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Ukraine: State Property Fund Bans International Tender

Kyiv, 21 January 1998 (RFE/RL) -- Plans for Ukraine's first international privatization tender have been abandoned, and will shortly be replaced with a revised scheme, the State Property Fund (SPF) has announced.

This week's announcement was a major setback to CS First Boston, Creditanstalt Austria Investment Bank and Britain's Schroders - foreign financial powerhouses - which had submitted extensive documentation in order to bid for a 24 percent stake in regional energy distributor Donbassenergo.

Serhy Chetvertnykh of CS First Boston suggested the scrapping of the original tender plan would hardly improve Ukraine's reputation as a difficult country in which to invest. "This may seriously affect other companies' attitudes towards participating in such sales," Chetvertnykh told RFE/RL.

The tender ran into serious trouble last month, with Parliament's (Dec. 11) decision to ban international tenders.

The ban came just two days after the State Property Fund announced the Donbassenergo sale. It was Parliament's response to an earlier decree issued by President Leonid Kuchma that introduced international tenders as a mechanism for selling-off state property. Deputies said Kuchma had exceeded his authority. The constitution grants the president the power to issue decrees relating to economic matters until mid-1999 - if the decree concerns an area of law not covered by existing legislation.

Parliament maintained that existing legislation was sufficient for the SPF to introduce international tenders itself, and vetoed the decree. Since Parliament undermined the legal basis for conducting the Donbassenergo sale, the SPF was forced to draft new tender regulations. After registering the revised plan with the Ministry of Justice, the SPF last week formed a new tender committee for the sale.

The State Property Fund says all wishing to take part in the new tender will have to submit new applications, including the foreign investment banks that submitted applications first time around.

One previous bidder already removed itself from the running. Renaissance Capital, one of Russia's largest financial concerns, canceled its bid plans soon after Parliament vetoed Kuchma's decree.

The frustration of potential foreign investors is bad news for Ukraine, which planned to raise millions of dollars this year from the sale of state enterprises. SPF Acting Chairman Volodymyr Lanovy said late last year that the government would rely heavily on international tenders as means to raise badly needed budget revenue.

Eastern Ukraine's Donbassenergo produces 15 percent of Ukraine's total electrical power, and is viewed as a lucrative investment.

The SPF says it is optimistic of even more bidders for Donbassenergo after the new announcement. But some observers, close to the Donbassenergo tender, are not. An expert (anonymous) from a bank that had planned to participate in the first tender told RFE/RL "This is the first time that we've participated in a tender, whose organizers don't have criteria for selecting the winner."

The SPF now says it will include details of how a winner will be chosen in its new tender announcement.

Legal observers say the whole episode need not have taken such a turn. They said the SPF blundered by getting Kuchma and Parliament involved in the issue of international tenders in the first place.

Privatization specialists say existing SPF regulations on conducting privatization tenders, approved last August, were sufficient for the SPF to draft new regulations specifically suited for international tenders. As one expert tells RFE/RL, "Kuchma's decree should not have been issued at all - it didn't alter privatization legislation, and just created unnecessary fuss over the issue."