Trying to promote new investments in mining and metalmaking

THE STATE CONCEDES SOME POWER

Trying to promote new investments in mining and metalmaking

Еlena SALIKHOVA, sector head of the Scientific Research Institute with the State Statistics Committee of Ukraine

The experience of many countries worldwide, irrespective of the degree of their development and economic, scientific, and technical potential, proves the expediency of foreign investments.

Unfortunately, in many post-socialistic countries including Ukraine implementation of this process faces a number of obstacles, namely lack of the appropriate investment climate; imperfect market mechanism; unstable political situation; poor business and professional skills of businesspeople; insufficiently attractive investment projects alongside with shortage of interested business partners; destructive fiscal system; absence of the effective investment insurance system; excessive monopolization of the economy; high inflation rates; lack of ownership over land; non-convertibility of the national currency, etc.

So it becomes clear, why Ukraine has done extremely poor in raising investment capital. According to the State Statistics Committee, in 1999 the volume of foreign investments in the national economy lost 18.2% compared to the previous year, reaching only USD 754.8 million. This comes to only USD 15 per capita. According to studies carried out by the European Bank for Reconstruction and Development, Ukraine ranks the 24-th in terms of aggregate direct foreign investment (DFI) per capita among the 26 transitional economies, leaving behind only Tadjikistan and Belarus. For comparison, Hungary annually attracts an average of USD 1,000 of DFI per capita, the Czech Rep. USD 400, Estonia USD 320, and Poland USD 110.

Specialists have calculated that the Ukrainian economy requires the total of more than USD 40 billion of foreign investments, including USD 7 billion for metalmaking; USD 5.1 billion for mechanical engineering; USD 3.3 billion for chemistry and petrochemistry, etc.

However, the breakdown of foreign investments in 1999 shows that the hot industries for investors are food-processing with USD 662.4 million, that is 20.4% of the aggregate foreign investments, and domestic trade with USD 557.7 million, 17.2%. Mechanical engineering and metalworking account for only 10.9% of all the investments; while ferrous and nonferrous metallurgy obtained 3% and 1.2% respectively.

It is necessary to mention that investors from the Virgin Islands backed by Russia’s MetalsRussia, the main owner of Donetsk Metallurgical Works, are very active in the Ukrainian iron and steel industry. As of October 1, 1999, the total investments from the Virgin Islands made up USD 58,669,000. Besides, one should keep an eye on the Slovak and Finnish investors who have invested USD 18.02 million and USD 4.28 million respectively in the Ukrainian ferrous metallurgy.

As to foreign investments in nonferrous metallurgy, the first lane is kept by the USA with USD 19.5 million worth of investments. Rather large investments were made by Spain with USD 9.79 million and Germany with USD 5.38 million.

With purpose to promote greater investments in these industries, the State Property Fund of Ukraine runs privatization of state-owned companies allowing participation of foreign capital and renders large industrial objects to trust management of foreign firms.

Let’s view in detail the latest changes in ownership over mining companies and metallurgical mills. The privatization process started speeding up in 1999 owing to several reasons. First of all, the Ukrainian metallurgical companies are mainly export-oriented, therefore control over local metallurgical mills yields the guaranteed export revenues in hard currency. Besides, last year saw favorable conditions on the world metal markets owing to the recovery in Asia, one of the largest consumers of metal. At the same time, a more favorable situation cropped up inside Ukraine, namely the authorities launched the experiment in mining and metallurgical complex giving various tax breaks, and exports of metal scrap became subject to restrictions, which promoted supplies of cheap raw materials to domestic metalmakers. Such a tendency stimulated interest of investors to ore mining and processing works and to chemical recovery mills, which supply the basic kinds of feedstock to metallurgical companies. As a result, proprietors of mining and metallurgical companies were subject to change.

Back in 1999 a 25% interest in Zaporozhstal, one of the largest iron and steel works out here, found purchasers neither at the contest held under investment obligations, nor at the trading on the Ukrainian Interbank Currency Exchange. However, after the State Property Fund partitioned these shares off into three parts in December 1999 and put two 8% interests and one 9% interest on sale, financial company Favorite immediately came up as a buyer. At the beginning of 2000 this company acquired both 8% interests, paying UAH 20.7 million apiece. It is worth noting that Favorite had already bought 7% in Zaporozhstal back in November 1999. As to the 9% interest, it was sold for the record-large amount of UAH 91 million at the Ukrainian Interbank Currency Exchange at the end of February 2000. Thus, public joint-stock company Zaporozhstal has been 75% privatized at this point of time (10.26% were sold on preferential terms, 26.71% were allocated via certificate auction in exchange for property privatization certificates, and 38.03 % were floated at stock exchange). In compliance with the share placement schedule, the last 25% in this company will be sold for money at a commercial tender in 2000.

The most significant shareholder in Alchevsk Iron and Steel Works (ISW) is the State itself, possessing 50% of the authorized capital + 1 share in this company. However, having bought 15% in Alchevsk ISW at an investment tender, Logoimpex company belonging to Interpipe group has recently become another large proprietor of this integrated mill. It is worth mentioning that Interpipe group that owns a one more 5% interest in Alchevsk ISW acquired at the stock exchange in 1999. Besides, Interpipe holds controlling interests in Nizhnedneprovsk, Novomoskovsk, and Dneprovsk Tube Works. Experts mention that Interpipe has become interested in metallurgical mills precisely because tube works have been lately in acute shortage of skelp, almost all of which was exported beyond Ukraine by domestic iron and steel works.

At the moment, the State represented by the State Property Fund owns 50% + 1 share in public joint-stock company Ilyich Iron & Steel Works of Mariupol, one of the largest manufacturers of iron, steel, and sheet steel in Ukraine. A weighty 31.02% interest is held by private joint-stock company Ilyich-Stal, while organization of lessors possesses some more 7.28%, and other shareholders hold 11.6%.

On January 21, 2000 the Board of Ilyich ISW decided to make a new issue of UAH 250 million worth of shares, i.e. 29.83% of the current amount of authorized capital. On February 28, when subscription commenced, the new issue was completely sold out. Shareholders in this company had an upper hand in purchasing shares of the new issue.

Private company Trade House Аzovstal was set up to consolidate shares in Аzovstal Iron and Steel Works held by the staff and the management of the latter.

On June 24, 1997 public joint-stock company Аzovstal reregistered its authorized capital adding 12.7% to the previous amount. Therefore, the state-owned interest decreased from 52.75% to 48.3%, and the interest held by outsiders dropped to 8.22%, whereas the share block belonging Trade House Аzovstal grew from 37.94% up to 43.48%. Аton company located in Donetsk acquired 2.7% in Аzovstal at the stock exchange in 1999.

A little bit earlier, investment company Cеramet-Invest has bought Теkt’s interest in private company Trade House Аzovstal leaving only 5 shares to Tekt. Certain sources mention that both companies worked on behalf of the ISD.

Foreign investments in ferrous and nonferrous metallurgy as of October 1, 1999 (‘000 USD)

In 1999 the Cabinet of Ministers fixed state ownership over 25% in Azovstal from September 15, 1999 till September 15, 2004. Today, 48.26% of shares in this metallurgical mill are still unsold. However, it has been let slip that the National Agency for Management over State-Owned Corporate Rights plans to hold a tender for trust management over the state-owned interest in Аzovstal. At the same time, the State Property Fund has included Аzovstal into the list of companies due to be put up for sale in 2000 to bring in the planned UAH 2.5 billion revenues from privatization. The State Property Fund hopes to get some UAH 185 million for 23.26% of shares in Azovstal.

According to the press service with the Antimonopoly Committee of Ukraine, Kiev-based Energoresurs company was allowed to acquire 26.6% of Zakarpatye Metallurgical Works. Energoresurs is the company that issues the bulk of commodity loans to this metallurgical mill. By the way, 74% of shares in Zakarpatye Metallurgical Mill have already been sold.

On October 5, 1999 Privat-Intertrading, the affiliate to Dnepropetrovsk-based Privatbank, was granted trust management over 50% + 1 share interest in joint-stock company Petrovsky Metallurgical Works of Dnepropetrovsk till July 26, 2004. The Antimonopoly Committee has already approved this deal, thus making it come into force. Hence, Privatbank now owns a metalmaking company and iron ore mining companies, namely JSC Sukhaya Balka and JSC Kirov Ore Management. Besides, this bank controls both Ukrainian producers of manganese ore, that is JSC Ordzhonikidze Ore Mining and Concentrating Works and JSC Marganets Ore Mining and Concentrating Works.

In November the National Agency for Management over State-Owned Corporate Rights transferred 50% + 1 share in Severny Ore Mining and Concentrating Works to Kharkov-based Ukrsibbank for the period of 5 years (this bank has also acquired trust management rights over Dzerzhinsky Iron and Steel Works of Dneprovsk). Ukrsibbank is the major supplier of resources and the largest purchaser of Severny’s products. The Antimonopoly Committee has already authorized this bargain. Besides, the State Property Fund has announced a tender for sale of 25% in Severny Ore Mining and Concentrating Works at the starting price of UAH 45 million. The tender’s term stipulate that the buyer should invest UAH 35 million in development and reconstruction of Severny. Moreover, the State Property Fund will offer some more 10.7% of shares in this company at stock exchange until the end of the year.

State-owned company Ukrrudprom manages 50% + 1 share in Tsentralny Ore Mining and Concentrating Works. The State Property Fund planned to sell a 26% interest in Tsentralny at a noncommercial tender at the fixed price and under obligations of the buyer to invest in development or reconstruction of the ore mining and concentrating works. The attempt to find a willing investor failed. Therefore, Tsentralny Ore Mining and Concentrating Works requested the government to alter the share allocation schedule and to sell a 25% interest for money at a commercial tender. In the near future the State Property Fund will put a 12.53% interest in Tsentralny Ore Mining and Concentrating Works for sale at stock exchange. Besides Ukrrudprom plans to transfer its stake of 50% + 1 share in Tsentralny to trust management of Ukrruda company.

At the end of 1999 the State Property Fund failed to realize a 15.1% interest in Ingulets Ore Mining and Concentrating Works, Krivoy Rog city of Dnepropetrovsk region, at a commercial tender, in spite of the biddings submitted.

However, in early 2000 the state-owned 50% interest in public joint-stock company Ingulets Ore Mining and Concentrating Works was transferred to trust management of Dnepropetrovsk-based limited liability company Smart-group that works as an intermediary sales agent dealing with metal products and equipment. From 1998 till early 2000 Ukrrudprom trust-managed this state-owned interest.

In June 1999 some 25% of shares in joint-stock company Alchevsk Coke Chemical Recovery Works was acquired at an investment tender by the Industrial Union of Donbass that has contacts with Mariupol-based Аzovstal and Ilyich Iron and Steel Works, as well as with Khartsyzsk Tube Works.

A 51% interest in joint-stock company Donetskkoks, which was previously supposed to be sold for cash till the end of 1999, has been transferred to trust management of Donetsk Regional State Administration. Some 10.56% of shares in JSC Donetskkoks have been sold on preferential terms, and some more 8.4% have been realized via certificate auctions.

Last year settled the final details with owners of all the three large ferroalloy manufacturers of Ukraine.

A state-owned 50% interest in joint-stock company Nikopol Ferroalloy Works is now managed by Credit-Dnipro bank and a 26% interest in this company has been acquired by Bipe company at an investment tender (both mentioned companies are members of Interpipe group).

With the decree dated November 24, 1999, the Cabinet fixed state ownership over 25% + 1 share in Zaporozhye Ferroalloy Works effective for the period of 3 years. Nevertheless, at the end of 1999 Kiev-based Ukrcreditbank acquired management over the state-owned interest. A half of Zaporozhye Ferroalloy Works’ shares have already been sold. In 2000 the State Property Fund plans to sell the remaining 25% in this company to raise at least UAH 75 million (a 16.99% stake was offered at the Ukrainian Interbank Currency Exchange in March at par value of UAH 0.7 per share).

The Ukrainian Industrial Company, Kiev city, has purchased the controlling 51% interest in joint-stock company Stakhanov Ferroalloy Works.

Kiev Invest company possesses a 78.95% stake in joint-stock company Pobuzhskoye Ferronickel Works, though the State Property Fund tries to prosecute this purchase because Kiev Invest has failed to meet its liabilities. This case is still pending because the stake had earlier been pawned Finance and Credit bank as a security for a loan that was not paid back.

The year 1999 saw the continuing struggle for control over public joint-stock company Nikolaev Alumina Works, the largest alumina supplier to Russian aluminum smelters. The major contestants were the TWG multinational and Russian corporation Siberian Aluminum (SibAl). The latter bought a 5.33% in Nikolaev Alumina Works from the Latvian financial group UKIO Bankas that purchased it earlier at the stock exchange. Afterwards, public company Personnel of Nikolaev Alumina Works granted the SibAl a right to control another 26.4% stake in Nikolaev-based works.

The State owned 55% in this company, though the State Property Fund sold a 30% interest at a commercial tender on March 20, 1999, at the original cost of UAH 115 million. In compliance with the tender’s terms, the buyer should pay off UAH 7 million of Nikolaev Alumina Works’ outstanding payables to the budget within the matter of 60 days from the moment of signing the contract; should finance construction of a 100,000-tonne-per-year primary aluminum smelter Ukraine to consume at least 200,000 tonnes Nikolaev Alumina Works’ alumina per year (construction should start before 2002); ensure transition to direct import-export transactions in supplies of raw material and sales of alumina during 2 years from the moment of signing the contract; and raise at least USD 30 million to the state budget during this period, as well as drive alumina output up to 1.3 million tonnes per year.

It is also necessary to mention that now the State Property Fund is selecting consultants to prepare and hold tenders on sale of large state-owned interests in public joint-stock companies, notably a 50% + 1 share in Donetsk Metal Rolling Works (at UAH 0.01 per share), 50% + 1 share in Makeyevka Iron and Steel Works (at UAH 0.25 per share), 50% + 1 share in Stakhanov Coke Chemical Recovery Plant (at UAH 0.25 per share), and 50% + 1 share in Petrovsky Metallurgical Works of Dnepropetrovsk (at UAH 0.25 per share).

These alterations in owners of mining companies and metallurgical mills cannot but influence the further attraction of foreign investments in Ukraine. As a matter of fact, the State concedes some of the power in management over industry hoping to get new opportunities to replenish the scarce domestic resources and to get additional financing for enterprises, industries, and the whole national economy.

Commentary

Anatoly DROBYAZKO, advisor of the chairman with the National Bank of Ukraine

Every sane foreigner realizes that doing investment in the existing Ukrainian legislative jungle is about the same as shoving a hand into a meat grinder. Prior to doing investment, an investor has to find answers to several fundamental questions.

Firstly, what is the payback period on investment? When it comes to lucrative investments with short payback period, investors can simply disregard numerous other factors. For instance, when all the analysts were signaling the approaching default of the Russian treasury bonds in 1998, foreign investors ignored the risks holding on to the opportunity of earning 20 to 30% or even 100% profits in hard currency per year.

Secondly, is there a legal protection of investment and will the investor get the adequate ownership titles? As we all know, there are quite a few cases when local authorities throw investors into a juridical merry-go-round as regards ownership rights, at the end leaving these investors with neither the rights, nor the investments.

Thirdly, how well does the market infrastructure suit the investor? In other words, investors would love to see the same rules of the game as in the USA or in Europe.

There are two groups of investors, namely portfolio and strategic ones. Portfolio investors are the most advantageous, though Ukraine has practically none of these. The main objective of these investors is not to yield profits, but to preserve the money invested in securities. At this point of time, Ukraine has no classic-type capital market. It is the most pathetic picture, when every Ukrainian stock market player tries to get it all for himself.

Strategic investors purchase controlling interests, unfortunately, running into risks as well. While we have already learned about the contradictions between the labor and the capital, the contradictions between owners and managers of property are still little or not explored and can cause quite a few unpleasant surprises.

There are quite a few other impediments that drive to a conclusion that the modern Ukraine is not ready to service foreign investments at this point of time. Perhaps, the crisis in management is the paramount calamity. Operations of our markets fail to determine fair wholesale value of goods, while the classic methods of capital flows via stock exchanges are just being tested. There has already appeared the generation of managers who know what the market economy is, though they are opposed by the clannish red-tape managers of commodity flows and property who benefit from the bedlam and permanent legal inconsistencies.

the Metal