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Ukraine: Britain To Help Blue Chip Company

Kyiv, 29 May 1998 (RFE/RL) -- Ukrainian blue chip Zakhidenergo will base company privatization and technical upgrade for the next two years on British experience.

RFE/RL's correspondent in Kyiv reports that company spokesmen unveiled the plan at a British Embassy press conference in the Ukrainian capital earlier this week. Under terms of the deal, Eastern British Power International -- a subsidiary of major British Energy provider Eastern Group -- will act as Zakhidenergo's opposite in a "twinning" program sponsored by the European Union (EU) and the European Bank of Reconstruction and Development (EBRD).

Eastern Group PLC Consultant Dr. Ilka Lewington explains that "twinning" is just another name for hands-on information exchange.

The project aims to assist Zakhidenergo to privatize and modernize by learning from the United Kingdom's experience during the late 1980s, when the British privatized -- somewhat painfully, but with ultimate success -- their nationally-owned utilities.

The EU/EBRD project will pay for exchange of information and personnel between Zakhidenergo specialists and their Eastern Group counterparts over the next two years.

"The project envisions cooperation on all levels," said Michael Benn of the Escatel Group consulting company. As he explains, "If a manager in Lviv has a question, now he will be able to call his counterpart."

Information regarding the cost of the program was not available. But money, or more exactly how Zakhidenergo can make more of it, is already the key topic of discussion between the Ukrainians and the British.

Currently only 18 percent privatized, with circulated shares mostly in the hands of company employees and management, Zakhidenergo has long been touted as one of the country's best bets for investors looking to take a position in Ukrainian industry. Electricity is easily exportable and, in Zakhidenergo's case, part of the power its three coal-fired power plants generate already sells in neighboring Poland, Slovakia, and Russia, which should mean export earnings and a fat company balance.

However, the government owns the remaining 82 percent of the firm. And, saddled as it is with unprofitable sectors like coal mining or education, few are shocked that the Ukrainian state takes more than 82 percent of the firm's profits.

"We make all this electricity, megawatts of it," Zakhidenergo Deputy Production Director Anatoly S. Naumchyk said. "The government needs money... so we only get three to ten percent of its value back." British experience will first come in by showing Zakhidenergo better collection, accounting, and transmission techniques to help the company become a better cash generator.

Privatization will come later, although a the end of the two years all concerned are targeting full state divestiture of its Zakhidenergo stake. But Naumchyk noted that when exactly that happens depends on the State Property Fund and politics.

Company valuation, the first step in converting a state company into a private one, may well become the second major object of polite British suggestion on how to avoid past missteps.

As a rule, the State Property Fund sets a value of state company up for some form of privatization based on the company's maximum theoretical value, as opposed to its real market cost or income-generating potential. The tentative number for Zakhidenergo, Naumchyk said, is roughly 150 million dollars.

"Much too low," in his view. As he put it, "I am positive the company is worth much more."