 Tender Trauma By Yulia PUSHKO |
Like a meteorite blazing across the sky, the nation's effort to privatize its major steel mill hit the atmosphere and burned away, leaving a short fiery spectacle and players in the world steel market with only a lump of coal to show for their interest.
The government's announcement on June 14 that it had sold the country's largest steel producer, Kryvorizhstal, to a consortium controlled by Ukraine's richest men has raised a furor. Foreign bidders had offered much more for the 93 percent stake in Kryvorizhstal, which produces a fifth of the nation's annual steel output. But potential bidders had to meet tender conditions that some say were tailor-made to ensure that the enterprise stayed in Ukrainian hands, whatever the price.
Administration officials called the sale to Ukrainian interests a "patriotic" decision, while opposition lawmakers cried foul, arguing that the nation was shortchanged by the deal. Foreign investors, concerned about discriminatory tender conditions, complained as well.
State Property Fund chief Mykhaylo Chechetov indicated that the complaints left him unmoved.
"If a government changes its decisions in response to some investor, then it isn't a government," he said.
Six firms had submitted bids by June 7 when the competition closed. They included a consortium formed by LNM Steel, the world's second-largest steel maker, and US Steel; Severstal, Russia's third-largest steelmaker, which had joined forces with Europe's largest holding, Luxembourg-based Arcelor; Russia's Euvrasholding; LLC Partner, a Ukrainian company registered in Transcarpathian region and thought to have Croatian investors; Investment and Metallurgical Union and Industrial Group consortium.
Investment and Metallurgical Union is a consortium organized by Viktor Pinchuk and Renat Akhmetov. Pinchuk is a steel and media magnate and President Leonid Kuchma's son-in-law. Akhmetov is reputed to be the country's wealthiest man, and is often referred to as the unofficial ruler of the Donetsk region. Industrial Group consortium is also controlled by Akhmetov.
India's Tata Steel had initially expressed interest in the tender, but failed to make the final bidders' list.
Potential buyers were forced to scramble to submit bids by the deadline set by the government. With just 30 days to prepare, foreign bidders were compelled to find Ukrainian partners to meet some of the conditions. And the government issued new requirements even as bids were being prepared.
The State Property Fund changed the terms of the tender, requiring future investors to maintain social benefits for workers, just three days before the deadline for bids. The action lead foreign investors to complain to the Cabinet of Ministers, which refused to intervene.
Industrial Policy Minister Oleksandr Neustroev called the conditions correct and patriotic.
"We started the privatization not for somebody else, but for the enterprise itself," he said. "Let them call it discrimination."
Briefly, it appeared as though the courts would intervene, examining the tender rules and giving potential buyers more time to prepare their bids. Valentina Semenyuk, head of parliament's privatization commission, filed lawsuits against the SPF in three courts in an effort to stall the sale. No sooner had a judge in Kyiv's Holosiyvskiy District Court issued an injunction and set a hearing date than the Pechersk District Court claimed jurisdiction, cancelled the hearing and ordered that the sale proceed.
On June 14, the SPF's Chechetov announced that IMU had paid $801 million for the stake - the equivalent of $137 per ton of rolled steel produced by the plant, which turns out 7 million tons of long steel per year.
The SPF disclosed that all of the foreign bidders had been excluded from the final round of the tender competition because they did not meet the terms of the purchase. That left only two companies: IMU and Industrial Group consortium, to vie for the stake.
Excluding the foreign bidders meant that the government would collect far less for the plant, which had been valued at $3.8 billion before the sale.
In the week prior to the sale announce-ment, bidders began to go public with the details about their bids. Severstal, along with minor partner Arcelor, said it had offered $1.2 billion for the stake. The bid entered by LNM Group and US Steel was described only as "good enough" by US Steel Chairman Chris Navetta. The companies said later that they had offered $1.5 billion for the stake, plus $1.2 billion in future investments in the company.
Russia's Euvrazholding continued to hold its cards close.
"If we name our price, it will mean that we believe we will be excluded from the privatization process," said President Aleksandr Abramov.
The eventual victor, Investment and Metallurgical Union, waited silently. Winning the tender ensures that Akhmetov's System Capital Management companies would get approximately 70 percent of Kryvorizhstal's output, while Pinchuk's Interpipe would get about 30 percent, industry sources said.
Post-announcement efforts to cancel the decision have thus far been fruitless.
In November 2003, parliament had tried to block any sale of Kryvorizhstal, placing it on a list of strategic government property that was exempt from privatization. President Kuchma vetoed that bill.
Now, opposition forces in parliament sought to pass legislation that would have repealed the tender, but found they lacked the 300 votes they would have needed to overcome a certain presidential veto.
LNM Group and US Steel asked President Leonid Kuchma and Prime Minister Viktor Yanukovich to review the tender results, saying that they were "disappointed that the SPF chose to ignore this opportunity." In a joint statement, they said, "Ukraine has missed a real opportunity by effectively ruling out foreign bidders."
Severstal said it would take the issue to court, calling the conditions "discriminatory - both to non-residents and to Ukrainian citizens."
At a news conference, President Kuchma seemed almost giddy with excitement over the amount of cash the tender had attracted.
"Billions of dollars! When will we ever have such money?" Kuchma said, offering the analysis that "there are arguments 'for' and 'against,' [selling the plant] and I am sure that there are more 'for.'"
SPF head Chechetov indicated that the deal was done and would not be rescinded.
"Those who came to Kryvorizhstal today have come to stay forever," he said. "Documents have been signed, money has been transferred, and the tender is over."
"Let them file lawsuits," he continued. "It is more likely that a meteorite will fall on my head than that a court will annul the results of the tender."
To the opposition, the tender represented all that they feel is wrong with the government.
"The oligarchs are ripping off the state," said our Ukraine faction member Yuriy Kostenko, who added that after this year's presidential elections, Kryvorizhstal could have been sold for $8 billion.
Semeniuk said that she would appeal to European courts to repeal the tender if necessary. Socialist Party leader Oleksandr Moroz said the Kryvorizhstal privatization was like "letting a thief into the house," and promised the tender would be an issue in the presidential election.
Meanwhile, Oleksandr Ryabchenko, director of the International Institute of Privatization and Investments, said that the country's privatization effort would accelerate after parliament's session ends on July 2. He said that the Kryvorizhstal tender was a litmus test to see whether parliament had the clout to stop a major privatization.
After July 2, he said, "the deputies will campaign for office and big business will look to the big privatizations."
In that case, Ukraine could soon be in for meteor showers.
Yulia Pushko is a journalist for Willard News Service, an online publication (www.wns.kiev.ua).
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