Ukrainian privatization has been rocked by a new scandal, this time concerning the Kyivmetrobud (subway construction) Joint Stock Company. Six contenders have engaged in a violent clash over this company’s controlling shares. With the State Property Fund (SPF) still keeping their names in secret, it is only known they all are Ukrainian. It is going to be quite a bitter and mostly undercover struggle. In fact, it is already underway.
When the tender had already been announced, Kyiv Mayor Oleksandr Omelchenko wrote to the SPF, requesting it place 25% of the Kyivmetrobud tendered shares at the City Administration’s disposal. SPF Chairman Oleksandr Bondar, who never hides his warm relationship with the Kyiv city fathers, was put into an awkward position. Formally, there is a reason why the controlling shares should be handed over to the city because tenders for this facility were already invited in 2000 and 2001 but found no buyers. Under law, in this case the shares can be taken free of charge. But the Kyiv mayor’s letter came well after the tender had been announced, and in order to meet Mr. Omelchenko’s request, the SPF would have to cancel the tender. Mr. Bondar admitted he would never dare make such a scandalous decision.
Meanwhile, the State Property Fund received one more letter. The Kyiv-based Tekt Investment Company demanded that additional tender participation conditions be lifted as contradicting the principles of competition. The main SPF condition is that the potential buyer must have been in subway construction for at least one year. Tellingly, Tekt itself did not submit a bid. Mr. Bondar said Tekt had already sued the SPF to obtain a court ruling to invalidate the announced tender. The SPF chairman made a very caustic comment on the situation, believing that Tekt only represents somebody else’s interests, “This is new know-how! My congratulations to Tekt. Sooner than not, it is cashing in on this. For it went to court over Zaporizhstal, instead of filing a bid, and now the same story with Kyivmetrobud: a lawsuit instead of a bid. This clearly shows how it makes money. Perhaps the goal is to make the bidders enter into negotiations or something else.”
Tekt General Director Vadym Hryb has categorically denied these accusations, saying that nobody has ever filed a suit: “All we have done thus far is send a letter to the SPF, in which we presented our claims.” Simultaneously, Mr. Hryb did not rule out later bringing suit should there be no SPF reaction to the charges made. The Tekt director announced his company and partners wished to take part in the tender on a 50:50 basis. But the trouble is Tekt is not a stock market operator, so it could not possibly have acquired any, let alone yearly, experience in subway construction. Mr. Hryb refused to disclose his firm’s partner company.
Yet, the Tekt manager made a more scathing comment about the SPF’s likely motives, “That the SPF has been granted the right to set additional bidding conditions sows the seeds of corruption.” Mr. Hryb believes that artificially narrowing the circle of companies authorized to participate in a tender has nothing to do with a market economy. The director pointed out that this circle is all too often reduced to the minimum, which raises suspicions that the SPF acts in the interests of certain financial groups. As an example, he cited the tender for Zaporizhstal state-owned shares, which Mr. Bondar also mentioned. The bidding conditions allowed the participation of only those companies that had delivered at least 700,000 tons of agglomerated ore or at least 400,000 tons of scrap metal to Zaporizhstal over two years. As a result, the tender was won, predictably, by the Zaporizhstal Trading House, while Tekt’s attempt to challenge the legitimacy of this tender through a court action was unsuccessful. As Mr. Hryb thinks, the Kyivmetrobud situation is following a similar scenario because only a very limited number of commercially viable companies have one year’s experience in subway construction.
Asked why a facility, which the state has failed to denationalize for two years has suddenly caused such an outcry, Mr. Hryb gave an evasive answer. In his words, domestic investors have just been flexing their financial muscles during these years and are only now capable of bidding for the shares of such giants as Kyivmetrobud. At the same time, the Tekt chief noted a surprisingly favorable price, “While this company earns over 100 million a year, its asking price is a mere four million. We wouldn’t look twice!” Incidentally, in 2000, when the auction price of this stake was five million hryvnias, there were no takers. SPF chief Bondar explains the nature of this strange phenomenon in simpler terms, “It is not ruled out that companies are settling scores dating to previous periods. As soon as a company submits a bid, others try to put the skids under it.”
Speaking of who stands to gain from the failure of the Kyivmetrobud tender, only two versions look plausible. First, if the tender is blocked by a court action, the whole process could drag on until the end of the year. With a new privatization program to come into force in January, the parliament might well strip the SPF of the right to set rigid restrictions on access, thus allowing such companies as Tekt to take part in privatization. Secondly, should the tender be called off, the Kyiv City Administration could try again to have the subway builders’ shares placed under its control.
Thus those whom the current privatization program leaves out of reach of tenders – primarily stock- market companies and commercial banks incapable of digging the subway but having free capital – also have options. The chain of privatization scandals is also likely to include other strategic facilities to be denationalized. With a grim struggle ahead, the SPF still has enough powers to set such access conditions that “the camel cannot go through the eye of a needle.” It is common knowledge that SPF boss Bondar is trying to make his institution apolitical, but the existing loopholes more and more often arouse lingering suspicions in and get on the nerves of those who have capital.
