Par. 7 of the Additional Instructions
of the Extract from the Minutes No. 23, June 18, 1998 Session of the
Cabinet of Ministers of Ukraine).  The state-owned share in the
authorized capital of power distribution companies was raised from 25%
to 50% + 1 share.

The practice of transferring
state-owned shares to local administrative bodies was widespread at
the time.  Unfortunately, off-tender transfers to commercial entities,
as well as the dispersion of management rights between regional and
sectoral authorities, did not facilitate the attraction of strategic
investors to the power sector, nor did it help in securing revenues
for the public budget.

The second phase was characterized
by a discrepancy in the positions of the Power Industry Ministry and
of the State Property Fund as to the direction of the revival of the
power companies privatization process, and also by the uncertainty on
the part of the Power Industry Ministry concerning the mechanism of
sector denationalization.

The commencement of the
third phase of the Ukrainian power sector privatization was associated
with the passing of the Presidential Decree, On Certain Issues Related
to the Privatization of Power Complex Facilities No. 944 dated August
2, 1999, which stated, among other things, that tenders primarily involving
the sale of controlling interest in power companies will require the
participation of hired advisers, and that share packages could be sold
only to entities which possess prior experience of managing power complex
facilities and of operating in the power market.

In the execution of this
Presidential Decree, the State Property Fund, jointly with the Antimonopoly
Committee, State Securities and Exchange Commission, and Power Industry 
Ministry, prepared Bidding Guidelines for the Acquisition of Shares
in Power Companies.

In December 1999, the
State Property Fund announced the bidding process for the selection
o