Commentary: How Privatization Can Transform Ukraine

Ukraine is in the midst of an ambitious privatization effort that is an important part of its reform and anti-corruption agenda.

Markets free of corruption and government interference are essential to Ukraine’s prosperity and political stability. Governments and businesses from around the world have invested billions of dollars to help make this goal a reality. There is genuine interest in doing business and investing in Ukraine.

Ukraine’s gross domestic product has experienced two consecutive years of expansion following negative growth in 2015, but its economy is far from where it could be. Privatization is the one thing most likely to expand Ukraine’s economy. But it must be done right.

Successful privatizations are centered on transparency, open competition, a fair process and clear valuation. Ukraine got those details right in its March 2018 privatization law. Mandating the involvement of independent advisers, giving investors the choice of international arbitration in disputes, and requiring extensive use of the online Prozorro — or “transparent” in Ukrainian — procurement system are examples.

Ukraine’s progress is encouraging and consistent with successful privatizations in other countries. New Zealand, which turned its economy around and reduced its public debt, organized the sale of assets to a wide variety of private investors, leading to more efficiency, consumer benefits and investment returns. The U.K.‘s privatization in the 1980s elevated company performance, improved prices and services, depoliticized regulatory systems and lowered the government’s role in the economy. It was a critical piece of that country’s 1980s economic revival.

Ukraine’s privatization plan is sound. The challenge now lies with execution and there are growing signs that Ukraine’s privatization effort may be off course. There are concerns that Ukraine is at risk of opening a door to corruption and a return to business as usual.

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The first wave of privatization now underway illustrates what’s concerning about Ukraine — and why foreign investors continue to be wary of the market. The assets being sold, the actors involved and the process being used are so irregular and raise so many concerns that the larger privatization effort can be called into question.

Several assets present problems. A chief executive of the United Mining and Chemical Company has been charged with embezzlement and the government official who appointed him has himself been accused of money laundering. The Zaporizhia Titanium Plant was on an original list of 23 state assets slated for sale but does not appear on the new list of assets and will be sold under a different process. The Odessa Port Plant continues to have issues with past debt. The Zaporizhia Titanium and Magnesium Combine is 49 percent owned by Dmytro Firtash, a billionaire oligarch under house arrest in Vienna at the request of the U.S. government for alleged corrupt practices using U.S. banks.

These examples show that the principles of openness, transparency and fair process are not being honored. Both the European Bank for Reconstruction and Development and the Organization for Economic Cooperation and Development have voiced concerns this year about privatization.

Just as disconcerting, it may not to be coincidence that these issues are converging. Titanium is a lucrative and strategic asset for Ukraine and one which has been at the center of corruption for decades. It is also a sector where Russian influence is strong and where control can manipulate global markets, impacting Western defense and space technologies.

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All of this can derail Ukraine’s “game changing” privatization program and scare off investors. There remain too many questions of undue risk for Western investors to have confidence. And it is Western investment that will demonstrate that the process is truly open and competitive — and that will support Ukraine’s economic growth, political stability and anti-corruption efforts.

Ukraine is on the verge of a historic break from the past when government and oligarchs conspired to control markets and state enterprises. It is poised to enact the type of market restructuring that will fundamentally alter its economy. The problem for Ukraine is not its laws but their troubled execution. Ukraine needs to do more to promote transparency, fairness and openness and remove corrupt actors — and it needs to do so under a rule of law process trusted inside and outside Ukraine.

A successful privatization with outside investment will broadcast to the world that Ukraine is open for business using a true market system. If it is done right, and only if it is done right, privatization will help transform Ukraine’s economy and deliver prosperity for all Ukrainians.

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