October 12, 2009

Odessa Chemical Plant's Privatization: To Be or Not To Be?

Ukraine's State Property Fund (henceforth, SPFU) fails to sell the Odessa Chemical Plant that is a monopolist in Ukraine's chemical industry. Moreover, Odessa Chemical Plant is the largest producer of ammonium nitrate in Eastern Europe.

Here are the events behind the failed sale. First, the privatization was mission impossible from the start because it was outlawed by Ukraine's President Viktor Yushchenko. Presidential Decree #200:2007 prohibited a privatization of the Odessa Chemical Plant because it held strategically important position in Ukraine's market for chemical products. Nonetheless, prime-minister Tymoshenko and SPFU persuaded bidders and public that it could overrule the presidential ban on privatization. Then the ban should be overruled before the start of auction, right?

Anyways, several bidders decided to participate in the auction and paid upfront 400 million hryvnia ($50 mln) in auction fees. One of the bidders was GAZPROM-owned Azot-Service Company. The auction was broadcasted on several national TV channels. SPFU offered a starting bid of 4 billion hryvnia while all experts including SPFU agreed that the real market value of the Odessa Chemical Plant was at least 8 billion hryvnia ($1 bil). Then Ukraine's Nortima Company that is a part of a Dnepropetrovsk-based corporation Privat offered the winning bid of 5 billion hryvnia. Privat's CEO Ihor Kolomyisky said that he was ready to offer up to $1 billion. Little did he know that SPFU would refuse to recognize the legitimacy of the auction? SPFU's official statement is that the winning bid was much lower than the real market value of the auctioned item. So the deal is off.

It's hard to understand the true nature of all commotion around the Odessa Chemical Plant. Prime-minister Tymoshenko who makes a rule of law as a cornerstone concept of her presidential campaign does not really show a lot of respect for the rule of law. It's also not clear why president Yushchenko refuses to auction off the Odessa Chemical Plant that he was very eager to sell three years ago. Perhaps, the failed privatization best illustrates only the Tullock rectangle.

From UkraineWatch

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