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Ukrainian Southern Group Set to Take Control of Kiev’s Energy

Ukrainian southern group set to take control of capital city’s energy

Zerkalo Nedeli, Kiev
21 Aug 04

The owners of the Zaporizhzhya steelworks are set to take over Kiev’s
energy supply, a serious weekly has said. By agreeing to the creation
of an energy holding, Kiev mayor’s office is giving up control of the
energy supply, according to the weekly. The following is the text of
the article by Ihor Maskalevych entitled “Kyyivenerhokholding: ‘We’
the undersigned, or special features of the sewerage discharge of
current” published in the Ukrainian newspaper Zerkalo Nedeli on 21
August; subheadings are as published:

At the beginning of August a modest decision by the Kiev Council was
published. In general such documents are issued in their hundreds, but
this one will hardly get lost against their background. Because it is
a question of a complete U-turn in the city’s energy. On 24 June the
Kiev Council virtually unanimously decided to set up the
Kyyivenerhokholding Kiev Energy Holding company. The share capital of
the newly created company, according to the resolution, will receive
60 per cent plus one share in Kyyivhaz Kiev Gas , 12.73 per cent of
the stock of Kyyivenerho Kiev Energy and 67 per cent of the stock of
Kyyivodokanal Kiev Water Supply that belong to the Kiev territorial
community. The decision was supported by Mayor Oleksandr Omelchenko,
and most deputies automatically voted “as they should”. There were
only four votes against. Thus, quietly and unnoticed, the city turned
its energy policy around 180 degrees.

Pulling the blanket over itself is a fairly traditional principle of
the mayor’s office in relation to state property. The city has taken
control of everything it can and much of what, in principle, it should
not. This is because the fragility of the majority of Ukrainian state
structures has led officials in the mayor’s office to a not unfounded
conclusion that it would nevertheless not be worse than how it is done
by the SPF State Property Fund .

Among the city’s enormous number of assets, the most valuable is
undoubtedly the Kyyivenerho city energy company. There is simply
nothing similar in Ukraine. Two basic city thermal power stations
fully supply the city with electricity. In effect Kiev operates in a
system close to autonomy. And even during the hardest energy crises,
it did not experience scheduled cuts in the early 1990s and
interruptions in hot water supply. The annual volume of Kyyivenerho
sales today has reached 360m dollars.

In general, the city always fought for Kyyivenerho, and for good
reason. The city authorities wanted to add to the company slogan “Heat
and light for Kievites” the words “from city funds”. The numerous
attempts to get hold of the running of the company have seen the use
of all means – targeted privatization, erosion of the state share.

Something succeeded. Under Prime Minister Valeriy Pustovoytenko in
1997-99 the city received the 12.73 per cent. Under Viktor Yushchenko
in 2000-01 it got both major thermal power stations. What is more, for
a whole week an instruction was in force on transferring to the city
the longed-for 50 per cent of the stock. But then everything
ended. The city could not accept it for a long time and countless
letters were written to the very highest instances. At times it seemed
that they were on the verge of winning. But the train left. And, as is
now clear, forever.

Over the past few years the mayor’s office has been running the state
share in Kyyivenerho, but then it had to be handed over to the SPF. In
principle that is not too awful – the SPF cannot run anything and does
not endeavour to. But it means that the package can be put up for
sale. From time to time in the corridors of the Cabinet of Ministers
there were indeed floated ideas of selling either the entire state
share in Kyyivenerho or half of it. Sometimes the EBRD also came with
that idea to the government.

On the one hand, such a step would certainly bring in a very decent
amount of money. The potential value of such a package amounts to many
millions of dollars. But on the other hand, a new investor, especially
a Western one, means entirely different rules of the game. Not to
mention the fact that our Western friends have never suffered from
excessive modesty in revenue planning. And the only attempt to attract
foreign investments into the city’s power engineering cannot in any
way be called successful.

The scheme to modernize Darnytsya thermal power station with the help
of Canada’s Northland Power turned into a fiasco. The Canadians have
been sitting on the power station for eight years now and have not had
the honour of investing not only the promised 150m dollars, but not
even one million. Omelchenko’s attitude to them has long been openly
contemptuous. At the same time, Kyyivenerho, albeit with problems, is
developing its own project with money from the World Bank.

And indeed the privatization of the neighbouring Kyyivoblenerho has
not at all led to a flow of investments into the regional energy
company. At the same time, the charges that even before were higher
than city charges, increased by another 50 per cent.

Pulling the cable across

The city that had been distracted with mergers and absorbtions
actively strove to get everything at once, but it obviously
underestimated threats of a different nature. For example, the
privatization of Kyyivenerho took place with a considerable dispersal
of shares. Under all forms of preferential subscription no more nor
less than 37.3 per cent of them went. This is noticeably more than the
traditional 25 per cent. To a large extent this was explained by the
position of the management of the company headed by Ivan
Plachkov. Credit where credit is due – the top management of
Kyyivenerho personally received very modest share packages. Neither
was there any discernible self-purchase “for the management”. Even
checks by the prosecutor’s office, according to which there were
originally several criminal cases instituted, did not discover
anything especially “dreadful”. Staff at the energy company had indeed
received their share packages and indeed sold them independently. It
is a good thing that there were opportunities and more than enough
firms buying up the shares. One could get a dollar and more for a
20-kopeck share. So the staff received not a bad additional source of
income.

In time the boom died down, but there is still interest in the
shares. In the 2000-03 period individuals bought 12.2m
shares. Naturally, they were bought up not just like that. The
concentration of packages soon became completely evident. The people
behind it were also discovered. The names of shareholders of the
Shelton oil trader firm and Ukrinbank – Serhiy Kryvosheya and Serhiy
Rys – started to surface, as did that of their business partner and
Green Party comrade, Vasyl Khmelnytskyy. Precisely over that period
the “green wave” rapidly took Zaporizhstal Zaporizhzhya-based
steelworks out of the hands of the state.

The aim with Kyyivenerho was also examined absolutely precisely –
first buy a blocking stake and then wait and see. Nobody took any
special counter-measures. First, the shares were expensive, and
self-purchase would require substantial resources. Second, the city
was sure that it would soon get a controlling stake by barter and the
problem would go away of itself. As a result, by 2001 the blocking
stake was successfully bought. Estimates put the cost of that to the
purchasers at 26m-28m dollars.

At exactly the same time, the city’s plans to swap the company shares
for buildings belonging to the Kiev community became entirely
illusory. In addition, by that time the city had pulled in so many
facilities that it clearly did not know what to do with them.

What is more, the campaign to strengthen Kyyivenerho by means of
transferring to it the running of heat networks, a rubbish burning
plant and so forth continued. It would be a big exaggeration to say
that everything went smoothly. A large part of the property being
acquired was in a wretched state.

At that time the last attempt was made to erode the state package in
the company. In 2001 the mayor’s office approved a decision to
increase the authorized capital by 30 per cent (i.e. by 8m
hryvnyas). Considering the fact that the energy company’s authorized
capital is tiny – only 27.1m hryvnyas – this automatically transformed
the state package from a controlling one into a 38 per cent one. Since
at that time the city was managing the state stake, its representative
naturally voted in favour. But… ellipsis as published Private
investors first showed their teeth and voted against. An attempt to
postpone the meeting by a month and coordinate positions on the basic
question produced little. The additional share issue failed.

And although in revenge not one representative of the “green oil
bankers” got on to the management bodies of Kyyivenerho, it became
clear that it would not be possible to ignore their interests. On the
other hand, it is doubtful that the mayor’s office had precisely
calculated how many more various “consideration of interests” it would
have to face. Thus, already in the following year it was forced to
agree the fate of the city’s bakery industry with the same group. The
Fininvesthrup and Haron companies that are friendly with the owners of
Zaporizhstal obtained 49 per cent of the Khlib Kyyiva closed
joint-stock company that is being set up on the basis of Kyyivmlyn)
and Kyyivkhlib. Then another firm that is friendly with the
Zaporizhzhya people, Ukrfinkom, moved into the holy of holies of the
city administration – the Khreshchatyk Bank and gradually started to
build up its share package.

The process reached its logical conclusion in summer this
year. According to the results of the bank’s third additional share
issue, the proportion of Ukrfinkom and structures close to it exceeds
40 per cent of the stock. In general, the Zaporizhstal people have
actively taken over the city, including as a big market for metal. And
although Kryvosheya and Rys later left “city” projects, they were
successfully replaced by Andriy Ivanov (chairman of Zaporizhstal
supervisory board) and Khmelnytskyy.

To be fair, it should be said that the “green” group always professed
the principle of “being, not seeming”, and did not feel the slightest
pull towards publicity. Mentions of it were limited either to football
or light charity. In politics, at the 2002 elections Zaporizhstal was
smart enough to finance unsuccessfully two parties simultaneously. And
then – silence.

It is amusing that a couple of years ago tracks of the Zaporizhzhya
metallurgists were spotted in Armenia. The biggest shareholder in
Zaporizhstal, Midland Resources Holding, bought 100 per cent of local
distribution networks. During the competition, the company said that
it owned, among other things, a blocking stake in
Kyyivenerho. However, they later amended that figure to 12 per
cent. In general, that was the truth.

We remind you that the owners of Zaporizhstal are divided into two
groups. Part of them, historically linked with the Zakhid-Rezerv
company, are represented by the afore-mentioned Messrs Ivanov and
Khmelnytskyy, as well as by Ihor Dvoretskyy (Zaporizhzhya Industrial
Bank). The other part, “the Midland group” is represented by Eduard
Shyfrin (Metallurgical Centre open joint-stock company – the Kiev
office of Midland is actually located at its address) and a Canadian,
(?Alexander Schneider). These shareholders are more oriented towards
foreign purchases. And they are acquiring property in Ukraine fairly
actively, since they have direct access to the president Leonid Kuchma
. Thus they recently acquired the Kremenchuk steel rolling
plant. Companies are being bought up in Russia, Poland, Montenegro and
Armenia.

It is interesting that there has recently been a clear strengthening
of Midland’s position at Zaporizhstal – at any rate two offshore
companies connected with it already control 60 per cent of the plant’s
shares.

For now these two groups of shareholders live in complete harmony. It
is not ruled out that some shareholders will face complete
naturalization in Kiev. Work on that is already being carried
out. And, unlike the United Social Democrats of presidential
administration head Viktor Medvedchuk , who, to put it mildly, have
complex relations with Mr Omelchenko, the Zaporizhzhya people are
fully signed up to local realities. They are correct and moderately
aggressive, and so people are already used to them.

Exploitation of gigantomania

May this excursion into the history of the “Zaporizhzhya group” not be
a digression from the theme. For it is precisely for this reason that
the creation of Kyyivenerhokholding is now taking place. The most
amusing aspect is that the pull of Mr Omelchenko is being successfully
exploited here in the creation of municipal super-structures. The
actual idea of an energy holding on the basis of the capital’s
property hovered in the city administration for several years now. For
that reason, many city deputies and officials simply failed to
understand that there was extremely little in common between what was
proposed, say, in 2002 and the present version.

All the more so in that the mayor’s office was frankly scared by the
situation with the creation of former First Deputy Prime Minister Oleh
Dubyna’s Energy Company of Ukraine ECU . The frantic attempts to
prevent Kyyivenerho joining it got nowhere.

Indeed, there was no point in hoping. Mr Dubyna had fought too
fiercely even for completely “deadbeat” thermal power stations in the
regions to give up the best bit of the country’s power engineering. In
other words, a real prospect had appeared for the city that control of
Kyyivenerho would be enacted not at all from 34 Khreshchatyk Street
mayor’s office . Even the present fate of the ECU is not that
cloudless. It was the prospect of losing control that prompted the
Kiev Council’s June decision. But such medicine may well turn out to
be worse than the disease.

The original plans to set up the company looked like this. The city
package of 12.73 per cent was to be merged with shares of private
investors amounting altogether to 28 per cent. The 40-per-cent stake
obtained would make it possible, if necessary, reliably to neutralize
any external pretensions. At the same time, shares in Kyyivvodokanal
water supply are being sold (33 per cent) and Kyyivhaz (up to 40 per
cent).

Former Zaporizhzhya governor and one-time deputy prime minister for
energy Volodymyr Kuratchenko will head the company. He has recently
been the head of Kiev’s Vodokanal… ellipsis as published

The Zaporizhzhya people laid claim to 49.999 per cent in the company
being set up, but Omelchenko insisted on 39 per cent. In other words,
the idea is that the city can run it itself.

However, practice shows that officials will far from always “taxi”
with such a package. Businessmen as a minimum are no stupider than
they are, and far more mobile. And indeed their incentive is
higher. If anyone thinks that they are ready to part with their stake
for no good reason, they are greatly mistaken.

Incidentally, talking about the stake, its current value according to
stock market quotes, amounts to 25m dollars. However, when there was
talk of selling, completely different figures were quoted of the order
of 68m-70m dollars. So far as is known, at negotiations the talk was
about selling two approximately equal stakes that reflect the
distribution of the assets of Zaporizhstal shareholders. What is more,
precisely for the same amount (400m hryvnyas) the city was prepared in
principle to buy the twice as large state-controlled stake (50 per
cent) from the SPF.

However, most likely it will not get as far as a sale. In that case
the payment will be made precisely in securities, i.e. in the
self-same shares in Kyyivenerho. And perhaps in the freshly bought
shares in Kyyivhaz. The shareholders will hardly come off losers –
instead of 28 per cent of shares in Kyyivenerho, they will get 40 per
cent of a bigger holding. And access to control of colossal resources.

There is so far little belief in the declared goal of attracting
investments. However, according to the first version, it was a
question of attracting about 15m-20m dollars. Which is pitifully
little compared with the requirements of the city’s municipal
economy. For example, modernization of the water supply over the next
six to seven years alone will require 1.9bn hryvnyas. Hundreds of
millions of hryvnyas of investment are needed for Kyyivenerho and
Kyyivhaz. All the more so in that it is still not sure that the Kiev
energy monster being set up will turn out to be viable.

That capacious word “We”

Indeed the actual process of creating Kyyivenerhokholding is
completely non-transparent. After all, to call a spade a spade, it is
a question of transferring property worth a huge amount of money to a
private structure. Forever, what is more… ellipsis as published The
operation being conducted affects the interests of city residents both
on the right bank of the Dnieper and on the left. And at the very
least they deserve to know something more about the aims and plans of
the city authorities. At present it is not even known who thought up
all this.

Things have reached the point of jokes. When in June deputies were
given the plan for the new holding, two sides of the process figured
in it – the Kiev administration and a second group modestly calling
itself “WE”. It is these “we” who were to gain 39 per cent of the
city’s energy infrastructure. Against this background, last year’s
lease for 49 years of the Odessa water supply to the Infoks company
that caused no little scandal there looks almost like a model of
transparency. There they at least presented a plan – to attract 700m
hryvnyas of investment over seven years. The Ukrainian anti-monopoly
committee issued an unflattering statement regarding this. But after
all, Kiev would seem to be a somewhat bigger and richer city.

The author has nothing against Zaporizhstal or whoever is meant there
by the word “we”. But is it not possible to be more specific – who,
why, how much and what will there be? There should be other goals
apart from a reasonable desire to restrict the influence of Dubyna and
provide employment for Kuratchenko. Over recent years the country had
more than enough of playing games with nameless investors from
offshore zones. If we even nominally intend to join Europe, perhaps we
should recall that the word “we” as a rule does not mean offshore
representatives but somewhat broader sections of the
population. Townsfolk, for example.

Varosian Antranik:
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