In the 1990s, the Ukrainian privatization process proved to be extraordinarily lucrative for many individuals and legal entities acquiring state-owned enterprises via auctions. Today, the Ukrainian government has initiated a new wave of privatization. Even during the war, some very interesting objects can be found for sale at the bidder’s well-researched discretion.
But how does an investor go about buying a state-owned building at auction?
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Browsing through the State Property Fund’s list of investment opportunities, a wide range of properties can be found for sale. One of the more interesting buildings sold on Sept. 18 was Hotel Ukraine, a classic Soviet/Stalinist hotel in the very center of Kyiv, with 365 rooms, a restaurant, a business center, six conference halls and other infrastructural objects – acquired for approximately $65 million.
The future of this investment looks good: after Ukraine wins the war, masses of tourists and businesspeople will inevitably arrive, and Hotel Ukraine will likely join the ranks of other top-notch global hotel chains in Kyiv.
The principal law governing privatization is Law No. 2269-VIII “On Privatization of State and Communal Property”, dated Jan. 18, 2018. There are essentially two types of privatization objects: small and large – each summarized below.
Generally, large privatization objects are those whose assets exceed Hr. 250 million (notably state-owned securities in large-scale construction projects such as shopping malls, pharmaceutical production facilities or energy objects).
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Small privatization objects are typically real estate objectsand small enterprises valued at less than Hr. 250 million (including state-owned complexes, unfinished construction projects, historic objects, and other individual properties).
International advisors will be involved in large privatisation deals, while small privatization opportunities will run exclusively on e-auctions.
Each privatization object has its own tender process with general and specific requirements regarding document submission, terms for winning bids and purchase price payments. To increase the efficiency of the privatization process, the timeframe for preparing objects for sale has been made relatively short. At the same time, the deadline for submission of potential buyers’ applications has been lengthened. As such, potential investors are highly advised to study the specific tender conditions announced for each object they are interested in.
Currently, auctions for many lucrative privatization objects are conducted via the Prozorro.Sale (“Transparent Sale”)platform, run by Ukraine’s Ministry of Economy. Thus, as a first step, potential investors need to review the terms and conditions of auctions announced by the State Property Fund, many of which are now online via Prozorro.Sale.
As the name suggests, this platform is designed to ensure transaction security and transparency (fair market prices, open access, etc.) between the buyer and the seller. Any foreign or local investor can examine the list of available investments, such as real estate and land, state-owned company privatization, non-performing loans, bankruptcy and liquidation targets, licenses, quotas, etc.
The sale of Hotel Ukraine, listed as a large privatization object, was the first to be conducted via the Prozorro.Sale online platform. The starting price was set at Just over Hr. 1 billion (approximately $25 million), but the awardee offered Hr. 2.5 billion (approximately $60 million), almost two and a half times the starting price.
As always, many detractors brought up questions about corruption within the system, arguing that the property was a “steal” for the winner and that the state could have waited out for an even higher bidder to bolster the coffers of its budget. On the other hand, proponents counter-claimed that the funds were urgent at a critical juncture in the protracted war with Russia. Regardless of the dispute, the deal was done.
Notably, four more privatization objects were immediately sold via the online platform to the tune of just over $1 million, including administrative buildings, non-residential buildings, wood processing facilities and product certification facilities in various regions of the country.
These separate auctions call for payment of the winning bidder’s price within 20 days to register the respective ownership rights in the name of the investors. In cases of large-scale objects, like Hotel Ukraine, the investor usually has 30 working days to pay the purchase price, and also needs to fulfil additional conditions, such as (in the hotel’s case) preservation of its activity, payment of salaries in arrears for the preceding six months, maintaining employees for six months after ownership rights have been formalized, and covering the hotel’s current debts.
Everyone had become accustomed to thinking that Ukrainian privatization was a thing of the past – a by-product of the 1990s – but lucrative opportunities are once again available from the State Property Fund to potential investors, this time via transparent auctions on internet platforms.
This is a unique opportunity for savvy investors to invest in Ukrainian companies and real estate objects at a reasonable price while providing desperately needed support of Ukraine's national economy and defense.
Scott Brown is Director/Partner at Frishberg & Partners, an American-owned law firm based in Kyiv since 1991, one of the oldest corporate law practices in Ukraine.
The views expressed are the author’s and not necessarily of Kyiv Post.
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